AQUILA LEGIS FRATERNITY

Corporation Law Reviewer
Page 1 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

CHAPTER 2: DEFINITION AND ATTRIBUTES   A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Attributes: 1. 2. 3. 4.  Artificial being; Created by operation of law; Right of succession; and Powers, attributes and properties expressly authorized by law or incident to its existence.

A corporation may claim for moral damages under Art. 2219 (7) of the Civil Code in cases of libel, slander or any form of defamation. (Filipinas Broadcasting Network vs. Ago Medical and Educational Center) Advantages of corporate form of business: 1. 2. 3. 4. 5. 6. 7. Capacity to act as a single unit; Limited shareholder‟s liability; Continuity in existence; Feasibility of greater undertaking; Transferability of shares; Centralized management; and Standardized method of organization, management and finance

Disadvantage of corporate form of business: 1. 2. To have valid and binding corporate act, formal proceedings, such as board meetings are required. The business transactions of a corporation is limited to the State of its incorporation and may not act as such corporation in other jurisdiction unless it has obtained a license or authority from the foreign state. The shareholders‟ limited liability tends to limit the credit available to the corporation as a separate legal entity. By the very nature of shares of stock which are personal properties, transferable at will by the owners thereof, transfers of share may result to uniting incompatible and conflicting interests. The minority shareholders have practically no say in the conduct of corporate affairs. In large scale enterprises, stockholders‟ voting rights may become merely fictitious and theoretical because of disinterest in management, wide-scale ownership and inaccessible place of meeting. Double taxation may be imposed on corporate income. Corporations are subject to governmental regulations supervision and control including submission of reportorial requirements not otherwise imposed in other business form.

3. 4.

5. 6.

7. 8.

AQUILA LEGIS FRATERNITY
Corporation Law Reviewer
Page 2 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

Distinctions between a corporation and a partnership CORPORATION 1. Created by law or operation of law 2. Generally there must be at least 5 incorporators 3. Can exercise only such powers and functions expressly granted to it by law and those necessary or incident to its existence 4. Unless validly delegated expressly or impliedly, must transact its business through the board of directors 5. Has the right of succession which presupposes that it continues to exist despite the death, withdrawal, incapacity or civil interdiction of the stockholders or members 6. Any stockholder can ordinarily transfer, sell or assign his shares of stock without the consent of the other stockholders 7. The liability of the stockholders or members in is limited to the extend of their subscription or their promised contribution 8. Term of existence is limited only to 50 years unless extended 9. Consent of the State is necessary for its dissolution PARTNERSHIP 1. Created by mere agreement of the parties 2. May be formed by 2 or more natural persons 3. Can do anything by agreement of the parties provided only that it is not contrary to law, morals, good customs, public policy and public order 4. In absence of agreement to the contrary, any one of the partners may validly bind the partnership 5. Based on mutual trust and confidence such that the death, incapacity, insolvency, civil interdiction or mere withdrawal of one partner would result in it dissolution 6. A partner cannot transfer his rights or interest in the partnership so as to make the transferee a partner without the consent of the other partners 7. All partners are liable pro rata with all their property and after all the partnership property has been exhausted, for all partnership liability 8. May exist for an indefinite period 9. Partners may dissolve at will

CHAPTER 3: CLASSIFICATION OF CORPORATIONS  Classes of corporations: 1. 2.  Stock Non-stock

Requisites to be classified as a stock corporation: 1. 2. That they have a capital stock divided into shares; and That they are authorized to distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares held by them

 

Non-stock corporations – no part of their income is distributable as dividends to its members, trustees or officers subject to the provisions on dissolution. (Sec. 87) The plain and ordinary meaning of a business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. (CIR vs. Club Filipino, Inc.) The test in determining whether a government owned or controlled corporation is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject to its provisions while those incorporated under the General Corporation Law are not within its coverage. (PNOC-EDC vs. NLRC)

AQUILA LEGIS FRATERNITY
Corporation Law Reviewer
Page 3 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

Other classes of corporations: 1. Public and Private. a. Public corporations – those created, formed or organized for political or governmental purposes with political powers to be exercised for purposes connected with the public good in the administration of civil government. Private corporations – those formed for some private purpose, benefit, aim or end.

b. 2.

Ecclesiastical (religious societies or corporation sole) and Lay (eleemosynary or civil). a. Ecclesiastical or religious corporations – those composed exclusively of ecclesiastics organized for spiritual purposes or for administering properties held for religious ones. They are further classified as religious societies or corporation sole. Lay corporations – those established for the purposes other than religion. They are further classified as eleemosynary or civil. Eleemosynary corporations are created for charitable and benevolent purposes. Civil corporations are organized not for the purpose of public charity but for the benefit, pecuniary or otherwise, of its members.

b.

3.

Aggregate and Sole. a. b. Aggregate corporations – those composed of a number of individuals vested with corporate powers. Corporations sole – those that consist of one person or individual only and who are made as bodies corporate and politic in order to give them some legal capacity and advantage which, as natural persons, they cannot have.

4.

Close and Open. a. b. Close corporations – those whose shares of stock are held by limited number of persons. Open corporations – those formed to openly accept outsiders as stockholders or investors.

5.

Domestic and Foreign. a. Domestic corporations – those that are organized or created under or by virtue of the Philippine laws. Note: issues of intra-corporate nature are governed by Philippine law. Foreign corporations – those formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state.

b.

6.

Parent or Holding Companies and Subsidiaries and Affiliates. a. b. c. Holding corporations – corporations that confine their activities to owning stock in, and supervising management of other companies. Subsidiary corporations – those which another corporation owns at least a majority of the shares, and thus have control. Affiliates – those corporations which are subject to common control and operated as part of a system.

7.

Quasi-public. a. Quasi-public corporations – private corporations which have accepted from the State the grant of a franchise or contract involving the performance of public duties (public service corporations).

AQUILA LEGIS FRATERNITY
Corporation Law Reviewer
Page 4 of 87 Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

8.

Quasi corporations. a. Quasi corporations – public bodies or municipal societies such as townships, counties, school districts, road or highway districts which, though not vested with the general powers of corporations, are organized by statutes or immemorial usage, as persons or aggregate corporations with precise duties which may be enforced, and privileges which may be maintained, by suits of law.

9.

De jure corporations. a. De jure corporations – juridical entities created or organized in strict or substantial compliance with the statutory requirements of incorporation and whose right to exist as such cannot be successfully attacked even by the State in a quo warranto proceeding.

10. De facto corporations. a. De facto corporations – those which exist by virtue of an irregularity or defect in the organization or constitution or from some other omission to comply with the conditions precedent by which corporations de jure are created, but there was colorable compliance with the requirements of the law under which they might be lawfully incorporated for the purposes and powers assumed, and user of the rights claimed to be conferred by law.

11. Corporations by estoppel. a. Corporations by estoppel – those which are so defectively formed as not to be either de jure or de facto corporations but which are considered as corporations in relation only to those who cannot deny their corporate existence due to their agreement, admission or conduct.

The mere fact that the government happens to be a majority stockholder does not make it a public corporation. (National Coal vs. CIR)

CHAPTER 4: FORMATION AND ORGANIZATION  Stages in the life of a corporation: 1. 2. 3.  Creation Reorganization or quasi-reorganization Dissolution and winding up

Steps in creation: 1. 2. 3. Promotional stage Process of incorporation Organization and commencement of business

PROMOTIONAL STAGE  A promoter acting for a proposed corporation has 3 options: 1. He may make a continuing offer on behalf of the corporation, which, if accepted after incorporation, will become a contract. In this case, the promoter does not assume any personal liability, whether or not the corporation will accept the offer. The promoter may make a contract at the time binding himself, with the understanding that if the corporation, once formed, accepts or adopts the contract, he will be relieved of responsibility. The promoter may bind himself personally and assume the responsibility of looking to the proposed corporation, when formed, for reimbursement.

2.

3.

2.  Drafting the articles of incorporation Preparation and submission of additional and supporting documents Filing with the SEC Subsequent issuance of certificate of incorporation Contents of the articles of incorporation 1. against trespass or conversion. a right in rem. as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field. (Philips Export B. 8. amount of authorized capital stock. vs. namely: 1. par value.  identical or deceptively or confusingly similar to that of any existing corporation or to any other name protected by law. the word or phrase has come to mean that the article was his product. in that trade and to that branch of the purchasing public. or (c) patently deceptive.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 5 of 87 Darren L. (Red Line Transportation Co. because geographically or otherwise descriptive. two requisites must be proven. Such other matters not inconsistent with law and which the incorporator may deem necessary and convenient 11. real or personal. (Doctrine of secondary meaning. original subscribers If a non-stock corporation. Treasurer‟s certificate CORPORATE NAME  A corporation cannot use a name which is: 1.V. confusing or contrary to existing law. 18. 4. 9. 3. vs.) A word or phrase originally incapable of exclusive appropriation with reference to an article on the market. still less that of another corporation.CA) A corporation's right to use its corporate and trade name is a property right. 5. amount of capital. 6. 2. 3. to a certain extent. Salipsip 98B & Ronald Patrick Rubin 06C PROCESS OF INCORPORATION  Process of incorporation: 1. 2. vs. Rural Transit Co. CA) To come within the scope of the prohibition of Sec. Name Purpose Principal office Term Incorporators Number of directors/trustees Names. contributors 10.V. confusing or contrary to law. number of shares. Lyceum of the Philippines. nationalities and residences of directors/trustees If a stock corporation. 4. vs. which it may assert and protect against the world in the same manner as it may protect its tangible property. Inc. or patently deceptive. (Philips Export B. and The proposed name is either: (a) identical or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law. 2. It is regarded. 7. might nevertheless have been used so long and so exclusively by one producer with reference to his article that. which is expressly set apart from it and protected by law. That the complainant corporation acquired a prior right over the use of such corporate name. The law gives a corporation no express or implied authority to assume another name that is unappropriated. CA)    .

therefore. Reasons for requiring a statement of purposes or objects: 1. Provided. all of legal age and a majority of whom are residents of the Philippines. in accordance with this Code. either by the legislature or by the corporators or stockholders under legislative authority. The purpose must be specific or stated concisely although in broad or general terms. prior clearance and/or approval of the concerned government agencies or instrumentalities will be required. affect the identity of the corporation. (Philips Export B. If there is more than one purpose. those reasonably necessary to accomplish its purpose and those which may be incidental to its existence.   PURPOSE CLAUSE  A corporation has only such powers as are expressly granted to it by law and by its articles of incorporation including those which are incidental to such conferred powers. . (CRS vs. So that the board of directors and management may know within what lines of business they are authorized to act. INCORPORATORS  Sec.Any number of natural persons not less than five (5) but not more than fifteen (15). That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. In order that the stockholder who contemplates on an investment in a business enterprise shall know within what lines of business his money is to be put at risk. does not. which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames. Proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur. 4. 10. . Number and qualifications of incorporators. Corporate term. the test is whether the similarity is such as to mislead a person using ordinary care and discrimination.  THE PRINCIPAL OFFICE  The residence of the corporation is the place of its principal office as may be indicated in its articles of incorporation and may. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. be sued only at that place.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 6 of 87 Darren L. (Philips Export B. vs. General limitations on the purpose clause: 1. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation. 2. . 2.   If the corporate purpose or objective includes any purpose under the supervision of another government agency. generally speaking. vs.A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. Antillon) TERM OF EXISTENCE  Sec. 11. CA) A mere change in the name of a corporation. Salipsip 98B & Ronald Patrick Rubin 06C  In determining the existence of confusing similarity in corporate names.V. The purpose must be lawful. may form a private corporation for any lawful purpose or purposes. 3. the primary as well as the secondary ones must be specified. 3. CA) A corporation has an exclusive right to the use of its name. privileges or obligations previously acquired or incurred by it.V. So that anyone who deals with the company may ascertain whether a contract or transaction into which he contemplates entering is one within the general authority of the management. The purpose must be capable of being lawfully combined. nor in any way affect the rights.

The by-laws may provide for additional qualifications and disqualifications. CA) If no election is conducted or no qualified candidate is elected. Subscribed capital stock – the total number of shares and its total value for which there are contracts for their acquisition or subscription. the incumbent director shall continue to act as such in a hold over capacity until the election is held and a qualified candidate is so elected. Directors must own at least one (1) share of the capital stock of the corporation. In order to be eligible as a director.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 7 of 87 Darren L. 2. of the stock as appearing on the books of the corporation. . Paid-up capital stock – the actual amount or value which has been actually contributed or paid to the corporation in consideration of the subscriptions made thereon. or a violation of this Code committed within five (5) years prior to the date of election or appointment. Stocks shall not be issued for a consideration less than the par or issued price thereof. 3. and Corporation sole. It may likewise disqualify a stockholder from being elected into office if he has a substantial interest in a competitor corporation to avoid any possible adverse effects of conflicting interest of a director. it may not do away with the minimum disqualifications laid down by the Code. though not less than 5 and not more than 15 should be divisible by 5. 2. Exceptions: 1. However. Cloribel) CAPITALIZATION     Authorized capital – the maximum amount fixed in the articles to be subscribed and paid-in or secured to be paid by the subscribers. Trustees must be members. not beneficial ownership. In close corporations where all the stockholders are considered as members of the board of directors thereby effectively allowing 20 members in the board. (Detective and Protective Bureau vs. (Lee vs. A majority of the directors or trustees must be residents of the Philippines. Other disqualifications under applicable special laws.     A by-laws may validly provide that no person may be elected as director unless he owns a specified number of shares required for the directorate qualification.   Educational corporations registered as a non-stock corporation whose number of trustees. Exception: Cooperatives and corporations primarily organized to hold equities in rural banks. THE DIRECTORS/TRUSTEES   General rule: There must be at least 5 but not more than 15 directors or trustees in a private corporation. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years. Minors are not qualified to become incorporators. Salipsip 98B & Ronald Patrick Rubin 06C    General rule: Only natural persons can be incorporators. 2.  Disqualifications: 1. what is material is the legal title to. Qualifications: 1.

Stock certificate is a document or instrument evidencing the interest of a stockholder in the corporation. any of which classes or series of shares may have such rights. 5. As a management control device. 4. The shares of stock of stock corporations may be divided into classes or series of shares. 2. 6. and Outstanding shares in exchange for stocks in the event of reclassification or conversion. Property.   The guarantee to preference as to dividends does not create a relation of debtor and creditor between the corporation and the holders of such stock. For regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders. if there be any. The board has the discretion to determine whether or not to declare dividends. 2. 3. or both. Labor performed or services actually rendered to the corporation. actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued. privileges or restrictions as may be stated in the articles of incorporation.    Except as otherwise provided in the articles of incorporation and stated in the certificate of stock. Common and preferred shares  Common stock – a stock which entitles its owner to an equal pro-rata division of profits. 5. Actual cash paid to the corporation. otherwise. Purpose of classification: 1.  Must be issued with a stated par value. each share shall be. in case of distribution. Shares of stock and their classification  Shares of stock designate the interest or right which the stockholder has in the management of the corporation. and The preferences must be stated in the articles of incorporation and in the certificate of stock. Limitations on preferred stock: 1. each share shall be equal in all respects to every other share. 3. equal to every other share. 2. To comply with statutory requirements. Previously incurred indebtedness by the corporation. 4.   . 6. Amounts transferred from unrestricted retained earnings to stated capital. For flexibility in price.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 8 of 87 Darren L. in all assets remaining after the payment of its debts. Participating preferred shares – the holders thereof are still given the right to participate with the common stockholders in dividends beyond their stated preference. tangible or intangible. To better insure return on investment. but without any preference or advantage in that respect over any other stockholder or class of stockholders. in all respect.  Stocks shall not be issued in exchange of promissory notes or future services. Preferred shares are presumed to be non-participating. and in the surplus profits and. Salipsip 98B & Ronald Patrick Rubin 06C  Consideration for the issuance of stock may be any or a combination of any two or more of the ff: 1. Preferred stock – a stock that gives the holder a preference over the holder of common stocks with respect to the payment of dividends and/or with respect to distribution of capital upon liquidation.  To specify and define the rights and privileges of the stockholders.

Non-cumulative preferred shares – those which grant the holders of such shares only to the payment of current dividends but not back dividends. Only preferred and redeemable shares may be denied the right to vote. public utilities and building and loan associations. Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal footing with other shares. 5. Flexibility in price. 2. Earned cumulative or dividend credit – gives the holder thereof the right to arrears in dividends if there were profits earned during the previous years but dividends were not declared.    . Salipsip 98B & Ronald Patrick Rubin 06C  Cumulative preferred share – those that entitle the owner thereof to payment not only of current dividends but also back dividends not previously paid whether or not. 3. Limitations of no par value shares: 1. when and if dividends are paid. 3. either at the election of the board of directors. 2.00.  Such shares. There must always be a class or series of shares which have complete voting rights. Par and no par value shares    Par value shares – those whose value are fixed in the articles of incorporation.   Unless the right to vote is clearly withheld. Evasion of the danger of liability upon watered stock.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 9 of 87 Darren L. by the stockholders themselves. 3. and They cannot be issued by banks. In absence of express stipulation. or in the absence thereof. or by the board of directors when so authorized by the said articles or by the by-laws. 6. No par value shares – those whose issued price are not stated in the certificate of stock but which may be fixed in the articles of incorporation. once issued. insurance companies. Types of non-cumulative preferred shares: 1. Mandatory if earned type – impose a positive duty on directors to declare dividends every year when profits are earned. preferred shares are presumed to be non-cumulative. Voting and non-voting shares  Voting shares – gives the holder thereof the right to vote and participate in the management of the corporation through the exercise of such right. The entire consideration for its issuance constitutes capital.  Advantages to the issuance of no par value shares: 1. during the past years. a preferred stockholder has the right to vote. Non-voting shares – do not grant the holder thereof the right to vote except under the penultimate paragraph of Sec. The consideration for its issuance should not be less than P5. 4. or in any manner requiring the stockholder‟s approval. They cannot be issued as preferred stock. non assessable. are deemed fully paid and thus. Par value shares cannot be issued nor sold by the corporation at less than par. hence. not available for dividend declaration. to the extent agreed upon before any other stockholders are paid the same. and Disappearance of personal liability on the part of the holder thereof for unpaid subscription.    2. trust companies. dividends were declared or paid. Discretionary dividend type – gives the holder of such shares the right to have dividends paid thereon in a particular year depending on the judgment or discretion of the board of directors.

regardless of the existence of unrestricted retained earnings in the books of the corporation. Manning)   CAPITAL REQUIREMENT  Sec. pledge or other disposition of all or substantially all of the corporate property.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 10 of 87 Darren L. however. which terms and conditions must also be stated in the certificate of stock representing said shares. 3. Increase or decrease of capital stock. it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission.  . redemption. and subject to the provisions of the following section. Such rights are only granted to outstanding shares of stock. Treasury shares have no voting and dividend rights.Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law. That in no case shall the paid-up capital be less than five Thousand (P5. lease. or in the absence of a fixed date or dates. donation or through some other lawful means. 5. 4.  Except as provided in the penultimate paragraph of Sec. Amount of capital stock to be subscribed and paid for the purposes of incorporation. Such shares may again be disposed of for a reasonable price fixed by the board of directors.00) pesos. Salipsip 98B & Ronald Patrick Rubin 06C  Non-voting shares shall nevertheless be entitled to vote on the following matters: 1.000. (CIR vs. Redeemable shares   Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. . Sale. creating or increasing bonded indebtedness. 2. Adoption and amendment of by-laws. provided that where the exclusive right to vote and be voted for in the election of directors is granted. 7. mortgage. upon call for payment by the board of directors: Provided. Incurring. Minimum capital stock required of stock corporations. They may be purchased or taken up by the corporation upon the expiration of a fixed period. Merger or consolidation of the corporation with another corporation or other corporations. the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. 6. Investment of corporate funds in another corporation or business in accordance with this Code. Amendment of the articles of incorporation. Sec. Founders‟ shares. Treasury shares may again be issued for a price less than par.Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks. . 12. 7. Founders’ shares  Sec. and Dissolution of the corporation.At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation. and upon such other terms and conditions as may be stated in the articles of incorporation. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. Treasury shares  Treasury shares are shares of stock which have been issued and fully paid for. 13. exchange. but subsequently reacquired by the issuing corporation by purchase. . and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription. the balance to be payable on a date or dates fixed in the contract of subscription without need of call. 6. 8.

COMMENCEMENT OF CORPORATE EXISTENCE   It is only from the time of the issuance of the certificate of incorporation that a corporation acquires juridical personality and legal existence. Sandiko) DE FACTO CORPORATION  De facto corporation – one that is so defectively created as not to be a de jure corporation but nevertheless exists. by virtue of its bona fide attempt to incorporate under existing statutory authority. The purpose or purposes of the corporation are patently unconstitutional.  . and Good faith in claiming to be and doing business as a corporation. General rule: Restrictions or preferences must be contained in the articles of incorporation and in all stock certificates to be issued by the corporation. coupled with the exercise of corporate powers. such restrictions and preferences must also be embodied in the by-laws. Exception: In close corporations. a corporation has no juridical personality to enter into contracts. as a corporate body. The Treasurer‟s Affidavit concerning the amount of capital stock subscribed and/or paid is false. An attempt. for all practical purposes. immoral. 4. illegal. 96. Salipsip 98B & Ronald Patrick Rubin 06C RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES     General rule: Corporations may or may not provide for restrictions and preferences regarding the transfer. Grounds for disapproval: 1. 3.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 11 of 87 Darren L. 2. 4. The percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. NO TRANSFER CLAUSE  No transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the books of the corporation and this restriction shall be indicated in all of the stock certificates to be issued by the corporation. It is discretionary. Exception: Close corporations are required to subject their shares to specified restrictions as required in Sec. A user of corporate powers. in good faith. or contrary to government rules and regulations. Requisites: 1. 2. The articles of incorporation of corporations subject to government supervision are not accompanied by a favorable recommendation from the appropriate government agency. 5. There is a valid law under which the corporation could have been created as a de jure corporation. sale or assignment of shares in the articles of incorporation. GROUNDS FOR DISAPPROVAL   Only substantial and not strict compliance is required. (Cagayan Fishing Development vs.  The articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed. Prior to incorporation. to form a corporation according to the requirements of law (colorable compliance). The grounds are not exclusive. 3.

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

AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 13 of 87 Darren L. The charter of corporations created by special laws consists of the special law creating the same and any and all laws. the latter has three remedies: 1. ORGANIZATION AND COMMENCEMENT OF BUSINESS  Sec. unless its failure to do so is due to causes beyond its control.    CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS CORPORATE CHARTER   Corporate charter – an instrument or authority from the sovereign power. Franchise – the right or privilege itself to be and act as a corporation or to do a certain act. jointly and severally. He may file the case directly against the associates personally who held out the association a corporation. Failure of the corporation to organize within the prescribed period would result in its automatic dissolution. the adoption of by-laws.  Organization – the election of officers.  As regards the liability of the associates of the alleged corporation. 2. 2. 3. bestowing rights and power. and Between and among the stockholders or members themselves as far as their relationship with one another is concerned. Effects on non-use of corporate charter and continuous inoperation of a corporation. The charter of corporations created under the Corporation Code consists of the articles of incorporation and the Corporation Code inclusive of the by-laws adopted thereunder and all pertinent provisions of any statute governing them. This provision shall not apply if the failure to organize. rules and regulations affecting or applicable to them. 3.  Between the corporation and the state insofar as it concerns its primary franchise to be and act as a corporation. and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created. Subsequent inoperation is merely a ground for suspension or revocation of corporate franchise. He may file a suit against the ostensible corporation to recover from the corporate properties. Substantial compliance is sufficient.If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation. . or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. The corporate charter is a three-fold contract: 1. commence the transaction of its businesses or the construction of its works. if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years. providing for the subscription and payment of capital stock. Dissolution is not automatic. its corporate powers cease and the corporation shall be deemed dissolved. the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. Between the corporation and the stockholders or members insofar as it governs their respective rights and obligations. only those who actively participated in holding out the association as a corporation should be held personally liable. 22. Salipsip 98B & Ronald Patrick Rubin 06C  If a corporation by estoppel exists and enters into a contract or transacts business with a third party.   . and Against both the ostensible corporation and persons forming it. However.

Primary franchise – the right or privilege of being a corporation which the state confers upon the applicant for this faculty. justify wrong. (Palay Inc. 3. A corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it. protect fraud. and the corporation are separate entities. the wrongdoing must be clearly and convincingly established. Test in determining the applicability of the doctrine of piercing the veil of corporation fiction: 1. or an alter-ego. Control. JR vs. Gregoria Araneta. Conversely. the officers may not be held personally liable as long as they act within the scope of their authority. Clave) In a right of action against the corporation. WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED   Corporate fiction cannot be disregarded in the absence of intent to defraud in corporate transactions. cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of the corporation being separate and distinct from the person composing it. a corporation has no interest in the individual property of its stockholders unless transferred to the corporation. (Caram vs. and to be exercised by the corporate body as such. NLRC)  2. Salipsip 98B & Ronald Patrick Rubin 06C  Kinds of franchises: 1. not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind. (Del Rosario vs. or dishonest and unjust act in contravention of plaintiff's legal rights. and is not affected by the personal rights. Inc.) A bona fide corporation should alone be liable for its corporate acts as duly authorized by its directors and officers. confuse legitimate issues. (Instrumentality Rule. NLRC) . vs. since the president. even in case of a oneman corporation. and The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. Dalisay) Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not. Inc. Inc. not mere majority or complete stock control. to perpetuate the violation of a statutory or other positive legal duty. Concept Builders. will or existence of its own. or to circumvent the law or perpetuate deception. IAC) For the separate juridical personality of a corporation to be disregarder. (Sulo ng Bayan. IAC) A corporation has a personality distinct and separate from its individual stockholders or members. (Soriano vs. Such control must have been used by the defendant to commit fraud or wrong. as an individual. vs. adjunct or business conduit for the sole benefit of a stockholder or a group of stockholders or another corporation. CORPORATE ENTITY THEORY   The corporation is possessed with a personality separate and distinct from the individual stockholders or members. (Remo. CA) The president and manager of a corporation who entered into and signed a contract in his official capacity. of itself. obligations and transactions of its stockholders or members. (Cruz vs.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 14 of 87 Darren L. The mere fact that one is president of a corporation does not render the property he owns and possesses the property of the corporation. vs. (Rustan Pulp and Paper Mills. Secondary franchise – the powers and privileges vested in. vs. defend crime. CA)      PIERCING THE VEIL OF CORPORATE FICTION  Piercing the veil of the corporate fiction is resorted to only in cases where the corporation is used or being used to defeat public convenience. 2. Inc. but complete domination. sufficient ground for disregarding the separate corporate personality.

2. Upon approval of the SEC. 38) Incurring.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 15 of 87 Darren L. In cases of extension of corporate term. vs. In case of extension of corporate term. as amended. (Note: not applicable to special amendments)  Special amendments: 1. A copy thereof. 2. Extension or shortening of corporate term (Sec. Vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporation. Salipsip 98B & Ronald Patrick Rubin 06C   Mere corporate ownership of all the stocks of another corporation will not justify their being treated as single entity. 3. Ritratto) There being not the least indication that the second corporation is a dummy or serves as a client of the first corporation. Resolution by at least a majority of the board of directors or trustees.  Time when the amendments shall take effect: 1. shall be indicated by underscoring the change or changes made. Hartigan) AMENDMENT OF THE CORPORATE TERM  Procedure to amend the corporate term: 1. (Yu vs. and provided that no extension can be made earlier than 5 years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the SEC. b. the fiction of separate and distinct corporate entities cannot be disregarder and brushed aside. or obligations previously acquired or incurred by it. a dissenting stockholder may exercise his appraisal rights. 5. Favorable recommendation of the appropriate government agency concerned in the case where the corporation is under its supervision. The original and amender articles together shall contain all the provisions required by law to be set out in the articles of incorporation. 4. 3. A change in the name of the corporation does not affect the identity of the corporation. 3. c. NLRC) AMENDMENT OF THE CORPORATE CHARTER  Steps to be followed for an effective amendment of the articles of incorporation: 1. nor in any way affect the rights. (PNB vs. 2. privileges. the extension should be for periods not exceeding 50 years in any single instance. (Philippine First Insurance Co. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations. Submission and filing of the amendments with the SEC as follows: a. . 38) PROVISIONS SUBJECT TO AMENDMENT   Matters which are fait accompli are not subject to change. Written notice of the proposed action and the time and place of meeting shall be served to each stockholder or member either by mail or by personal service. duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that such amendments have been duly approved by the required vote of the stockholders or members. creating or increasing bonded indebtedness (Sec. or From the date of filing with the SEC if not acted upon with 6 months from the date of filing for a cause not attributable to the corporation. 2. 37) Increase or decrease of capital stock (Sec. Such articles. Approval by a majority vote of the board or directors or trustees.

Inc.Unless otherwise provided in the Code. the corporate by-laws or by the official act of the board of directors. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable and necessary to carry out the corporate purpose or purposes. (Barreto vs. Orientalist Co. Orientalist Co. Salipsip 98B & Ronald Patrick Rubin 06C  Extension may be made only before the term provided in the corporate charter expires. vs. Those that are apparent or those acts which although not actually granted. adopted a resolution recognizing the existence of the contract and directing that steps be taken to enable the corporation to utilize its benefits. for the board can create liability. Ratification in this case is held to have occurred when the board. such defense should be specially pleaded.) The power to make corporate contracts resides primarily in the company's board of directors. by other means than by a formal expression of its will. La Previsora)     QUALIFICATIONS AND DISQUALIFICATIONS  Qualifications: 1. (Ramirez vs. The board may delegate the exercise of corporate powers. 5. . . Orientalist Co. all business conducted and all property of such corporations controlled and held by the board of directors or trustees. Failure to make an issue as to such authority eliminates any questions regarding it. (Ramirez vs. The board of directors and trustees. The authority of the board of directors does not extend to the fundamental changes in the corporate charter. Those that are inherent or acts that go with the office. Trustees must be members. 2. Orientalist Co.. (Ramirez vs.  Those expressly conferred or those granted by the articles of incorporation. SEC) CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS POWERS OF THE BOARD  Sec.) Contracts between a corporation and third persons must be made by or under the authority of its board of directors and not of its stockholders. Directors must own at least one (1) share of the capital stock of the corporation. like an individual. (Alhambra Cigar & Cigarette Mfg. A corporation is bound by the acts of its corporate officers if they act within the scope of the 5 classifications of powers of corporate agents: 1.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 16 of 87 Darren L. 3. (Ramirez vs. Co. A majority of the directors or trustees must be residents of the Philippines. 4.    Where a corporation seeks to evade liability on a contract on the ground of lack of authority on the part of the person who assumed to act for it. Powers arising out of customs. the principal knowingly allows or permits it to be done.) Where a corporate contract has been effected with the approval of the board of directors. with knowledge that the contract had been made. but the board may ratify an unauthorized contract made by an officer of the corporation. 23.) The fact that the power to make corporate contracts is thus vested in the board of directors does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation. the corporate powers of all corporations formed under this Code shall be exercised. a resolution adopted at a meeting of stockholders refusing to recognize the contract or repudiating it is without effect. 2. usage or emergency.

(Lee vs. if allowed in its articles of incorporation or by-laws. President. 3. for any reason.   In order to be eligible as a director. Candidates receiving the highest number of votes shall be declared elected. must be present at the election of directors. or a violation of this Code committed within five (5) years prior to the date of election or appointment.   Vote such number of shares for as many persons as there are directors to be elected. I. Salipsip 98B & Ronald Patrick Rubin 06C  Disqualifications: 1. in person or by proxy. it may not be adjourned indefinitely. in person or by representative authorized to act by written proxy.. General rule: To have a valid corporate act. 2. . not beneficial ownership. The election must be by ballot if requested by any voting stockholder or member. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years. 2. In stock corporations. the stockholder may: 1. 3. who shall be a director Treasurer. must be present in the election. The directors or officers shall hold office for one (1) year until their successors are elected and qualified. Distribute them on the same principle among as many candidates as he shall see fit. In non-stock corporations.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 17 of 87 Darren L. Cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. a member may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. no election is held. the decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum is required. 2.e. who shall be a resident and citizen of the Philippines Such other officers as may be provided for in the by-laws. However. the majority of the outstanding capital stock. (Detective and Protective Bureau vs. of the stock as appearing on the books of the corporation.   Any two (2) or more positions may be held concurrently by the same person.  No delinquent stock shall be voted. except that no one shall act as president and secretary or as president and treasurer at the same time. 4. The election may be adjourned if. Officers to be elected 1. CA) If no election is conducted or no qualified candidate is elected. In stock corporations. cumulative voting is not available unless provided for in the articles of incorporation or by-laws. cumulative voting is a matter of right. Other disqualifications under applicable special laws. VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS    General rule: the quorum requirement for a valid board meeting is the majority of the number of the directors or trustees as fixed in the articles of incorporation. a majority of the members entitled to vote. Exception: The articles of incorporation or the by-laws may provide for a greater majority. the incumbent director shall continue to act as such in a hold-over capacity until the election is held and a qualified candidate is so elected. what is material is the legal title to. or if the required quorum is not obtained. In non-stock corporations. Cloribel) ELECTION AND VOTING        In stock corporations. who may or may not be a director Secretary.

(Buenaseda vs. vs. This apparent authority may result from (1) the general manner by which the corporation holds out an officer or agent as having power to act or. 2. GSIS) A corporate officer entrusted with the general management and control of its business. the apparent authority with which it clothes him to act in general. General rule: Individual directors cannot bind the corporation by their individual acts..  Although an officer or agent acts without. Implied ratification: 1. the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority. or By recognition or adoption. Kong Li Po) Silence coupled with acceptance of benefits constitutes a binding ratification. custom. acquiescence and acceptance of benefits are equivalent to an implied ratification by the Board of Directors and binds the corporation even without formal resolution passed and recorded. if a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it. as where an officer is allowed to exercise a particular authority with respect to the business. his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority. (Yu Chuck vs. with actual or constructive knowledge thereof. As such officer. Inc. the corporation will be estopped to deny that such apparent authority is real.) An invalid contract may be validated by the ratification only of the board of directors. Bowen & Co. as to innocent third persons dealing in good faith with such officers or agents.) Express ratification: through formal board action. 3. whether within or without the scope of his ordinary powers. the general manager may bind the company without formal authorization of the board of directors. 2. he may. or (2) the acquiescence in his acts of a particular nature. or Where the officer or agent is clothed with actual or apparent authority. CA) Any action of the board without a meeting and without the required voting and quorum requirement will not bind the corporation unless subsequently ratified. the president has no authority to ratify such contract. Also.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 18 of 87 Darren L. (Francisco vs.         . Neumark and Co. perform all acts of an ordinary nature. continuously and publicly. (Lopez vs. 3. Acceptance and/or retention of benefits. Silence or acquiescence. has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. for a considerable time. Where similar acts have been approved by the directors as a matter of general practice. Salipsip 98B & Ronald Patrick Rubin 06C    Exception: The election of corporate officers requires the vote of a majority of all the members. in other words. Fontecha) Where a general business manager of a corporation is clothed with apparent authority to borrow money and the amount borrowed does not exceed the ordinary requirements of the business. Where expressly conferred. (Pua Casim & Co. or a particular branch of it. Exceptions: 1. which by usage or necessity are incident to his office. the authority is implied and that the corporation is bound. and policy. expressly or impliedly. By delegation of authority. (Yao Ka Sin Trading vs. or in excess of. without any special authority from the Board of Directors. (Board of liquidators vs. Kalaw) Lack of repudiation. and may bind the corporation by contracts in matters arising in the usual course of business.

and Vacancy due to other causes when the remaining directors or trustees do not constitute a quorum. In no case shall the total yearly compensation of directors. and If the director renders extra-ordinary or unusual service. or enjoining any resolution or other act of the corporation or its board of directors or directing or prohibiting any act of the corporation or the board of directors thereby effectively taking away the rights of the directors to act as managers of the corporation. the SEC is authorized to issue an order cancelling. as such directors. even motu propio by the appointment of a management committee. Vacancies to be filled by the stockholders or members in a regular or special meeting: 1. as such directors. 2. by a majority vote the outstanding capital stock grant the same. PD 902-A grants the court the power and authority to remove or oust a director and it can do so. 3. Exceptions: 1. altering.  The removal should take place at a general or special meeting duly called for that purpose. 2. The special meeting must be called by the secretary. the predecessor shall hold office in a hold-over capacity until such successor is duly elected and qualified.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 19 of 87 Darren L. 24. 3. Prior notice of the proposed removal must be made stating the time and place of meeting either by publication or by written notice. 2. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give notice. (Detective and Protective Bureau vs. Any change in the constitution of the board of directors or trustees must be reported to the SEC. If the successor is not qualified. 4. When the stockholders. or if there is no secretary. Vacancy due to an increase in the number of board of directors. exceed 10% of the net income before income tax of the corporation during the preceding year. 3. The removal must be a vote of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations.  When there is a provision in the by-laws fixing their compensation. General rule: Directors or trustees may be removed with or without just cause.          Vacancy due to removal may be filled by an election at the same meeting without further notice. on order of the president or on the written demand of the stockholders representing a majority of the outstanding capital stock. Salipsip 98B & Ronald Patrick Rubin 06C REMOVAL AND FILLING UP OF VACANCIES  Requirements and procedure: 1. Exception: Removal without just cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Sec. Vacancy due to expiration of term. or a majority of the members entitled to vote. except for reasonable per diems. the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member signing the demand. The tenure of the director filling up the vacancy shall only be for the unexpired term of his predecessor in office. . Cloribel) COMPENSATION OF DIRECTORS   General rule: Directors shall not receive any compensation. Vacancy due to removal. In case of a deadlock in a close corporation.

Salipsip 98B & Ronald Patrick Rubin 06C  If there is wastage of corporate assets. 3.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 20 of 87 Darren L. gross negligence in directing its affairs. vs. its stockholders or members or other persons shall be imposed upon directors or trustees: 1. or (c) for conflict of interest. 2. and whether or not it will cause losses or decrease in profits are not subject to the review of the court. Tibe. Questions of policy and management are left solely to the honest decision of the board of directors and the courts are without authority to substitute its judgment as against the former. 4. (Central Cooperative Exchange vs. when they render services to the corporation in a capacity other than as directors or trustees. does not forthwith file with the corporate secretary his written objection thereto. the person or persons who actually signed the check in behalf of such drawer shall be liable under this Act. by specific provision of law. 3. (Sec. (Western Institute of Technology. its stockholders or other persons. to personally answer for his corporate action. (Govt.. company or entity.) Members of the board of directors may receive compensation. He consents to the issuance of watered stocks or who. vs. NLRC) THREE-FOLD DUTY OF DIRECTORS  Three-fold duty of directors: 1. Inc. or He is made. Who willfully and knowingly vote for or assent to patently unlawful acts of the corporation. Bacolod Murcia Milling. trustee or officer along with the corporation may validly attach. the courts may be justified to look into the reasonableness and fairness of the compensation despite the fact that the grant thereof is authorized pursuant to the by-laws and by the vote of the majority of the holders of the outstanding capital stock of the corporation. 3. The board may not grant compensation upon itself without authorization of the by-laws or in contravention of the by-laws. vs. (Tramat Mercantile. Jr. as a rule. or Who acquire any personal property or pecuniary interest in conflict with their duty as such directors or trustees.  Business judgment rule – directors are not liable for losses due to imprudence or honest error of judgment. (Montelibano vs. Who are guilty of gross negligence or bad faith in directing the affairs of the corporation. Resolutions passed in good faith by the board of directors are valid and binding. Inc.)  . BP 22) In labor cases. Personal liability of a corporate director. having knowledge thereof. a corporate officer or agent is not civilly or criminally liable for acts done by him as such officer or agent. The remedy is in the hands of the stockholders who have the power at any lawful meeting to change the rule. 1. only when: 1. He agrees to hold himself personally and solidarily liable with the corporation. Co. He assents (a) to a patently unlawful act of the corporation. CA) 2. Inc. 2. corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. Salas) The fact that the amount paid as compensation to directors under a by-law provision has increased beyond what would probably be necessary to secure adequate service from them is a matter that cannot be corrected by the court.  Obedience Diligence Loyalty Solidarily liability for all damages suffered by the corporation. or (b) for bad faith. in addition to reasonable per diems. (Uichico vs. resulting in damages to the corporation. El Hogar Filipino)    LIABILITY OF CORPORATE OFFICERS   The general rule is that unless the law specifically provides.   Where a check is drawn by a corporation.

as to which equity imposes a disability upon him to deal in his own behalf. in the case of a contract with a director or trustee. where a director is liable to account for profits if he attempts to acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in confidence as to which equity imposes a disability upon him to deal in his own behalf is not subject to ratification by the stockholders. Distinction between Secs. Salipsip 98B & Ronald Patrick Rubin 06C   General rule: A director is not liable for misconduct of co-directors or other officers.  Directors are liable for fraud committed by concealment of information as to the state and probable result of the negotiations for the sale of corporate assets which may affect the price of the corporation‟s stock. and The contract is fair and reasonable under the circumstances. by virtue of his office. 34. Exceptions: 1. 4. The contract is ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members Such ratification is made at a meeting called for that purpose. acquires for himself a business opportunity which should belong to the corporation. He connives or participates in it.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 21 of 87 Darren L. unless all of the following conditions are present: 1. When a director or trustee acquires any personal or pecuniary interest in conflict with his duty as such director or trustee. and When he. and That in case of an officer. 2. Full disclosure of the adverse interest of the directors or trustees involved is made. 2. 3. the president as such may bind the corporation by a contract in the ordinary course of . 31 & 34: 1.  In the absence of express delegation. a contract entered into by the president. He cannot appropriate to himself a business opportunity which in fairness should belong to the corporation. in violation of his duty. (Strong vs. That the contract is fair and reasonable under the circumstances. such contract may be ratified. at the option of such corporation. provided: 1.  Corporate opportunity doctrine – It places a director of a corporation in the position of a fiduciary and prohibits him from seizing a business opportunity and/or developing it at the expense and with the facilities of the corporation. on behalf of the corporation. any interest adverse to the corporation in respect to any matter which has been reposed in him in confidence. Repide) SELF-DEALING DIRECTORS  A contract of the corporation with one or more of its directors or trustees or officers is voidable. 4. That the vote of such director or trustee was not necessary for the approval of the contract. Sec. may bind the corporation if the board should ratify the same expressly or impliedly. 3. 2. or He is negligent in not discovering or acting to prevent it. Where any of the first two conditions set forth in the preceding paragraph is absent. he is bound to account for such profits unless his act is ratified by the stockholders owning or representing at least 2/3 of the outstanding capital stock. Sec. the contract has been previously authorized by the board of directors. When he attempts to acquire or acquires. thereby obtaining profit to the prejudice of such corporation. where the director acquires for himself a business opportunity which should belong to the corporation. 3.  2.  The duty of loyalty is violated in the following instances: 1. 2.  That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting. Furthermore. 31.

That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal. a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided. a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation. Mc Cullough) INTERLOCKING DIRECTORS  Sec. i.  A director who owns a substantial interest in one corporation dealing with another where he has a nominal interest is a regarded as a self-dealing director in so far as the latter corporation is concerned. 33.Except in cases of fraud. in order to make the court‟s judgment binding upon it. is dealing with a third person.e. purportedly acting for the corporation. person outside the corporation. to bring about a      . Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. Orozco. Salas) The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. et al. Salipsip 98B & Ronald Patrick Rubin 06C business. (Mead vs. (Western Institute of Technology. . (Everett vs. The law does not require litigants to do useless acts.  A stockholder in a corporation who was not such at the time of the transactions complained of. Individual or personal suit – one brought by the shareholders for direct injury to his rights. Asia Banking Corporation) The corporation should be made a party.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 22 of 87 Darren L. such as denial of his right to inspect corporate books and records or pre-emptive right. vs. 3. can not maintain a derivative suit unless such transactions continue and are injurious to the stockholder. he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Khan) Where corporate directors are guilty of breach of trust – not mere error of judgment or abuse of discretion – and intra-corporate remedy is futile or useless. or the redress of a wrong committed against him.. provided the same is reasonable under the circumstances. (Pascual vs. Contracts between corporations with interlocking directors. Inc. or whose shares had not devolved upon him since by operation of law.. (Republic Bank vs. These rules only apply where the president or other officer. or affect him specifically in some other way. (Prime White Cement Corp. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vest jurisdiction upon the court or quasi-judicial body concerned over the subject matter and nature of the action. (SMC vs. and provided the contract is fair and reasonable under the circumstances. and thus bar future relitigation of the issue. or for the protection or vindication of his own particular right. individually. It does not apply to self-dealing directors or officers. IAC)  A director or officer may in good faith and for an adequate consideration purchase from a majority of the directors or stockholders the property even of an insolvent corporation. DERIVATIVE SUIT  Suits that stockholders may bring against erring directors or officers: 1. Representative of class suit . 2. On what side the corporation appears is not important. Cuaderno) The minority shareholder who is suing for and in behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. The number of his shares is immaterial since he is not suing in his own behalf. demand upon such board to institute action and prosecute the same is not required. vs. and recovery is in favor of the corporation.) When the board is under the complete control of the principal defendants in the case. and Derivative suit – an action based on injury to the corporation – to enforce a corporate right – wherein the corporation is joined as a necessary party. but in behalf and for the benefit of the corporation.

The party bringing the action should be a stockholder as of the time the act or transaction complained of took place.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 23 of 87 Darren L. so that the suit for the damages claimed should be by the corporation rather than by the stockholders.  CHAPTER 7: CORPORATE POWERS AND AUTHORITY  Classification of corporate authority: 1. (Reyes vs. 3. in order to make the court‟s judgment binding upon it. requirements and procedure so that a derivative suit may proceed or prosper: 1. et al. 3. Victoriano. This rule. He has tried to exhaust intra-corporate remedies.  2. otherwise. The amendment or repeal of by-laws or the adoption of new by-laws. by majority vote of all its members.e. Santos) Rules. Any benefit or damages recovered shall pertain to the corporation. the injury complained of is primarily to the corporation. is not required if the company is under the complete control of the directors who are the very ones to be sued (or where it becomes obvious that a demand upon them would have been futile and useless) since the law does not require a litigant to perform useless acts. The number of shares is immaterial. 2. 4. 5.)   The stockholders in a derivate suit cannot allege or vindicate their own individual interests or prejudice. on such specific matters within the competence of the board. The stockholders may not directly claim those damages for themselves for that would result in the appropriation by. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable. (Gamboa vs.) In a derivative suit. Demand. either as party-plaintiff or defendant. General rule: The executive committee may act. the case is dismissible. (Evangelista vs. The corporation should be made a party. or whose shares have evolved upon him since by operation of law. i. and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities. The stockholder bringing the suit must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated. The filling of vacancies in the board. et al. Approval of any action for which shareholders' approval is also required. . Those expressly granted or authorized by law inclusive of the corporate charter or articles of incorporation Those impliedly granted as are essential or reasonably necessary to the carrying out of the express powers Those that are incidental to its existence. as may be delegated to it in the by-laws or on a majority vote of the board. Exceptions: 1. EXECUTIVE COMMITTEE   An executive committee may be created when authorized by the by-laws. 2. Salipsip 98B & Ronald Patrick Rubin 06C redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. and A distribution of cash dividends to the shareholders. does not apply if such act or transaction continues and is injurious to the stockholder or affects him specifically in some other way. 3. 5. however. however. 4. he has made a demand on the board of directors for the appropriate relief but the latter had failed or refused to heed his plea. Tan.

38) 13. 36) Power to amend its articles of incorporation (Sec. Power to invest corporate funds in another corporation or business or for any other purpose (Sec. otherwise the service is insufficient. Power to incur. amend or repeal by-laws (Sec. 8. Villarosa & Partner Co. vs. (Delta Motor Sales Corp. Power to sell or dispose corporate assets (Sec. Benito)  POWER OF SUCCESSION  Right of succession – a corporation persists to exist despite the death. Corporate secretary. 3. 43) 19. treasurer. 9. 5. 36) Power to adopt. Managing partner. 2. 4. service of summons upon an agent of the corporation is no longer authorized. civil interdiction or withdrawal of the stockholders or members thereof. Power to increase or decrease capital stock (Sec. 37) 12. Antillon) Service of summons upon a corporation must be made upon: 1. Power to enter into management contract (Sec. Power to establish pension. Power to acquire own shares (Sec. 36) Power to enter into merger or consolidation (Sec. incapacity. Salipsip 98B & Ronald Patrick Rubin 06C  Powers expressly granted 1. (CRS vs. 7. 41) 17. 38) 14. Power to sue and be sued (Sec. 36) Power to acquire or alienate real or personal property (Sec. 42) 18. 36) Power to issue or sell stocks/ to admit members (Sec. General manager. Power to extend or shorten corporate term (Sec. . LTD.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 24 of 87 Darren L. 39) 15.  President. 36) Power to adopt and use a corporate seal (Sec. therefore. Power to declare dividends (Sec. (E. 44) POWER TO SUE AND BE SUED   The residence of the corporation is the place of its principal office as may be indicated in its articles of incorporation and may. Power to deny pre-emptive right (Sec. and other plans (Sec. 3. or In-house counsel Strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation.. 6. vs. retirement. Mangosing) Under the new rules.B. be sued only at that place. create or increase bonded indebtedness (Sec. 5. The officer upon whom service is made must be one who is named in the statute. 36) Power of succession (Sec. 40) 16. 36) 11. 4. 6. 36) 10. 36) Power to make reasonable donations (Sec. 2.

as amended. openly. morals or public policy. there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. Acts in the usual course of business Acts to protect debts owing to the corporation Embarking on a different business . of Lands vs. POWER TO ESTABLISH PENSION. POWER TO ACQUIRE/ALIENATE PROPERTY  Real or personal properties must be acquired.D. and It shall not be in aid of any political party or candidate.) POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR NECESSARY TO CARRY OUT ITS PURPOSES (IMPLIED POWERS)  Classification of implied powers: 1. POWER TO ISSUE/SELL STOCKS OR ADMIT MEMBERS  The power of a corporation to issue or sell stock is an inherent right except where it sells or issues stocks of other corporations (Securities Regulation Code).. (Republic vs. (Dir.) A corporation whose business may properly conducted in a populous center may acquire an appropriate lot and construct thereon an edifice with facilities in excess of its own immediate requirements. A corporation cannot undertake acquisition of property which would have no purpose and would have no necessary connection with its legitimate business. within one month from receipt of official notice of the issuance of certificate of incorporation or registration. (Luneta Motors Co. continuously and publicly within the prescribed statutory period of 30 years under the Public Land Law. A. scientific. held or conveyed as the transaction of the lawful business of the corporation may reasonably and necessarily require. Inc. it shall be subject to the limitations imposed by law and the Constitution. not contrary to law. personally or through its predecessor-in-interest. Inc. CA)    POWER TO MAKE REASONABLE DONATIONS  Limitations imposed upon corporate donations: 1. It must be for public welfare. or for purpose of partisan political activity. Furthermore. 3. 2. since it is converted into private property by mere lapse of completion of said period. POWER TO AMEND ARTICLES OF INCORPORATION   General rule: Amendment of the articles of incorporation is a matter of right (Note: procedure differs for special amendments) Exception: Corporations created by special law POWER TO ADOPT BY-LAWS  A corporation. 2. cultural or similar purpose.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 25 of 87 Darren L. once formed is required to adopt its by-laws. (Govt. vs. charitable. or for hospital. Salipsip 98B & Ronald Patrick Rubin 06C POWER TO ADOPT AND USE COMMON SEAL  Statutes empowering corporations to make and own a seal are not mandatory but merely permissive. 3. RETIREMENT AND OTHER PLANS  While as a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by law of its organization and therefore beyond the powers conferred upon it by law. vs. The donation must be reasonable. Acoje Mining Co. Santos. El Hogar) A corporation may register alienable public lands if it has been held by it.

vs. (Powers vs. . (NPC vs. the same cannot be made ealier than five (5) years prior to the original or subsequent expiry date unless there are justifiable reasons for an earlier extension. 2. suitable or necessary to enable it to fully perform the undertaking designated in its charter. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations. either by mail or personal service. Salipsip 98B & Ronald Patrick Rubin 06C 4. (NPC vs. Prior written notice of the proposed action must be made stating the time and place of meeting addressed to each stockholder or member at his place of residence. The ratification must be at a meeting duly called for that purpose. 7. and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense. INCUR. 2. Vera) Examples: 1. 9. 4. POWER TO INCREASE/DECREASE INDEBTEDNESS  Requirements and procedure: 1. the same must be made during the lifetime of the corporation. CAPITAL. Inc. countersigned by the chairman and the secretary of the stockholder‟s meeting. Approval by the majority vote of the board of directors or trustees. 3. 38. (NPC vs. A certificate in duplicate must be signed by a majority of the directors of the corporation. Submission of the amended articles with the SEC. (Teresa Electric Power Co. Prior written notice of the proposal to extend or shorten the corporate term must be made stating the time and place of meeting addressed to each stockholder or member at his place of residence. and is done for the purpose of serving corporate ends. setting forth the matters contained in subsection 1 to 7 of Sec. 6.. In case of extension. either by mail or personal service. 3. Vera) International School‟s imposition of a development fee for expansion and maintenance.  Acts in part or wholly to protect or aid employees Acts to increase business A corporation has authority to do what will legitimately tend to effectuate the express purposes and objects. 5. In case of extension. 3. that it may ordinarily do all things that are convenient. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations. There must be a logical and necessary relation of the act to the corporate purpose. Marshall)    POWER TO EXTEND/SHORTEN CORPORATE TERM  Requirements and procedure: 1. PSC) NPC‟s undertaking of stevedoring services for its power plant. 8. it may be fairly considered within the corporation‟s charter powers. Approval by the majority vote of the board of directors or trustees. Vera) If the act is one which is lawful in itself and not otherwise prohibited. and Approval thereof by the SEC. and for which it is organized. 5. Any dissenting stockholder may exercise his appraisal right. Operation and maintenance of an electric plant for a cement factory. CREATE OR INCREASE BONDED 5.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 26 of 87 Darren L. 2. 4. The ratification must be at a meeting duly called for that purpose.

AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 27 of 87 Darren L.  A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares. Moreover. In case of decrease in capital stock. or otherwise contract a debt has the implied power to issue bonds in payment or as a security provided it violates no prohibition or restriction in its charter or any other statutes. and Approval thereof by the SEC.    . Existence of unissued or unsubscribed share out of the original capital stock will not prohibit the increase of capital stock.  3 ways of increasing the capital stock: 1. a deception as it were. the existing ratio of their proprietary interest and voting power in the corporation. in proportion to their respective stockholdings. The basis for the grant of this right is the preservation. of the old stockholders‟ relative and proportionate voting strength and control. or Shares to be issued in good faith with the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock. Corporate bonds must be registered and approved by the SEC before they are issued. Salipsip 98B & Ronald Patrick Rubin 06C 6. To reduce or wipe out existing deficit where no creditors would thereby be affected. or To write down the value of its fixed assets to reflect the present actual value in case where there is a decline in the value of the fixed assets of the corporation. unless such right is denied by the articles of incorporation or an amendment thereto. the same must not prejudice the right of the creditors. Rivera) A reduction of capital stock may not be used as a subterfuge. 2. Increasing the number of existing shares without increasing the par value thereof. 3. unimpaired and undiluted. Exceptions: 1. 7.   Increasing the par value of the existing number of shared without increasing the number of shares. In case of increase in capital stock. vs. 9. 2. and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by law. 2. Filing of the certificate of increase and amended articles with the SEC. 39. All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class. 25% of such increased capital must be subscribed and that at least 25% of the amount subscribed must be paid either in cash or property. to camouflage the fact that a corporation has been making profits to obviate a just sharing to labor. (Philippine Trust Company vs.    POWER TO DENY PRE-EMPTIVE RIGHTS  Pre-emptive right – is a right granted by law to all existing stockholders of a stock corporation to subscribe to all issues or disposition of shares of any class. in proportion to their respective shareholdings. Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public. that is. When capital is more than what is necessary to procreate the business or reduction of capital surplus. to contract for labor or services. (Madrigal & Co. 3. without a valuable consideration for such release. subject only to the limitations imposed under Sec. Zamora) A corporation which has the power to borrow or raise money. strict compliance with the statutory regulations is necessary. in exchange for property needed for corporate purposes or in payment of a previously contracted debt. 8. and Increasing the number of existing shares and at the same time increasing the par value of the shares. Reasons for decreasing capital stock: 1.

the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into such transaction. lease. Resolution by the majority vote of the board of directors or trustees. (Note: In non-stock corporations where there are no members with voting rights. It includes new share issued pursuant to an increase in capital stock. unissued shares which form part of the original capital stock and treasury shares.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 28 of 87 Darren L. expressly or impliedly by inability or failure to exercise it after having been notified. the latter is not liable for the debts and liabilities of the transferor. and Any dissenting stockholder shall have the option to exercise his appraisal right. mortgage. CA) General rule: Where a corporation sells or otherwise transfers all of its assets to another corporation. 2.  The sale or other disposition of all or substantially all of the corporate property or assets must be voted for by the legitimate board and concurred in by the bona fide stockholders or members. The pre-emptive right covers all issues or disposition of share of any class. The right may be lost by waiver. 2. Exceptions: 1. and Where the transaction is entered into fraudulently in order to escape liability for such debts. The ratification must be at a meeting duly called for that purpose. Where the purchasing corporation is merely a continuation of the selling corporation. Where the transaction amounts to a consolidation or merger of the corporations.)  5. Prior written notice of the proposed action must be made stating the time and place of meeting addressed to each stockholder or member at his place of residence. 6. 7. (IDP vs. Where the purchaser expressly or impliedly agrees to assume such debts. pledge or other dispose of property and assets is necessary in the usual and regular course of business of the corporation. 4. The sale. 4. Conditions for the valid exercise of this right: 1. 3. 2.   . Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations.  Exception to application of the procedure and requirements: 1. The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and monopolies. Salipsip 98B & Ronald Patrick Rubin 06C    The exceptions do not apply to stockholders of a close corporation. or The sale or other disposition of property and assets is appropriated for the conduct of the corporation‟s remaining business. either by mail or personal service. POWER TO SELL/DISPOSE ASSETS  There is a sale or other disposition of substantially all the corporate property and assets if the corporation would thereby be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. exchange. 3.

Requirements and procedure: 1. either by mail or personal service. is merely voidable and may become binding and enforceable when ratified by the stockholders. Resolution by the majority vote of the board of directors or trustees. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations. 3. 2. including but not limited to the following cases: 1. 3. and Any dissenting stockholder shall have the option to exercise his appraisal right. actual or constructive. free from fraud. and Stockholder‟s right to compel a close corporation to purchase his shares when the corporation has sufficient assets to cover its debts and liabilities. Prior written notice of the proposed investment and the time and place of meeting shall be made. 4. The ratification must be at a meeting duly called for that purpose. To collect or compromise an indebtedness to the corporation. arising out of unpaid subscription. 4. An unauthorized investment which is not illegal or void ab initio or not contrary to law. Dividends can only be declared out of unrestricted retained earnings. bonds and other liquid assets and does not include real properties or other fixed assets. 2. Unrestricted retained earnings – undistributed earnings of a corporation which have not been allocated for any managerial. SEC) POWER TO DECLARE DIVIDENDS    Dividends – are corporate profits set aside. Redemption of redeemable shares. . Exceptions: 1. vs. To eliminate fractional shares arising out of stock dividends. (Gokongwei.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 29 of 87 Darren L.   The approval of the stockholders or members is not required where the investment is reasonably necessary to accomplish its primary purpose. POWER TO INVEST FUNDS   The right refers to investment in the form of money. and to purchase delinquent shares sold during said sale.  The acquisition of shares must be made in good faith. in a delinquency sale. and To redeem redeemable shares. stock. addressed to each stockholder or member at his place of residence. public order or public policy. 2. 5. morals. To pay dissenting or withdrawing stockholders entitled to payment for their shares.   General rule: the corporation must have unrestricted retained earnings. and that the corporation is not insolvent or in the process of dissolution and that the rights of creditors and other stockholders are in no way injuriously affected. contractual or legal purpose and which are free for distribution to the stockholders as dividends. Jr. declared and ordered by the Board of Directors to be paid to the stockholders. Salipsip 98B & Ronald Patrick Rubin 06C POWER TO ACQUIRE OWN SHARES  A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes.

Property dividend – those that take form of bonds. notes. or for a dishonest purpose or act fraudulently. or When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation. or When the corporation is prohibited under any loan agreement with any financial institution or creditor. (Neilson & Co. The contract shall not be for a period longer than 5 years for any one term. When justified by definite corporate expansion projects or programs approved by the board of directors. Cash dividend – first applied to the unpaid balance on subscription costs and expenses. evidences of indebtedness or stock in other corporations. 3.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 30 of 87 Darren L. oppressively. whether local or foreign. such as when there is need for special reserve for probable contingencies. except those which relate to exploration. Stock dividends cannot be issued to a person who is not a stockholder.   General rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock. 3. Inc. and such consent has not yet been secured.    General rule: The board of directors exercise exclusive authority in declaring dividends. (Ladia)      POWER TO ENTER INTO MANAGEMENT CONTRACTS  Requirements and procedure: 1. 2. Resolution by the board of directors or trustees. gross negligence or willful and knowing assent. The approval must be at a meeting duly called for that purpose. The judgment of the board of directors in the matter of declaring dividends is conclusive except when they act in bad faith. the approval of the stockholders representing at least 2/3 of the outstanding capital stock is required. 2. Cash dividend – those that are payable in lawful money. 3. Approval by the stockholders representing a majority of the outstanding capital stock or majority of the members in case of non-stock corporations. The right of the stockholders to be paid dividends vest as soon as they have been lawfully and finally declared by the Board of Directors. . unless attended with bad faith. 2. Exception: In declaring stock dividends.) Directors are not liable for declaration of dividend contrary to law. unreasonably or unjustly or abuse of discretion can be shown so as to impair the rights of the complaining stockholders to their just proportion of corporate profits. Lepanto Consolidated Mining Co. development or utilization of natural resources which may be entered into for such periods as may be provided by pertinent laws and regulations.  Rules on dividends due on delinquent stock: 1.. Exceptions: 1. Salipsip 98B & Ronald Patrick Rubin 06C  Types of dividends: 1. The essential test of bad faith is to determine if the policy of the directors is dictated by their personal interest rather than the corporate welfare. Stock dividends – refer to the corporation‟s shares of stock. Stock dividend – withheld until subscription is fully paid. 4. 2. No revocation of dividend may be had unless it has not been officially communicated to the stockholders or is in the form of stock dividends which is revocable at any time prior to distribution. vs. from declaring dividends without its/his consent.

Since such accommodation paper cannot thus be enforced against the corporation. and thereby secure the profit derived from their sale. it will.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 31 of 87 Darren L. should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong. De la Rama Steamship) Corporations authorized to acquire the bonds have the implied power to guarantee them in order to place them upon the market under better. (Republic vs. estoppel or on equitable grounds unless the public or third parties are thereby prejudiced.  Acts which are clearly beneficial to the company or necessary to promote the interest or welfare of the corporation. inherent or implied powers as defined by its charter or articles of incorporation. (Crisologo-Jose vs. in the absence of proof to the contrary. vs. and (c) if the contract is executory on one side only. Where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation. (b) if the contract is executory on both sides. neither party can maintain an action for its non-performance. ULTRA-VIRES ACTS  Ultra-vires acts – are those that can not be executed or performed by a corporation because they are not within its express. operating agreements or otherwise. be presumed to be valid. When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made. The doctrine of ultra vires. Corporations are presumed to contract within their powers. 3. 2. or Where the contract would constitute the management or operation of all or substantially all of the business of another corporation. after proper notice and hearing. Where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation. On the immediate parties – (a) if the contract is fully executed on both sides. its employees and their families. (Carlos vs. Acoje Mining) Mere ultra-vires acts which are not illegal per se may become binding and enforceable either by ratification.  2. On the corporation itself – the proper forum may suspend or revoke. Midoro Sugar Co. (Japanese War Notes Claimants Assoc. the contract is effective. Consequences of ultra-vires acts: 1. On the rights of the stockholders – a stockholder may either an individual or derivative suit to enjoin a threatened ultra-vires act or contract. (Privano vs. or in the legitimate furtherance of its business are within corporate powers. especially since it is not involved in any aspect of the corporate business or operations.) Actions which are beyond the powers of the corporation as embodied in its articles of incorporation and have absolutely no relation to the avowed purpose of the corporation are ultra-vires. to regulate the conduct and define the duties of the stockholders or members towards the corporation and among .. more advantageous conditions. when invoked for or against a corporation. SEC) Corporate officers have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. the party who has received the benefits is estopped to set up that the contract is ultra-vires. whether such contracts are called service contracts. CA)     CHAPTER 8: BY-LAWS  By-laws – are rules and ordinances made by a corporation for its own government. 3. the signatories thereof shall be personally liable therefor. Inc. the franchise or certificate of registration of the corporation for serious misrepresentation as to what the corporation can do or is doing to the great damage or prejudice of the general public. as well as for the consequences arising from their acts in connection therewith. and has been fully performed on the other. Salipsip 98B & Ronald Patrick Rubin 06C  When approval of the stockholders of the managed corporation owning at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations are required: 1.

must be filed with the SEC which shall be attached to the original articles of incorporation. The time and manner of calling and conducting regular or special meetings of the stockholders or members. place and manner of calling and conducting regular or special meetings of the directors or trustees. subject to the inspection of the stockholders or members during office hours. 7. 2. b. Adopted within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the SEC. 2. Approved and signed by all the incorporators. The form for proxies of stockholders and members and the manner of voting them. Salipsip 98B & Ronald Patrick Rubin 06C themselves. the Corporation Code and other statutes which form part of the corporate charter. In the case of stock corporations. Signed by the stockholders or members voting for them Kept in the principal office of the corporation. 4. The qualifications. By-laws become effective only upon the approval of the SEC . officers and employees. Affirmative vote of the stockholders representing at least a majority of the outstanding capital stock. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. 3. affairs and concerns and its stockholders or member and directors and officers with relation thereto and among themselves in their relation to it. Contents of by-laws: 1. The manner of election or appointment and the term of office of all officers other than directors or trustees. 5. e.  Requirements and procedure for adoption of by-laws: 1. 6. The time. Submitted together with the articles of incorporation to the SEC. duties and compensation of directors or trustees. Issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. c. They are rules and regulations or private laws enacted by the corporation to regulate. If adopted subsequent to incorporation: a. 4. d. The penalties for violation of the by-laws. duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation. 3.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 32 of 87 Darren L. or of at least a majority of the members in case of nonstock corporations. 5. and 10. A copy thereof.   By-laws are subordinate to the articles of incorporation. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof. the manner of issuing stock certificates. The by laws must not be inconsistent with the Code.  Certification of the appropriate government agency concerned to the effect that such bylaws or amendments are in accordance with law. 8. b. If adopted prior to incorporation: a. 9. govern and control its own actions. The required quorum in meetings of stockholders or members and the manner of voting therein.

directors or trustees. . (LGVHA vs. It must be called by the proper party. 4. public policy or morals. It must be held at the proper place. 5. (Govt. or By the board of directors alone when delegated by 2/3 of the outstanding capital stock or members    Delegated power to amend. It must be reasonable. 2. members. SEC) Elements of a valid by laws: 1. 3. It must not impair obligations and contracts or vested rights. 2. effect or prejudice third persons without knowledge. vs. repeal or adopt by-laws may be revoked Incorporation of an invalid by-law provision is not a misdemeanor. Botica Nolasco) Two modes of amending or repealing by laws or adopting a new one: 1. etc. Prior to incorporation – must be signed by all the incorporators. 2. It must not be contrary to law. General Special STOCKHOLDER’S MEETINGS  Requirements to have a valid stockholder‟s meeting: 1. CA) By-laws are internal rules an cannot bind. Quorum and voting requirements must be met It must be held on the date fixed in the by-laws or in accordance with law. 2. El Hogar) The by-laws may disqualify a stockholder from being elected into office if he has a substantial interest in a competitor corporation to avoid any possible adverse effects of conflicting interest of a director. Jr. must be filed together with the articles of incorporation After incorporation – approval of at least a majority of the outstanding capital stock     Failure to file by-laws may result to suspension or revocation of corporate franchise after proper notice and hearing Failure to file by-laws does not result in automatic dissolution. or the transaction of business of a common interest.  CHAPTER 9: MEETINGS   Meetings – applies to every duly convened assembly either stockholders. Prior notice must be given.  Regular meetings shall be held annually on a date fixed in the by-laws. 3.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 33 of 87 Darren L. for any legal purpose. (Fleisher vs. manages. Salipsip 98B & Ronald Patrick Rubin 06C  Time of filing: 1. It must be general and uniform in its effect or applicable to all alike or those similarly situated. Classes of meetings: 1. 4. at a regular or special meeting called for that purpose. 5. It must be held on the date fixed in the by-laws or in accordance with law. It must not be inconsistent with the articles of incorporate. vs. or if not so fixed. By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or members. (Gokongwei. on any date in April of every year as determined by the board of directors or trustees. It does not justify the dissolution of the corporation. 2.

2. and On order of the proper forum under Sec.        Regular – 2 weeks prior notice Special – 1 week prior notice The by-laws may provide for a different period (shorter or longer) Failure to give notice of a meeting would render the resolution made thereunder voidable at the option of the stockholder or member who was not notified. DIRECTORS’/TRUSTEES’ MEETING  Regular meetings – held monthly. Absent of any provision in the by-laws. 4. 3. even if improperly held or called will be valid if all the stockholders or members are present or duly represented.  The basis of determining the presence of a quorum: 1. (Board of Directors vs. 2. Notice of meetings shall be in writing. or the stockholder or member making the demand if there is no secretary or he refuses to do so. the remedy is to file a petition for mandamus. Under Sec. Tan) Notice may be waived. in its by laws.  The by-laws or the Code itself may provide for a greater quorum. Salipsip 98B & Ronald Patrick Rubin 06C  Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws.  Persons who may call the meeting: 1.   Stock corporation – total subscription irrespective of the amount paid by them. shall be held in the city or municipality where the principal office of the corporation is located. unless the by-laws provide otherwise .AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 34 of 87 Darren L. If the voting requirement is met. It must be held at the proper place. Otherwise. expressly or impliedly.  It must be called by the proper party. A quorum once present is not broken by the subsequent withdrawal of a part or fraction of the stockholders.  A stockholder may only petition the SEC to issue an order directing the petitioner to call a meeting when there is no person authorized to call a meeting. the president. any resolution passed in the meeting. by the secretary on order of the president or on written demand of the stockholder representing or holding at least a majority of the outstanding capital stock or majority of the members entitled to vote in a non-stock corporation. Quorum and voting requirements must be met  A quorum shall consist of the stockholders representing a majority of the outstanding capital stock. Non-stock corporation – total number of registered voting members. 28 (removal of director). and if practicable in the principal office of the corporation. 2. 50.  General Rule: Stockholders' or members' meetings. Metro Manila is considered a city or municipality. whether regular or special. Prior notice must be given. and the time and place thereof stated therein. Exceptions to the rule: 1. Notice must state the agenda otherwise it may become voidable. The person or persons authorized under the by-laws. A non-stock corporation. may provide for any place within the Philippines.

In case of pledged or mortgaged shares. receivers. 55) Executors. and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. Exceptions: 1. It also refers to the instrument or paper which is evidence of the authority of the agent or the holder thereof to vote for and in behalf of the stockholder or member. unless the by-laws provide otherwise. unless otherwise provided by the by-laws. Notice must be sent at least one (1) day prior to the scheduled meeting. Notice may be waived. (Sec. the act of any one director may bind the corporation without a meeting. the right to vote may be limited. broadened or denied in the articles of incorporation or in the by-laws. 6 Treasury shares Delinquent shares Unregistered transferee of stock General rule: Stockholders or members may vote personally or through a representative by way of proxy. teleconferencing and videoconferencing is allowed. 50) An executor or administrator of a stockholder may not be elected unless he owns at least 1 share. 2. the consent of all the co-owners shall be necessary. (RA 8792) The president shall preside at the meeting. (Sec. General Rule: In case of shares jointly owned. Fontecha) In a close corporation. .AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 35 of 87 Darren L.  Non-voting shares are not entitled to vote except in those instances provided for in the penultimate paragraph of Sec. Exceptions: 1. STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING   General rule: The right to vote is an inherent right and the stockholder may vote any way he pleases. If the notice requirement is not complied with the meeting is illegal and will not bind the corporation except when subsequently ratified. administrator. Exception: In non-stock corporations. Presence at a meeting waives want of notice. 3. A director or trustee cannot attend or vote by proxy at any board meeting. expressly or impliedly. 2. (Lopez vs. The right to vote is vested with the legal owner of the shares. Written proxy signed by all the co-owners The shares are owned in an "and/or" capacity        PROXY  Proxy – the authority given by the stockholder or member to another to vote for him at a stockholders‟ or members‟ meeting. unless the by-laws provide otherwise. administrators. Physical presence at the meeting is not required. the pledgor or mortgagor is entitled to vote in absence of a written agreement (recorded in the corporate books) to the contrary. voting trust agreement or by the executor. Salipsip 98B & Ronald Patrick Rubin 06C           Special meetings – held at any time upon the call of the president or as provided in the by-laws Meetings may be held anywhere in or outside of the Philippines. receiver of other legal representative. 4.

to vote for fundamental changes in the corporate charter or for other unusual transactions. it shall be valid only for the meeting for which it is intended. said agreement is ineffective and unenforceable. 2. and shall specify the terms and conditions thereof. or until the agreement is terminated. either with or without reservation to the owners or persons designated by them the power to direct how such control shall be used. It must be in writing and notarized. 2. or for a period contingent upon a certain event. Revocation may be expresses: 1. The certificate or certificates of stock covered by the voting trust agreement shall be canceled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. Salipsip 98B & Ronald Patrick Rubin 06C  Two types of proxies: 1. it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. 2. A certified copy thereof must be filed with the corporation and with the Securities and Exchange Commission. Requirements: 1. Limited – restricts the authority to vote on specified matters only and may direct the manner in which the vote will be cast. or a group of identical agreements between individual stockholders and a common trustee. 3. otherwise. It is a device of binding stockholders to vote as a unit and thus assuring a desirable stability and continuity in management in situations where it is needed. In writing Signed by the stockholder or member Filed before the scheduled meeting with the corporate secretary      By-laws may reasonably regulate the form and execution of proxies. 4. It should confer upon the trustee or trustees the right to vote and other rights pertaining to the shares. 5. 3. General – gives a general discretionary power of attorney to vote for directors and all ordinary matters that may properly come before a meeting. however. To the proxy holder To the election committee By a subsequent proxy to another By sale of the shares VOTING TRUST  A voting trust is one created by an agreement between a group of stockholders of a corporation and a trustee. It should be for a period not exceeding five (5) years at any time unless the voting trust is specifically required as a condition in a loan agreement. In the books of the corporation.   Proxy voting may not be denied except in a non-stock corporation.  3. shall be lodged in the trustee. Requirements: 1. unless specified. control over the stock owned by such stockholders. in which case. the voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. Unless otherwise provided in the proxy. A proxy is revocable unless coupled with an interest. whereby it is provided that for a term of years. 2. 4. . It is not an authority. No proxy shall be valid and effective for a period longer than five (5) years at any one time.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 36 of 87 Darren L.

Subscription contract – any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. Conditional subscription – one made upon a condition precedent. By a contract of subscription with the corporation. Subscription upon special terms – an absolute subscription.  Voting trust distinguished from proxy VOTING TRUST The beneficial owner of the shares ceases to be a stockholder of record of the corporation The trustee votes as owner of the shares The beneficial owner of the shares is disqualified to be a director The purpose is to acquire voting control of the corporation Irrevocable The trustee can act and vote at any meeting during the duration of the voting trust agreement The trustee may vote in person or by proxy The duration may exceed 5 years Must be notarized and filed with the SEC PROXY Legal title remains with the beneficial owner The proxy holder votes merely as an agent The owner of the shares may be elected as a director since legal title remains with him Generally used to secure voting and quorum requirements or merely for the purpose of representing an absent stockholder Revocable unless coupled with an interest A proxy holder can generally act as such only at a particular meeting A proxy holder must vote in person The duration may not exceed 5 years Need not be notarized nor filed with the SEC   A corporation is not a party to a voting trust agreement therefore it is not a real party interest in a suit to enforce the same. which shall be transferable in the same manner and with the same effect as certificates of stock. operation and management of the corporation. Aquino) CHAPTER 10: STOCKS AND STOCKHOLDERS  3 ways in which a person may become a stockholder: 1. SUBSCRIPTION CONTRACT   Subscription – the mutual agreement of the subscribers to take and pay for the stocks of a corporation. Salipsip 98B & Ronald Patrick Rubin 06C 6. Aquino) A voting trust transfers only voting and other rights pertaining to the shares subject of the agreement or control over the stock. The trustee or trustees shall execute and deliver to the transferors voting trust certificates. By the purchase of treasury shares from the corporation. as soon as the subscription is accepted. or render him to pay the amount of his subscription. A subscription contract is not required to be written.    . an oral contract for subscription is valid and enforceable. 7. 3. not withstanding the fact that the parties refer to it as a purchase or some other contract. 2. and By purchase or acquisition of shares from existing stockholders (includes purchase from the stock exchange). It should not be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. (NIDC vs. does not make the subscriber a stockholder. (NIDC vs.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 37 of 87 Darren L. until the performance or fulfillment of the condition. making the subscriber a stockholder. The statutes of fraud do not apply to a subscription contract because such subscription does not fall under the statutory definition of a sale. and rendering him liable as such. the special term being an independent stipulation. It does not include the assets.

2. and Outstanding shares in exchange for stocks in the event of reclassification or conversion. Amounts transferred from unrestricted retained earnings to stated capital. Their realization is uncertain. Lapse of a period of 6 months from the date of subscription. 2.   Pre-incorporation subscriptions – subscriptions for shares of stock of a corporation still to be formed. Previously incurred indebtedness by the corporation.   3. The charter or enabling act prohibits the same. Exceptions: 1.    Stocks shall not be issued in exchange of promissory notes or future services. Stocks shall not be issued for a consideration less than the par or issued price thereof. 3. 2. Issue – the making of a share contract or contract of subscription. Pre-incorporation subscriptions are mandatory in view of Secs. 13 and 14 which mandates that a corporation may be registered as such only if at least 25% of its authorized capital stock has been subscribed and that at least 25% of the total subscription has been paid. actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued. Inc. or The conditions are such as to render their performance beyond the powers of the corporation or in violation of law or contrary to public policy. Exceptions: 1. General rule: A subscription for shares of stock of a corporation still to be formed is irrevocable. 5. 4. Inc.) A condition facultative as to the debtor renders the whole obligation void. (Trillana vs. (Trillana vs. 6. Quezon College. Salipsip 98B & Ronald Patrick Rubin 06C    In case of doubt.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 38 of 87 Darren L.)  PRE-INCORPORATION SUBSCRIPTIONS  Types of subscriptions as to time of execution: 1. or The incorporation of said corporation fails to materialize within 6 months or within a longer period as may be stipulated in the contract of subscription. Property. General rule: Conditional subscriptions are valid. Quezon College. All the subscribers consent to the revocation. . a subscription shall be considered one upon special terms in order to protect the creditors and other subscribers. Actual cash paid to the corporation. transaction by which a person becomes the owner of shares and by which new share contracts are created. The issuance of shares is not dependent on the delivery of a certificate of stock. Consideration for the issuance of stock may be any or a combination of any two or more of the ff: 1. tangible or intangible.   Exception to the exceptions: No pre-incorporation subscription may be revoked after the submission of the articles on incorporation to the SEC.  An application for subscription which is at variance with the terms evidenced in a general form of subscription must be accepted by the corporation to create a binding contract. Labor performed or services actually rendered to the corporation. 2. and Post-incorporation subscriptions – those made or executed after the formation or organization of the corporation.

Inc. Good faith rule – the value of the property or services is a matter about which there can be an honest difference of opinion.    The set-off or satisfaction of a debt due from the corporation is a lawful and valid consideration for the issuance of stock. (National Exchange Co. (National Exchange Co. Zonal valuation as certified by the BIR. Dexter)   CERTIFICATES OF STOCK AND THEIR TRANSFER  Certificate of stock – the piece of paper or document which evidences the ownership of shares and a convenient instrument for the transfer of the title. Appraisal report of an independent appraiser. Salipsip 98B & Ronald Patrick Rubin 06C   Par or issue price – indicates the amount which the original subscribers are supposed to contribute to the corporate capital as the basis of the privilege of profit sharing with limited liability. is illegal and void. Intangible properties (such as patents or copyrights): a. True value rule – the motives or intent of those making the valuation are disregarded and the sole and decisive factor or question is whether or not the property or services are in fact worth the value placed on them. an agreement between a corporation and a particular subscriber. Tangible properties (particularly real properties): a. or Appraisal report of an independent appraiser. or as fraud upon creditors of the corporation by withdrawing or decreasing capital. . if the parties have acted in good faith without fraud or intentional over-valuation. vs. Initial determination by the incorporators or the board of directors subject to the approval of the SEC. b. (Ex. conversion of founder‟s shares to common shares. Inc. Valuation of properties given as a consideration for issuance of stock: 1. Dexter) A corporation has no power to receive a subscription upon such terms as will operate as a fraud upon the other subscribers as stockholders by subjecting the particular subscribers to lighter burden. or Market value indicated in the Real Estate Tax Declaration. Amounts transferred from unrestricted retained earnings to stated capital – refers to the declaration and distribution of stock dividends where corporate earnings are capitalized. 2. Two theories in the valuation of property or services: 1.. c. b. Therefore. illegal. A stipulation is a stock subscription which obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the stock is a discrimination in favor of the particular subscriber. Outstanding shares exchanged for stocks in the event of reclassification or conversion – refers to stocks surrendered to the corporation in exchange for a new or different type of shares. 2. vs.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 39 of 87 Darren L. or is to be payable in part only. or by giving his greater rights and privileges. by which the subscription is not to be payable. and hence.   Labor performed or services actually rendered to the corporation must be capable of valuation and in fact fairly valued. the transaction cannot be overturned even if the later becomes evident that the property or services were in fact worth much less than the value fixed on them initially.) The prohibition against the issuance of shares by corporations except for actual cash or property at its fair valuation secures absolute equality among stockholders with respect to their liability upon stock subscriptions.. Therefore.

4. 3. cannot be effective as against the corporation. Reasons for the necessity of the registration of transfers of stock: 1. until the transfer is recorded in the books of the corporation. Non-registration of a transfer of stock will not. When the corporation has already issued stock certificates – only by delivery of the certificate or certificates of stock indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. Salipsip 98B & Ronald Patrick Rubin 06C  Requisites for the issuance of a certificate of stock: 1.   The issuance of a stock certificate is not a condition sine quanon to consider a subscriber as a stockholder. Therefore. 2.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 40 of 87 Darren L. The shares have been declared delinquent. and The full amount of subscription together with interest and expenses (in case of delinquent shares) if any is due. Thus. however. remedies and defenses which the true and lawful owner may have. General rule: A certificate of stock is not a negotiable instrument. It must be sealed with the corporate seal. by his act or negligence. Thus. if the legal owner thereof. The duty of the corporate secretary to register a valid transfer of shares is ministerial. (as when he clothes another with apparent title or authority to dispose of the same) a purchaser in good faith and without notice will acquire a better title as against the owner so estopped. Until registration is accomplished. To enable the corporation to know who its stockholders are. A bona-fide purchaser of a certificate of stock will acquire no better title to the shares than his transferor had and will be subject to all rights. To afford the corporation an opportunity to object or refuse registration of the transfer in cases allowed by law (as when it has unpaid claims on the shares transferred).   General rule: Holders of subscribed shares not fully paid are entitled to all the rights of a stockholder. When the corporation has not yet issued certificates of stock – by a duly notarized deed. and To protect creditors who have the right to look upon stockholders. in case of non-payment or watered shares. The corporation looks only though its books for the purpose of determining who its stockholders are. 2. 5. Shares of stock are personal properties and the owners thereof have the unbridled right to transfer the same to anyone they please subject only to reasonable charter provisions. 2. mandamus will lie to compel registration in case the corporation or the corporate secretary refuses    . for the satisfaction of their claims. he may be compelled by mandamus. Exception: When the general principles of estoppel apply.     The duty of the corporate secretary to record a valid transfer of shares of stock is ministerial. Two modes of transferring shares of stock: 1.   No transfer shall be valid. except as between the parties. It must be signed by the president or vice-president and countersigned by the secretary or assistant secretary. 3. Exceptions: 1. is estopped from claiming ownership. To enable the transferee to exercise his rights as a stockholder. or The stockholder exercises his appraisal right. has been paid. affect the validity thereof at least in so far as the contracting parties are concerned. the transfer of stock. though valid between the parties. 2. To avoid fictitious and fraudulent transfers.

such as the Public Service Act requiring the approval of the government agency concerned if it will vest unto the transferee 40% of the capital of the public service company. Bobcock & Templeton. This is considered “reasonable” since it merely suspends the right to transfer within the period specified.)     . Share of stock against which the corporation holds any unpaid claim shall not be transferable in the books of the corporation. giving them the first option to purchase the shares of a selling stockholder within a reasonable period not exceeding 30 days provided that the same is contained in the articles of incorporation and in all of the stock certificates to be issued by the corporation. (Uson vs. except the parties to such transfer. by-laws and stock certificates of a close corporation. and Those covered by reasonable agreement of the parties. Samahang Magsasaka. CA) However. therefore. (Monserrat vs.  Transfer – refers to absolute and unconditional conveyance of the title and ownership of a share of stock to warrant registration in the books of the corporation in order to bind the latter and other third persons. 6. Botica Nolasco) However. refer to claims arising from unpaid subscription and not to any indebtedness which a stockholder may owe the corporation such as monthly dues. The ownership of shares in a corporation is property distinct from the certificates which are merely the evidence of such ownership. inasmuch as a chattel mortgage of the aforesaid title is not a complete and absolute alienation of the dominion and ownership thereof. IAC) Other restrictions on the right to transfer shares: 1. Sale to aliens in violation of maximum ownership of shares under the Nationalization Laws. Every owner of corporate shares has the same uncontrollable right to alienate them and is under no obligation from selling them at his sacrifice and for the welfare and benefit of the corporation and other stockholders. conditions or period. The property in the shares are deemed to be situated in the province in which the corporation has its principal office or place of business. the right to transfer may be “regulated” to give the corporation protection against colorable or fraudulent transfer or to enable it to know who its stockholders are. as to all persons interested. A corporation may classify its shares and grant such “rights. and in restraint of trade. except as between the parties. Diosomito) A clause contained in the by-laws of a corporation which provides that the owner of a share of stock cannot sell it to another person except to the defendant corporation is ultra-vires. 5. and indeed. (Fleischer vs. (Monserrat vs. Also.    3. Ceron) Chattel mortgages over shares of stock should be registered both at the owner‟s domicile and in the province where the corporation has its principal office or place of business in order to bind third persons. 4. It is not valid. Transfers not so entered are invalid as to attaching or execution creditors of the assignors as well as to the corporation and to subsequent purchasers in good faith. unpaid claims. Salipsip 98B & Ronald Patrick Rubin 06C registration. CA)  The right to transfer shares of stock may not be unreasonably restricted or prohibited. until recorded in the books of the corporation. Inc. (Padgett vs. Fleischer vs. (Go Soc & Sons vs.) All transfers of shares should be entered in the books of the corporation. (Rural Bank of Salinas vs.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 41 of 87 Darren L. violative of the property rights of shareholders. Ceron) Only the transfer or absolute conveyance of the ownership of the title to a share need be entered and noted upon the books of the corporation in order that such transfer may be valid. the SEC allows the grant of “preferential rights” to existing stockholders and/or the corporation. Restrictions required to be indicated in the articles of incorporation. (Chua Guan vs. privileges or restrictions” provided that such are made in the articles of incorporation and subject to reasonable terms. Botica Nolasco Co. the transferee has no such right when his title to said shares has no prima facie validity of is uncertain. its entry and notation upon the books of the corporation is not a necessary requisite to its validity. Restrictions imposed by special law. (Tay vs. 2. as a matter of policy.

(Tan vs. unless his own negligence has been such as to create an estoppel against him. (Tay vs. it is essential that the person petitioning for the same has a clear legal right to the thing demanded and that is it the imperative duty of the respondent to perform the act required. The assignees cannot enjoy the status of a stockholder. The corporation‟s obligation to register is ministerial. CA)   Delivery is not essential where it appears that the person sought to be held as stockholders are officers of the corporation. (Embassy Farms. the transfer must be recorded in the books of the corporation. Wack Wack Golf & Country Club. results in the protection of the corporation as well as of the individual parties to the contract. and have custody of the stock books. which is the evidence of ownership of corporate stock. a transferee under a forged assignment acquires no title which can be asserted against the true owner. For an effective transfer of shares of stock the mode and manner of transfer prescribed by law must be followed. In order that a writ of mandamus may issue. However. CA) Without a stock certificate.         An assignment. and except to the extent that valid restrictive regulations and agreements exist and are applicable. or to an insolvent person. there must be strict compliance with the mode of transfer prescribed by law. Subject only to such restrictions. and will not be entitled to dividends. SEC) After a valid transfer of share. even though the sale is to a competitor or the company. (Padgett vs. the owner of such shares may. or unless the right to do so is properly restricted. If the owner of the certificate has endorsed it in blank. or even though a controlling interest is sold to one purchaser. and To be valid against third parties. (Razon vs. the pledgee has no right to demand the registration of the pledged shares in his name. Fox) An indorsee of an undelivered certificate of stock has no power to effectively transfer the shares to other persons or his nominees. The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer. without endorsement and delivery. the right to have such registered commences to exist. (Rural Bank of Salinas vs. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale. IAC) The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. CA) Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. in the absence of a valid lien upon its shares. 2. the assignment of corporate shares is effective only between the parties to the transaction. 1. 3. Consequently. as a general rule. Therefore. Inc. There must be delivery of the stock certificate. does not necessarily make the transfer effective.) Certificates of stock are not negotiable instruments.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 42 of 87 Darren L. Republic)  . and is reasonable as to the length of time of suspension is valid. Peers Marketing) For a valid transfer of stocks. Babcock & Templeton) Any restriction on a stockholder‟s right to dispose of his shares must be construed strictly. vs. and it is stolen from him. Salipsip 98B & Ronald Patrick Rubin 06C  Shares of stock being regarded as property. and any attempt to restrain a transfer of shares is regarded as being in restraint of trade. (Lambert vs. Babcock & Templeton) The suspension of the power to sell shares of stock which has a beneficial purpose. restrictions consisting in the word “non-transferable” is illegal. while valid as among the parties. Therefore. a stockholder cannot be controlled in or restrained from exercising his right to transfer by the corporation or its officers or by other stockholders. (Rural Bank of Lipa City. (De Los Santos vs. insofar as the assigned shares are concerned. no title is acquired by an innocent purchaser for value. (Padgett vs. unless the corporation has been dissolved. (Won vs. (Nava vs. Inc. cannot vote nor be voted for. dispose of them as they see fit. vs. Inc. CA) The pledge of shares of stock does not vest ownership of such shares to the pledgee. it would not follow that said right should be exercised immediately or within a definite period. or the owner‟s privilege of disposing of his shares has been hampered by his own action.

General rule: In forged or unauthorized transfer of stock the purchaser acquires no title as against the lawful owner and will have no right or remedy against the corporation (non-negotiability of stock certificates). compel the corporation to recognize him as a stockholder or claim reimbursement and damages against the latter. Ways in which watered stocks may be issued: 1.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 43 of 87 Darren L. Directors or officers shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same for the following acts: 1. Exception: If after such forged or unauthorized transfer. Thus. no certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares). The duty of the corporate officers to issue stock certificates to those entitled is a ministerial duty enforceable by mandamus. He may therefore. For a consideration in property. valued in excess of its fair market value. All creditors. Gratuitously or under an agreement that nothing shall be paid at all. either fraudulently or by mistake. whether prior or subsequent to the issuance of watered stock may enforce payment of such water. . A stockholder whose subscription is not fully paid may not be issued a stock certificate for that portion already paid. tangible or intangible. Unauthorized issuance of certificate of stock – the act of the corporation in issuing a certificate. the latter may rightfully acquire title thereto since the corporation will be estopped to deny the validity thereof. 3. has been paid. Salipsip 98B & Ronald Patrick Rubin 06C FORGED AND UNAUTHORIZED TRANSFERS    Forged and unauthorized transfer – what is forged or unauthorized is the transfer of the certificate from the true and lawful owner to another person. or In the guise of stock dividends when there are no surplus profits of the corporation.  ISSUANCE OF STOCK CERTIFICATES  Subscriptions to shares of stock are indivisible. the corporation issues a new certificate and such certificate passes into the hands of subsequent bona fide purchaser. (Fua Cun vs. 2. 4. Summers and China Banking Corporation)    WATERED STOCK   Watered stock – one which is issued by the corporation as fully paid-up shares when in fact the whole amount of the value thereof has not been paid. 2. For a monetary consideration less than its par or issued value. he becomes entitled to be issued a stock certificate. Once a subscriber has paid his subscription in full. or Having knowledge thereof. The subsequent purchaser in good faith took the shares by virtue of the genuiness of the certificates issued by the corporation or of the representation made by the corporation that the same is valid and subsisting and that the person named therein is a stockholder of the corporation.   Consenting to the issuance of watered stocks. if any is due. failing to forthwith express his objection in writing and file the same with the corporate secretary.

2. actual or constructive. or promised to pay the same. If however. deny the validity of the stock certificate it issued as against a purchaser in good faith.  On the date or dates fixed in the contract of subscription. if so required by. Salipsip 98B & Ronald Patrick Rubin 06C  Evil effects of stock watering: 1. As against transferees of the watered stock – his right is the same as that of his transferor. or which will tend to injure or defraud the public. a certificate of stock has been issued and duly indorsed to a bona fide purchaser. such rate shall be deemed to be the legal rate. are injured and prejudiced by the reduction of their proportionate interest in the corporation. the subscriber is liable to pay the full par or issued value thereof. and at the rate of interest fixed in the by-laws. The corporation is deprived of its capital thereby hurting its business prospects. financial capability and responsibility. solidary against the responsible directors/officers and the stockholders concerned. or On the date or dates that may be specified by the board of directors pursuant to a “call” declaring any or all unpaid portion thereof to be so payable. Trust fund doctrine – treating the capital of the corporation. This is because a corporation is prohibited from issuing certificates of stock until the full value of the subscriptions have been paid and could not. If no rate of interest is fixed in the by-laws. without knowledge. and Present and future creditors are deprived of corporate assets for the protection of their interest. 2.  Effects of issuance of watered stock: 1. As to the corporation – when a corporation is guilty of ultra-vires acts which constitute an injury to or fraud upon the public. or the water in the stock. 6. 3. the State may institute a quo-warranto proceeding to forfeit its charter for the misuse or abuse of its franchise. Two possible remedies available to the corporation to enforce payment of unpaid subscription: 1. inclusive of the unpaid portion of subscriptions to said capital. at least as against the corporation. to render it valid and effective. As to creditors – they may enforce payment of the difference in the price. As between the corporation and the subscriber – the subscription is void. the latter cannot be held liable. 2. therefore. As to the consenting stockholders – they are estopped from raising any objection thereto. shall be paid: 1. As to dissenting stockholder – in view of the dilution of their proportionate interest in the corporation. 4. they may compel the payment of the “water” in the stock solidarily against the responsible and consenting directors and officers inclusive of the holder of the watered stock.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 44 of 87 Darren L. 2. Fraud or misrepresentation theory – liability is based on the false representation made by the corporation and the stockholder concerned to the creditors that the true par value or issued price of the shared has been paid or promised to be paid full. as a “trust fund” which the creditors have a right to look up to for the satisfaction of their claims. By a collection case in court.  Two theories advanced as the basis for the liability on water stocks: 1. since he took the shares on reliance of the misrepresentation made by the corporation that the stock certificate is valid and subsisting. 5. 2. By board action (delinquency sale). .  Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription. ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS  When unpaid subscription or any percentage thereof. Stockholders who paid their subscriptions in full. together with interest if required. 3.

6. Notice of the sale. 11. Sale at public auction if no payment is made by the delinquent stockholder in favor of the bidder who offered to pay the full amount of the balance in the subscription. Publication of the notice of sale must be made once a week for two consecutive weeks in the newspaper of general circulation in the province or city where the principal officer is located. cost and expenses. 7. 4.  . cost of advertisement and expenses of sale. Payment shall be made in the date specified in the call or on the date provided for in the contract of subscription. with the copy of the board resolution should be sent to every delinquent stockholder either personally or by registered mail. If within 30 days from the date stated in the call or as may be provided in the contract of subscription no payment is made. 10. The sale shall be made not less than 30 days nor more than 60 days from the date the stocks became delinquent. through its board of directors to enforce or collect payment of unpaid subscription will not prevent the creditors or the receiver of the corporation to institute a court action to collect the unpaid portion thereof (trust fund doctrine). the same shall be credited in favor of the delinquent stockholder who shall be entitled to the issuance of a certificate of stock covering such shares. The board.  Highest bidder – is such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest. 2. time and place of the sale. Irregularity or defect in the notice of sale. 5. If there be any remaining shares. However. orders the sale of the delinquent stock stating the amount due and the date. if the contract of subscription provides the date or dates when payment is due. Grounds to question the delinquency sale: 1.  2. The shares so purchased by the corporation shall be vested in the latter as treasury shares. 3. The board of directors. 12. 13. Salipsip 98B & Ronald Patrick Rubin 06C  Failure or refusal of the corporation. declares the whole or any percentage of unpaid subscriptions to be due and payable on a specific date. 8. by a formal resolution. The stockholders concerned are given notice of the board resolution by the corporation either personally or by registered mail. cost of advertisement and expenses for the smallest number of shares. bid for the same and the total amount due shall be credited or paid in full in the corporate books. Registration or transfer of the shares of stock in the name of the bidder and corresponding issuance of the stock certificate covering the shares successfully bidded. inclusive of interest.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 45 of 87 Darren L. all the stock covered by the subscription shall become delinquent and shall be subject to a delinquency sale. Publication of the notice of call is not required unless the by-laws provide otherwise. the corporation may. for the smallest number of shares or fraction of a share. or Irregularity or defect in the sale itself. and 14. Notice is not likewise necessary if the contract of the subscription stipulates a specific date when any unpaid portion is due and payable. subject to the provisions of the Code. If there is no bidder at the public auction who offers to pay the total amount due plus interest. 9. by resolution. no “call” declaration of the board is necessary. Procedure for the enforcement of payment through board action: 1. Failure to pay on the date required in the call or as specified in the contract of subscription will render the entire balance due and payable and making the stockholder liable for the interest.

Salipsip 98B & Ronald Patrick Rubin 06C  Two conditions before an action to recover delinquent stocks irregularly sold may be allowed: 1.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 46 of 87 Darren L. vs. Suarez) Shares of stock become delinquent when no payment is made on the balance of all or any portion of the subscription on the date or dates fixed in the contract of subscription without need of call. the corporation may still make use of the methods provided by the Code.   A “call” is a condition precedent before the right of action to institute a recovery suit accrues. (PNB vs. (Apocada vs.) General rule: A valid and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber from liability thereon. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt. Aboitiz & Co. (Edward Keller & Co.. 2. 3. (Apocada vs. (De Silva vs. (Garcia vs.) The subscription to capital stock of the corporation. (Lumanlan vs.) A stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription. Thus the President cannot condone the payment of stock subscriptions in the event that the counterpart fund to be invested by the government would not be available. or Release supported by consideration. Set-off of a debt due from the corporation.     . NLRC) Unpaid subscriptions are not due and payable until a call is made by the corporation for payment. NLRC) Subscription to the capital of a corporation constitutes a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debt.  A subscription for shares of stock does not require an express promise to pay the amount subscribed. is not payable at the moment of the subscriptions but on a subsequent date which may be fixed by the corporation. Cura) The President of the Philippines is devoid of the prerogative of suspending the operation of any stature or any of its items. or The corporation has become insolvent. 2. Cob Group Marketing. Exception: Consent of all the stockholders is given. Inc. as the law implies a promise to pay on the part of the subscriber. Bitulok Sawmill. Bona fide compromise. Poizat) Notwithstanding the fact that the by-laws of the corporation provides for a method for the collection of the unpaid portion of stock subscriptions. 2. (Velasco vs. The contract of subscription provides for a date or dates when payment is due. The party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold. Exceptions to the exception: 1. and The action shall be commenced by the filing of a complaint within six months from the date of the sale. Ltd. Instances when a “call” is not necessary: 1. Baltazar)        The NLRC has no jurisdiction to determine intra-corporate disputes between the stockholder and the corporation as in the matter of unpaid subscriptions. A demand is required before a debtor may incur a delay in the performance of his obligation. (Lingayen Gulf vs. unless otherwise stipulated. with interest from the date of the sale at the legal rate. and the right of the company to demand payment is no less incontestable. or on the date specified by the board of directors pursuant to a call made by it. Inc.

and The name of the corporation which issued the same. 3. Be voted for or to vote. Participation in the management of the corporate affairs by exercising their right to vote and be voted upon either personally or by proxy. c. or negligence on the part of the corporation and its officers. 4. for such amount and in such form and with such sureties as may be satisfactory to the board of directors. Requirements and procedure for issuance of new certificates of stock in lieu of those lost. stolen or destroyed and issue in lieu thereof new certificate of stock. To exercise pre-emptive rights. Except in case of fraud. in which case a new certificate may be issued even before the expiration of the one 1 year period. or Any of the rights of a stockholder. To be issued a certificate of stock for fully paid-up shares. 2. effective for a period of 1 year. 2. Representation at any stockholder's meeting. To receive dividends and to compel their declaration if warranted. Salipsip 98B & Ronald Patrick Rubin 06C  General rule: No delinquent stock shall not be entitled to: 1. If a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock. 4. To enter into a voting trust agreement.    He shall also submit such other information and evidence which he may deem necessary. Exception: Shares of stock not fully paid are not entitled to be issued a certificate of stock. the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost. General rule: Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost. 3. the issuance of the new certificate of stock shall be suspended until the final decision by the court regarding the ownership of said certificate of stock. stolen or destroyed pursuant to the procedure above-described. 6. The number of shares represented by such certificate. If no contest has been presented within 1 year from the date of the last publication. d. Publication of a notice in a newspaper of general circulation published in the place where the corporation has its principal office. 5. 3. once a week for 3 consecutive weeks at the expense of the registered owner of such certificate of stock.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 47 of 87 Darren L. stolen or destroyed: 1.  RIGHTS AND LIABILITIES OF STOCKHOLDERS  Certain basic rights for the protection of stockholders: 1. bad faith. 2. However. 5. The circumstances as to how the certificate was lost. the registered owner may file a bond or other security. . while stock dividends shall be withheld until his unpaid subscription is paid in full).  Exception: Delinquent stocks are entitled to the right to dividends (any cash dividends due on delinquent stockholders shall first be applied to the unpaid balance on his subscription plus cost and expenses. b. stolen or destroyed. The serial number of the certificate. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth: a. To transfer shares of stock subject only to reasonable restrictions inclusive of the right of the transferee to compel the registration of the transfer in the books of the corporation.

CHAPTER 11: CORPORATE BOOKS AND RECORDS  Records to be kept and maintained by the corporation: 1.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 48 of 87 Darren L. journals. among others. to withdraw therefrom. 11. liabilities and damages of ostensible corporations. 3. To exercise their appraisal right. To institute and file a derivative suit. whether the meeting was regular or special. income tax returns. as general partners. In the case of a close corporation. vouchers and receipts. how authorized. To answer to creditors for the unpaid portion of their subscription. To pay interest on his unpaid subscription if required by the by-laws or by the contract of subscription. Salipsip 98B & Ronald Patrick Rubin 06C 7. financial statements and other books of accounts. In the case of a close corporation. the notice given. 4. 8. To answer the “water” in their stocks. a statement of every alienation. 5. and every act done or ordered done thereat which must likewise be kept at the principal office of the corporation. and 16. 2. To participate in the distribution of the assets of the corporation upon dissolution. To be furnished the most recent financial statements of the corporation. 15. 13. for any reason. 2. are subject to inspection by any director. to petition the SEC to arbitrate a deadlock. those present and absent. Records of all business transactions – which include. 10. 14. inclusive of all business transactions and minutes of meetings. To have the corporation dissolved. ledgers. to be personally liable for corporate torts when they actively participate in the management of the corporation. contracts. the date thereof. To be issued a new stock certificate in lieu of the lost or destroyed one. the amount padi or unpaid on all stock for which subscription has been made. 3. stockholder or member of the corporation at reasonable hours on business days and a copy of excerpts of said records may be demanded. Stock and transfer book – showing the names of the stockholders. or any director or trustee who through a resolution by the board votes for such refusal shall be liable for damages and shall be guilty of an offense which shall be punishable under Sec. Minutes of all meetings of stockholders or members and of the directors or trustees setting forth in detail the time and place of holding the meeting. and to compel the purchase of his shares. 6. and by and to whom made which must be kept either in the principal office of the corporation or in the office of its stock transfer agent. and voting trust agreement which must be kept and carefully preserved at its principal office. for all debts. To inspect the books of the corporation.  . General rule: Any officer or agent of the corporation who refuses to allow the inspection of corporate books and records. To recover shares of stock unlawfully sold for delinquency. To pay the corporation the balance of his unpaid subscriptions. sale or transfer of stock made. and In case of a close corporation. To be liable. 9. 144.  These corporate books and records. if special its object. 12. trustee.  Certain obligations and liabilities of stockholders: 1.

Philpotts vs. However.00. 3. showing in reasonable detail its assets and liabilities and the result of its operations. Damages either against the corporate or the responsible officer. 2. Salipsip 98B & Ronald Patrick Rubin 06C  Exception. (Vegaruth vs.000. the other or others being dissolved and merged therein. which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year. the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year. which shall include financial statements. the uniting of two or more corporations by the transfer of property to one of them which continues in existence. 144 of the Code.G. The basis of the right of the stockholder to inspect the books and records of the corporation for a proper purpose is to protect his interest as a stockholder.) The corporation.. Philippine Manufacturing Co. (Pardo vs. or its responsible directors and officers cannot unduly restrict the right of inspection and may not arbitrarily set a few days of the year within which the stockholder may make the inspection. duly signed and certified by an independent certified public accountant. if the paid-up capital of the corporation is less than P50. PNB) Remedies of a stockholder who is denied inspection of corporate books: 1. Has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 49 of 87 Darren L.  Within ten (10) days from receipt of a written request of any stockholder or member. although personal.  . 2. Isabela Sugar Co. (Gonzales vs. (Gokongwei vs. Inc. At the regular meeting of stockholders or members. However.) It is a required condition for the inspection of corporate books that the one requesting it must not have been guilty of using improperly any information secured through a prior examination and that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand. or Was not acting in good faith or for a legitimate purpose in making his demand. The right to inspect corporate books. the corporation shall furnish to him its most recent financial statement. the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. Co. Mandamus. SEC) Exception: The subsidiary and the parent are legally being operated as separate and distinct entities.          CHAPTER 12: MERGER AND CONSOLIDATION  Merger – a union effected by absorbing one or more existing corporations by another which survives and continues the combined business. (W. It shall be a defense that the person demanding inspection 1. may be exercised through an agent or representative since it may be unavailing in many instances. or Criminal complaint based on Sec. Hercules Lumber.) Directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable hours. Consolidation – the uniting or amalgamation of two or more existing corporations to form a new corporation and the termination of existence of the old ones. there is no absolute right to secure certified copies of the minutes of the corporation until these minutes have been written up and approved by the directors. General rule: The right of stockholders to examine corporate books extends to a wholly owned subsidiary which is completely under the control and management of the parent company where he is such a stockholder.

is believed to be contrary to law. As to stock corporations. 2. immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under the Code. and all property and all receivables due on whatever account. 4. the SEC shall set a hearing to give the corporations concerned an opportunity to be heard upon proper notice and thereafter.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 50 of 87 Darren L. The names of the constituent corporations. The surviving or the consolidated corporation shall possess all the rights. except that of the surviving or the consolidated corporation. respectively. The surviving or the consolidated corporation will possess all the rights. 5. 3. The plan of the merger or consolidation. or in the case of non-stock corporations. and   4. shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed. . and all and every other interest of. There will only be a single corporation. Prior notice of such meeting. and As to each corporation. 6. c. the surviving corporation. If the plan. the number of members. 3. Execution of the articles of merger or consolidation by each constituent corporation to be signed by the president or vice-president and certified by the corporate secretary or assistant secretary setting forth the following: a. In case of merger. the SEC shall proceed as provided in the Code. b. and Issuance of the certificate of merger or consolidation by the SEC at which time the merger or consolidation shall be effective. or due to each constituent corporation. Termination of the corporate existence of the constituent corporations. Effects of merger or consolidation: 1. Submission of the articles of merger or consolidation in quadruplicate to the SEC subject to the requirement of that if it involves corporations under the direct supervision of any other government agency or governed by special laws the favorable recommendation of the government agency concerned shall first be secured. including subscriptions to shares and other choses in action. b. or belonging to. The terms of the merger or consolidation and the mode of carrying the same into effect. immunities and franchises of the constituent corporations. either personally or by registered mail stating the purpose thereof. or in case of consolidation. The board of directors or trustees of each constituent corporation shall approve a plan of merger or consolidation setting forth the following: a.  Any amendment to the plan of merger or consolidation must be approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least 2/3 of the outstanding capital stock or of 2/3 of the members of each of the constituent corporations. Mergers and consolidations may not be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or for purposes of fraud. the number of shares outstanding. if any. privileges. the number of shares or members voting for and against such plan. Salipsip 98B & Ronald Patrick Rubin 06C  Requirements and procedure for merger or consolidation: 1. privileges. d. in the articles of incorporation. however. the consolidated corporation. and Other provisions deemed necessary and desirable. Approval of the plan by the stockholders representing 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporations of each constituent corporation at separate corporate meetings called for the purpose. 2. A statement of changes. c. with a copy or summary of the plan of merger or consolidation shall be given to all stockholders or members at least 2 weeks prior to the scheduled meeting.

c. exchange. Upon payment of the shares by the corporation. mortgage. A written demand for payment must be made by the dissenting stockholder within 30 days after the date on which the vote was taken. and any pending claim. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations.  Merger or consolidation does not become effective upon the mere agreement of the constituent corporations.  In case of sale. lease. It shall be effective only upon the issuance of a certificate of merger. 2. Failure to make the demand within the said period shall be deemed a waiver of the appraisal right. a stockholder has the right to compel the corporation for any reason to purchase his shares at their fair value which shall not be less than the par or issued value when the corporation has sufficient assets to cover it debts and liabilities. or Extending or shortening the term of corporate existence. Investment of corporate funds in another corporation or business or for any other purpose. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. 2. and In case of merger or consolidation. Authorizing preferences in any respect superior to those of outstanding shares of any class. the dissenting stockholder shall transfer his shares to the corporation. The stockholder must have voted against the proposed corporate action in any of the instances allowed by law for the exercise of the appraisal right. exclusive of capital stock. The purpose of the right is to protect the property rights of dissenting stockholders from actions by the majority shareholders which alters the nature and character of their investment. Salipsip 98B & Ronald Patrick Rubin 06C 5. If the stockholder and the corporation cannot agree on the fair market value thereof. 3. action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. excluding any appreciation or depreciation in anticipation of such corporate action. It is a right granted to dissenting stockholders on certain corporate or business decisions to demand payment of the fair market value of their shares. 4. pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code. b. Other instances provided for in the Code: 1. (Associated Bank vs. The corporation must have unrestricted retained earnings in it books to cover the payment of the fair value of the shares of the dissenting stockholder. 3. Surrender of the certificate of stock by the dissenting stockholder for notation in the corporate books and payment by the corporation of the fair market value of said shares as of the day prior to the date on which the vote was taken. CA) CHAPTER 13: APPRAISAL RIGHT  Appraisal right – the method of paying a shareholder for the taking of his property. the same shall be determined by appraisers. .AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 51 of 87 Darren L. In a close corporation. 2. the statutory means whereby a stockholder can avoid the conversion of his property into another property not of his own choosing. 5. In case any amendment to the articles of incorporation has the effect of: a.  Requirements and procedure for the exercise of the appraisal right: 1. Instances when a stockholder may have the right to dissent and demand payment of the fair value of his shares: 1. transfer.  Changing or restricting the rights of any stockholder or class of shares.

whenever necessary or proper. gain or income for the corporation or members does not make it a profit-making corporation where such profit or income is used for the purpose  .    If the dissenting stockholder is not paid the value of his shares within 30 days after the award. The stockholder withdraws his demand for payment with the consent of the corporation. and all dividend distributions which would have accrued on such shares shall be paid to the transferee.      General rule: The costs and expenses of appraisal shall be borne by the corporation. The stockholder fails within 10 days after demanding payment for his shares to submit the certificates of stock representing his shares to the corporation for notation and the corporation. If such be the case. A dissenting stockholder is required within 10 days after demanding payment for his shares to submit the stock certificates representing his shares to the corporation for notation. Even if a corporation has capital stock divided into shares it is considered as non-stock so long as it does not distribute dividends to its members and officers. at its option. be used for the furtherance of the purpose or purposes for which the corporation was organized. (CIR vs. the rights of the transferor as a dissenting stockholder shall cease and the transferee shall have all the rights of a regular stockholder. A stockholder whose subscription is not fully paid is still entitled to exercise his appraisal right. 4. Instances when the right to payment ceases: 1. Exception: The fair value ascertained by the appraisers is approximately the same as the price which the corporation offered to pay the stockholder. 3. The dissenting stockholder is not prohibited from selling. After either the right ceases or the purchase of the said shares by the corporation – all rights accruing to such shares are restored and all dividend distributions which would have accrued on the shares shall be paid to the holder thereof. Club Filipino de Cebu) Any profit which a non-stock corporation may obtain as an incident to its operations shall. 2. The proposed corporate action is disapproved by the SEC where such approval is necessary. No demand for payment may be withdrawn unless the corporation consents thereto. 2.one where no part of its income is distributable as dividends to its members. are suspended. The SEC determines that such stockholder is not entitled to the appraisal right. at the option of the corporation. except the right to receive payment. transferring or assigning his shares. From the time of demand for payment – all rights accruing to such shares. Exception: The refusal of the stockholder to receive payment is unjustified. Salipsip 98B & Ronald Patrick Rubin 06C  Effects of demand for payment of the fair value of a stockholder‟s shares: 1. or officers. His failure to do so shall. A director who exercises his appraisal right remain to be a director until his shares are no longer registered in his name. including voting and dividend rights. all costs and expenses shall be assessed against the corporation.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 52 of 87 Darren L. General rule: In an action to recover the fair value of stocks.    CHAPTER 14: NON-STOCK CORPORATIONS    Non-stock corporation . The fact that a non-profit corporation earns a profit. subject to the provisions of the Code on dissolution. 5. trustees. 6. once the certificates are subsequently canceled. The proposed corporate action is abandoned or rescinded by the corporation. The shares represented by the certificates bearing such notation are transferred and the certificates subsequently canceled. terminates the right. terminate his rights. his voting and dividend rights shall immediately be restored.

being both against his duty as a member of the corporation. General rule: A member may vote by proxy. or any combination thereof (non-exclusive). Exception: The articles of incorporation or the by-laws provide otherwise. educational. 3. Membership in non-stock corporations may be acquired by complying with the provisions of its rules prescribed in the by-laws. Salipsip 98B & Ronald Patrick Rubin 06C set forth in the articles of incorporation and is not distributable to its incorporators. otherwise it may render the expulsion ineffective and invalid. although it has no immediate relation to a member‟s duty as such. fraternal. shall be entitled to one vote (no cumulative voting). literary. cultural. the power is nonetheless inherent in the following situations: 1. General rule: The board of directors of a non-stock corporation shall have the authority to admit members. The provisions governing stock corporation. like trade. members or officers. regardless of class. industry.   MEMBERSHIP AND VOTING RIGHTS      General rule: Each member. otherwise. shall be applicable to non-stock corporations. it is so infamous as to render him unfit for society of honest men.           2. and which is indictable at common law. a non-stock corporation may act arbitrarily and exclude any persons it may see fit. agricultural and like chambers. and under such conditions which may be prescribed by the SEC. social. . as it would be an ultra-vires act. Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of. Exception: The right to vote is limited. necessary. and the courts have no power to interfere. If the business activity is authorized in the said articles. (Carmoan vs. or similar purposes. professional. scientific. the same may be undertaken by the corporation. when pertinent. General rule: Membership in a non-stock corporation and all rights arising therefrom are personal and non-transferable. When an offense is committed which. not. It is free to fix qualifications for membership and to provide for termination of membership. broadened or denied in the articles of incorporation or the bylaws. PED) In absence of any provision in the articles of incorporation or by-laws relative to the manner and causes of termination. since mere intangible or pecuniary benefits of the members does not change the nature of the corporation. Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Purposes: Charitable. and also indictable at common law. Exception: The articles of incorporation or the by-laws provide otherwise. General rule: Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 53 of 87 Darren L. civic service. incidental or essential thereto. strict compliance with the manner and procedure laid down in the bylaws must be observed. Exception: The by-laws provide otherwise. religious. Exception: Proxy voting is denied in the articles of incorporation or the by-laws.  The determination of whether or not a non-stock corporation can engage in profit-making business or activity depends largely on the purpose or purposes indicated in the articles of incorporation. In absence of restrictions. When the offense is a violation of his duty as a member of the corporation. and When the offense is of a mixed nature. In terminating membership.

3. Courts cannot strip a member of a non-stock corporation of his membership therein without cause.   General rule: Regular or special meetings of members of a non-stock corporation shall be held in the city or municipality where the principal office is located. the manner by which it was conducted and the results thereof. Exception: The articles of incorporation or the by-laws provide otherwise. General rule: The number of trustees in a non-stock corporation may exceed 15. The organization exceeds its powers.     He is a member of the corporation. or An incorporated association or its members avail of the remedy of instituting an intracorporate dispute case. Salipsip 98B & Ronald Patrick Rubin 06C  As to whether or not a member should be expelled or maintained is the established right of the corporation to determine and the courts are without authority to strip a member of his membership without cause. 2. General rule: The term of office of the board of trustees may be staggered. The proceedings are violative of the laws of society. 4. arbitrary or unjustly discriminatory. or the law of the land. The by-laws of the corporation provide otherwise. The proceedings are illegal. Majority thereof must be residents of the Philippines. 7. Otherwise. 5. 8. There is lack of jurisdiction on the part of the tribunal conducting the proceedings. The action complained of is capricious. and Metro Manila is considered a city or municipality. Property and civil rights are invaded. Exception: The articles of incorporation or the by-laws provide otherwise. 6.   General rule: officers of a non-stock corporation may be directly elected by the members.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 54 of 87 Darren L. as by depriving a person of due process of law. They shall classify themselves in order that 1/3 of their number shall expire every year and subsequent elections of trustees comprising 1/3 shall be held annually. 2. (Chinese YMCA vs. (Lions Club International vs. There is fraud. 3. that would be an unwarranted and undue interference with the well established right of a corporation to determine its membership. and Other qualifications as may be provided for in the by-laws. 2. Exceptions: 1. Exception: The articles of incorporation or the by-laws provide otherwise. CA) Exceptions: 1. Trustees elected to fill vacancies occurring before the expiration of a particular term hold office only for the unexpired period. and if practicable in the principal office of the corporation. General rule: The courts will not interfere on matters involving the internal affairs of an unincorporated association such as elections. Qualifications of trustees: 1.  . oppression or bad faith. Ching)  TRUSTEES AND OFFICERS     Non-stock or special corporations may designate their governing boards by any name through their articles of incorporation or their by-laws.

societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution. 2.  Procedure and requirements for a plan of distribution of assets: 1. assets may be distributed to such persons. educational or similar purposes. exclusive of treasury shares.   All the corporation's issued stock of all classes. Salipsip 98B & Ronald Patrick Rubin 06C  Requirements for meetings held outside the location of the principal office as provided for by the by-laws: 1. CA) . 2. transfer or conveyance.one whose articles of incorporation provide that: 1.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 55 of 87 Darren L. not exceeding 20. whether or not organized for profit. and In any other case. if any. transferred or conveyed in accordance with such requirements. as may be specified in a plan of distribution. shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws. Proper notice is sent to all members indicating the date. or provide for distribution. 2. Assets held by the corporation upon a condition requiring return. time and place of the meeting.   General rule: All proceedings and business transactions at a meeting improperly held or called are invalid. a corporation cannot be considered a close corporation and would thus be governed by the general provisions on ordinary corporations. but not held upon a condition requiring return. transfer or conveyance by reason of the dissolution. and The place of meeting must be within the Philippines. Exception: All of the members are present or duly represented at the meeting. 3. satisfied and discharged. (San Juan Structural Steel vs. DISTRIBUTION OF ASSETS UPON DISSOLUTION  Rules of distribution: 1.86% of the capital stock. 3. A corporation does not become a close corporation just because a husband and wife owns 99. and The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. time and place of such meeting shall be given to each member entitled to vote. 4. or any class or classes of members. or adequate provision shall be made therefore. All liabilities and obligations of the corporation shall be paid. shall be returned. Majority vote of the board of trustees adopting a plan of distribution. 5. societies. within the time and in the manner provided in the Code for the giving of notice of meetings to members. religious. 3. Approval of such plan by at least 2/3 of the members having voting rights present or represented by proxy at a regular or special meeting for that purpose. and Prior written notice setting forth the proposed plan of distribution or a summary thereof and the date. to the extent that the articles of incorporation or the by-laws. Assets received and held by the corporation subject to limitations permitting their use only for charitable. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by Title XV of the Code. and which condition occurs by reason of the dissolution. CHAPTER 15: CLOSE CORPORATIONS  Close corporation . shall be held of record by not more than a specified number of persons. benevolent. organizations or corporations. Absent any of the three requisites. determine the distributive rights of members. Assets other than those mentioned in the preceding paragraphs. shall be transferred or conveyed to one or more corporations. 2.

7. b. and the determination of whether or not it should be vested with public interest is within its domain.    That all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders.  Sec. No meeting of stockholders need be called to elect directors. and The stockholders of the corporation shall be subject to all liabilities of directors. If upon the expiration of said period. Stock exchanges. 2. instead of by the board of directors. Insurance companies.  Restrictions on the right to transfer shares shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder within reasonable terms. The articles of incorporation of a close corporation may provide: 1. The by-laws. the existing stockholders or the corporation fails to exercise the option to purchase. conditions or period. 5. So long as this provision continues in effect: a. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein. 3. The provisions of Title XV of the Code shall primarily govern close corporations. General rule: Any corporation may be incorporated as a close corporation. 4. the stockholders of the corporation shall be deemed to be directors. . 5. 3. Salipsip 98B & Ronald Patrick Rubin 06C    A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. 140 authorizes the NEDA to recommend to the legislature the setting of maximum limits to family or group ownership of stock in corporation vested with public interest. 6. 2. The articles of incorporation. Educational institutions.  In order to bind purchasers in good faith. officers or even perhaps as partners in management which is akin to the partnership form of business. and The certificate of stock. the transferring stockholder may sell his shares to any third person. Mining or oil companies. Unless the context clearly requires otherwise.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 56 of 87 Darren L. the provisions of other Titles of the Code apply suppletorily. Exceptions: 1. 4. 3. Public utilities. However. That the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. restrictions on the right to transfer shares must appear in: 1. and Corporations declared to be vested with public interest. For a classification of directors into one or more classes. each of whom may be voted for and elected solely by a particular class of stock. For a greater quorum or voting requirements in meetings of stockholders or directors. Banks. 2. A close corporation may partake the nature of a partnership in that the stockholders thereof take an active role in the management of the corporate affairs either as directors. c.

 Exceptions: 1. No provision in any written agreement signed by the stockholders. if in writing and signed by the parties thereto. The stock certificate conspicuously shows a restriction on transfer of stock. to the extent that such agreements are not inconsistent with the articles of incorporation. or Recover under any applicable warranty. The transfer of stock has been consented to by all the stockholders. 2. The stock is issued or transferred to a person not entitled under the articles of incorporation. An agreement between two or more stockholders. 2. or The transfer of stock is in violation of a restriction on transfer of stock. The articles of incorporation states the number of persons. signed by all stockholders. or as determined in accordance with a procedure agreed upon by them. Rescind the transfer. irrespective of where the provisions of such agreements are contained. express or implied. The issuance or transfer of stock causes the stock to be held by more than such number of persons. 2. except those required by this Title to be embodied in said articles of incorporation. He is not eligible to be a holder of stock of the corporation.   The term "transfer" is not limited to a transfer for value. The stock certificate conspicuously states such number. shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. 2. the shares held by them shall be voted as therein provided. not exceeding 20. if such be their intent. and 2. The transferee is conclusively presumed to have notice of this fact. The transfer violates the restriction.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 57 of 87 Darren L. Agreements by and among stockholders executed before the formation and organization of a close corporation. 1. may provide that in exercising any voting rights. The stock certificate conspicuously shows the qualifications of the persons entitled. 3. 1. Transfer of stock to him causes the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation. EFFECTS The transferee is conclusively presumed to have notice of his ineligibility to be a stockholder.  Options granted to the transferee: 1.   . who are entitled to be holders of record of its stock 2. shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders. Salipsip 98B & Ronald Patrick Rubin 06C  Effects of issuance or transfer of stock in breach of qualifying conditions: CONDITIONS 1. relating to any phase of the corporate affairs. or The close corporation has amended its articles of incorporation.  General rule: A close corporation may refuse to register the transfer of stock in the name of the transferee who has or is conclusively presumed to have notice that: 1. The transferee is conclusively presumed to have notice of this fact. and 3. or as they may agree.

including reissuance of treasury shares. 4. 2. Delete or remove any provision required by Title XV of the Code to be contained in the articles of incorporation.)       Exception to the exceptions: The by-laws provide otherwise. or Reduce a quorum or voting requirement stated in said articles of incorporation.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 58 of 87 Darren L. 3. an action taken therein within the corporate powers is deemed ratified by a director who failed to attend. 101. Written consent is signed by all the directors. Exception: The articles of incorporation provide otherwise. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing. When board meeting is unnecessary or improperly held. Exceptions: 1.the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained. (If a director's meeting is held without proper call or notice. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders. the stockholders shall be held to strict fiduciary duties to each other and among themselves. or All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. deleting or removing any of the aforesaid provisions. whether for money. with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally. or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending.  Deadlock . General rule: The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued. at a meeting duly called for the purpose. Any amendment to the articles of incorporation which seeks to: 1. Sec.Unless the by-laws provide otherwise. whether with or without voting rights. or in payment of corporate debts. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. property or personal services. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation. 2. . That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors.   must be approved by the affirmative vote of at least 2/3 of the outstanding capital stock. unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: General rule: Any action by the directors of a close corporation without a meeting is invalid. . Salipsip 98B & Ronald Patrick Rubin 06C  A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided.

 Provisional director: 1. 6. or oppressive or unfairly prejudicial to the corporation or any stockholder. Appoint a provisional director. the SEC has the power to arbitrate the dispute and the authority to: 1. compel the said corporation to purchase his shares at their fair value. or officers. A provisional director shall have all the rights and powers of a duly elected director of the corporation. officers or those in control of the corporation is illegal. 4. Any stockholder of a close corporation may. when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock. 2. officers. 7. . Require the purchase at their fair value of shares of any stockholder. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. Cancel or alter any provision contained in the articles of incorporation. Salipsip 98B & Ronald Patrick Rubin 06C  In case of a deadlock and upon written petition by any stockholder.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 59 of 87 Darren L. 2.  Any stockholder of a close corporation may. 3. by-laws. Cancel. which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. and whose further qualifications. His compensation shall be determined by agreement between him and the corporation subject to approval of the SEC. until such time as he shall be removed by order of the SEC or by all the stockholders. stockholders. or by the other stockholders. may be determined by the SEC. or dishonest. or other persons party to the action. if any. or any stockholder's agreement.  2. which shall not be less than their par or issued value. for any reason. including the right to notice of and to vote at meetings of directors. either by the corporation regardless of the availability of unrestricted retained earnings in its books. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation. 5. by written petition to the SEC. Direct or prohibit any act of the corporation or its board of directors. or fraudulent. or Grant such other relief as the circumstances may warrant. compel the dissolution of such corporation whenever: 1. alter or enjoin any resolution or act of the corporation or its board of directors. or Corporate assets are being misapplied or wasted. 4. Any of acts of the directors. 3. stockholders. Dissolve the corporation.

Agreements between stockholders regarding the operations of the business can validly be made. be restricted. 14.. in effect. Directors can validly act even without a meeting. 4. 14. 7. The articles of incorporation may provide that all officers shall be elected or appointed by the stockholders. 4. 25. 13. 16. Salipsip 98B & Ronald Patrick Rubin 06C  Close corporations distinguished ordinary stock corporations CLOSE CORPORATION 1. Unless he sells his shares. Those active in management are personally liable for corporate torts unless the corporation has obtained an adequate liability insurance. Generally no restriction on transfer of shares. 6. 2. Although the articles of incorporation or by-laws may provide for greater quorum and voting requirements in directors‟ meetings under Sec. Pre-emptive rights of stockholders is broader as it includes all issues without exception. as a rule. Maximum number of directors is 15 3. 8.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 60 of 87 Darren L. The number of stockholders cannot exceed 20. 16. 10. To the extent that directors may be classified into one or more classes and to be voted solely by a particular class of stock. a stockholder cannot get back his investment nor compel the corporation to buy his shares except in the exercise of his appraisal right. Officers are elected by the Board of Directors. Ordinarily. The number of directors can effectively be more than 15. It may provide for greater quorum and voting requirements in meetings of stockholders and directors. 6. 5. 5. Shares of stock are subject to specified restrictions. Restrictions on transfer of shares should be indicated in the articles of incorporation. No limitation as to number of shareholders. Directors are liable for torts only if they have acted negligently or fraudulently. 15. even if the directors/stockholders are acting in good faith. Pre-emptive rights may be denied as provided for in Sec. The proper forum may interfere in the management of a close corporation in case of deadlocks under Sec. Directors must. 9. Any stockholder may petition the Sec for corporate dissolution on grounds among others. those for stockholders‟ meetings cannot generally be altered. 105. Valid and binding if indicated in the articles of incorporation and stock certificates. as amended. no such classification and no restrictions on cumulative voting. Dissolution may be had only on the grounds provided by the provisions of the Code on dissolution and PD 902-A. Management is lodged in the board of directors. 12. Courts cannot interfere in the business judgment of the directors/stockholders. 3. 8. 2. 11. Stockholders may take an active part in corporate management by vesting management to them rather than the a board of directors. ORDINARY STOCK CORPORATION 1. by-laws and stock certificates. 39. A stockholder may withdraw and compel the corporation to purchase his shares for any reason with the limitation only that the corporation has sufficient assets to cover its liabilities exclusive of capital stock. cumulative voting may. 11. act as a body at a duly constituted meeting. provided for in Sec. 9. Not valid and binding since stockholders‟ agreement cannot limit the discretion of the Board to manage corporate affairs. 104. 15. 10. . 13. 12. 7. No prohibition. Shares of stock are prohibited from being listed in the stock exchange or offered for sale to the public.

CFTI failed to comply with this law-imposed duty or obligation. (Naguiat vs. Exception: Educational institutions established by religious groups and mission boards. Educational corporations are governed primarily by special laws and secondarily by the Code. or other institutions of learning shall. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for 5 years.  Religious corporations are governed by the appropriate chapter of the Code and the general provisions on non-stock corporations.  Corporations sole.      RELIGIOUS CORPORATIONS  Religious corporation – one composed entirely of spiritual persons which is created for the furtherance of religion or perpetuating the rights of the church or for the administration of church or religious work or property. occurring before the expiration of a particular term. Essentially a tort consists in the violation of a right given or the omission of a duty imposed by law. Classes of religious corporations: 1. CA) Stockholders who actively engage in the management or operation of the business and affairs of a close corporation shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. . The control and administration of educational institutions shall be vested in citizens of the Philippines. Exception: The rule shall not apply to schools established for foreign diplomatic personnel and their dependents and. the number and term of directors shall be governed by the provisions on stock corporations. unless otherwise provided by law. General rule: No educational institution shall be established exclusively for aliens and no group of aliens shall comprise more than 1/3 of the enrollment in any school.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 61 of 87 Darren L. Trustees of non-stock educational corporations shall not be less than 5 nor more than fifteen 15. NLRC)  CHAPTER 16: SPECIAL CORPORATIONS EDUCATIONAL CORPORATIONS       Educational corporations – those which provide facilities for teaching or instruction. The powers and authority of trustees shall be defined in the bylaws. Consequently. Educational institutions are required to incorporate within 90 days after their recognition as such. 2. shall hold office only for the unexpired period. colleges. as soon as organized. in multiples of 5. a corporate action taken at a board meeting without proper call or notice is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting. Unless otherwise provided in the articles of incorporation on the by-laws. Trustees thereafter elected to fill vacancies. A favorable recommendation of the Secretary of Education. Article 283 of the Labor Code mandates the employer to grant separation pay to employees in case of closure or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses. A majority of the trustees shall constitute a quorum for the transaction of business. Salipsip 98B & Ronald Patrick Rubin 06C  In a close corporation. the board of trustees of incorporated schools. and Religious societies. failure to comply will not immune the educational institution from suit as a corporation. (Manuel Dulay Enterprises vs. so classify themselves that the term of office of 1/5 of their number shall expire every year. General rule: Educational institutions shall be owned solely by citizens of the Philippines or corporations or associations at least 60% of the capital of which is owned by such citizens. Culture and Sports is required before the SEC accepts or approves the articles of incorporation or by-laws of any educational institution. its stockholder who was actively engaged in the management or operation of the business should be held personally liable. However. For institutions organized as stock corporations. for other foreign temporary residents.

c. including hospitals. From and after the filing of the aforementioned documents with the SEC. colleges. which place must be within the Philippines. who are incorporated by law in order to give them some legal capacities and advantages.    . Exception: A corporation sole becomes endowed with corporate personality after filing of the verified articles of incorporation together with other required documents. minister. bishop. priest. d. properties and temporalities of any religious denomination. according to the rules. sect or church within his territorial jurisdiction. describing such territorial jurisdiction. priest. sect or church and that he desires to become a corporation sole.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 62 of 87 Darren L. estate and properties of his religious denomination. rabbi of presiding elder is required to be filled. schools. minister. as trustee. sect or church administered or managed by the corporation sole shall be held in trust for the use. behalf and sole benefit of the religious denomination. particularly that of perpetuity. priest. rabbi or presiding elder. rabbi or other presiding elder of such religious denomination. That he is the chief archbishop. orphan asylums. rabbi or presiding elder of his religious denomination. regulations or discipline of the religious denomination. Accompanied by a copy of the commission. bishop. General rule: A corporation acquires juridical personality only upon the issuance of a certificate of incorporation by the SEC. rabbi or presiding elder. sect or church. he is charged with the administration of the temporalities and the management of the affairs. The chief archbishop. 3. The articles of incorporation must be: Verified by affidavit or affirmation of the chief archbishop. sect or church must file the articles of incorporation with the SEC which must contain the following: a. rabbi or presiding elder. The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. sect or church to which he belongs. minister. That the rules. bishop. certificate of election or letter of appointment of such chief archbishop. bishop.  All temporalities.    b. purpose. and Duly certified to be correct by any notary public. Who – Chief archbishop. priest. sect or church. priest. minister. Requirements and procedure of incorporation: 1. Purpose – Administration and management. sect or church. 2. which in their natural persons they could not have had. minister. That as such chief archbishop. of the affairs. minister. regulations and discipline of his religious denomination. rabbi or presiding elder shall become a corporation sole. such chief archbishop. minister. minister. 4. parsonages and cemeteries thereof. as the case may be. Salipsip 98B & Ronald Patrick Rubin 06C Corporation Sole  Corporation sole – consists of one person only and his successor in some particular station. priest. e. rabbi or other presiding elder of such religious denomination. bishop. and The place where the principal office of the corporation sole is to be established and located. A provision relative to its term of existence is not required since a corporation sole is supposed to exist in perpetuity. sect or church are not inconsistent with his becoming a corporation sole and do not forbid it. The manner in which any vacancy occurring in the office of chief archbishop. estate and properties of the religious denomination. priest. priest. bishop. bishop. bishop.

bishop. (Republic vs. and may receive bequests or gifts for such purposes. If it is private.          Approval of the SEC. vs. Purpose – the administration of its temporalities or for the management of its affairs. Religious Societies   Religious society – a body of person associated together for the purpose of maintaining religious worship. can acquire alienable land of the public domain depends upon the character of the land at the time of the institution of the registration proceeding. (Roman Catholic Apostolic Adm. The constitutional requirement that 60% of the capital of a corporation must be owned by Filipino citizens before it may register land in its own name does not apply to a corporation sole. Exception: Court intervention is not necessary when the rules. c. CA) In case of vacancy in the office of the “head” of the corporation. regulations and discipline of the religious denomination. had openly. minister. exclusively and notoriously possessed the same for 30 years. or any private corporation for that matter. of Davao. priest. the person authorized by the rules. INC) Under the Public Land Act. charitable. benevolent or educational purposes. and The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. The reason for dissolution and winding up. continuously. The successors in office shall become the corporation sole and shall be permitted to transact business as such only upon the filing with the SEC of a copy of their commission. 2. regulations or discipline of the denomination shall exercise all the powers and authority of the corporation sole during such vacancy and until such vacancy has been filled-up. d. selling and mortgaging real estate and personal property. Before such an order is granted. such application may be opposed by any member of the religious denomination. holding. LRC) Whether or not a corporation sole. a verified petition must be made by the chief archbishop. However. A corporation sole has no nationality and the framers of the constitution did not have in mind the corporation sole when it provided for such requirement. Inc. Salipsip 98B & Ronald Patrick Rubin 06C  A corporation sole may purchase and hold real estate and personal property for its church. rabbi or presiding elder acting as corporation sole and it must be shown that notice of the application has been given as directed by the court and that it is to the interest of the corporation that the petition be granted. upon completion of the requisite period ipso jure and without the need of judicial or other sanction. (Director of Lands vs. sect or church. b. General rule: A court order is required before a corporation sole may sell or mortgage real property held by it. sect or church represented by the corporation sole. The authorization for the dissolution of the corporation by the particular religious denomination. properties and estate . If it still forms part of the public domain. no. personally or through his predecessor-in-interest. duly certified by a notary public. Requirements for the voluntary dissolution of corporations sole: 1. or letters of appointment. The law creates the legal fiction whereby the land. certificate of election. ceases to be public land and becomes private property. sect or church. yes. The name of the corporation. alienable public land may be subject to registration by a possessor if he. religious society or order concerned represented by such corporation sole regulate the method of acquiring. Registration of real property in the name of the corporation sole does not vest ownership unto the head thereof. Filing with the SEC of a verified declaration of dissolution which must set forth the following: a.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 63 of 87 Darren L.

4. synod. synod.  The articles of incorporation of a religious society need not indicate a term since it is supposed to exist in perpetuity. synod. secretary. Exception: The corporation will continue as a body corporate for another period of 3 years from the time it is dissolved for the purpose of winding up its affairs and the liquidation of its assets. sect. 2. By expiration of the corporate term.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 64 of 87 Darren L. By voluntary surrender of its primary franchise (voluntary dissolution). synod. or diocese. or of the diocese. f. Three modes of dissolution: 1. That the religious society or religious order. rules. or district organization of the religious denomination. synod. regulations or discipline of the religious denomination. nationalities. at a duly convened meeting of the body. 3. or district organization desires to incorporate for the administration of its affairs. Filing of the articles of incorporation with the SEC. synod. The place where the principal office of the corporation is to be established and located. That the incorporation of the religious society or religious order. or district organization desiring to incorporate is not forbidden by competent authority or by the constitution. or diocese. That at least 2/3 of its membership have given their written consent or have voted to incorporate. The articles of incorporation must be verified by the affidavit of the presiding elder. it ceases to be a juridical entity and can no longer pursue the business for which it is incorporated. or church of which it forms a part. The articles of incorporation must set forth the following: a. or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order. or clerk or other member of such religious society or religious order. or any diocese. c. Issuance of the SEC of the certificate of incorporation. CHAPTER 17: DISSOLUTION     Dissolution – the extinguishment of the corporate franchise and the termination of corporate existence. b. properties and estate. Corporations sole. or diocese. EXPIRATION OF CORPORATE TERM   General rule: A corporation registered under the Corporation Code is required to indicate its term of existence in the articles of incorporation. That the religious society or religious order. or district organization of any religious denomination. Requirements and procedure for incorporation: 1. or diocese. sect or church. or the diocese. or district organization. or By the revocation of its corporate franchise (involuntary dissolution). 2. and Religious societies. 3. e. and The names. . and residences of the trustees elected by the religious society or religious order. which place must be within the Philippines. the board of trustees to be not less than 5 nor more than 15. Salipsip 98B & Ronald Patrick Rubin 06C   Who – any religious society or religious order. General rule: When a corporation is dissolved. or district organization is a religious organization of a religious denomination. Exceptions: 1. synod. d. 2. sect or church. sect or church.

setting forth all claims and demands against it. 4. A copy of the resolution authorizing the dissolution must be certified by a majority of the board of directors or trustees and countersigned by the corporate secretary. 5. which date shall not be less than 30 days nor more than 60 days after entry of the order. 3. place and subject of the meeting for 3 consecutive weeks in a newspaper published in the place where the principal office of said corporation is located or in a newspaper of general circulation in the Philippines. Voluntary dissolution where no creditors are affected  Formal and procedural requirements for voluntary dissolution where no creditors are affected: 1. 4. 2. Publication of the notice of time. (Daguhoy Enterprises vs. Petition for the dissolution shall be filled with the SEC signed by the majority of its board of directors or trustees or other officers having the management of its affairs. 2. Before such date. Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock or 2/3 of the members at the meeting duly called for the purpose. Voluntary dissolution where no creditors are affected. a copy of the order must be published once a week for 3 consecutive weeks in a newspaper of general circulation published in the city or municipality where the principal office is situated or in a newspaper of general circulation in the Philippines. and Shortening of corporate term. 3. (PNB vs. Majority vote of the board of directors or trustees. and Issuance of a certificate of dissolution by the SEC. 3. Posting of the same order for 3 consecutive weeks in 3 public places in such city or municipality. Salipsip 98B & Ronald Patrick Rubin 06C  A corporation ceases to exist and is automatically dissolved upon the expiration of the term indicated in its articles of incorporation without the need of formal proceeding. 2.  The requirements and formalities provided by law for the dissolution of corporations are mandatory such that failure to comply therewith will have no effect on the legal existence of the corporation. A mere resolution by the stockholders or the board of directors of a corporation to dissolve the same does not affect the dissolution of a corporation. 5. There is no need to for the institution of a proceeding for quo warranto to determine the time and date of the dissolution of a corporation because the period of corporate existence is provided in the articles of incorporation.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 65 of 87 Darren L. Affirmative vote of the stockholder representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members at a meeting duly called for that purpose. CFI) SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)  Three modes of voluntary dissolution: 1. 6. A corporation being a creation of law may only terminate its existence in the manner prescribed by law. Ponce)  Voluntary dissolution where creditors are affected  Formal and procedural requirements for voluntary dissolution where creditors are affected: 1. Issuance of an order by the SEC reciting the purpose of the petition and fixing the date on or before which objections thereto may be filed by any person. . verified by the president or secretary or one of its directors or trustees. Voluntary dissolution where creditors are affected. Sending of notice to each stockholder or member either by registered mail or personal delivery at least 30 days prior to the meeting (scheduled by the board for the purpose of submitting the board action to dissolve the corporation for approval of the stockholders or members).

upon any ground provided by law. 2. the SEC shall hear the petition and try any issue made by the objections filed. sect or church is necessary. 5 (m) of RA 8799 provides that the SEC shall have the power to suspend or revoke. 144). 3. and Judgment dissolving the corporation and directing disposition of its assets as justice requires and the appointment of a receiver (if necessary in the court‟s discretion) to collect such assets and pay the debts of the corporation. Submission of the amended articles of incorporation to the SEC. Salipsip 98B & Ronald Patrick Rubin 06C 6. 4. and Proper notice and hearing on the grounds provided by laws. In a close corporation.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 66 of 87 Darren L. Approval of the SEC. Dissolution by shortening the corporate term  Procedure to shorten the corporate term: 1. PD 902-A: 1. 2. Failure to file by-laws within the required period. the franchise or certificate of registration of corporations. 5. and Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period. Fraud in procuring the certificate of registration. It is only upon the approval of the SEC that the corporation is deemed dissolved.  Filing of a verified complaint. 3. Upon 5 days notice. 5 of PD 902-A to the Special Commercial Courts. rules and regulations. 7.   Other grounds provided for the in Corporation Code: 1. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations. 2. 2. 4. after proper notice and hearing. 5. Written notice of the proposed action and the time and place of meeting shall be served to each stockholder or member either by mail or by personal service. In case of a corporation sole. A vote must cast at a duly constituted meeting. given after the date on which the right to file objects has expired. The law is intended to let the stockholders have control of the assets of the corporation upon dissolution and winding up of its affairs. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise. Continuous inoperation for a period of at least 5 years. Sec. an authorization for the dissolution by the particular religious denomination. Notwithstanding the fact that RA 8799 transferred the jurisdiction of the SEC under Sec. INVOLUNTARY DISSOLUTION  Requirements for involuntary dissolution by the SEC: 1. 3. partnerships or associations. Written assent is insufficient. Grounds for involuntary dissolution under Sec. 6. 105). Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public. 6. officers or those in control of the corporation which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the . any acts of directors.    Approval by a majority vote of the board or directors or trustees. Violation of any provision of the Code (Sec.  The appointment of a receiver is only permissive and not mandatory. the same law granted the SEC concurrent jurisdiction over revocation proceedings. In case of deadlock in a close corporation (Sec.

Piccio) In a close corporation. (Gelano vs. (Hall vs. (Republic vs.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 67 of 87 Darren L. or officers. except under express limitation. (PD 902-A) The SEC has concurrent jurisdiction to suspend. Inc. Dissolution terminates the corporation‟s power to enter into contracts or to continue the business as a going concern. (Government vs. 5(m) RA 8799) The existence of a de jure corporation may be determined in a private suit for its dissolution between stockholders. the franchise or certificate of registration of corporations. and is not available where the rights of the stockholders can be.. or for a plain abuse of power by which the corporation fails to fulfill the design and purpose of its organization. The stockholders succeed to the rights and liabilities of the dissolved corporation in an unexpired leasehold state which may be enforced by or against the receiver or liquidating trustee. and a forfeiture will not be allowed. members. shall be removed or impaired by the subsequent dissolution of said corporation. members or associates. the Securities Regulation Code and the General Banking Act. e. Exception: The lease.) The court has a discretion with respect to the infliction of capital punishment upon corporations and there are certain misdemeanors and misusers of franchises which should not be recognized as requiring their dissolution. Philippine Sugar Estates Co. Piccio) General rule: In a lease to a corporation. trustees. (Government vs. between any or all of them and the corporation. and between such corporation.         EFFECTS OF DISSOLUTION  No right or remedy in favor of or against any corporation. members. 105). CA)      . by its terms. The Special Commercial Courts. Bisaya Land Transportation Co. (Republic vs. any stockholder or member of a corporation can institute a dissolution proceeding against his own corporation before the proper forum. Contracts for personal services are deemed terminated by the dissolution of the corporation. (Hall vs. trustees. without intervention of the State. protected in some other way. directors. The several acts of misuse and misapplication of the funds and/or assets of the corporation were committed more particularly by the corporation‟s president. nor any liability incurred by any such corporation. stockholders.) Under the present state of law. El Hogar) That the corporation is guilty of willful and repeated violation of the law and that its continuance inflicts substantial injury to the public warrants its dissolution. revoke. or officers. But when such abuses and violations constitute or threaten a substantial injury to the public or such as to amount to a violation of the fundamental conditions of the contract (charter) by which the franchise were granted and thus defeat the purpose of the grant. after proper notice and hearing. respectively. terminates when the corporation ceases to exist. (Sec. then dissolution will be granted. members or associates. Security Credit) Relief by dissolution will be awarded only where no other adequate remedy is available. a petition for the dissolution of the corporation may be instituted by any shareholder on the ground of mere dishonesty.   Other grounds can be found in special laws. the rights and obligations thereunder are not extinguished by the corporation‟s dissolution since leases affect property rights and survives the death of parties. directors.g. for the commission of which they may be held personally liable. Dissolution terminates a corporation‟s primary franchise and generally prevents it from further exercising other or secondary franchises which have been conferred to it. Salipsip 98B & Ronald Patrick Rubin 06C corporation or any stockholder or whenever corporate assets are being misapplied or wasted (Sec. partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity. partnership or association of which they are stockholders. or are. There is an implied condition that the contract shall terminate in such event. shall hear and decide cases involving intra-corporate dispute or partnership relations between and among stockholders. its stockholders. partnership or associations upon any of the grounds provided by law. Courts proceed with extreme caution in the proceeding which have for their object the forfeiture of corporate franchises.

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

Holders of preferred shares may be granted certain rights or privileges upon dissolution. A license or permit to do so. (Gelano vs. Exception: In times of war. the “control test” would apply in determining the corporate nationality. those having pecuniary interest in the corporate assets. (Sumera vs. and A certificate of authority from the appropriate government agency. a corporation created by laws of one state is usually allowed to transact business in other states and to sue in the courts of the forum. Valencia)   (Board of Liquidators vs. CA) A claim established against the corporation may be prosecuted against the liquidator of such corporation even after the three years from its dissolution. Once the three year period for liquidation and winding up has elapsed without any trustee or receiver being appointed..AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 69 of 87 Darren L. Exception: The stockholders of a dissolved corporation may convey their respective shareholdings toward the creation of a new corporation to continue the business of the old. CA) Note: The above decision is an aberrant ruling.       . (Clemente vs. it is a foreign corporation. organized or existing under any laws other than those of the Philippines (and whose laws allow Filipino citizens and corporations to do business in its own country or state). (Chung Ka Bio vs. may make proper representations with the SEC for working out a final settlement of the corporate concern. subject to restrictions and certain requirements imposed therein. Marsman Development Company) Upon dissolution of the corporation its assets are held for the benefit of its stockholder after payment of its debts and will be so distributed to the said stockholder in accordance with their proportionate interest in the corporation or their contracts of subscription. while if it is registered under Philippine laws. General rule: The board of directors of a dissolved corporation is not permitted to undertake any activity outside of the usual liquidation of the corporation. General rule: A corporation can have no legal existence outside the boundaries of the sovereign by which it is created.e. the assets of the corporation will be escheated in favor of the Government thus barring the claims of stockholders and creditors. Winding up is the sole activity of a dissolved corporation that does not intend to incorporate a new. i. Kalaw) The counsel who prosecuted and defended the interest of the corporation and who appeared in behalf of the corporation may be considered a trustee of the corporation at least with respect to the matter in litigation only. The phrase “whose laws allow Filipino citizens and corporations to do business in its own country or state” is a mere condition precedent to the grand of a license of a foreign corporation to do business in the Philippines. If it is incorporated in another state. Requisites for a foreign corporation to transact business in the Philippines: 1. 2. the citizenship of the controlling stockholders determines the nationality of the corporation. The word “trustee” must be understood in its general concept.        CHAPTER 18: FOREIGN CORPORATIONS  Foreign corporation – one formed. IAC) If the three year period of liquidation has elapsed and no effort to finally settle or close the corporate affairs was undertaken. it is deemed a Filipino or domestic corporation irrespective of the nationality of its stockholders. General rule: The “incorporation test” is applied in determining whether a corporation is domestic or foreign. including not only the stockholders but likewise the creditors. Salipsip 98B & Ronald Patrick Rubin 06C instituted or which may be instituted even outside of the period of three years fixed for the offices of the corporation. (Republic vs. acting for and its behalf. Exception: By virtue of state comity.

comply with the provisions of existing laws applicable to them. no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate government agency. 2. a translation thereof in English under oath of the translator shall be attached thereto. 5. g. Foreign banking. Its outstanding capital stock. Upon issuance of the license. 4. i. and to determine and assess the fees payable. The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation. c. The date and term of incorporation. and their translation to an official language of the Philippines.  Foreign corporations already issued a license to transact business in the Philippines prior to the effectivity of the Code continue to have such authority under the terms and conditions of its license. certified in accordance with law. the SEC shall thereafter issue the license. or of government owned or controlled corporations and entities. h. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation. such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 70 of 87 Darren L. for the benefit of creditors. 3. other special laws and the rules and regulations implementing them. The directors and officers of the corporation. e. j. If such certificate is in a foreign language. a foreign corporation. and Such additional information as may be necessary or appropriate in order to enable the SEC to determine whether such corporation is entitled to a license to transact business in the Philippines. The principal office of the corporation in the country or state of incorporation. and that the applicant is an existing corporation in good standing. revoked. Within 60 days after the issuance of the license. unless already stated in its articles of incorporation. securities consisting of bonds or other evidence of indebtedness of the Philippine government or its political subdivisions or instrumentalities. The place in the Philippines where the corporation intends to operate. except those engaged in foreign banking or insurance. shares of stock in “registered enterprises. 125. The resident agent. Upon compliance with the provisions of Sec.” shares of stock in domestic insurance companies and    . Salipsip 98B & Ronald Patrick Rubin 06C  Procedure for application of a license: 1. The purpose or purposes of the corporation. and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. Submission to the SEC of its articles of incorporation and by-laws. subject to the provisions of the Code and other special laws. b. f. The application shall be under oath and. Its authorized capital stock. shall specifically set forth the following: a. if necessary. suspended or annulled in accordance with this Code or other special laws. attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein. d. whenever required by law. shall deposit with the SEC. in addition to the above requirements. unless such license is sooner surrendered. In the case of all other foreign corporations. The amount actually paid in. financial and insurance corporations shall. showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition.

Regional operating headquarters. The necessity of the appointment of a resident agent is only for the purpose of receiving summons and other legal processes in any legal action or proceeding against the foreign corporation. Branch office. 3. If it does so. Service upon the SEC – if the licensed foreign corporation has ceased to transact business in the Philippines or has no resident agent in the Philippines. A foreign corporation cannot transact business in the Philippines without the requisite license. 7. The following may be appointed as a resident agent: 1. Representative or liaison office. Salipsip 98B & Ronald Patrick Rubin 06C banks.00. 2.   An individual residing in the Philippines. with an actual market value of P100. Elser & Co. Modes of service of summons upon a foreign corporation: 1.000. or Service upon any of its officers or agents within the Philippines. the responsible officers may be subjected to the penal provisions of Sec. Regional warehouse. 5. Local subsidiary. W. or its successors or assigns. Additional securities may be required by the SEC if the actual market value of the securities on deposit has decreased by at least 10%. but to prevent it from acquiring a domicile for the purpose of pursuing its business without taking steps to render it amendable to suit in the local courts. shall be permitted to maintain or intervene in any action. 2. suit or proceeding in any court or administrative agency of the Philippines Exception: Such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. or A domestic corporation lawfully transacting business in the Philippines (includes partnerships such as law firms and accounting firms). vs. (Marshall-Wells Co. DOING BUSINESS WITHOUT A LICENSE  General rule: No foreign corporation transacting business in the Philippines without a license. 4. or any combination thereof. or Joint venture. 6. Regional or area headquarters. 2. Service upon the resident agent – service upon the resident agent is mandatory if the foreign corporation is license to do business in the Philippines. of good moral character and of sound financial standing. 144.) MODES OF ENTRY OF FOREIGN CORPORATIONS  Modes of entry of foreign corporations: 1.  The objective of the law requiring the license is not to prevent the foreign corporation from performing isolated or single acts.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 71 of 87 Darren L.   . RESIDENT AGENT   The appointment of a resident agent is a condition precedent to the issuance of a license to transact business in the Philippines by a foreign corporation. 3. H.

A foreign corporation transacting business in the Philippines without a license can be sued in Philippine courts. and contemplates. Salipsip 98B & Ronald Patrick Rubin 06C  General rules regarding whether or not a foreign corporation may sue or be sued in the Philippines: 1. 2. the purpose and object of its organization. reputation or goodwill.” The foreign corporation is not seeking to enforce any legal or contractual rights arising from. Henry W. If it is doing business in the Philippines. The object of the statute was not to prevent the foreign corporation from performing single acts. As to whether it can be sued or not.    It is not the lack of required license but doing business without a license which bars a foreign corporation from access to our courts. a. shall not be permitted to maintain any suit in the local courts. The term implies a continuity of commercial dealings and arrangements. The foreign corporation is merely defending a suit filed against it. vs. vs. The party is estopped to challenge the personality of the corporation by entering into a contract with it. a foreign corporation doing business in the country without a license can not sue in Philippine Courts. or growing out of any business which it has transacted in the Philippines. (Mentholatum Co. the performance of acts or works or the exercise of some of the functions normally incident to. tradename. (Universal Shipping vs. b. 5. to that extent. (Bulakhidas vs. and until it complies with the law. and in progressive prosecution of. 2. but to prevent is from acquiring domicile for the purpose of business without taking the steps necessary to render it amenable to suit in the local courts.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 72 of 87 Darren L. The law simply means that no foreign corporation shall be permitted “to transact business in the Philippine Islands” unless it shall have the license required by law. If it is not transacting business in the Philippines. Mangaliman) The object of the statute was to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts. Elser & Co.. Exceptions: 1. c. The true test regarding “doing” or “engaging in” or “transacting” business is whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. it can sue before the Philippine Courts. IAC) General rule: A foreign corporation must have the requisite license to sue before the Philippine courts.) A foreign corporation not engaged in business in the Philippines may not be denied the right to file an action in Philippine courts for isolated transactions. 4. The act or transaction involved is an “isolated transaction. corporate name. b. Subject to certain exceptions. 3. even without a license.  Exception to an exception: Where a single act or transaction however. Inc. it cannot be sued in Philippine courts for lack of jurisdiction. (Marshall-Wells Co. a. Navarro)    . is not merely incidental or casual but indicates the foreign corporation‟s intention to do other business in the Philippines. The suit is based on a violation of the Revised Penal Code. The purpose of the suit is to protect its trademark. said single act or transaction constitutes „doing‟ or „engaging in‟ or „transacting‟ business in the Philippines. A foreign corporation transacting or doing business in the Philippines with a license can sue before Philippine Courts. c. 6. As to whether or not it can sue. A foreign corporation transacting business in the Philippines with the requisite license can be sued in the Philippines.

 A single act may bring the corporation within the purview of the statute where it is an act of the ordinary business of the corporation. agencies or branches. the single act of transaction is not merely incidental or casual. a trademark acknowledges no territorial boundaries or municipalities or states or nations.e. more so may it sue based on a mistake. Soliciting orders. it transacts business in its name and for its own account. The respondent. but extends to every market where the trader‟s goods have become known and identified by the use of the mark. does not need to obtain a license to do business in order to have the capacity to sue. among them being as follows: 1.. Since it is the trade and not the make that is to be protected. or conversion. (Western Equipment and Supply Co. being a foreign corporation not doing business in the Philippines. (Communication Materials and Design. shall constitute doing business even in the enterprise has no office or fixed place of business in the Philippines. (Swedish East Asia Co. In determining whether a corporation does business in the Philippines or not. One who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity. Manila Port Service) There was only one agreement between petitioners and the respondent. (Far East Int‟l Import vs. the phrase „doing business‟ has been exemplified with illustrations. Nankai) ITEC‟s arrangement with its various business contacts in the country indicate its purpose to bring about the situation among its customers and the general public that they are dealing directly with ITEC and that ITEC is actively engage in business in the country.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 73 of 87 Darren L.. commercial gain or of the purpose and objective of the business organization. vs. a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. aside from their activities within the forum. or the exercise of some of the functions normally incident to. (Atnam Consolidated. Any other act or acts that imply a continuity of commercial dealings or arrangements. Ltd. Inc. i. vs. against trespass. reference may be made to the contractual agreements entered into by it with other entities in the country. vs. not acting independently of the foreign firm amounting to negotiation or fixing of the terms and conditions of sales or service contract. a right in rem. 4. An the doctrine of estoppel to deny corporate existence applies to a foreign as well as to domestic corporations. The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract. or in the progressive prosecution of. Inc. De La Rosa)   2. vs. (Communication Materials and Design. (Facilities Management Corp. but is of such character as distinctly to indicate a purpose on the part of the operations for the conduct of a part of the corporation‟s ordinary business. whether called „liaison‟ offices. The three seemingly different transactions were entered into by the parties only in an effort to fulfill the basic agreement and in no way indicate an intent on the part of the respondent to engage in a continuity of transactions with petitioners which will categorize it as a foreign corporation doing business in the Philippines. Appointing a representative or distributor who is domiciled in the Philippines unless said representative or distributor has an independent status. Inc. purchase (sales) or service contracts. CA) Under the rules of the BOI. and not in the name or for the account of the pricipal. real or personal. vs. unless provided otherwise. Opening offices. CA) A foreign corporation doing business in the Philippines may sue in Philippine courts although no authorized to do business here against a Philippine citizen or entity who had contracted with and benefited by said corporation. and contemplate to that extent the performance of acts or works. Reyes)    . To put it another way. 3. in any of the courts of the world – even in jurisdictions where it does not transact business – just the same as it may protect its tangible property. In such a case. regardless of whether the contracts are actually reduced to writing. vs. CA) The right of a corporation to use its corporate and trade name is a property right. Concrete and specific solicitations by a foreign firm. which it may assert and protect against all the world. Salipsip 98B & Ronald Patrick Rubin 06C  If A foreign corporation not engaged in business in the Philippines has the right to sue on an isolated transaction.

liabilities. Exceptions: 1. The qualifying circumstance of whether or not a foreign corporation has engaged in business in the Philippines is an essential part of the element of a foreign corporation‟s capacity to sue and must be affirmatively pleaded. (Le Chemise Lacoste vs. Inc. however. (General Garments Corporation vs. (Atlantic Mutual Insurance Co. members or officers of a corporation to each other or to the corporation.g. or Laws which fix the relations. dismissal should not be allowed. Intra-corporate or internal matters not affecting creditors or the public in general are governed not by Philippine laws but the law under which the foreign corporation was formed or organized. Razon.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 74 of 87 Darren L. or duties of stockholders. for unfair competition. whether or not it forms part of the trademark. its failure to aver its legal capacity to institute the present petition is not fatal. A foreign corporation authorized to transact business in the Philippines which amends its articles of incorporation or by-laws must file a copy of such amended articles of incorporation or by-laws with  . bar the institution of the same action. (Le Chemise Lacoste vs. Exceptions: 1. whether or not it has been licensed to do business in the Philippines. limitations. import duties and tax incentives under the Omnibus Investments Code). Salipsip 98B & Ronald Patrick Rubin 06C  A foreign corporation which has never done business in the Philippine Islands and which is unlicensed and unregistered to do business here. based on failure of the foreign corporation to aver its capacity to sue. Cebu Stevedoring Co. Fernandez) In a suit involving the violation of the Revised Penal Code the complainant foreign corporation‟s capacity to sue is not significant. 2. (Olympia Business Machines Co. Reyes)   LAWS GOVERNING FOREIGN CORPORATIONS   General rule: Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws.) Since petitioner is not maintaining any suit but is merely defending one against itself (it did not file any complaint but only a corollary defensive petition to prohibit the lower court from further proceeding with a suit that it had no jurisdiction to entertain). vs. rules and regulations applicable to domestic corporations of the same class. The foreign corporation is not suing or maintaining a suit but is merely defending itself from one filed against it. but is widely and favorably known in the Islands through the use therein of its products bearing its corporate and trade name has a legal right to maintain an action in the Islands. circuitous ceremony considering the absence of any meritorious substantial defense of the defense of the defendant. Fernandez)    CAPACITY TO SUE   General rule: A foreign corporation must affirmatively plead its capacity to sue in order that it may proceed and effectively institute a case in Philippine courts. organization or dissolution of corporations. or false designation of origin and false description. (Time. privileges or incentives to a foreign corporation not otherwise applicable or granted to domestic corporations (e. Inc.  The action involves a complaint for violation of the Revised Penal Code. Director of Patents) Article 8 of the Paris Convention to which the Philippines became a party provides that a trade name shall be protected in all the countries of the Union without the obligation of filing or registration. vs. Inc. vs. especially so if it would be an idle.   Laws which provide for the creation. formation.. would not. IAC) A foreign corporation not doing business not doing business in the Philippines needs no license to sue before Philippine courts for infringement of trademark and unfair competition.) If the dismissal of the case. Special laws may provide or grant certain restrictions. Parenthetically the Trademark Law allows a foreign corporation or juristic person to bring an action in Philippine courts for infringement of a mark or trade-name. 2. responsibilities. Technical rules should not be accorded undue importance to frustrate and defeat a plainly valid claim. (Puma vs.

imposts. if any. lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid. 9. 2. or The foreign corporation desires to pursue other or additional purposes in the Philippines.  Grounds for the revocation or suspension of license: 1. 4. 7. and If the absorbed corporation is the foreign corporation doing business in the Philippines.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 75 of 87 Darren L. report. Failure to appoint and maintain a resident agent in the Philippines. . affidavit or other document submitted. or Any other ground as would render it unfit to transact business in the Philippines. lawfully due to the Philippine Government or any of its agencies or political subdivisions. All claims which have accrued in the Philippines have been paid. imposts. Requirements in a merger or consolidation of a foreign corporation licensed in the Philippines: With a domestic corporation: Such must be permitted under Philippines laws and by the law of its incorporation. if any. to submit to the SEC a statement of such change. and The requirements on merger or consolidation provided by the Code must be followed. Failure to submit to the SEC an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by the Code. Failure. With a foreign corporation: Such must be permitted by the law of its incorporation. assessments or penalties. 3. Failure to file its annual report or pay any fees as required by the Code.  Requirements and procedure for the withdrawal of foreign corporations: 1. 4. A duly authenticated articles of merger or consolidation must be filed with the SEC or the appropriate government agency within 60 days from the effectivity of the merger or consolidation. and Issuance of the certificate of withdrawal by the SEC. 2.  The foreign corporation changes its corporate name. All taxes. 6. 3. after change of its resident agent or of his address. 8. Publication of the petition for withdrawal once a week for 3 consecutive weeks in a newspaper of general circulation in the Philippines. 5. compromised or settled. Failure to pay any and all taxes. 5. a petition for withdrawal of its license must also be filed. assessments and penalties. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license. 2.  Instances when a foreign corporation authorized to transact business in the Philippines must obtain an amended license: 1. Filing of a petition for withdrawal of license. Salipsip 98B & Ronald Patrick Rubin 06C the SEC or the appropriate government agency within 60 days from the effectivity of such amendment. Misrepresentation of any material matter in any application. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines.

the geographic location. 2. whether or not fully or partially paid. trustees or officers. General Banking Act – imminent danger of insolvency. The SEC shall have the power and authority to implement the provisions of this Code. Furnish a copy thereof to the appropriate government agency.00) pesos but not more than ten thousand (P10. including recommendations for their prevention or correction. the labor intensity of the activity. Such report shall be submitted within such period as may be prescribed by the SEC. domestic or foreign. Issue a certificate of revocation. except insofar as the law may require the same to be made public or where such interrogatories. impairment of its security deposit. The NEDA shall. the economies of scale. 3. rules and regulations designed to promote the general welfare and foster economic development.00) pesos or by imprisonment for not less than thirty (30)     . together with a financial statement of its assets and liabilities. and shall submit to Congress. make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws. failure to comply with the provisions of law or regulation obligatory upon it. lawfully doing business in the Philippines shall submit to the SEC an annual report of its operations. answers or results are necessary to be presented as evidence before any court. business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership. directors. the size of the enterprise. prevent illegal monopolies or combinations in restraint or trade. the NEDA shall consider the type and nature of the industry. a report of its findings. All interrogatories propounded by the SEC and the answers thereto. Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1.  Every corporation.000. and Mail a notice of such revocation accompanied by a copy of the certificate of revocation to the corporation at its registered office in the Philippines. books and records of any corporation.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 76 of 87 Darren L. particularly in the prevention of fraud and abuses on the part of the controlling stockholders. In recommending to Congress corporations. covering the preceding fiscal year and such other requirements as the SEC may require. the export potential. belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests. whenever deemed necessary. the extent of Filipino ownership. a condition or method of business hazardous to the public or its policy holders. Omnibus Investments Code – willful violation of the provisions of existing laws and implementing guidelines or violation of the terms and conditions of its license. except treasury shares. from time to time. Salipsip 98B & Ronald Patrick Rubin 06C  Other grounds for revocation of license under special laws: 1. Insurance Code – unsound condition. Maximum limits may be set by Congress for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section. or whenever it is necessary to achieve national objectives. through their articles of incorporation or their by-laws. 3. or to implement national economic policies declared in laws. and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder. Non-stock or special corporations may. as well as other factors which are germane to the realization and promotion of business and industry. certified by any independent certified public accountant in appropriate cases. 2. as well as the results of any examination made by the Commission or by any other official authorized by law to make an examination of the operations.  In case the revocation is warranted the SEC shall: 1. or deficiency in the margin of solvency. shall be kept strictly confidential. members. designate their governing boards by any name other than as board of trustees.000. CHAPTER 18: MISCELLANEOUS PROVISIONS    Outstanding capital stock – the total shares of stock issued under binding subscription agreements to subscribers or stockholders.

3. (Mangalad vs. its stockholders. 3. licensed or registered by the Securities and Exchange Commission. 2. further. licensed or registered under the provisions of this Code. in the discretion of the court. Distribution of Special Commercial Courts: 1. Fraud committed by a corporation in failing to pay individual money market placements. members.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 77 of 87 Darren L.  No right or remedy in favor of or against any corporation. nor any liability incurred by any such corporation. One in each in other cities in Metro Manila.    . Premier Corporation) Corporate officer‟s act of diverting corporate funds and assets for his personal use. All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized. as amended were transferred to the Special Commercial Courts by RA 8799. 5 of PD 902-A. shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. (Orosa. heard and tried by the Special Commercial Courts. partners. or officers. 2000. Two in Makati City.  PD 902-A. trustee or officer of the corporation responsible for said violation: Provided. 4. directors. Two in Quezon City. vs. 2. or officers. CA) Pyramiding schemes. AS AMENDED     The SEC‟s quasi-judicial functions under Sec. trustees. 5 [a])  General rule: The Special Commercial Courts shall have original and exclusive jurisdiction to hear and decide cases involving devices or schemes employed by or any acts of the board of directors. and shall be governed by the provisions hereof: Provided. stockholders. That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code. the same may. Salipsip 98B & Ronald Patrick Rubin 06C days but not more than five (5) years. be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided. business associates. the same must be filed. Exception: The SEC shall retain jurisdiction over cases involving suspension of payments and corporate rehabilitation filed on or before June 30. members of associations or organizations registered with the SEC. CA) Corporations act of duping persons into investing money when such corporations authority to issue commercial papers has already expired. be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same. amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder. (Alleje vs. or both. said corporation shall. Jr. That such dissolution shall not preclude the institution of appropriate action against the director. 5 of PD 902-A. subject to the terms and conditions of its license. directors. If the violation is committed by a corporation. after notice and hearing. shall be deemed to have been authorized. Syndicated Estafa) Even if the action is for recovery of sums of money paid or given to the corporation through devices and schemes amounting to fraud or misrepresentation detrimental to the investing public. 4. General rule: The Special Commercial Courts shall have exclusively and originally jurisdiction over cases falling under Sec. trustees. Examples of acts amount to fraud or misrepresentation within the original and exclusive jurisdiction of the Special Commercial Courts: 1. DEVICES OR SCHEMES AMOUNTING TO FRAUD AND MISREPRESENTATION (Sec. members. its officers or partners. and One per region. That if any such corporation is affected by the new requirements of this Code. unless otherwise herein provided. Exception: The complaint is based on the violation of the Revised Penal Code (Ex.

2. (DMRC Enterprises vs.) If all of the requirements for a valid transfer have been complied the dispute is intra-corporate and is within the jurisdiction of the Special Commercial Court. Inc. Ilustre. Salipsip 98B & Ronald Patrick Rubin 06C  The allegation of fraud must be stated with particularity to place the case with the jurisdiction of the Special Commercial Courts. CA)         CONTROVERSIES IN THE APPOINTMENT. both charges to be filed and proceeded independently. partnerships or associations. de la Cruz. Rural Bank of Salinas. 5 [b])   Intra-corporate controversies include those of corporations. An intra-corporate relationship: a. or Between the corporation. Between them and the corporation. CA) The fact that shares of stock were issued to be used as part payment for lease rentals does not convert it into a intra-corporate controversy. associates of a corporation. (Saavedra vs. partnerships and associations. a fraudulent act may give rise to liability for violation of the rules and regulations of the SEC cognizable by the SEC itself. . the ordinary/regular courts can acquire jurisdiction thereto. jurisdiction would fall with the Special Commercial Courts. (SEC vs. Florendo. ELECTION AND REMOVAL OF DIRECTORS AND OFFICERS (Sec. But if it requires a mere determination of the contractual rights of the parties under an ordinary agreement. (DPB vs. (Fabia vs. such that. members. (Speed Distributing Corp.) Recovery of the control and management of a corporation in the guise of a complaint for rescission of a memorandum of agreement which vested such control and management is an intra-corporate controversy.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 78 of 87 Darren L. Elements of intra-corporate controversies: 1. (Rivera vs. Tay vs. partnership or association. c. officers or managers of corporations. The dispute among the parties must be intrinsically connected with the regulation of the corporation. Jr. with the other. b. CA) If the petitioner does not have a “prima facie” title to the share sought to be recorded in his name the dispute is not intra-corporate and the ordinary or regular court can assume jurisdiction over the case. partnership or association and the State. CA) The filing of the civil/intra-corporate case before the SEC does not preclude the simultaneous and concomitant filing of a criminal action before the regular courts. (Abejo vs. vs. and may be simultaneously. as well as criminal liability for violation of the Revised Penal Code cognizable by the regular courts. The controversy must arise out of said relationship. 5 [c])  The Special Commercial Courts have original and exclusive jurisdiction to hear and decide cases involving controversies in the election or appointment of directors. partnership or association. CA) A dispute regarding the automatic rescission clause of a Memorandum of Agreement regarding the sale of shares of a group of stockholders to another group of stockholders is intra-corporate. The factor which decides whether the action is within the jurisdiction of the Special Commercial Courts is that the controversy arose out of an intra-corporate relation between and among the parties. Inc. Este del Sol Mountain Reserve. If the nature of the controversy involves matters that are purely civil in character necessarily the case does not involve an intra-corporate controversy. SEC) Where the conflict involves the enforcement of rights and obligations under the Corporation Code or the inter and intra-corporate affairs of the corporation. INTRA-CORPORATE CONTROVERSIES (Sec. vs.  Between and among the stockholders. trustees.

Upon the appointment of a management committee. be it before the trial court or any tribunal or before this Court. The rehabilitation plan is a plan under which the corporation will reschedule the payment of its debts and liabilities. including the rendition of judgment during the state of suspension.   RECEIVERSHIP AND SUSPENSION (Sec. EFFECTS OF SUSPENSION OF PAYMENTS   The proper court may issue an order suspending payments of claims due from a distress corporation. Either the petitioner corporation will propose the plan or ask for the appointment of a receiver who will study and make the plan. appointment or termination by the board of directors is always a corporate act. Suspended proceedings include extra judicial foreclosures. 5 [d] and 6[c. Exception: The main cause of action is for the recovery of unpaid wages and separation pay. labor cases. (PAL vs. the assertion of right to have money paid. Three types of suspension of payments: 1. collection suits or any other claims of a pecuniary nature. Salipsip 98B & Ronald Patrick Rubin 06C  General rule: A corporate officer‟s election. board or body are lodged within the jurisdiction of the Special Commercial Courts. If so. partnership or association. The reason for suspension of payments for claims against a distressed corporation is to enable the management committee to effectively exercise its powers free from judicial or extrajudicial interference that might unduly hinder or prevent the „rescue‟ of the debtor company. Sadic and Kurangking) The suspension of all actions for claims against a corporation embraces all phases of the suit. d])  Petitions for suspension of payments of corporations. whether or not insolvent.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 79 of 87 Darren L. You cannot even consolidate. board or body shall be suspended accordingly. this Court will proceed to complete the proceedings on the suspended actions. tribunal. Movilla) The main aspect to be considered is whether the corporate officer asserts his rights as such officer or questions his removal or ouster. Suspension of payments where the corporation has no sufficient assets to cover its debts and liabilities with or without the appointment of a management committee with or without a rehabilitation plan. A corporation. vs. No other action may be taken. Inc. Simple suspension of payments – mere deferment of payment of debts and it refers to a petition which is filed by a corporation which possesses sufficient assets to cover its liabilities but foresees the possibility of meeting them when they respectively fall due owing to temporary liquidity problems. partnership or association under management or receivership pending before any court. rehabilitation receiver. No exception in favor of labor claims is mentioned in the law..   2. the case would fall within the ambit of the jurisdiction of the Special Commercial Courts and not the NLRC. is completed.     . and the fact that the officer asks for backwages does not alter the picture. Suspension of payments with the appointment of a receiver with or without a rehabilitation plan. Once the process of rehabilitation. board or body all actions for claims against the corporation. Zamora) Claims – refers to debts or demands of pecuniary nature. Furthermore. partnerships or associations. 3. and appointment of receivership. (PAL vs. Sps. can file a petition for suspension of payments provided it is placed under a rehabilitation receiver or management committee or rehabilitation receiver. It must be stressed that what are automatically stayed or suspended are the proceedings of a suit and not just the payment of claims during the execution stage after the case had become final and executory. management committee. All proceedings at whatever stage are suspended. the actions that are suspended cover all claims against the corporation whether for damages founded on a breach of contract of carriage. The original and exclusive jurisdiction rests with the Special Commercial Courts. however. (Midland Construction Co.

director or officer.  If the rehabilitation of the corporation is not feasible. Inc. loss or wastage or destruction of assets or other properties or paralyzation of business operations of such corporation or entities which may be prejudicial to the interest of minority stockholders. secured or preferred credits under the applicable provisions of the Civil Code will definitely have preference over unsecured ones. In the event that the assets of the corporation. partnerships or other associations supervised or regulated by other government agencies such as banks and insurance companies. upon the request of the government agency concerned. may the bank foreclose? Yes. rehabilitation receiver. corporation files for suspension. It is not an action for ac claim against the corporation. Not anyone of them should be given any preference by paying one of them ahead of the others. are not.        2. partnerships or associations that are pending before any court. rehabilitation receiver. board or body in accordance with the provisions of PD 902-A. shall be suspended effective upon the appointment of a management committee. without distinction as to whether or not a creditor is secured or unsecured. (Alemars Sibal and Son. the court muto propio or the management committee may petition the lifting and the preferences will be there again. board or body may be appointed or created:   . Requisites before a management committee. CA) Equality is Equity – during suspension the assets are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another by the expediency of an attachment. board or body. APPOINTMENT OF MANAGEMENT COMMITTEE. vs. board or body to undertake the management of corporations. tribunal or board. personal to corporate officer concerned. The creditors should stand on equal footing. (Finasia Investment and Finance Corporation vs. It may also create or appoint a management committee. IAC) VERY IMPORTANT!!! 1. BOARD OR BODY (Sec. All claims against corporations. Suspension of claims against the corporation under rehabilitation is counted or figured up only upon the appointment of a management committee or a rehabilitation receiver. partnerships or association not supervised or regulated by other government agencies in appropriate cases where there is imminent danger of dissipation. partnerships or associations. and will not be covered by the suspension of payments order issued by the court pursuant to PD 902-A. partnership or association are finally liquidated. as surety of corporate liabilities. an action against a corporation seeking the nullification of corporate documents cannot be suspended by reason thereof. Union bank case. board or body. but enforcement of such preferences is equally suspended upon the appointment of a management committee.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 80 of 87 Darren L. Elibenas) The issue of whether or not preferred creditors of distressed corporations stand on equal footing with all other creditors gains relevance and materiality only upon the appointment of a management committee. however. Secured creditors retain their preference over unsecured creditors. execution or otherwise. (Union Bank vs. and one of its key officers uses his private properties to guarantee the loan. parties-litigant or the general public. 6 [d])  Special Commercial Courts may create or appoint a management committee. (Filinvest vs. since the civil action does not present a monetary claim against the corporation. Ejercito) Note the words “against the corporation. CA) The SEC does not have jurisdiction to entertain petitions for suspension of payments filed by parties other than corporations. Same with regard to criminal proceedings. the execution of the decision is likewise suspended.” If a corporation secures a loan. the bank want to foreclose on the prop. board or body upon petition or muto propio to undertake the management of corporations. Despite the appointment of a receiver for a corporation under PD 902-A. rehabilitation receiver. (RCBC vs. Salipsip 98B & Ronald Patrick Rubin 06C    Even if the suspension order is issued after a creditor‟s action in court has already become final but pending execution. Properties of an individual stockholder.

Doctrine of primary jurisdiction – courts will not determine a controversy involving a question within the jurisdiction of the administrative tribunal. Inc. Sec. something to happen upon the instant. jeopardy. Hence. The rehabilitation receiver shall not take over the management and control of the debtor but shall closely oversee and monitor the operations of the debtor during the pendency of the proceedings. Creditors have the personality (at least 25% of the total outstanding liablitities) may file. (Sy Chim vs. 5 rule 2. close although not yet happening. (Sy Chim vs. In the absence of a strong showing of an imminent danger of dissipation. including peril.)    Danger – a general term. Service of pleadings . it must first be referred to an administrative agency of special competence. as well as implement the rehabilitation plan after its approval. and Paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders. all complaints for any violation of the Code and its implementing rules and regulations should be filed with the SEC. loss. wastage or destruction of assets or other properties of a corporation and paralysis of its business operations. where the dissention among the stockholders is such that the corporation cannot successfully carry on its corporate functions. 2. Sy Siy Ho & Sons. and preserve the entity‟s assets and properties in its possession. and on the verge of happening. It shall take the place of the management and board of directors of the entity under management. Eb Villarosa case. assume their rights and responsibilities. may be by fax or email.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 81 of 87 Darren L. committee subject to…. When authorized by the court. Salipsip 98B & Ronald Patrick Rubin 06C 1. hazard and risk.e. the SEC shall indorse the complaint to the DOJ for preliminary investigation and prosecution as provided in Section 53.) Mere disagreement among stockholder as to the fairness of the corporation would not in itself suffice as a ground for the appointment of a management committee. (Rule of Court)           SECURITIES REGULATION CODE (SRC)   Full disclosure rule – as long as there is full and complete disclosure relative to the issue of securities the investing public should determine for themselves whether or not to invest. Bayantel. partnership or association. Hence. Nature of proceedings is in rem. refers to exposure or liability to injury. (Jacinto vs. where the question demands the exercise of sound administrative discretion requiring the specialized knowledge and expertise of said administrative tribunal to determine technical and intricate matters of fact. i. Service of summons. A criminal charge for violation of the SRC is a specialized dispute. vs. He shall be primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the debtor‟s property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated. loss. the mere apprehension of future misconduct based upon prior mismanagement will not authorize the appointment of a management committee/receiver.. Imminent – something which is threatening to happen at once.1. (Baviera vs. Jurisdiction acquired upon publication of the proceeding. Sec. 6 rule 1. Sy Siy Ho & Sons. the appointment of a management committee becomes imperative. Paglinawan)  . something close at hand. ex. Actuations of the board. Their compensation is subject to agreement of the parties. Its enforcement is particularly vested in the SEC. Venue of actions in intra-corporate controversies – Special Commercial Court which has jurisdiction over the principal office of the corporation. Inc. First Women‟s Credit Corporation) A management committee shall have the power to take custody of and control all assets and properties owned and possessed by the entity under management. However. parties-litigants or the general public. Dissipation. wastage or destruction of assets or other properties. Where the complaint is criminal in nature. made upon any of the statutory or corporate officers or their respective secretaries. body. the SEC… The SRC is a special law.

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Securities  Securities – are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: 1. 2. 3. 4. 5. 6. 7.  Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities; Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; Fractional undivided interests in oil, gas or other mineral rights; Derivatives like option and warrants; Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; Proprietary or non proprietary membership certificates incorporations; and Other instruments as may in the future be determined by the Commission.

The definition of securities is extra-ordinarily broad. It is a catch all phrase meant to include all novel devices which are of the same nature. Investment contracts and golf club shares are included in the definition of securities. General rule: Securities cannot be sold or offered for sale or distribution to more than 19 persons without a Registration Statement duly filed and approved by the SEC. Once the securities are sold or offered to more than 19 persons, it becomes a public offering requiring prior registration with the SEC. Violation thereof renders the person administratively, civilly and criminally liable. Exception: The securities involved are covered by Sec. 9 (exempt securities) and Sec. 10 (exempt transactions). Persons engaging in the business of buying or selling securities in the Philippines as a broker or dealer, or acting as a salesman for such entities must be registered and authorized as such by the SEC. Investment contract – a contract or scheme whereby a person invests his money in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Issuance of certificates of participation in a multi-level marketing scheme, solely on the management of others without goods or services is an investment contract and thus a security. (Justee vs. SEC) Pyramiding schemes partakes of a nature of an investing contract which cannot be sold to more than 19 persons without prior approval of the SEC. When an investor is relatively uninformed and turns over his money to others, essentially depending upon their representations and their honesty and skill in managing it, the transaction generally is considered as an investment contract. The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. (People vs. Petralba)

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Exempt Securities  Exempt Securities (Sec. 9): 1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content of disclosures the Commission may prescribe.

2.

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Corporation Law Reviewer
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3. 4. 5.

Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, HLURB, or BIR. Any security issued by a bank except its own shares of stock.

Exempt Transactions  Exempt Transactions (Sec. 10): 1. 2. Any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions the SRC, to liquidate a bona fide debt, a security pledged in good faith as security for such debt. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner‟s account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transactions of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under the SRC or was, when sold, exempt from the provisions of the SRC, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under the SRC. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. Broker‟s transactions, executed upon customer‟s orders, on any registered Exchange or other trading market. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased.

3.

4.

5.

6.

7.

8. 9.

10. The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. 11. The sale of securities by an issuer to fewer than 20 persons in the Philippines during any twelve-month period.

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Corporation Law Reviewer
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12. The sale of securities to any number of the following qualified buyers: a. b. c. d. Bank; Registered investment house; Insurance company; Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; Investment company; or Such other person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management.

e. f.

Tender Offer   Tender Offers – a publicly announced intention by the purchaser to acquire a certain block of equities of a company through open market purchases or private negotiations. A tender offer is required of any person or group of persons acting in concert who intend to acquire: 1. At least 15% of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least P50M and having 200 or more stockholders with at least 100 shares each; or At least 30% of such equity over a period of 12 months.

2. Proxies  

Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to be issued by the Commission. Requisites for proxies: 1. 2. 3. In writing; Signed by the stockholder or his duly authorized representative; and Filed before the scheduled meeting with the corporate secretary.

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General rule: A proxy shall be valid only for the meeting for which it is intended. Exception: It is otherwise provided in the proxy. No proxy shall be valid and effective for a period longer than 5 years at one time. No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried for the account of a customer, to a person other than the customer, without the express written authorization of such customer. A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as the Commission may prescribe of the outstanding share of the issuer, shall submit a report identifying the beneficial owner within 10 days after such acquisition, for its own account or customer, to the issuer of the security, to the Exchange where the security is traded and to the Commission.

Independent Director  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 of 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 2 independent directors or such independent directors shall constitute at least 20% of the members of such board, whichever is the lesser. Independent director – a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

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Corporation Law Reviewer
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The SEC may exempt corporations from the required independent directors as it did in the rehabilitation of Victorias Milling Co. Inc..

Insider Trading  Insider: 1. 2. 3. The issuer; A director or officer (or person performing similar functions) of, or a person controlling the issuer; A person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; A government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or A person who learns such information by a communication from any of the foregoing insiders.

4.

5.  

General rule: An insider may not sell or buy a security of the issuer while in possession of material information with respect to the issuer or the security that is not generally available to the public. Exceptions: 1. 2. The insider proves that the information was not gained from such relationship; or The insider disclosed the information to a party reasonably believed by the insider to possess the information.

Material non-public information – has not been generally disclosed to the public and: 1. 2. would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.

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An insider may not communicate material non-public information to any person who will likely buy or sell a security of the issuer while in possession of such information. Trading by persons who have material non-public information about a tender offer is prohibited.

Registration of Brokers, Dealers, Salesmen and Associated Persons  Persons engaging in the business of buying or selling securities in the Philippines as a broker or dealer, or acting as a salesman for such entities must be registered and authorized as such by the SEC. Broker – a person engaged in the business of buying and selling securities for the account of others. Dealer – any person who buys and sells securities for his/her own account in the ordinary course of business. Salesman - a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and sell securities. A stockbrokerage firm can have no other business than that. Purchase of shares should be coursed through a broker. However a private transaction can be made.

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Fraudulent Transactions and Other Market Manipulations  Fraudulent and manipulative devices: 1. Wash sale – any transaction in a security which involves no change in the beneficial ownership thereof.

3. and boiler room operations are illegal when they are effected to: 1. hype and dump. or artifice to defraud. Circulating or dissemination information that the price of any security listed in the Exchange will or is like to rise or fall (illegal) Making false or misleading statements with respect to any material fact.” Squeezing the float – the part or portion of the issue/security which is outstanding but intentionally held by dealers or other persons with a view of reselling them later for profit. Investors are induced to purchase through hard-sell techniques based on unfounded predictions and mailing of misleading market letters. squeezing the float. Employing any device. Raise the price or induce the purchase of a security or of a controlling. Hype and dump – the act employed by a person or group of persons of purchasing the outstanding capital stock of a dormant public shell company for a nominal amount and merge it with their privately held company.  Other fraudulent transactions: 1. scheme. then hire a promoter who would “hype” the virtues of the company. The broker-dealer then generates volume and advance bid price. Depress their price to induce the sale of a security. Marking the close – place of purchase or sale order. Boiler room operations – involves an intensive selling campaign through numerous salesmen by telephone or through direct mail offerings for securities of either a certain type or from a specific issuer. they would “dump” their shareholdings and bail out. 10. 4. The shares of the Shell Company are often reverse-split four to one or more to reduce the number of shares. its products and stocks. and Creates active trading to induce such purchase or sale through said devices or schemes. painting the tape. controlled company. at or near the close of the trading period. Marking the close. Pegging or fixing or stabilizing the price of security effected either alone or with others through any series of transactions for the purchase or sale thereof (illegal) 11. They would then look for a brokerdealer who would be willing to make a market relative to the stocks of the newly merged company.   Wash sale and matched order is illegal when used as a means to create a false or misleading appearance of active trading in the security concerned. 2. which he knew or had reasonable ground to believe was so false or misleading for the purpose of inducing the purchase or sale of any security (illegal). They would then gain control of the majority of the stocks of the merged entity. of the same issuer or of a controlling. Stock certificates are often re-issued in the name of the merged entity to relatives and associates who act as nominees of the person or group of persons employing the device. 3. 5. controlled or commonly controlled company by others. Painting the tape – the activity is made during normal trading hours. Salipsip 98B & Ronald Patrick Rubin 06C 2. whether of the same or of a different class. . It involves buying activity among nominee accounts at increasingly higher or lower prices or causing fictitious reports to appear on the “ticker tape.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 86 of 87 Darren L. Matched order – an order or orders for the purchase or sale of security with the knowledge that a simultaneous order or orders of substantially the same size. 8. time and price for the sale or purchase of such security has. or will be entered by or for the same or different parties. Insider trading – the act of an insider of buying or selling securities of the issuer while in possession of material information with respect thereto that is not generally available to the public (illegal unless exempted). 6. 12. 7. Short sale – sale of securities which the vendor does not own (illegal unless done in accordance with the rules and regulations of the SEC) (T3 rule). 9. When the market reaches a high price. or common controlled company of others.

Limitation of Actions. The Commission may only agree to a settlement offer based on its findings that such settlement is in the public interest. not misleading.2. in the light of the circumstances under which they were made.  Fasle registration statement .  Fraud – akin to bad faith which implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. . 3.AQUILA LEGIS FRATERNITY Corporation Law Reviewer Page 87 of 87 Darren L. Limitation of Actions  SEC. practice or course of business which operates or would operate as a fraud or deceit upon any person. No action shall be maintained to enforce any liability created under any other provision of this Code unless brought within two (2) years after the discovery of the facts constituting the cause of action and within five (5) years after such cause of action accrued. or Engaging in any act. Obtaining money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made. Settlement Offer    At any time.liable civily . 56 Ceiling as to amount of damages . 62. Any agreement to settle shall have no legal effect until publicly disclosed.sec.1.not later than 5 years after the cause of action accrues .1 (a) more than five (5) years after the security was bona fide offered to the public. parties being investigated and/or charged may propose in writing an offer of settlement with the Commission. unless brought within two (2) years after the violation upon which it is based. Upon receipt of such offer of settlement. In no event shall any such action be brought to enforce a liability created under Section 56 or Subsection 57. if the action is to enforce a liability created under Subsection 57. the nature of the investigation or proceeding. Such decision may be made without a determination of guilt on the part of the person making the offer. or under Subsection 57.1(a). transaction.1 (b) more than five (5) years after the sale. Salipsip 98B & Ronald Patrick Rubin 06C 2. 62. the Commission may consider the offer based on timing.triple of the amount involved limitation of actions . and the public interest. during an investigation or proceeding under this Code. or. No action shall be maintained to enforce any liability created under Section 56 or 57 of this Code unless brought within two (2) years after the discovery of the untrue statement or the omission.62.

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