Revsed Bagtas Revewer by Ve and Ocfe 2A 125

XI. STOCKHOLDERS AND MEMBERS

Shares of stock n a corporaton consttute persona property of the stockhoder, whch he can
contract wth as n any other form of property. Shares of stock however do not represent propretary
rghts of stockhoders to the assets or propertes of the corporaton. Its hoder do not own any part of
the assets represented by the capta of the corporaton; nor are the stockhoders entted to the
possesson of any defnte porton of the corporatons assets or propertes.
POWERS OF CORPORATION WITH RESPECT
TO THE SHARES OF STOCK ALREADY ISSUED
POWERS WHICH CORPORATION DOES NOT
HAVE
(1) Sub|ect to any contrary stpuaton n the
subscrpton agreement, to ca for the
payment of the unpad subscrpton, together
wth nterest accrued, f any, on the date
specfed n the contract of subscrpton or on
the date stated n the ca made by the
board;
(1) Demand for the repurchase of ts shares
of stock uness the shares are cassfed as
redeemabe shares n the artces of
ncorporaton;
(2) To mpose nterest on the unpad
subscrptons from the date of subscrpton, f
so requred by, and at the rate of nterest
fxed n, the by-aws;
(2) Refuse to pay to the stockhoders
dvdends decared on shares whch have not
been decared denquent to appy them to
the payment of the unpad subscrpton, and
(3) To refuse to ssue to the subscrber the
certfcates of stock coverng shares where
the subscrpton has not been fuy pad;
(3) Bd denquent shares, and thereby obtan
for tsef proft, for vaue greater than the
baance due on the unpad subscrpton, pus
accrued nterest, cost of advertsement and
expenses of sae.
(4) To refuse to recognze and regster the
sae or assgnment of any share where the
subscrpton has not been fuy pad;
(5) To refuse to recognze a sae or
assgnment of shares of stock whch have
not been duy regstered n the stock and
transfer book.
1. Shareholders Not Corporate Creditors. aGarcia v. Lim Chu Sing, 59 Ph. 562 (1934).
GARCIA v. LIM CHU SING
FACTS:
Lm CUAN SY had an account wth the Mercante Bank of Chna (Pantff Bank) n the form of "trust
recepts" guaranteed by Lm CHU SING (defendant) as surety & wth chatte mortgage securtes. Lm
CUAN SY faed to compy wth hs obgatons. The Pantff Bank requred Lm CHU SING, as surety, to
devered a promssory note for P19,605.17 wth nterest thereon at 6% per annum, payabe monthy.
One of the condtons stpuated n the sad note s that n case of defendant's defaut n the payment
of any of the monthy nstaments the entre amount, together wth nterest thereon at 6% per
annum, sha become due & payabe on demand. The defendant had been makng parta payments
eavng an unpad baance of P9,105.17. However, he defauted n the payment of severa
nstaments by reason of whch the unpad baance on the promssory note had pso facto become
due & demandabe. The Mercante Bank of Chna, wthout the knowedge & consent of the
defendant, forecosed the chatte mortgage and prvatey sod the property covered thereby. The
defendant s the owner of shares of stock of the Pantff Bank of Chna amountng to P10,000. The
Pantff Bank was subsequenty paced under qudaton. The defendant fed a moton for the
ncuson of the prncpa debtor Lm Cuan Sy as party defendant wth the CFI-Mana so that he coud
ava hmsef of the beneft of the exhauston of the property of sad Lm Cuan Sy. The moton was
dened. The proceeds of the sae of the mortgaged chattes together wth other payments made were
apped to the amount of the promssory note n queston, eavng the baance whch the pantff now
seeks to coect.
ISSUE: W/N t s proper to COMPENSATE the defendant-appeant's ndebtedness of P9,105.17 wth
the sum of P10,000 representng the vaue of hs shares of stock wth the Mercante Bank of Chna.
HELD: NO. Accordng to the weght of authorty, a share of stock or the certfcate thereof s not an
ndebtedness to the owner nor evdence of ndebtedness and, therefore, t s not a credt.
Stockhoders, as such, are not credtors of the corporaton. It s the prevang doctrne of the
Amercan courts that the capta stock of a corporaton s a trust fund to be used more partcuary for
the securty of credtors of the corporaton, who presumaby dea wth t on the credt of ts capta
stock.
The shares of a bankng corporaton do not consttute an ndebtedness of the corporaton to
the stockhoder and, therefore, the atter s not a credtor of the former for such shares. The
ndebtedness of a sharehoder to a bankng corporaton cannot be compensated wth the amount of
hs shares theren, there beng no reaton of credtor & debtor wth respect to such shares.
Therefore, the defendant-appeant Lm CHU SING not beng a credtor of the Pantff Bank,
athough the atter s a credtor of the former, there s no suffcent ground to |ustfy a compensaton.
2. S!s"riptio# Co#tra"t (Sec. 60 & 72; Trillana v. Quezon Colegialla, 93 Ph. 383 |1953|).
Secton 60. Subscrpton contract. - Any contract for the acquston of unssued stock n an exstng
corporaton or a corporaton st to be formed sha be deemed a subscrpton wthn the meanng of
ths Tte, notwthstandng the fact that the partes refer to t as a purchase or some other contract.
Secton 72. Rghts of unpad shares. - Hoders of subscrbed shares not fuy pad whch are not
denquent sha have a the rghts of a stockhoder.
PURCHASE OF ISSUED SHARES SUBSCRIPTION OF UNISSUED SHARES
(1) TRADITION/DELIVERY - upon fu payment
of the prce; sae consttutes merey a tte
and not a mode by whch ownershp of the
sub|ect matter s transferred.
(1) UPON PERFECTION - ISSUANCE of shares
of stock even wthout fu payment; upon the
mere meetng of the mnds, the effects of a
rea contract take pace. Furthermore, the
regstraton of the subscrpton n the stock
and transfer book s not aso essenta to
consttute subscrpton and ssuance of the
shares. (Such s meant to govern the bndng
effects of sae and dspostons of shares as
far as thrd partes are concerned, but not
wth respect to the corporaton and
stockhoders.)
Such consttutes the very mode by whch the
covered shares are thereby ssued and then
owned by the subscrber.
(2) SUBSTANTIAL BREACH - remedes
rescsson or specfc performance
(2) Even n the case of breach, the
subscrber cannot rescnd
(3) Bankruptcy or nsovency of the
corporaton w termnate ts cam aganst
the purchaser on the theory that t can no
onger perform ts sde of an executory
contract by devery of a vad certfcate and
that the consderaton has faed.
(3) When the corporaton becomes nsovent,
the corporaton becomes mmedatey abe
to pay for the shares of stock subscrbed to.
IN RELATION TO LIMITED LIABILITY OF
STOCKHOLDERS - Stockhoders are abe to
the extent of how much they promsed to
subscrbe - ths s the prce the stockhoder
Revsed Bagtas Revewer by Ve and Ocfe 2A
pays for en|oyng mted abty.
(4) Can be sub|ect to a resoutory or
suspensve condton - non occurrence of
whch does not gve rse to the sae
(4) Can be sub|ect to terms and condtons
but such must not excuse buyer from payng.
Terms and condtons and stpuatons may
be agreed upon n a subscrpton agreement.
Such varyng terms are vad and effectve
between the partes for so ong as they do
not undermne the utmate obgaton of the
subscrber to pay the subscrpton n order to
protect the cams of the corporate credtors.
(5) Purchaser s not a debtor, and accordng
to some courts, the measure of abty of
the purchaser f he defauts, s n damages
for the dfference between the contract prce
and the market vaue of the shares
(5) The unpad subscrpton s a debt of
subscrber.
(6) The provson of the Corporaton Law
regardng cas for unpad subscrptons and
assessment of stock do not appy.
(7) The rue that the corporaton has no ega
capacty to reease an orgna subscrber to
ts captas stock from the obgaton to pay
for hs shares s nappcabe to a contract of
purchase of shares.
NOTE: CONSIDERATION for subscrpton s aways onerous for the protecton of the credtors. Ths s
another enforcement of the trust fund doctrne. ISSUANCE OF STOCK BELOW THE PAR VALUE s a
voaton of the trust fund doctrne. ISSUANCE OF STOCKS WITH NO PAR VALUE must be decared n
the books.
CLV: Subscrpton agreements are not covered by Statute of Frauds, and the corporaton has a rght
to enforce and coect, and to adduce ora evdence, upon an ora subscrpton agreement, on the
foowng grounds: (1) the speca treatment accorded to subscrpton agreement under Corporate
Law requres that subscrpton agreements, even when they have been entered nto oray, shoud be
aowed to be proved and enforced by ora evdence, n order to fuy protect corporate credtors
under the trust fund doctrne; and (2) even f subscrpton agreements are covered by the Statute of
Frauds, but by ther nature whch upon consent woud make the subscrber a stockhoder and owner
of the covered shares, whch woud consttute parta executon, they are deemed to be exempted
from the prohbton aganst the presentng of ora evdence to prove and enforce them.
CHARACTERISTICS:
1) Orgna ssuance from authorzed capta stock at the tme of ncorporaton;
2) The openng, durng the fe of the corporaton of the porton of the orgna authorzed capta
stock prevousy unssued;
3) The ncrease of authorzed capta stock acheved through a forma amendment of the artces
of ncorporaton and regstraton thereof wth SEC.
NOTE: Any transacton coverng ssued shares of stock s a not a subscrpton agreement, and
therefore s governed by the Law on Saes.
a$ Purchase Agreement. aBayla v. Silang Traffic Co., Inc., 73 Ph. 557 (1942).
BAYLA v SILANG TRAFFIC CO. INC.
FACTS:
Pettoners n G.R. No. 48195 nsttuted ths acton n the CFI of Cavte aganst the respondent Sang
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Traffc Co., Inc. (cross-pettoner n G.R. No. 48196), to recover certan sums of money whch they
had pad severay to the corporaton on account of shares of stock they ndvduay agreed to take
and pay for under certan specfed terms and condtons:
"(1)That the subscrber promses to pay personay or by hs duy authorzed agent to the seer
at the Muncpaty of Sang, Provnce of Cavte, Phppne Isands, the sum of one thousand fve
hundred pesos (P1,500), Phppne currency, as purchase prce of FIFTEEN (15) shares of capta
stock, sad purchase prce to be pad as foows, to wt: fve (5%) per cent upon the executon of
the contract, the recept whereof s hereby acknowedged and confessed, and the remander n
nstaments of fve per cent, payabe wthn the frst month of each and every quarter
thereafter, commencng on the 1st day of |uy, 1935, wth nterest on deferred payments at the
rate of SIX (6%) per cent per annum unt pad.
(2)That the sad subscrber further agrees that f he fas to pay any of sad nstament when
due, or to perform any of the aforesad condtons, or f sad shares sha be attached or eved
upon by credtors of the sad subscrber, then the sad shares are to revert to the seer and the
payments aready made are to be forfeted n favor of sad seer, and the atter may then take
possesson, wthout resortng to court proceedngs.
(3)The sad seer upon recevng fu payment, at the tme and manner herenbefore specfed,
agrees to execute and dever to sad subscrber, or to hs hers and assgns, the certfcate of
tte of sad shares, free and cear of a encumbrances."
The pettoners agreed to purchase the foowng number of shares and, up to Apr 30, 1937, had
pad the foowng sums on account thereof:
Sofrono T.
Baya.......
8 shares P360
Venanco
Toedo........
8 shares 375
|osefa
Nava..............
15
shares
675
Paz
Toedo................
15
shares
675
Pettoners' acton for the recovery of the sums above mentoned s based on a resouton by the
board of drectors of the respondent corporaton on August 1, 1937.
The respondent corporaton set up the foowng defenses: (1) resouton s not appcabe to the
pettoners Baya, Nava, and Toedo because on the date thereof "ther subscrbed shares of stock
had aready automatcay reverted to the defendant, and the nstaments pad by them had aready
been forfeted"; and (2) resouton of August 1, 1937, was revoked and canceed by a subsequent
resouton of the board of drectors of the defendant corporaton dated August 22, 1937.
The tra court absoved the defendant from the compant and decared forfeted n favor of the
defendant the shares of stock n queston. It hed that the resouton of August 1, 1937, was nu and
vod, ctng Velasco vs. Poiza (37 Ph., 802), wheren ths Court hed that "a corporaton has no ega
capacty to reease an orgna subscrber to ts capta stock from the obgaton to pay for shares;
and any agreement to ths effect s nvad" CA modfed the decson of the tra court. It affrmed the
dsmssa of the pantffs companed part thereof decarng ther subscrpton canceed s reversed.
Defendant s drected to grant pantffs 30 days after fna |udgment wthn whch to pay the arrears
on ther subscrpton. Both partes appeaed to ths Court by petton and cross-petton for ceriorari.
The partes tgant, the tra court, and the Court of Appeas have nterpreted or consdered the sad
agreement as a contract of subscrpton to the capta stock of the respondent corporaton. It shoud
be noted, however, that sad agreement s entted "Agreement for Instament Sae of Shares n the
Sang Traffc Company, Inc.,"; that whe the purchaser s desgnated as "subscrber," the corporaton
Revsed Bagtas Revewer by Ve and Ocfe 2A
s descrbed as "seer"; that the agreement was entered nto on March 30, 1935, ong after the
ncorporaton and organzaton of the corporaton, whch took pace n 1927; and that the prce of the
stock was payabe n quartery nstaments spread over a perod of fve years. It aso appears that n
cv case No. 3125 of the Court of Frst Instance of Cavte mentoned n the resouton of August 1,
1937, the rght of the corporaton to se the shares of stock to the person named n sad resouton
(ncudng heren pettoners) was mpugned by the pantffs n sad case, who camed a preferred
rght to buy sad shares.
ISSUES: (1) W/N the contracts are subscrptons or saes of stock (2) W/N under the contract between
the partes, the faure of the purchaser to pay any of the quartery nstaments on the purchase
prce automatcay gave rse to the forfeture of the amounts aready pad and the reverson of the
shares to the corporaton.
HELD:
(1) They are contracts of sae and not of subscrpton. "A subscrpton, propery speakng, s the
mutua agreement of the subscrbers to take and pay for the stock of a corporaton, whe a purchase
s an ndependent agreement between the ndvdua and the corporaton to buy shares of stock from
t at stpuated prce."
(2) No. The contract provdes for nterest of the rate of sx per centum per annum on deferred
payments. The provson regardng nterest on deferred payments woud not have been nserted f t
had been the ntenton of the partes to provde for automatc forfeture and canceaton of the
contract. Moreover, the contract dd not expressy provde that the faure of the purchaser to pay
any nstament woud gve rse to forfeture and canceaton wthout the necessty of any demand
from the seer; and under artce 1100 of the Cv Code persons obged to dever or do somethng
are not n defaut unt the moment the credtor demands of them |udcay or extra-|udcay the
fufment of ther obgaton, uness (1) the obgaton or the aw expressy provdes that demand
sha not be necessary n order that defaut may arse, (2) by reason of the nature and crcumstances
of the obgaton t sha appear that the desgnaton of the tme at whch that thng was to be
devered or the servce rendered was the prncpa nducement to the creaton of the obgaton.
Is the resouton of August 1, 1937, vad? The contract n queston beng one of purchase and not
subscrpton as we have heretofore ponted out, we see no ega mpedment to ts rescsson by
agreement of the partes. Accordng to the resouton of August 1, 1937, the recsson was made for
the good of the corporaton and n order to termnate the then pendng cv case nvovng the
vadty of the sae of the shares n queston among others. To that rescsson the heren pettoners
apparenty agreed, as shown by ther demand for the refund of the amounts they had pad as
provded n sad resouton. It appears from the record that sad cv case was subsequenty
dsmssed, and that the purchasers of shares of stock, other than the heren pettoners, who were
mentoned n sad resouton were abe to beneft by sad resouton. It woud be an un|ust
dscrmnaton to deny the same beneft to the heren pettoners.
%!$ Pre-Incorporation Subscription (Sec. 61)
Secton 61. Pre-ncorporaton subscrpton. - A subscrpton for shares of stock of a corporaton st to
be formed sha be rrevocabe for a perod of at east sx (6) months from the date of subscrpton,
uness a of the other subscrbers consent to the revocaton, or uness the ncorporaton of sad
corporaton fas to materaze wthn sad perod or wthn a onger perod as may be stpuated n
the contract of subscrpton: Provded, That no pre-ncorporaton subscrpton may be revoked after
the submsson of the artces of ncorporaton to the Securtes and Exchange Commsson.
When propertes were assgned pursuant to a pre-ncorporaton subscrpton
agreement, but the corporaton fas to ssue the covered shares, the return of such
propertes to the subscrber s a drect consequence of rescsson and does not amount to
corporate dstrbuton of assets pror to dssouton. a!n "ong v. Tiu, 375 SCRA 614 (2002).
NOTE: The present Code recognzed that the subscrpton agreement s a contract between the
subscrber and the corporaton. Athough the corporaton s st non-exstent snce t s st n the
process of ncorporaton, t s st bound under the pre-ncorporaton agreement. The atter s
repaced by the promoters contract athough t s merey an expectancy. A subscrpton agreement
s n a sense a contract among severa subscrbers, and no one of the subscrbers can thus wthdraw
from the contract wthout the consent of a the others and thereby dmnsh, wthout the unversa
12
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consent of a the others, the common fund n whch a have acqured an nterest.
%"$ Release from Subscription Obligation (a!ng "ong v. Tiu, 401 SCRA 1 (2003); Velasco
v. Poiza, 37 Ph. 802 |1918|; P#B v. Biulo$ Sa%mill, Inc., 23 SCRA 1968 |1968|; #aional
&'change Co. v. (e'er, 51 Ph. 601 |1928|)
The accepted rue n Ph. |ursdcton s that a corporaton can reease a subscrber from abty
on the subscrpton, n whoe or n part, ony wth the express or mped consent of a the
sharehoders and ony when there s no pre|udce to corporate credtors.
|ursprudence has aowed certan exceptons to ths rue: n the case of a bona fde compromse
or to set-off a debt due from the corporaton, a reease, supported by consderaton, whch w be
effectua as aganst dssentng stockhoders and subsequent and exstng credtors. NOTE: There
must st be vauabe consderaton.
ONG YONG v. TIU
Facts: In 1994, the constructon of the Masagana Ctma n Pasay Cty by Frst Landnk Asa
Deveopment Corporaton (FLADC) owned by the Tu famy was threatened by the forecosure by the
PNB for ther P 190 M debt. In order to stave off the threat the Tu famy together wth the Ong
famy agreed to restructure FLADC and created a pre-subscrpton agreement and each were to
mantan equa sharehodngs. The Ong famy nvested a tota sum of P 190 M to the corporaton
whe the Tu famy ncuded severa rea estate propertes as added capta for the restructured
corporaton. The Ong and Tu fames now owned 1,000,000 shares each of FLADC. After a the
debts were pad, the peace between Ong and Tu dd not ast. Tu camed rescsson based on
substanta breach by Ong upon the pre-subscrpton agreement. Ong, on the other hand mantaned
that t was Tu who commtted the breach because one of the propertes that they were supposed to
ncude n the agreement was n fact aready n the rea estate owned by FLADC. The SEC approved
the rescsson (both partes were return to status quo, P 190 M to the Ong famy and a the
remanng FLADC assets to the Tu famy, whch ncuded the now fnshed ma vaued at more than
P 1B) and the CA affrmed the decson wth sght modfcatons.
Hed:
1.) Is rescsson the proper remedy for an ntra-corporate dspute No, the Corporaton Code,
SEC rues and even the Rues of Court provde for approprate and adequate ntra-corporate
remedes, other than rescsson, n stuatons ke ths. Rescsson s certany not one of them,
specay f the party askng for t has no ega personaty to do so (because t s a corporaton,
Tu famy s not the corporaton) and the requrements of the aw therefore have not been
met. A contrary doctrne w tread on extremey dangerous ground because t w aow |ust
any stockhoder, for |ust about any rea or magned offense, to demand rescsson of hs
subscrpton and ca for the dstrbuton of some part of the corporate assets to hm wthout
compyng wth the requrements of the Corp. Code.
2.) Grantng rescsson s a proper remedy, does t voate the TFD Yes t w voate the TFD
and the procedures for vad dstrbuton of assets and property under the Corp. Code. The
TFD provdes that subscrpton to the capta stock of a corporaton consttute a fund to whch
the credtors have a rght to ook for the satsfacton of ther cams. The doctrne s the
underyng prncpe n the procedure for the dstrbuton of capta assets, n the Corp. Code
whch aows the dstrbuton of corporate capta ony n three nstances: (1) amendments of
the Artces of Incorporaton to reduce the authorzed capta stock (requres Board Resouton
and stockhoderss meetng) (2) purchase of redeemabe shares by the corporaton,
regardess of the exstence of unrestrcted retaned earnngs and (3) dssouton and eventua
qudaton of the corporaton. In the nstant case, the rescsson of the pre-subscrpton
agreement w effectvey resut n the unauthorzed dstrbuton of the capta assets and
property of the corporaton, thereby voaton the TFD and the Corp. Code, snce the rescsson
of a subscrpton agreement s not one of the nstances when dstrbuton of capta assets and
property of the corporaton s aowed.
%d$ When Condition of Payment Provided in y-la!s. (e Silva v. )boiiz * Co., 44 Ph.
755 (1923).
&. Co#sideratio# (Sec. 62).
Revsed Bagtas Revewer by Ve and Ocfe 2A
Secton 62. Consderaton for stocks. - Stocks sha not be ssued for a consderaton ess than the
par or ssued prce thereof. Consderaton for the ssuance of stock may be any or a combnaton of
any two or more of the foowng:
1. Actua cash pad to the corporaton;
2. Property, tangbe or ntangbe, actuay receved by the corporaton and necessary or
convenent for ts use and awfu purposes at a far vauaton equa to the par or ssued vaue
of the stock ssued;
3. Labor performed for or servces actuay rendered to the corporaton;
4. Prevousy ncurred ndebtedness of the corporaton;
5. Amounts transferred from unrestrcted retaned earnngs to stated capta; and
6. Outstandng shares exchanged for stocks n the event of recassfcaton or converson.
Where the consderaton s other than actua cash, or conssts of ntangbe property such as patents
of copyrghts, the vauaton thereof sha ntay be determned by the ncorporators or the board of
drectors, sub|ect to approva by the Securtes and Exchange Commsson.
Shares of stock sha not be ssued n exchange for promssory notes or future servce.
The same consderatons provded for n ths secton, nsofar as they may be appcabe, may be used
for the ssuance of bonds by the corporaton.
The ssued prce of no-par vaue shares may be fxed n the artces of ncorporaton or by the board
of drectors pursuant to authorty conferred upon t by the artces of ncorporaton or the by-aws, or
n the absence thereof, by the stockhoders representng at east a ma|orty of the outstandng
capta stock at a meetng duy caed for the purpose. (5 and 16)
%a$ Cash %"$ Ser'i"e %d$ Shares
%!$ (ropert) %d$ Retai#ed Ear#i#*s
CASH AND PROMISSORY NOTES FOR SUBSCRIPTION - WHY THE PROHIBITION
Two factors - (1) The underyng dfference n ega consequence between notes recevabe or
accounts recevabe and subscrpton recevabe on the other hand. If a not recevabe s accepted
as payment for subscrpton of shares of stock, the face vaue of the note woud appear as an
addton to the assets of the corporatons baance sheet, wthout correspondng deducton on the
capta stock of the equty porton. On the other hand, subscrpton recevabes are correcty
treated not as assets and are refected propery n the baance sheet of the corporaton as
deductons from stockhoders equty and the dfference shows the net amount of the
stockhoders equty whch s backed up by assets actuay receved by the corporaton (such as
cash or property) whch have vaues that do not depend on the credt standng of another person.
In short, the atter nforms the credtors of the actua net amount of capta stock whch s truy
backed-up by reazabe assets. (2) TFD - that the capta stock of the corporaton, especay the
pad-up porton thereof shoud be backed up by assets whch have ther own ntrnsc vaue other
than the promse of a person to pay n the future.
PROPERTY CONSIDERATION
The property to be accepted by the corporaton must be necessary or proper for t to own n
carryng on ts busness. (It cannot awfuy ssue stock for property whch ts charter does not
authorze t to acqure, or for property acqured for an unauthorzed purpose.) The property must
be of substanta nature, havng pecunary vaue capabe of beng ascertaned, and must be
somethng rea and tangbe as dstngushed from somethng specuatve. It must be devered to
the corporaton. It must be capabe of beng apped to the payment of debts and of dstrbuton
among the stockhoders.
EXAMPLE: Rea property may be accepted as payment on subscrpton to the capta stock ony
13
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when the same can be used n the busness of the corporaton, as n rea estate deveopment,
subdvson, agro-ndustra busness, and the ke, as we as for the estabshment of offces.
SEC has rued that property as fnanca nstruments and recevabes may be egay accepted as
capta contrbutons sub|ect to the foowng condtons: (1) actuay receved by the corporaton
(2) necessary or convenent for the corporatons use and awfu purpose; and (3) at a far
vauaton equa to the par vaue of the stock to be approved by the SEC
DEBTS AND SERVICES AS CONSIDERATION
Labor performed or servces actuay rendered are aso consdered as consderatons, provded
that the transacton s n good fath and no fraud s perpetuated upon other stockhoders.
Prevousy-ncurred debts vauaton woud have been estabshed at arms-ength pror to even
negotatng on the subscrpton agreement, and they woud more often represent the true vaue
of servces whch the corporaton receved.
Future servces are not aowed as consderaton for subscrpton because the vaue of such
servce to the corporaton n exchange for shares of stock woud agan depend on the future
performance of the subscrber of the servces offered, and there woud be tendency to short-
change the corporaton.
SET-OFF OF CORPORATIONS INDEBTEDNESS
Prevousy-ncurred debts vauaton woud have been estabshed at arms-ength pror to even
negotatng on the subscrpton agreement, and they woud more often represent the true vaue
of servces whch the corporaton receved.
Snce these exsts n ts books, the corporaton woud have had to pay the same n cash to ts
credtor, and n turn the same cash s pad back by such credtor to the corporaton for
subscrpton of shares.
UNRESTRICTED RETAINED EARNINGS OR EXISTING CAPITAL AS CONSIDERATION
The amounts transferred from URE to stated capta covers the decaraton of stock dvdends,
whch has the net effect of captazng URE. Stock dvdends are n the nature of shares of stock,
where the consderaton s the amount of URE converted nto equty n the corporatons books.
CONSEOUENCES OF UNLAWFUL CONSIDERATION
Subscrpton contract s vad, but the consderaton s vod. It woud not be n consonance wth
the TFD nor to the best nterest of the corporaton and the subscrber, to consder the contract as
vod. The reasonabe nterpretaton s that the subscrpton contract woud be vad and bndng
on both the corporaton and the subscrber, but that the provson on such unawfu consderaton
s deemed vod, such that the subscrpton agreement woud be construed to be for cash and the
unpad amount be treated as part of subscrpton recevabes.
(OUESTION KO: So what do you for nstance wth accepted PNs refected as assets of the corporaton
- amend the records that contan them? Wont credtors be pre|udced because they were ed to
beeve that the assets are up to ths amount where they are not.)
Stock dvdends are n the nature of shares of stock, the consderaton for whch s the
amount of unrestrcted retaned earnngs converted nto equty n the corporatons books.
Lincoln Phil. Life v. Cour of )++eals, 293 SCRA 92 (1998).
1
+. ,atered Sto"-s (Sec. 65)
Secton 65. Labty of drectors for watered stocks. - Any drector or offcer of a corporaton
consentng to the ssuance of stocks for a consderaton ess than ts par or ssued vaue or for a
consderaton n any form other than cash, vaued n excess of ts far vaue, or who, havng
1The bass for determnng the documentary stamps due on stock dvdends decared woud be ther book vaue
as ndcated n the atest audted fnanca statements of the corporaton, and not the par vaue thereof.
Commissioner of Inernal ,evenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002).
Revsed Bagtas Revewer by Ve and Ocfe 2A
knowedge thereof, does not forthwth express hs ob|ecton n wrtng and fe the same wth the
corporate secretary, sha be sodary, abe wth the stockhoder concerned to the corporaton and
ts credtors for the dfference between the far vaue receved at the tme of ssuance of the stock
and the par or ssued vaue of the same.
NOTES:
Shares ssued as fuy pad when n truth the consderaton receved s known to be ess than the
par vaue or ssued vaue of the shares are caed WATERED STOCK.
Ths s prohbted because of the n|ures caused to: (1) CORPORATION whch s deprved of the
needed capta and the opportunty to market ts securtes to ts own advantage, thus hurtng ts
busness prospects and fnanca responsbty; (2) EXISTING AND FUTURE SHAREHOLDERS who
are aso n|ured by the duton of the proportonate nterests n the corporaton and who pay fu
vaue for ther shares; (3) PRESENT AND FUTURE CREDITORS who are n|ured as the corporaton
s deprved of the assets or capta requred by aw to be contrbuted by a sharehoders as
substtute for ndvdua abty for corporate debts; and (4) PERSONS WHO DEAL WITH IT OR
PURCHASE ITS SECURITIES WHO ARE DECEIVED because stock waterng s nvarabe
accompaned wth mseadng corporate accounts and fnanca statements, partcuary by an
overstatement of the vaue of assets receved for the shares to cover up a capta defct resutng
from overvauaton and underpayment of purported capta contrbutons.
.. (a)/e#t o0 Bala#"e o0 S!s"riptio# (Secs. 66 and 67; Lingayen Gulf &lecric Po%er Co. v.
Balazar, 93 Ph. 404 |1953|).
Secton 66. Interest on unpad subscrptons. - Subscrbers for stock sha pay to the corporaton
nterest on a unpad subscrptons from the date of subscrpton, f so requred by, and at the rate of
nterest fxed n the by-aws. If no rate of nterest s fxed n the by-aws, such rate sha be deemed to
be the ega rate.
Secton 67. Payment of baance of subscrpton. - Sub|ect to the provsons of the contract of
subscrpton, the board of drectors of any stock corporaton may at any tme decare due and
payabe to the corporaton unpad subscrptons to the capta stock and may coect the same or
such percentage thereof, n ether case wth accrued nterest, f any, as t may deem necessary.
Payment of any unpad subscrpton or any percentage thereof, together wth the nterest accrued, f
any, sha be made on the date specfed n the contract of subscrpton or on the date stated n the
ca made by the board. Faure to pay on such date sha render the entre baance due and payabe
and sha make the stockhoder abe for nterest at the ega rate on such baance, uness a dfferent
rate of nterest s provded n the by-aws, computed from such date unt fu payment. If wthn thrty
(30) days from the sad date no payment s made, a stocks covered by sad subscrpton sha
thereupon become denquent and sha be sub|ect to sae as herenafter provded, uness the board
of drectors orders otherwse.
NOTES:
The word ca s capabe of three meanngs namey (1) resouton of the board of drectors for the
payment of unpad subscrptons (2) notfcaton of such resouton made on the stockhoders (3)
the tme when the subscrptons become payabe.
A ca s usuay expressed n the form of a resouton adopted by the board of drectors,
specfyng the proporton of the unpad subscrpton whch t desred to ca n and the tme or
tmes when t s to be payabe. The entre amount of the unpad subscrpton may be caed at
once or t may be made payabe by nstaments, at stated ntervas or by successve cas.
A ca must be unform wth respect to a hoders of the cass of shares on whch t s made, who
have aready pad an equa amount on ther shares, and as a genera rue t must not exceed the
baance remanng unpad on ther shares.
WHEN CALL NOT NECESSARY (1) When, under the terms of the subscrpton contract, subscrpton
s payabe, not upon ca but mmedatey, or on a specfed day, or when t s payabe n
nstaments at specfed tmes; (2) If the corporaton becomes nsovent whch makes the abty
13
3
on the unpad subscrpton due and demandabe regardess of any stpuaton to the contrary n
the subscrpton agreement.
|ursprudence provdes that notce of ca for payment of unpad subscrbed stock must be
pubshed, except when the corporaton s nsovent.
A stockhoder who s empoyed wth the company, cannot sett-off hs unpad subscrpton
aganst hs awarded cams for wages, where there has been no ca for the payment of such
subscrpton. )+o-aca v. #L,C, 172 SCRA 442 (1989).
1. Deli#2e#") o# S!s"riptio# (Secs. 68, 69, 70 and 71; Phili++ine Trus Co. v. ,ivera, 44
Ph. 469 |1923|; .iran-a v. Tarlac ,ice .ill Co., 57 Ph. 619 |1932|)
Secton 68. Denquency sae. - The board of drectors may, by resouton, order the sae of
denquent stock and sha specfcay state the amount due on each subscrpton pus a accrued
nterest, and the date, tme and pace of the sae whch sha not be ess than thrty (30) days nor
more than sxty (60) days from the date the stocks become denquent.
Notce of sad sae, wth a copy of the resouton, sha be sent to every denquent stockhoder ether
personay or by regstered ma. The same sha furthermore be pubshed once a week for two (2)
consecutve weeks n a newspaper of genera crcuaton n the provnce or cty where the prncpa
offce of the corporaton s ocated.
Uness the denquent stockhoder pays to the corporaton, on or before the date specfed for the
sae of the denquent stock, the baance due on hs subscrpton, pus accrued nterest, costs of
advertsement and expenses of sae, or uness the board of drectors otherwse orders, sad
denquent stock sha be sod at pubc aucton to such bdder who sha offer to pay the fu amount
of the baance on the subscrpton together wth accrued nterest, costs of advertsement and
expenses of sae, for the smaest number of shares or fracton of a share. The stock so purchased
sha be transferred to such purchaser n the books of the corporaton and a certfcate for such stock
sha be ssued n hs favor. The remanng shares, f any, sha be credted n favor of the denquent
stockhoder who sha kewse be entted to the ssuance of a certfcate of stock coverng such
shares.
Shoud there be no bdder at the pubc aucton who offers to pay the fu amount of the baance on
the subscrpton together wth accrued nterest, costs of advertsement and expenses of sae, for the
smaest number of shares or fracton of a share, the corporaton may, sub|ect to the provsons of
ths Code, bd for the same, and the tota amount due sha be credted as pad n fu n the books of
the corporaton. Tte to a the shares of stock covered by the subscrpton sha be vested n the
corporaton as treasury shares and may be dsposed of by sad corporaton n accordance wth the
provsons of ths Code.
Secton 69. When sae may be questoned. - No acton to recover denquent stock sod can be
sustaned upon the ground of rreguarty or defect n the notce of sae, or n the sae tsef of the
denquent stock, uness the party seekng to mantan such acton frst pays or tenders to the party
hodng the stock the sum for whch the same was sod, wth nterest from the date of sae at the
ega rate; and no such acton sha be mantaned uness t s commenced by the fng of a compant
wthn sx (6) months from the date of sae.
Secton 70. Court acton to recover unpad subscrpton. - Nothng n ths Code sha prevent the
corporaton from coectng by acton n a court of proper |ursdcton the amount due on any unpad
subscrpton, wth accrued nterest, costs and expenses.
Secton 71. Effect of denquency. - No denquent stock sha be voted for or be entted to vote or to
representaton at any stockhoder's meetng, nor sha the hoder thereof be entted to any of the
rghts of a stockhoder except the rght to dvdends n accordance wth the provsons of ths Code,
unt and uness he pays the amount due on hs subscrpton wth accrued nterest, and the costs and
expenses of advertsement, f any.
The prescrptve perod to recover on unpad subscrpton does not commence from the
Revsed Bagtas Revewer by Ve and Ocfe 2A
tme of subscrpton but from the tme of demand by Board of Drectors to pay the baance
of subscrpton. Garcia v. Suarez, 67 Ph. 441 (1939).
NOTES:
The SEC has rued that the use of the word SHALL shows that a pror ca or board resouton
demandng payment s not necessary f a specfc date of payment s specfed n the subscrpton
contract; and nether s there a need of a forma decaraton of the board for an unpad
subscrpton to become denquent n the event of faure to pay the unpad subscrpton wthn
the prescrbed 30 day perod from the date specfed n the subscrpton contract.
WHO IS THE HIGHEST BIDDER
Such bdder who sha offer to pay the fu amount of the baance on the subscrpton together
wth accrued nterests, costs of advertsements and expenses of sae for the smaest number of
shares or fracton of a share.
If there s no bdder, the corporaton may bd for the same, wth such shares to be vested n the
corporaton as treasury shares.
(DISCLAIMER: I am not sure f ths s correct but ths s how I understood the expanaton.) For
exampe stockhoder X owes the corporaton Php 3M (ncusve of costs, etc.) for 3000 shares.
Durng the bd, what the bdders do ets say bdders A, B and C s to bd for a certan number of
shares n exchange for a fxed prce whch w cover the baance on the subscrpton together
wth accrued nterests, costs of advertsement and expenses of sae. Whoever bds for the
smaest number of shares sha be consdered as the hghest bdder, and the remanng shares
not covered by the bd s reverted to ts denquent owner. In ths case, et us say for Php 3M, A
expressed the ntenton to pay 3M for 1000 shares whe B for 2000 shares and C for 3000 shares,
the hghest bdder s A. The 1000 shares sha be paced under the name of A, whe the 2000
shares whch were not covered sha be deemed as fuy pad by denquent stockhoder X (who s
no onger denquent by ths tme).
CLV tes us that durng ths bddngs, bdders do not ncude the amount they wsh to bd for the
shares of stock, as what the corporaton deems mportant s that the denquent amount pus
costs of the sae be pad, no more, no ess. What they ony ncude n ther bd s the number of
shares they wsh to purchase. That s why the rue s the hghest bdder sha be the one who
purchases the east number of shares for a fxed prce. CLV aso tes us that the corporaton
generay does not desre to proft from ths endeavor but ony to dscharge such denquency.
However, nothng precudes the corporaton from earnng profts n ths case provded they
structure the bd n such a way as to accommodate such endeavor. However CLV tes us that ths
s qute dffcut.
OTHER REMEDIES AVAILABLE TO THE CORPORATION
The Board of Drectors has absoute dscreton to choose whch remedy t deems proper n order
to coect on the unpad subscrptons. If t does not know whch remedy t w make use of, t may
put up the unpad stock for sae as provded n Sectons 38 to 48 of the Code, or by acton n
court.
EFFECTS OF DELINOUENCY
DELINOUENCY MAY BE ACHIEVED IN TWO WAYS: (1) faure to pay the subscrpton on the date
mentoned n the ca or (2) faure to pay the subscrpton on the date specfed on the contract of
subscrpton. THESE ARE ITS EFFECTS: (1) t dsquafes the stockhoders to be voted for or be
entted to vote or to representaton at any stockhoders meetng; (2) t dsquafes the
stockhoder to exercse any rghts of a stockhoder except the rght to dvdends unt and uness
he pays the amount due on hs subscrpton wth accrued nterest and the costs and expenses of
13
5
advertsement f any.
They sha not be entted to notce on meetngs, and they are not ncuded n the determnaton
of the quorum. The ony rght remanng to them s the rght to receve dvdends but the cash
dvdends sha frst be apped to the unpad baance, whe the stock dvdend sha be wthhed
unt payment of unpad baance.
PRESCRIPTION ON DEMAND FOR PAYMENT OF SUBSCRIPTION
The perod begns to run from the tme the payment becomes demandabe, whch n the case of
subscrpton of shares begns to run ony from the tme the board of drector decares that
baance are due and demandabe. The perod does not run from the date of subscrpton.
%a$ Who "ay #uestion a $elin%uency Sale (Sec. 68 and 69).
Secton 68. Denquency sae. - The board of drectors may, by resouton, order the sae of
denquent stock and sha specfcay state the amount due on each subscrpton pus a accrued
nterest, and the date, tme and pace of the sae whch sha not be ess than thrty (30) days nor
more than sxty (60) days from the date the stocks become denquent.
Notce of sad sae, wth a copy of the resouton, sha be sent to every denquent stockhoder ether
personay or by regstered ma. The same sha furthermore be pubshed once a week for two (2)
consecutve weeks n a newspaper of genera crcuaton n the provnce or cty where the prncpa
offce of the corporaton s ocated.
Uness the denquent stockhoder pays to the corporaton, on or before the date specfed for the
sae of the denquent stock, the baance due on hs subscrpton, pus accrued nterest, costs of
advertsement and expenses of sae, or uness the board of drectors otherwse orders, sad
denquent stock sha be sod at pubc aucton to such bdder who sha offer to pay the fu amount
of the baance on the subscrpton together wth accrued nterest, costs of advertsement and
expenses of sae, for the smaest number of shares or fracton of a share. The stock so purchased
sha be transferred to such purchaser n the books of the corporaton and a certfcate for such stock
sha be ssued n hs favor. The remanng shares, f any, sha be credted n favor of the denquent
stockhoder who sha kewse be entted to the ssuance of a certfcate of stock coverng such
shares.
Shoud there be no bdder at the pubc aucton who offers to pay the fu amount of the baance on
the subscrpton together wth accrued nterest, costs of advertsement and expenses of sae, for the
smaest number of shares or fracton of a share, the corporaton may, sub|ect to the provsons of
ths Code, bd for the same, and the tota amount due sha be credted as pad n fu n the books of
the corporaton. Tte to a the shares of stock covered by the subscrpton sha be vested n the
corporaton as treasury shares and may be dsposed of by sad corporaton n accordance wth the
provsons of ths Code.
Secton 69. When sae may be questoned. - No acton to recover denquent stock sod can be
sustaned upon the ground of rreguarty or defect n the notce of sae, or n the sae tsef of the
denquent stock, uness the party seekng to mantan such acton frst pays or tenders to the party
hodng the stock the sum for whch the same was sod, wth nterest from the date of sae at the
ega rate; and no such acton sha be mantaned uness t s commenced by the fng of a compant
wthn sx (6) months from the date of sae.
3. Certi0i"ate o0 Sto"- (Sec. 63)
Secton 63. Certfcate of stock and transfer of shares. - The capta stock of stock corporatons sha
be dvded nto shares for whch certfcates sgned by the presdent or vce presdent, countersgned
by the secretary or assstant secretary, and seaed wth the sea of the corporaton sha be ssued n
accordance wth the by-aws. Shares of stock so ssued are persona property and may be transferred
by devery of the certfcate or certfcates ndorsed by the owner or hs attorney-n-fact or other
person egay authorzed to make the transfer. No transfer, however, sha be vad, except as
between the partes, unt the transfer s recorded n the books of the corporaton showng the names
of the partes to the transacton, the date of the transfer, the number of the certfcate or certfcates
Revsed Bagtas Revewer by Ve and Ocfe 2A
and the number of shares transferred.
No shares of stock aganst whch the corporaton hods any unpad cam sha be transferabe n the
books of the corporaton.
NOTES:
Certfcate sha ony be ssued upon fu payment - the ratonae for ths s to prevent parta
dsposton of a subscrpton whch s not fuy pad, because f t s permtted and the subscrber
subsequenty becomes denquent n the payment of hs subscrpton, the corporaton may not be
abe to se as many of hs subscrbed shares as woud be necessary to cover the tota amount
due from hm.
In the absence of the provson of the by-aws to the contrary, a corporaton may appy payments
made by subscrbers on account of ther subscrptons ether as: (1) fu payment for the
correspondng number of shares, the par vaue of whch s covered by such payment; or (2)
payment pro rata to each and a the entre number of shares subscrbed for.
The SEC may by specfc rue or reguaton, aow corporatons to provde n ther artces of
ncorporaton and by-aws for the use of uncertfed securty - securty evdenced by eectronc or
smar records.
%a$ &ature of Certificate' aTan v. S&C, 206 SCRA 740 (1992); a(e los Sanos v. ,e+ublic, 96
Ph. 577 (1955); aPonce v. )lsons Cemen Cor+., 393 SCRA 602 (2002); C.#. /o-ges v.
Lezama, 14 SCRA 1030 (1965).
TAN v. SEC
FACTS:
Respondent Vsayan Corp. was regstered on October 1, 1979. As ncorporator, pettoner had four
hundred (400) shares of the capta stock standng n hs name at the par vaue of P100.00 per share,
evdenced by Certfcate of Stock No. 2. He was eected as Presdent and subsequenty reeected,
hodng the poston as such unt 1982 but remaned n the Board of Drectors unt Apr 19, 1983 as
drector.
On |anuary 31, 1981, whe pettoner was st the presdent of the respondent corporaton, two other
ncorporators, namey, Antona Y. Young and Teresta Y. Ong, assgned to the corporaton ther
shares, represented by certfcate of stock No. 4 and 5 after whch, they were pad the correspondng
40% corporate stock-n-trade.
Pettoner's certfcate of stock No. 2 was canceed by the corporate secretary and respondent
Patrca Aguar by vrtue of Resouton No. 1981 (b), whch was passed and approved whe pettoner
was st a member of the Board of Drectors of the respondent corporaton. Due to the wthdrawa of
the aforesad ncorporators and n order to compete the membershp of the fve (5) drectors of the
board, pettoner sod ffty (50) shares out of hs 400 shares of capta stock to hs brother Ange S.
Tan. Another ncorporator, Afredo B. Uy, aso sod ffty (50) of hs 400 shares of capta stock to
Teodora S. Tan and both new stockhoders attended the speca meetng, Ange Tan was eected
drector and on March 27, 1981, the mnutes of sad meetng was fed wth the SEC.
Accordngy, as a resut of the sae by pettoner of hs ffty (50) shares of stock to Ange S. Tan on
Apr 16, 1981, Certfcate of Stock No. 2 was canceed and the correspondng Certfcates Nos. 6 and
8 were ssued, sgned by the newy eected ffth member of the Board, Ange S. Tan as Vce-
presdent, upon nstructon of Afonso S. Tan who was then the presdent of the Corporaton.
Mr. Buzon, submtted an Affdavt aegng that he was personay requested by Mr. Tan Su Chng to
request Mr. Afonso Tan to make proper endorsement n the canceed Certfcate of Stock No. 2 and
Certfcate No. 8, but he dd not endorse, nstead he kept the canceed (1981) Certfcate of Stock
No. 2 and returned ony to me Certfcate of Stock No. 8, whch he devered to Tan Su Chng.
When pettoner was dsodged from hs poston as presdent, he wthdrew from the corporaton on
February 27, 1983, on condton that he be pad wth stocks-n-trade equvaent to 33.3% n eu of
the stock vaue of hs shares n the amount of P35,000.00. After the wthdrawa of the stocks, the
13
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board of the respondent corporaton hed a meetng on Apr 19, 1983, effectng the canceaton of
Stock Certfcate Nos. 2 and 8 n the corporate stock and transfer book 1 and submtted the mnutes
thereof to the SEC on May 18, 1983.
Fve (5) years and nne (9) months after the transfer of 50 shares to Ange S. Tan and three (3) years
and seven (7) months after effectng the transfer of Stock Certfcate Nos. 2 and 8 from the orgna
owner n the stock and transfer book of the corporaton, the atter fed the case before the Cebu SEC
Extenson Offce questonng for the frst tme, the canceaton of hs aforesad Stock Certfcates Nos.
2 and 8. SEC Extenson Offce Hearng Offcer rued n favor of pettoner. Prvate respondent n the
orgna compant went to the SEC on appea. The commsson en banc unanmousy overturned the
Decson of the Hearng Offcer.
ISSUES:
(1) W/N the meanng of shares of stock are persona property and may be transferred by devery of
the certfcate or certfcates ndorsed by the owner or hs attorney-n-fact or other person egay
authorzed to make the transfer (2) W/N Secton 63 of the Corporaton Code of the Phppnes s
"mandatory n nature", meanng that wthout the actua devery and endorsement of the certfcate
n queston, there can be no transfer, or that such transfer s nu and vod.
HELD:
(1) There s no doubt that there was devery of Stock Certfcate No. 2 made by the pettoner to the
Corporaton before ts repacement wth the Stock Certfcate No. 6 for ffty (50) shares to Ange S.
Tan and Stock Certfcate No. 8 for 350 shares to the pettoner, on March 16, 1981. The probem
arose when pettoner was gven back Stock Certfcate No. 2 for hm to endorse and he deberatey
wthed t for reasons of hs own. That the Stock Certfcate n queston was returned to hm for hs
purpose was attested to by Mr. Buzon n hs Affdavt.
The proof that Stock Certfcate No. 2 was spt nto two (2) consstng of Stock Certfcate No. 6 for
ffty (50) shares and Stock Certfcate No. 8 for 350 shares, s the fact that pettoner surrendered the
atter stock (No. 8) n eu of P2 mon pesos worth of stocks, whch the board passed n a resouton
n ts meetng on Apr 19, 1983. Thus, on February 27, 1983, pettoner ndcated he was wthdrawng
from the corporaton on condton that he be pad wth stock-n-trade correspondng to 33.3%, whch
had ony a par vaue of P35,000.00. In ths same meetng, the transfer of Stock Certfcate Nos. 2 and
8 from the orgna owner, Afonso S. Tan was ordered to be recorded n the corporate stock and
transfer book thereafter submttng the mnutes of sad meetng to the SEC on May 18, 1983.
It s aso doubtess that Stock Certfcate No. 8 was exchanged by pettoner for stocks-n-trade snce
he was operatng hs own enterprse engaged n the same busness, otherwse, why woud a
busnessman be nterested n acqurng P2,000,000.00 worth of goods whch coud possby at that
tme, f up warehouse? In fact, he even padocked the warehouse of the respondent corporaton,
after wthdrawng the thrty-three and one-thrd (33 1/3%) percent stocks. Accordngy, the
Memorandum of Agreement prepared by the respondents' counse, Atty. Ramrez evdencng the
transacton, was aso presented to pettoner for hs sgnature, however, ths document was never
returned by hm to the corporate offcer for the sgnature of the other offcers concerned.
(2) No. To foow the argument put up by pettoner whch was uphed by the Cebu SEC Extenson
Offce Hearng Offcer, Fex Chan, that the canceaton of Stock Certfcate Nos. 2 and 8 was nu and
vod for ack of devery of the canceed "mother" Certfcate No. 2 whose endorsement was
deberatey wthhed by pettoner, s to prescrbe certan restrctons on the transfer of stock n
voaton of the corporaton aw tsef as the ony aw governng transfer of stocks. Whe Secton 47(s)
grants a stock corporatons the authorty to determne n the by-aws "the manner of ssung
certfcates" of shares of stock, however, the +o%er o regulae is no he +o%er o +rohibi, or o
im+ose unreasonable resricions of he righ of soc$hol-ers o ransfer heir shares. (Emphass
supped)
Moreover, t s safe to nfer from the facts deduced n the nstant case that, there was aready
devery of the unendorsed Stock Certfcate No. 2, whch s essenta to the ssuance of Stock
Certfcate Nos. 6 and 8 to ange S. Tan and pettoner Afonso S. Tan, respectvey. What ed to the
probem was the return of the canceed certfcate (No. 2) to Afonso S. Tan for hs endorsement and
hs deberate non-endorsement.
Revsed Bagtas Revewer by Ve and Ocfe 2A
For a ntents and purposes, however, snce ths was aready canceed whch canceaton was
aso reported to the respondent Commsson, there was no necessty for the same certfcate to be
endorsed by the pettoner. A the acts requred for the transferee to exercse ts rghts over the
acqured stocks were attendant and even the corporaton was protected from other partes,
consderng that sad transfer was earer recorded or regstered n the corporate stock and transfer
book.
Tuazon v. La Provisora 0ili+ina: But devery s not essenta where t appears that the persons sought
to be hed as stockhoders are offcers of the corporaton, and have the custody of the stock book
A certfcate of stock s not necessary to render one a stockhoder n corporaton. Nevertheess, a
certfcate of stock s the paper representatve or tangbe evdence of the stock tsef and of the
varous nterests theren. The certfcate s not stock n the corporaton but s merey evdence of the
hoder's nterest and status n the corporaton, hs ownershp of the share represented thereby, but s
not n aw the equvaent of such ownershp.
Under the nstant case, the fact of the matter s, the new hoder, Ange S. Tan has aready exercsed
hs rghts and prerogatves as stockhoder and was even eected as member of the board of drectors
n the respondent corporaton wth the fu knowedge and acquescence of pettoner. Due to the
transfer of ffty (50) shares, Ange S. Tan was cothed wth rghts and responsbtes n the board of
the respondent corporaton when he was eected as offcer thereof.
NOTE: Pettoner even attempted to msead the Court by erroneousy quotng the rung of the Court
n C. N. Hodges v. Lezama, whch has some paraesm wth the nstant case was the partes nvoved
theren were aso cose reatves as n ths case. The quoted porton appearng on p. 11 of the
petton, was cut short n such a way that reevant portons thereof were purposey eft out n order to
mpress upon the Court that the unendorsed and uncanceed stock certfcate No. 17, was
uncondtonay decared nu and vod, fagranty omttng the |ustfyng crcumstances regardng ts
acquston and the reason gven by the Court why t was decared so.
NOTE: Ths case hed that the ack of endorsement of a certfcate of a stock whch had been
prevousy devered to the corporaton by the regstered stockhoder for canceaton woud not
prevent the corporaton from canceng n the books of the corporaton, such certfcate and ssuance
of a new certfcate n favor of the new owner of the shares. The statement n Tan that the certfcate
of stock does not represent ownershp of the shares covered theren shoud be understood n the
ght than Tan essentay nvoved ssues between ntra-corporate members, namey the corporaton
and the stockhoders.
NOTE: How can Tan stand together wth Btong? Btong provded for rues wth regard to certfcate of
stocks, but not a appcabe rues for such were provded by Btong. Tan provdes for rues n reaton
to certfcate of stocks treated as quas-negotabe nstruments.
NOTE: Why s Tan correct n ths case? Why was devery not essenta? Secton 63 of the Corporaton
Code tes us that the devery and ndorsement of a certfcate of stock s |ust one means of
dsposton, as the Code uses the permssve word "MAY". Other ways of constructve devery are
executon of pubc nstrument and en|oyment of the prerogatves of ownershp wth fu knowedge
and consent of the orgna owner. The atter was present n ths case.
DELOS SANTOS v REPUBLIC
NOTE: Ths case hed that a certfcate of stock s not a negotabe nstrument, but s regarded as
quas-negotabe n the sense that t may be transferred by endorsement couped wth devery, but t
s not negotabe because the hoder thereof takes t wthout pre|udce to such rghts or defenses as
the regstered owners thereof may have under the aw, except nsofar as such rghts or defenses are
sub|ect to the mtatons mposed by the prncpes governng estoppe.
NOTE: A transferee under a forged assgnment acqures no tte whch can be asserted aganst the
true owner uness the true owners own neggence has been such as to create an estoppe aganst
hm. Ths woud mean that a bona fde purchaser of shares under a forged or unauthorzed transfer
13
9
acqures no tte as aganst the true owner does not appy where the crcumstances are such as to
estop the atter from assertng hs tte.
PONCE v ALSONS CEMENT
FACTS:
On |anuary 25, 1996, Vcente C. Ponce, fed a compant wth the SEC for mandamus and damages
aganst Asons Cement Corporaton and ts corporate secretary Francsco M. Gron, |r. In hs
compant, pettoner aeged, among others, that:
x x x 5. The ate Fausto G. Gad was an ncorporator of Vctory Cement Corporaton (VCC),
havng subscrbed to and fuy pad 239,500 shares of sad corporaton.
6. On February 8, 1968, pantff and Fausto Gad executed a "Deed of Undertakng" and
"Endorsement" whereby the atter acknowedges that the former s the owner of sad shares
and he was therefore assgnng/endorsng the same to the pantff. A copy of the sad
deed/endorsement s attached as Annex "A".
7. On Apr 10, 1968, VCC was renamed Foro Cement Corporaton (FCC for brevty).
8. On October 22, 1990, FCC was renamed Asons Cement Corporaton (ACC for brevty) as
shown by the Amended Artces of Incorporaton of ACC, a copy of whch s attached as Annex
"B".
9. From the tme of ncorporaton of VCC up to the present, no certfcates of stock
correspondng to the 239,500 subscrbed and fuy pad shares of Gad were ssued n the
name of Fausto G. Gad and/or the pantff.
10. Despte repeated demands, the defendants refused and contnue to refuse wthout any
|ustfabe reason to ssue to pantff the certfcates of stocks correspondng to the 239,500
shares of Gad, n voaton of pantffs rght to secure the correspondng certfcate of stock n
hs name.
Attached to the compant was the Deed of Undertakng and Endorsement upon whch pettoner
based hs petton for mandamus.
DEED O4 5NDERTAKIN6
KNOW ALL MEN BY THESE PRESENTS:
I, VICENTE C. PONCE, s the owner of the tota subscrpton of Fausto Gad wth Vctory
Cement Corporaton n the tota amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE
HUNDRED (P239,500.00) PESOS and that Fausto Gad does not have any abty whatsoever
on the subscrpton agreement n favor of Vctory Cement Corporaton x x x
ENDORSEMENT
I, FAUSTO GAID s ndorsng the tota amount of TWO HUNDRED THIRTY NINE
THOUSAND FIVE HUNDRED (239,500.00) stocks of Vctory Cement Corporaton to VICENTE
C. PONCE. x x x
Wth these aegatons, pettoner prayed that |udgment be rendered orderng respondents (a) to
ssue n hs name certfcates of stocks coverng the 239,500 shares of stocks and ts ega
ncrements and (b) to pay hm damages.
Instead of fng an answer, respondents moved to dsmss the compant. They argued, iner
alia, that there beng no aegaton that the aeged "ENDORSEMENT" was recorded n the books of
the corporaton, sad endorsement by Gad to the pantff of the shares of stock n queston-
assumng that the endorsement was n fact a transfer of stocks-was not vad aganst thrd persons
such as ALSONS under Secton 63 of the Corporaton Code. There was, therefore, no specfc ega
duty on the part of the respondents to ssue the correspondng certfcates of stock, and mandamus
w not e.
Revsed Bagtas Revewer by Ve and Ocfe 2A
Pettoner fed hs opposton to the moton to dsmss on February 19, 1996 contendng that:
(1) mandamus s the proper remedy when a corporaton and ts corporate secretary wrongfuy
refuse to record a transfer of shares and ssue the correspondng certfcates of stocks; (2) he s the
proper party n nterest snce he stands to be benefted or n|ured by a |udgment n the case; (3) the
statute of mtatons dd not begn to run unt defendant refused to ssue the certfcates of stock n
favor of the pantff on Apr 13, 1992.
SEC granted the moton to dsmss sayng that there s no record of any assgnment or transfer n
the books of the defendant corporaton, and there s no nstructon or authorty from the transferor
(Gad) for such assgnment or transfer. There s not even any endorsement of any stock certfcate to
speak of. What the pantff possesses s a document by whch Gad supposedy transferred the
shares to hm.
Pettoner appeaed the Order of dsmssa. On |anuary 6, 1997, the Commsson En Banc
reversed the appeaed Order and drected the Hearng Offcer to proceed wth the case. In rung
that a transfer or assgnment of stocks need not be regstered frst before t can take cognzance of
the case to enforce the pettoners rghts as a stockhoder. A transfer or assgnment of stocks need
not be regstered frst before the Commsson can take cognzance of the case to enforce hs rghts
as a stockhoder. Aso, the probem encountered n securng the certfcates of stock made by the
buyer must be expedtousy taken up through the so-caed admnstratve mandamus proceedngs
wth the SEC than n the reguar courts. It aso found that the Hearng Offcer erred n hodng that
pettoner s not the rea party n nterest.
Ther MR havng been dened, respondents appeaed the decson of the SEC En Banc and the
resouton denyng ther MR to the CA. In ts decson, the CA hed that n the absence of any
aegaton that the transfer of the shares between Fausto Gad and Vcente C. Ponce was regstered
n the stock and transfer book of ALSONS, Ponce faed to state a cause of acton. Thus, sad the CA,
"the compant for mandamus shoud be dsmssed for faure to state a cause of acton. Pettoners
MR was kewse dened.
Pettoner frst contends that the act of recordng the transfer of shares n the stock and transfer
book and that of ssung a certfcate of stock for the transferred shares nvoves ony one contnuous
process. Thus, when a corporate secretary s presented wth a document of transfer of fuy pad
shares, t s hs duty to record the transfer n the stock and transfer book of the corporaton, ssue a
new stock certfcate n the name of the transferee, and cance the od one. A transferee who
requests for the ssuance of a stock certfcate need not spe out each and every act that needs to be
done by the corporate secretary, as a request for ssuance of stock certfcates necessary ncudes a
request for the recordng of the transfer. Ergo, the faure to record the transfer does not mean that
the transferee cannot ask for the ssuance of stock certfcates.
Secondy, accordng to pettoner, there s no aw, rue or reguaton requrng a transferor of
shares of stock to frst ssue express nstructons or execute a power of attorney for the transfer of
sad shares before a certfcate of stock s ssued n the name of the transferee and the transfer
regstered n the books of the corporaton. He contends that /ager vs. Bryan, 19 Ph. 138 (1911),
and ,ivera vs. 0loren-o, 144 SCRA 643 (1986), cted by respondents, do not appy to ths case.
These cases contempate a stuaton where a certfcate of stock has been ssued by the company
whereas n ths case at bar, no stock certfcates have been ssued even n the name of the orgna
stockhoder, Fausto Gad.
Fnay, pettoner mantans that snce he s under no compuson to regster the transfer or to
secure stock certfcates n hs name, hs cause of acton s deemed not to have accrued unt
respondent ALSONS dened hs request.
Respondents, n ther comment, mantan that the transfer of shares of stock not recorded n the
stock and transfer book of the corporaton s non-exstent nsofar as the corporaton s concerned and
no certfcate of stock can be ssued n the name of the transferee. Unt the recordng s made, the
14
1
transfer cannot be the bass of ssuance of a certfcate of stock. They add that pettoner s not the
rea party n nterest, the rea party n nterest beng Fausto Gad snce t s hs name that appears n
the records of the corporaton. They concude that pettoners cause of acton s barred by
prescrpton and aches snce 24 years eapsed before he made any demand upon ALSONS.
ISSUES:
(1) W/N CA erred n hodng that pettoner has no cause of acton for a wrt of mandamus. (2) W/N
the transfer of shares of stocks not recorded n the stock and transfer book of the corporaton s non-
exstent(3) W/N notce to a corporaton of the sae of the shares and presentaton of certfcates for
transfer s equvaent to regstraton
HELD:
No. The CA dd not err n rung that pettoner had no cause of acton, and that hs petton for
mandamus was propery dsmssed.
In ,ural Ban$ of Salinas, Inc., prvate respondent Meana Guerrero had a Speca Power of
Attorney executed n her favor by Cemente Guerrero, the regstered stockhoder. It gave
Guerrero fu authorty to se or otherwse dspose of the 473 shares of stock regstered n
Cementes name and to execute the proper documents therefor. Pursuant to the authorty so
gven, Meana assgned the 473 shares of stock owned by Guerrero and presented to the
Rura Bank of Sanas the deeds of assgnment coverng the assgned shares. Meana
Guerrero prayed for the transfer of the stocks n the stock and transfer book and the ssuance
of stock certfcates n the name of the new owners thereof. Based on those crcumstances,
there was a cear duty on the part of the corporate secretary to regster the 473 shares n
favor of the new owners, snce the person who sought the transfer of shares had express
nstructons from and specfc authorty gven by the regstered stockhoder to cause the
dsposton of stocks regstered n hs name.
That cannot be sad of ths case. The deed of undertakng wth endorsement presented by
pettoner does not estabsh, on ts face, hs rght to demand for the regstraton of the transfer and
the ssuance of certfcates of stocks. In /ager vs. Bryan, 19 Ph. 138 (1911), ths Court hed that a
petton for mandamus fas to state a cause of acton where t appears that the pettoner s not the
regstered stockhoder and there s no aegaton that he hods any power of attorney from the
regstered stockhoder, from whom he obtaned the stocks, to make the transfer.
Wthout dscussng or decdng the respectve rghts of the partes whch mght be
propery asserted n an ordnary acton or an acton n the nature of an equtabe sut, we are
a agreed that n a case such as that at bar, a mandamus shoud not ssue to compe the
secretary of a corporaton to make a transfer of the stock on the books of the company,
uness t affrmatvey appears that he has faed or refused so to do, upon the demand
ether of the person n whose name the stock s regstered, or of some person hodng a
power of attorney for that purpose from the regstered owner of the stock. There s no
aegaton n the petton that the pettoner or anyone ese hods a power of attorney from
the Bryan-Landon Company authorzng a demand for the transfer of the stock, or that the
Bryan-Landon Company has ever tsef made such demand upon the Vsayan Eectrc
Company, and n the absence of such aegaton we are not abe to say that there was such
a cear ndsputabe duty, such a cear ega obgaton upon the respondent, as to |ustfy the
ssuance of the wrt to compe hm to perform t.
Under the provsons of our statute touchng the transfer of stock (secs. 35 and 36 of Act
No. 1459), the mere endorsement of stock certfcates does not n tsef gve to the ndorsee
such a rght to have a transfer of the shares of stock on the books of the company as w
entte hm to the wrt of mandamus to compe the company and ts offcers to make such
transfer at hs demand, because, under such crcumstances the duty, the ega obgaton, s
not so cear and ndsputabe as to |ustfy the ssuance of the wrt. As a genera rue and
Revsed Bagtas Revewer by Ve and Ocfe 2A
especay under the above-cted statute, as between the corporaton on the one hand, and
ts sharehoders and thrd persons on the other, the corporaton ooks ony to ts books for
the purpose of determnng who ts sharehoders are, so that a mere ndorsee of a stock
certfcate, camng to be the owner, w not necessary be recognzed as such by the
corporaton and ts offcers, n the absence of express nstructons of the regstered owner to
make such transfer to the ndorsee, or a power of attorney authorzng such transfer.
(2) A transfer of shares of stock not recorded n the stock and transfer book of the corporaton s
non-exstent as far as the corporaton s concerned. As between the corporaton on the one hand,
and ts sharehoders and thrd persons on the other, the corporaton ooks ony to ts books for the
purpose of determnng who ts sharehoders are. It s ony when the transfer has been recorded n
the stock and transfer book that a corporaton may rghtfuy regard the transferee as one of ts
stockhoders. From ths tme, the consequent obgaton on the part of the corporaton to recognze
such rghts as t s mandated by aw to recognze arses.
Hence, wthout such recordng, the transferee may not be regarded by the corporaton as one
among ts stockhoders and the corporaton may egay refuse the ssuance of stock certfcates n
the name of the transferee even when there has been compance wth the requrements of Secton
64 of the Corporaton Code. Ths s the mport of Secton 63 whch states that "No transfer, however,
sha be vad, except between the partes, unt the transfer s recorded n the books of the
corporaton showng the names of the partes to the transacton, the date of the transfer, the number
of the certfcate or certfcates and the number of shares transferred." The stuaton woud be
dfferent f the pettoner was hmsef the regstered owner of the stock whch he sought to transfer to
a thrd party, for then he woud be entted to the remedy of mandamus.
x x x unt regstraton s accompshed, the transfer, though vad between the partes,
cannot be effectve as aganst the corporaton. Thus, n the absence of any aegaton that
the transfer of the shares between Gad and the prvate respondent |heren pettoner| was
regstered n the stock and transfer book of the pettoner corporaton, the prvate
respondent has faed to state a cause of acton.
(3) Pettoners reance on our rung n )be1o vs. (e la Cruz, 149 SCRA 654 (1987), that notce gven
to the corporaton of the sae of the shares and presentaton of the certfcates for transfer s
equvaent to regstraton s mspaced. In the case, there s no aegaton n the compant that
pettoner ever gave notce to respondents of the aeged transfer n hs favor. Moreover, that case
arose between and among the prncpa stockhoders of the corporaton, Pocket Be, due to the
refusa of the corporate secretary to record the transfers n favor of Teectroncs of the corporatons
controng 56% shares of stock whch were covered by duy endorsed stock certfcates. As
aforesad, the request for the recordng of a transfer s dfferent from the request for the ssuance of
stock certfcates n the transferees name. Fnay, n )be1o, the Court dd not say that transfer of
shares need not be recorded n the books of the corporaton before the transferee may ask for the
ssuance of stock certfcates. The Courts statement, that "there s no requrement that a
stockhoder of a corporaton must be a regstered one n order that the Securtes and Exchange
Commsson may take cognzance of a sut seekng to enforce hs rghts as such stockhoder among
whch s the stock purchasers rght to secure the correspondng certfcate n hs name," was
addressed to the ssue of |ursdcton, whch s not pertnent to the ssue at hand.
NOTE: That pettoner was under no obgaton to request for the regstraton of the transfer s not n
ssue. It has no pertnence n ths controversy. One may own shares of corporate stock wthout
possessng a stock certfcate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occason to decare that
a certfcate of stock s not necessary to render one a stockhoder n a corporaton. But a certfcate
of stock s the tangbe evdence of the stock tsef and of the varous nterests theren. The
certfcate s the evdence of the hoders nterest and status n the corporaton, hs ownershp of the
share represented thereby. The certfcate s n aw, so to speak, an equvaent of such ownershp. It
expresses the contract between the corporaton and the stockhoder, but t s not essenta to the
exstence of a share n stock or the creaton of the reaton of sharehoder to the corporaton. In fact,
t rests on the w of the stockhoder whether he wants to be ssued stock certfcates, and a
stockhoder may opt not to be ssued a certfcate. In Won vs. Wack Wack Gof and Country Cub,
14
3
Inc., 104 Ph. 466 (1958), we hed that consderng that the aw does not prescrbe a perod wthn
whch the regstraton shoud be effected, the acton to enforce the rght does not accrue unt there
has been a demand and a refusa concernng the transfer. In the present case, pettoners compant
for mandamus must fa, not because of aches or estoppe, but because he had aeged no cause of
acton suffcent for the ssuance of the wrt.
NOTE: Ponce teaches us that the very fact that a certfcate s ndorsed and devered to a thrd
person does not automatcay entte such person to regster such certfcate n hs name, or compe
the corporaton to regster the certfcate n hs name even. Ths case teaches us that an ndorsed
and devered certfcate does not create a cear rght wth respect to the possesson of such
certfcate by the thrd person, as the same mode (ndorsement and devery) appes to sae, pedge
and mortgage. Ths s where the regstered owner must come n, he must nform the corporaton
whether the dsposton was a pedge, or mortgage or sae, whch woud determne whether or not
the thrd person s entted regstraton. Snce amost a deangs comprse of the same mode, the
owner must apprse the corporaton wth the necessary nformaton and nstructons.
A stock certfcate s merey evdence of a share of stock and not the share tsef.
Lincoln Phil. Life v. Cour of )++eals, 293 SCRA 92 (1998).
A certfcate of stock coud not be consdered ssued n contempaton of aw uness
sgned by the presdent or vce-presdent and countersgned by the secretary or
assstance secretary. Biong v. Cour of )++eals, 292 SCRA 503 (1998).
%!$ 7asi8#e*otia!le Chara"ter o0 Certi0i"ate o0 Sto"-9aBachrach .oor Co. v. Lacson
Le-esma, 64 Ph. 681 (1937).
BACHRACH MOTOR CO. v LACSON LEDESMA
FACTS:
Bachrach obtaned |udgment (n 1927) aganst Ledesma n two cv cases. The sherff, n compance
wth the wrt of executon ssued n favor of Bachrach, attached and sod the rght of redempton of
Ledesma over severa propertes, and attached as we a rght, tte to and nterest that Ledesma
had n "Any bonus, dvdend, shares of stock, money, or other property whch Ledesma was entted
to receve from Tasay-Say Mng Co. Inc.. on account of beng a stockhoder n that corporaton
or whch he s entted to receve from that corporaton for any other cause or pretext whatsoever."
The propertes and the shares Ledesma owned n Tasay were mortgaged to PNB as securtes to
ensure hs payment of P624,000. There was another mortgage over the rea propertes n favor of
PNB to answer for the debts of Centra Tasay-Say Mng. Centra resoved to grant a bonus or
compensaton to the owners of the propertes mortgaged for the rsk ncurred from beng sub|ected
to sad mortgage en. Under the resouton, Ledesma was aotted P19,911.11. Ths was payabe ony
n |anuary, 1930. PNB brought an acton aganst Ledesma and hs wfe for recovery of mortgage
credt (1928). In 1929, they amended the compant to ncude Bachrach, "because they cam to
have some rght to certan propertes whch are the sub|ect matter of the compant." The court rued
n favor of PNB, and ordered the sae of propertes mortgaged. PNB was aso granted the authorty to
se the stock certfcates.
Durng the pendency of the case of PNB v. Ledesma, Bachrach fed an acton aganst Tasay
to recover P13,850 whch by vrtue of the resouton was bestowed upon Ledesma by Centra. PNB
ntervened, aegng a preferred rght, as sad bonus beng a cv frut of the mortgaged ands, the
bank became entted to t as the mortgage had become due. |udgment was rendered n favor of
Bachrach. The SC hed that the bonus had no mmedate reaton to the ands n queston but merey
a remote and accdenta one. It was not a cv frut, beng a mere persona rght of Ledesma.
In |anuary, 1930, Stock Cert. 772 was ssued n favor of Ledesma by Tasay. Ledesma ordered
ths to be devered to PNB. The 6,300 shares consttuted the 2,100 orgna shares that was gven as
pedge to PNB under the deed of mortgage. On Feb. 1931, the sherff sod the whoe 6,300 shares
covered by 772, and not ony the 2,100 orgna shares. PNB nformed Tasay of the sae, and Tasay
ssued Stock Cert. 1155 representng 8,968 shares (6,300 + 2,100).
ISSUES:
W/N Bachrach had a preferred rght by vrtue of the |udgment and attachment made (1927) - NO
W/N the pedge was neffectve as aganst Bachrach because evdence of ts date was not made to
appear n a pubc nstrument - NO
Revsed Bagtas Revewer by Ve and Ocfe 2A
W/N the pedge coud not egay exst as the Cert. was not the shares themseves - NO
HELD:
Pantff sad t had a preferred rght over the 6,300 shares because the stocks were n
custoda egs by vrtue of the attachment/garnshment when Cert 772 was devered to PNB, and
when Tasay ssued Cert 1155 n favor of PNB. Ths contenton was unfounded as t appeared that
the stocks were pedged to the bank pror to the garnshment.
Cert 772 was devered to PNB on Feb 27, 1930. The garnshment was notfed to the partes
and became effectve on August 11, 1930, more than fve months after devery. On Feb, 1931,
Tasay ssued Cert 1155 n favor of PNB.
Accordng to Artce 1865 of the Cv Code then, n order that a pedge may be effectve as
aganst thrd persons, evdence of ts date must appear n a pubc nstrument n addton to the
devery of the thng pedged to the credtor. However, Sec. 4 of the Chatte Mortgage Law mpcty
modfed 1865 - a contract of pedge and that of chatte mortgage need not appear n pubc
nstruments to be effectve aganst thrd persons, provded that devery was made. Therefore, the
pedge of the 6,300 shares was vad aganst Bachrach.
The contenton that a certfcate of stock or of stock dvdends can not be the sub|ect matter
of contract of pedge or chatte mortgage was untenabe. Certfcates of stock or of stock dvdends
are quas negotabe nstruments. They may be gven n pedge or mortgage to secure an obgaton.
They are transferabe, when propery ndorsed, by mere devery, and by estoppe aganst the
corporaton or aganst pror hoders, as good a tte to the transferee as f they were negotabe. It s
to the pubc nterest that such use shoud be smpfed and factated by pacng them as neary as
possbe on the pane of commerca paper.
In order for a transfer of stock certfcate to be effectve, t must be propery ndorsed
and that tte to such certfcate of stock s vested n the transferee by the devery of the
duy ndorsed certfcate of stock. Endorsement of the certfcate of stock s a mandatory
requrement of aw for an effectve transfer of a certfcate of stock. a,azon v. I)C, 207
SCRA 234 (1992).
RAZON v IAC
FACTS:
Vcente Chudan, as admnstrator of the ntestate estate of |uan Chudan, prayed that defendants
Enrque Razon, etc. be ordered to dever certfcates of stocks representng the shares of deceased
|uan n the E. Razon Inc. The defendants aeged n turn that a the shares of stock n the name of
stockhoders of record of the corporaton were fuy pad for by defendant Razon; that sad shares
were sub|ect to agreement between defendants and ncorporators; that the shares were actuay
owned and remaned n the possesson of Razon; and that nether Vcente nor |uan pad any amount
for the 1,500 shares of stock n queston. Enrque organzed E. Razon Inc n 1962 for the purpose of
bddng for arrastre servces n South Harbor, Mana. Some of the ncorporators wthdrew, so Enrque
dstrbuted the stocks n the names of the wthdrawng ncorporators to hs frends. Among them was
|uan who receved 1,500 shares. The shares were regstered n |uans name ony as nomna
stockhoder, and wth the agreement that the sad shares were owned and hed by Enrque. |uan was
gven the opton to buy these though. Because of the agreement, |uan devered the cert. of stocks
to Razon, who from then on had possesson of the cert. unt he devered t for depost wth the PBC
under |ont custody wth |uan.
ISSUE:
W/N by vrtue of the agreement, the shares were owned by Enrque - NO
HELD:
No. In the Corporaton Code and n the case of Embassy Farms v. CA, for an effectve transfer of
shares of stock the mode and manner as prescrbed by aw must be foowed. Shares of stock may be
14
5
transferred by devery to the transferee of the cert propery ndorsed. Tte may be vested n the
transferee by the devery of the duy ndorsed cert. No transfer sha be vad, except as between the
partes unt the transfer s propery recorded n the books of corporaton. In the case at hand, the
stocks were n the name of |uan n the books of the corporaton. Aso, he was aso eected member of
the Board of Drectors whch ceary showed that he was a stockhoder of the corporaton. The
pettoner faed to present any byaws whch coud show the effectve transfer to hm of the stocks.
In the absence of such byaws, the provsons of the Corporaton Code governs. Aso, preponderance
of evdence showed that the shares were gven to |uan for vaue |uan was the ega counse of the
corporaton. The shares were gven as payment for the ega servces. The cash and stock dvdends
and a the preemptve rghts are a ncdents of stock ownershp. The rghts of stockhoders are the
ff: (1) to have a certfcate or other evdence of hs status as stockhoder ssued to hm (2) vote at
meetngs of the corporaton (3) receve hs proportonate share of the profts of the corporaton (4)
partcpate proportonatey n the dstrbuton of the corporate assets upon dssouton or wndng up.
The rue s that the endorsement of the certfcate of stock by the owner or hs
attorney-n-fact or any other person egay authorzed to make the transfer sha be
suffcent to effect the transfer of shares ony f the same s couped wth devery. The
devery of the stock certfcate duy endorsed by the owner s the operatve act of transfer
of shares from the awfu owner to the new transferee. But to be vad aganst thrd
partes, the transfer must be recorded n the books of the corporaton. aBiong v. Cour of
)++eals, 292 SCRA 503 (1998)
BITONG v CA
FACTS:
Nora Btong fed n the SEC a dervatve sut for the beneft of Mr. and Ms Pubshng Co, Inc.
to hod spouses Aposto abe for fraud, msrepresentaton, dsoyaty, evdent bad fath, confct of
nterest and msmanagement n drectng the affars of Mr. & Ms. to the damage of the Corp and ts
stockhoders. Nora camed that she had been the Treasurer and a Member of the Board of Drectors
of Mr & Ms, and was the regstered owner of 1,000 shares of stock.
Eugena Aposto was Presdent and Char of the Board of Mr & Ms. It was aeged that except
for the sae of the name Phppne Inqurer to Phppne Day Inqurer, a other transactons and
agreements entered nto by Mr & Ms wth PDI were not supported by any bond and/or stockhoders
resouton. Severa cash advances were aso made to PDI amountng to P3.276M. on some of these
oans, PDI pad no nterest. Though the advances were booked as advances to an affate, no
resouton or document exsted whch coud egay authorze the creaton of and support to an
affate. It was aso camed that respondent spouses were aso stockhoders, drectors, and offcers
n both Mr & Ms and PDI. The stock subscrptons were pad for by Mr & Ms and ntay treated as
recevabes from offcers and empoyees.
Mr & Ms was actuay made when Ex Lbrs Pubshng Co., whose orgna stockhoders were
|uan Ponce Enre and hs wfe through |AKA Investments and the spouses Aposto, suffered fnanca
dffcutes. In 1989, t was agreed upon among the ncorporators of Mr & Ms that t woud be a
partnershp or a cose corporaton, and the spouses woud manage ts affars. No shares woud be
sod to 3
rd
partes wthout frst offerng the shares to other stockhoders. The spouses asserted that
Eugena nformed her busness partners of her actons as manager, and obtaned ther advce and
consent.
The spouses aso sad that Btong, beng merey a hoder-n-trust of |AKA shares, ony
represented and contnued to represent |AKA n the board. Btong and her prncpas, and Eugenas
reatonshp became straned due to potca dfference. In md-1986 to 88, Btong refused to speak
wth Eugena, but the atter aways made avaabe to Btong and her representatves a the books of
the corporaton.
The spouses camed that a the PDI shares they owned were acqured thru ther own prvate
funds. That the oan of P750,000 by PDI from Mr & Ms had been fuy pad wth nterest. That Btong
was not the rea part n nterest, that beng |AKA whch contnued to be the true stockhoder of Mr &
Ms.
Revsed Bagtas Revewer by Ve and Ocfe 2A
Pettoner testfed that she became the regstered and benefca owner of 997 shares of
stock out of the 4,088 tota outstandng shares after she acqured them from |AKA thru a deed of sae
executed on |uy 25, 1983. She sad ths was recorded n the Stock and Transfer Book of Mr & Ms.
Spouses sad that Eugena sgned the Cert ony on March 1989, not |uy 1983. Snce the Stock
and Transfer Book that was presented by Btong was not regstered wth the SEC, the entres theren
were frauduent. Eugena sad that she had not seen the Book unt t was presented to her by Btong
on March 1989.
The SEC dsmssed the sut. It found that there was no serous msmanagement whch woud
warrant drastc correctve measures. It gave credence to the asserton that Mr was operated as a
cose corporaton where mportant matters were dscussed at breakfast conferences. The SEC En
Banc reversed the decson. It ordered the spouses to account for, return and dever to Mr any and
a funds and assets they dsbursed from the coffers of Mr. ncudng shares of stock, profts,
dvdends and/or fruts receved as a resut of ther nvestment n PDI; as we as cease and desst
from managng Mr. The CA reversed the decson of the SEC En Banc, hodng that Btong was not the
rea party n nterest.
ISSUE:
W/N Btong was a rea party n nterest - NO
HELD:
The spouses repeatedy contested the standng of Btong, startng wth the SEC up to ts
appea to the CA. The SEC aso hed that Btong was not the rea party, but aowed for the resouton
of the compant as to resove the mportant ssues as we. Pettoner nvokes Sec 63 of the Corp
Code, whch provdes that no transfer sha be vad as between the partes unt the transfer s
recorded n the books of the corporaton, and upon ts recordng the corporaton s bound by t and s
estopped to deny the fact of transfer of sad shares. She aeged that as a stockhoder soey on the
strength of the recordng n the stock and transfer book can exercse a the rghts of the stockhoder,
ncudng the rght to fe a dervatve sut n the name of the corporaton.
The SC hed that ths provson envsons a forma certfcate of stock whch can be ssued ony
upon compance wth certan requstes. (1) The certfcates must be sgned by the Pres or VP,
countersgned by the secretary or assstant-secretary, and seaed wth the corporatons sea. A mere
typewrtten statement cannot be consdered a forma certfcate of stock. (2) Devery s an essenta
eement of ts ssuance. (3) The par vaue or the fu subscrpton as to no par vaues shares must be
fuy pad. (4) The orgna cert must be surrendered where the person requestng the ssuance of a
cert s a transferee from a stockhoder.
The cert of stock tsef once ssued s a contnung affrmaton or representaton that the stock
descrbed theren s vad and genune and s at east prma face evdence that t was egay ssued
n the absence of evdence to the contrary. However, ths presumpton may be rebutted. Books and
records of a corporaton whch ncude even the stock and transfer book are generay admssbe n
evdence. They are ordnary the best evdence of corporate acts and proceedngs. However, they
are ony prma face evdence. They may be rebutted. They can be destroyed by testmony of a more
concusve character than mere suspcon that there was an rreguarty n the manner n whch the
books were kept.
These are founded on the basc prncpe that stock ssued wthout authorty and n voaton
of aw s vod and confers no rghts on the person to whom t s ssued and sub|ects hm to no
abtes. Where there s an nherent ack of power n the corporaton to ssue the stock, nether the
corporaton nor the person to whom the stock s ssued s estopped to queston ts vadty sne an
estoppe cannot operate to create stock whch under the aw cannot have exstence.
Evdence showed that the certfcate of stock was ony sgned by Eugena n 1989, not n 1983
as purported by Btong. The Book was aso kept by Btong, and was ony presented to Eugena n
1989 as we. The testmony gven by Enre hmsef contradcted that of Btongs. Enre sad that n
1983, he tod Btong to work out the documentaton of the transfer of shares to Aposto as a nomna
hoder. Then he decded to transfer the shares to Btong. But the transfer was done oray. Btong
hed that the shares were transferred to her thru a deed of sae. Pus, records show that the shares
were aready transferred to Aposto, who woud hod them n trust for the beneft of |AKA, as of May
1983. Btong sad that the deed of sae was executed n |uy 1983. Hence, no vad sae coud have
14
7
been made. Nothng n the records showed that |AKA revoked the trust gven to Aposto. Nor was
there any request to Aposto to transfer or assgn the shares.
For a vad transfer of stocks, (a) there must be devery of the stock cert (b) the cert must be
endorsed by the owner or hs atty-n-fact or other persons egay authorzed to make the transfer (c)
to be vad aganst 3
rd
partes, the transfer must be recorded n the books of the corporaton.
Compance wth at most the frst two was not seen n ths case.
We setted s the rue that where corporate drectors are guty of a breach of trust, not of
mere error of |udgment or abuse of dscreton, and ntracorporate remedy s fute or useess, a
stockhoder may nsttute a sut n behaf of hmsef and other stockhoders and for the beneft of the
corporaton, to brng about a redress of the wrong nfcted drecty upon the corporaton and
ndrecty upon the stockhoders. The bass of a stockhoders sut s aways one n equty. However, t
cannot prosper wthout frst compyng wth the ega requstes for ts nsttuton. The most mportant
of these s the bona fde ownershp by a stockhoder of a stock n hs own rght at the tme of the
transacton companed of whch nvests hm wth standng to nsttute a dervatve sut for the
beneft of the corporaton.
NOTE: Requrements for a vad transfer of stocks (1) there must be a devery of the stock
certfcate; (2) the certfcate must be ndorsed by the owner or hs attorney-n-fact or other persons
egay authorzed to make the transfer; and (3) to be vad aganst thrd partes, the transfer must be
recorded n the books of the corporaton.
NOTE: Endorsement and devery are essenta for (1) sae or assgnment of shares (2) pursuant to a
trust or nomnee arrangement (3) by way of pedge or encumbrance of the shares.
NOTE: Why cannot ega standng of stockhoders be based or dependent on the payment they
made? Because from the moment a person subscrbes to stocks, the trust fund doctrne comes n
removng a contractua stpuatons that come wth such purchase.
Even when a forma Deed of Assgnment coverng the shares was duy executed,
wthout the endorsement and devery of the coverng certfcates of stocks, the covered
shares cannot be deemed to transferred and regstered n the names of the assgnees. a,ural
Ban$ of Li+a Ciy v. Cour of )++eals, 366 SCRA 188 (2001); ,ivera V. 0loren-o, 144 SCRA 643
(1986).
RURAL BANK OF LIPA CITY v CA
Vanueva, Sr. executed a deed of assgnment n favor of stockhoders of the bank. The former faed
to compy wth hs obgaton that shares were converted nto Treasury shares and that he was no
onger nformed and ncuded n the meetngs. The Court hed that ths s mproper as the deed does
not effect a transfer that the aw contempates as the requrements are not comped wth as (1)
there must be a devery of the stock certfcate (2) t must be endorsed (3) must be recorded n the
books of the corporaton.
%"$ Right to Issuance (Sec. 64; Balazar v. Lingayen Gulf &lec. Po%er Co., Inc., 14 SCRA
522 |1965|).
Secton 64. Issuance of stock certfcates. - No certfcate of stock sha be ssued to a subscrber unt
the fu amount of hs subscrpton together wth nterest and expenses (n case of denquent
shares), f any s due, has been pad.
The remedes avaabe to a stockhoder f a corporaton wrongfuy refuses to ssue a certfcate
of stock s as foows: (1) to fe a sut for specfc performance of an express or mped contract;
(2) to fe for an aternatve reef by way of damages where specfc performance cannot be
granted; (3) to fe a petton for mandamus to compe the ssuance of the certfcate where the
condtons, facts, and crcumstances of the partcuar case brng t wthn the ega rues whch
govern the grantng of the wrt; (4) to rescnd the contract of subscrpton f the corporaton
wrongfuy refuses to dever a certfcate and sue to recover back what has been pad.
%d$ (ost or $estroyed Certificates (Sec. 63 and 73)
The SEC has hed that requrements under 73 are not mandatory, however when the corporaton
does not foow these steps, they may not ava of the free and harmess cause provded n sad
secton and opens tsef to cams for damages.
Revsed Bagtas Revewer by Ve and Ocfe 2A
Secton 63. Certfcate of stock and transfer of shares. - The capta stock of stock corporatons
sha be dvded nto shares for whch certfcates sgned by the presdent or vce presdent,
countersgned by the secretary or assstant secretary, and seaed wth the sea of the corporaton
sha be ssued n accordance wth the by-aws. Shares of stock so ssued are persona property and
may be transferred by devery of the certfcate or certfcates ndorsed by the owner or hs attorney-
n-fact or other person egay authorzed to make the transfer. No transfer, however, sha be vad,
except as between the partes, unt the transfer s recorded n the books of the corporaton showng
the names of the partes to the transacton, the date of the transfer, the number of the certfcate or
certfcates and the number of shares transferred.
No shares of stock aganst whch the corporaton hods any unpad cam sha be transferabe n the
books of the corporaton.
Secton 73. Lost or destroyed certfcates. - The foowng procedure sha be foowed for the ssuance
by a corporaton of new certfcates of stock n eu of those whch have been ost, stoen or
destroyed:
1. The regstered owner of a certfcate of stock n a corporaton or hs ega representatve
sha fe wth the corporaton an affdavt n trpcate settng forth, f possbe, the
crcumstances as to how the certfcate was ost, stoen or destroyed, the number of shares
represented by such certfcate, the sera number of the certfcate and the name of the
corporaton whch ssued the same. He sha aso submt such other nformaton and evdence
whch he may deem necessary;
2. After verfyng the affdavt and other nformaton and evdence wth the books of the
corporaton, sad corporaton sha pubsh a notce n a newspaper of genera crcuaton
pubshed n the pace where the corporaton has ts prncpa offce, once a week for three (3)
consecutve weeks at the expense of the regstered owner of the certfcate of stock whch
has been ost, stoen or destroyed. The notce sha state the name of sad corporaton, the
name of the regstered owner and the sera number of sad certfcate, and the number of
shares represented by such certfcate, and that after the expraton of one (1) year from the
date of the ast pubcaton, f no contest has been presented to sad corporaton regardng
sad certfcate of stock, the rght to make such contest sha be barred and sad corporaton
sha cance n ts books the certfcate of stock whch has been ost, stoen or destroyed and
ssue n eu thereof new certfcate of stock, uness the regstered owner fes a bond or other
securty n eu thereof as may be requred, effectve for a perod of one (1) year, for such
amount and n such form and wth such suretes as may be satsfactory to the board of
drectors, n whch case a new certfcate may be ssued even before the expraton of the one
(1) year perod provded heren: Provded, That f a contest has been presented to sad
corporaton or f an acton s pendng n court regardng the ownershp of sad certfcate of
stock whch has been ost, stoen or destroyed, the ssuance of the new certfcate of stock n
eu thereof sha be suspended unt the fna decson by the court regardng the ownershp of
sad certfcate of stock whch has been ost, stoen or destroyed.
Except n case of fraud, bad fath, or neggence on the part of the corporaton and ts offcers, no
acton may be brought aganst any corporaton whch sha have ssued certfcate of stock n eu of
those ost, stoen or destroyed pursuant to the procedure above-descrbed.
Whe Sec. 73 of Corporaton Code appears to be mandatory, the same admts
exceptons, such that a corporaton may vountary ssue a new certfcate n eu of the
orgna certfcate of stock whch has been ost wthout compyng wth the requrements
under sad secton. It woud be an nterna matter for the corporaton to fnd measures n
ascertanng who are the rea owners of stock for purposes of qudaton. It s we-setted
that uness proven otherwse, the "soc$ an- ransfer boo$2 s the best evdence to
estabsh stock ownershp. (SEC Opnon, dated 28 |anuary 1999, addressed to Ms. Ma.
Ceca Saazar-Santos).
%e$ )orged and *nauthori+ed ,ransfers. a3. Sanamaria v. /ong4ong an- Shanghai
Ban$ing Cor+., 89 Ph. 780 (1951); a#eugene .ar$eing, Inc. v. Cour of )++eals, 303
SCRA 295 (1999).
14
9
SANTAMARIA v HSBC
FACTS:
|osefa Santamara bought 10,000 shares of Batangas Mneras, nc through the stock brokerage frm
Woo, Uy-Toco & Naftay n whch she receved stock certfcate # 517 ssued n the name of the
stock brokerage frm and ndorsed n bank by ths frm. Afterwards, Santamara pace an order for
purchase of 10,000 shares of Crown mnes, nc. wth another brokerage frm, R| Campos & Co., and
devered the stock Certfcate #517 as securty wth the understandng that the certfcate w be
returned to her upon payment of the 10,000 Crown Mnes shares. The name of Santamara was
wrtten n penc on the rght margn of the certfcate for the purpose of dentfcaton but the
certfcate remaned to be n the name of the Woo et a. frm ndorsed n bank.
When Santamara went to R| Campos to pay for the 10,000 shares, she was nformed that the
frm was no onger transactng busness and that the certfcate was wth HSBC. It appears that R| et
a. had an opened an overdraft account wth the bank and pedged to the bank the certfcate among
others.
Santamara then went to HSBC to cam the certfcate but was tod that the bank dd not
know about the transacton between her and R| Campos. Thereafter, Santamara fed an estafa case
aganst R| Campos et a. wheren the court rued n favor of Santamara. However, |udgment coud
not be enforced because the presdent became nsovent so Santamara then nsttuted the present
case acton aganst HSBC.
ISSUE:
Dd the tra court erroneousy fnd that HSBC was not chargeabe wth neggence n the transacton
whch gave rse to ths case? Dd the tra court err on hodng that t was the obgaton of the HSBC
to have nqured nto the ownershp of the certfcate when t receved t from R| Campos et a. and n
concudng that the bank was neggent for no havng done so?
HELD:
Santamara was neggent and thus abe for the consequences.
She dd not take any precauton to protect hersef aganst the possbe msuse of the shares.
She coud have asked for the canceaton of the certfcate and that another be ssued n her name
to apprse the hoder that she was the hoder.
Her faure to do ths amounted to cothng R| Campos et a. wth apparent tte and apparent
authorty to negotate t snce the certfcate s what s known as a street certfcate. Snce a street
certfcate s transferabe by mere devery, HSBC, who had no knowedge of the crcumstances, had
every rght to assume that R| Campos et a. was awfuy n possesson of the same.
HSBC was not obged to ook beyond the certfcate to ascertan the ownershp of the stock. A
stock certfcate ndorsed n bank s deemed quas-negotabe and as such, the transferee thereof s
|ustfed n beevng that t beongs to the hoder and transferor.
Even assumng that Santamara had reay approached the bank, ths woud merey show that
she has an adverse cam to the ownershp of the certfcate but ths woud not necessary pace the
bank n a poston to nqure as to the rea bass of her cam. A mere cam of ownershp does not
estabsh the fact of ownershp
NOTE: Ths case hed that a bona fde pedgee or transferee of a stock from the apparent owner s
not chargeabe wth knowedge of the mtatons paced on sad certfcates by the rea owner, or by
any secret agreement reatng to the use whch mght be made of the stock by the hoder. It further
hed that when a stock certfcate s ndorsed n bank t consttutes a street certfcate so that upon
ts face, the hoder s entted to demand ts transfer nto hs name from the ssung corporaton. In
ths case, Mrs. Santamaras neggence s the mmedate cause of the damage.
NEUGENE MARKETING INC. v CA
FACTS:
Chares Sy, Arseno Yang |r. and Lok Chun Suen, hoders of shares representng at east 2/3 of
the outstandng certfcates of stock, sent notce to the board of drectors and the sharehoders for a
speca meetng to consder the dssouton of Neugene. In that meetng, the dssouton was
approved. Thus, the SEC ssued a Certfcate of Dssouton.
Revsed Bagtas Revewer by Ve and Ocfe 2A
Leonco Tan, Ncanor Martn, Sonny Moreno, and |ohnson Lee brought an acton to annu
the SEC certfcate of dssouton and stated that they are the ma|orty sharehoders of Neugene
ownng 80% of the outstandng certfcate of stocks at the tme of the adopton and approva of the
resouton for dssouton.
They contend that, pror to the meetng, Sy et a. endorsed ther stock certfcates n bank
and devered the same to the UY famy, and that the Uy famy agreed to award the Neugene stock
certfcates to |ohnny Uy to sette famy squabbes; that |ohnny then authorzed |ohnson Lee to
dspose of the same and |ohnson Lee sod the sad shares of stock to Tan and Martn. Ths seres of
transacton s refected n the Stock and Transfer Book of Neugene.
They aso contend that Sy assgned 2,100 of hs 2,800 shares to Tan, and Yang assgned 350
of hs 1,050 to Tan as we. Furthermore, Lok Chun Suen ceased to be a Sharehoder before the
meetng.
Therefore, Sy, Yang and Lok coud not have vady vote for the dssouton of Neugene, and
that the meetng dd not there fore represent a quorum and thus was nu and vod.
Sy, Yang and Lok, on the other hand, aege that the aforesad assgnments were smuated
and frauduenty effected and that the stocks were stoen by |ohnny Uy.
ISSUE: Whether or not Sy, Yang and Lok acked the requste number of shares of stocks or had they
dvested themseves of ther stockhodngs when they voted for the resouton dssovng Neugene
HELD:
The Supreme court hed n favor of Sy, Yang and Lok.
The certfcates were ndeed stoen and therefore not vady transferred to Tan et a. The
entres n the Stock and Transfer Book were aso frauduenty recorded. The records revea that the
reatonshp between the stockhoders of Neugene and the Uy famy; they had an understandng that
the benefca ownershp woud reman wth the Uy Famy, such that sub|ect of shares of stocks were
mmedatey upon ssuance, endorsed n bank by the stockhoders and entrusted to the Uy famy
through Ban Ha Chua, for Safekeepng.
As nomnees of the Uys, the approva of Sy, Yang and Lok was necessary for the vadty
and effectvty of the transfers of stock certfcates regstered under ther names. In ths case, not
ony dd the transfers of the stock certfcates ack the requste approva, Sy, Yang and Lok
categorcay decared under oath that the sad certfcates were stoen from the confdenta vaut of
the UYs and egay transferred to the names of Tan et a. n the Stock and Transfer book of
Neugene
NOTE: The SC sad that when the certfcates of stock have been ndorsed n bank for purposes of
showng the nomnee reatons, the eventua devery and regstraton of the shares n voaton of the
trust reatonshp and after ther havng been stoen, woud be vod, even when such transfers have
been regstered n the stock and transfer book
NOTE: No neggence was found to have actuated the acts of the regstered owners. The proper
corporate offcers were aware of the bank endorsement of the certfcates and therefore were
ad|udged to have acted n bad fath n assgnng the certfcates to other partes and n recordng the
transfers n the stock and transfer book. Snce the certfcates were endorsed n bank and devered
for safekeepng and not n the process f negotaton, t was essenta that the benefca owners must
gve ther approva for the transfer of the certfcates for such transfers to be vad and effectve.
:. STOCK AND TRANS4ER BOOK (Secs. 63, 72 and 74; a0ua Cun v. Summers, 44 Ph. 704 |1923|;
a.onserra v. Ceran, 58 Ph. 469 |1933|; aChua Guan v. Samahang .agsasa$a, Inc., 62 Ph.
472 |1935|; a5son v. (iosomio, 61 Ph. 535 |1935|; a&sca6o v. 0ili+inas .ining Cor+oraion,
74 Ph. 71 |1944|; aBachrach .oors v. Lacson7Le-esma, 64 Ph. 681 |1937|; a#ava v. Peers
.ar$eing Cor+., 74 SCRA 65 |1976|).
Secton 63. Certfcate of stock and transfer of shares. - The capta stock of stock corporatons sha
be dvded nto shares for whch certfcates sgned by the presdent or vce presdent, countersgned
by the secretary or assstant secretary, and seaed wth the sea of the corporaton sha be ssued n
15
1
accordance wth the by-aws. Shares of stock so ssued are persona property and may be transferred
by devery of the certfcate or certfcates ndorsed by the owner or hs attorney-n-fact or other
person egay authorzed to make the transfer. No transfer, however, sha be vad, except as
between the partes, unt the transfer s recorded n the books of the corporaton showng the names
of the partes to the transacton, the date of the transfer, the number of the certfcate or certfcates
and the number of shares transferred.
No shares of stock aganst whch the corporaton hods any unpad cam sha be transferabe n the
books of the corporaton.
Secton 72. Rghts of unpad shares. - Hoders of subscrbed shares not fuy pad whch are not
denquent sha have a the rghts of a stockhoder.
Secton 74. Books to be kept; stock transfer agent. - Every corporaton sha keep and carefuy
preserve at ts prncpa offce a record of a busness transactons and mnutes of a meetngs of
stockhoders or members, or of the board of drectors or trustees, n whch sha be set forth n deta
the tme and pace of hodng the meetng, how authorzed, the notce gven, whether the meetng
was reguar or speca, f speca ts ob|ect, those present and absent, and every act done or ordered
done at the meetng. Upon the demand of any drector, trustee, stockhoder or member, the tme
when any drector, trustee, stockhoder or member entered or eft the meetng must be noted n the
mnutes; and on a smar demand, the yeas and nays must be taken on any moton or proposton,
and a record thereof carefuy made. The protest of any drector, trustee, stockhoder or member on
any acton or proposed acton must be recorded n fu on hs demand.
The records of a busness transactons of the corporaton and the mnutes of any meetngs sha be
open to nspecton by any drector, trustee, stockhoder or member of the corporaton at reasonabe
hours on busness days and he may demand, n wrtng, for a copy of excerpts from sad records or
mnutes, at hs expense.
Any offcer or agent of the corporaton who sha refuse to aow any drector, trustees, stockhoder or
member of the corporaton to examne and copy excerpts from ts records or mnutes, n accordance
wth the provsons of ths Code, sha be abe to such drector, trustee, stockhoder or member for
damages, and n addton, sha be guty of an offense whch sha be punshabe under Secton 144
of ths Code: Provded, That f such refusa s made pursuant to a resouton or order of the board of
drectors or trustees, the abty under ths secton for such acton sha be mposed upon the
drectors or trustees who voted for such refusa: and Provded, further, That t sha be a defense to
any acton under ths secton that the person demandng to examne and copy excerpts from the
corporaton's records and mnutes has mpropery used any nformaton secured through any pror
examnaton of the records or mnutes of such corporaton or of any other corporaton, or was not
actng n good fath or for a egtmate purpose n makng hs demand.
Stock corporatons must aso keep a book to be known as the "stock and transfer book", n whch
must be kept a record of a stocks n the names of the stockhoders aphabetcay arranged; the
nstaments pad and unpad on a stock for whch subscrpton has been made, and the date of
payment of any nstament; a statement of every aenaton, sae or transfer of stock made, the date
thereof, and by and to whom made; and such other entres as the by-aws may prescrbe. The stock
and transfer book sha be kept n the prncpa offce of the corporaton or n the offce of ts stock
transfer agent and sha be open for nspecton by any drector or stockhoder of the corporaton at
reasonabe hours on busness days.
No stock transfer agent or one engaged prncpay n the busness of regsterng transfers of stocks
n behaf of a stock corporaton sha be aowed to operate n the Phppnes uness he secures a
cense from the Securtes and Exchange Commsson and pays a fee as may be fxed by the
Commsson, whch sha be renewabe annuay: Provded, That a stock corporaton s not precuded
from performng or makng transfer of ts own stocks, n whch case a the rues and reguatons
mposed on stock transfer agents, except the payment of a cense fee heren provded, sha be
appcabe.
FUA CUN v SUMMERS
Revsed Bagtas Revewer by Ve and Ocfe 2A
FACTS:
Chua Soco subscrbed 500 shares of capta stock of the Chna Bankng Corp at par vaue of
P100/ share, payng the sum of P25k, or haf of the subscrpton prce and was ssued a recept. Later
Chua Soco ssued a PN n favor of Fua Cun for P25k and secured t wth a chatte maortgage on the
shares of stock he former subscrbed. Chua Soco ndorsed the recept and devered t wth the
mortgage.
Subsequenty, Fua Cun brought the recept to the manager of CBC and nformed the atter of
the transacton but Fua Cun was tod to wat for the acton of the board.
In the meantme, Chua Soco ncurred a debt of P37k wth CBC. CBC brought an acton aganst
Chua Soco resutng to the sezure of hs nterest n the 500 shares and attachment of the recept.
Fua Cun brought an acton prayng that hs en on the 250 shares, pad for and thereby
owned by Chua Soco be decared to hod prorty over the cam of CBC.
ISSUE: Who has the better rght?
HELD:
The Sc hed n favor of Fua Cun.
There can be no doubt that an equty n shares of stock may be assgned and that the
assgnment s vad as between the partes and as to persons to whom notce s brought. The
assgnment made by Chua Soco n favor of Fua Cun was vad; even though t was made was made
for the purpose of securng a debt. The endorsement of the recept to Fua Cun was accompaned by
devery and further strengthened by the executon of the chatte mortgage; whch, at east, operated
as a condtona equtabe assgnment.
As aganst the rghts of Fua Cun, CBC had no en uness by vrtue of the attachment. But the
attachment was eved after the bank had receved notce of the assgnment of Chua Socos nterests
to Fua Cun and was therefore sub|ect to the rghts of the atter. It foows that as aganst these rght,
CBC hods no en whatsoever.
NOTE: Fua Cun s not actuay covered by Sec 63 snce t nvoved pedge of shares wthout
certfcates.
NOTE: Haf pad shares do not mean that they are haf-ssued, once t s pad or even subscrbed to, t
sha be deemed ssued to the stockhoder. Whe t s haf-pad or not even haf-pad, the same s
aready consdered as fuy owned by the stockhoder and as a coroary for such, the stockhoder has
fu-domnon over the shares of stock and not the corporaton. It s |ust that the certfcate of stock
sha be ssued upon fu payment of the stockhoder of the vaue of the shares he subscrbed to. But
nsofar as ownershp s concerned, the shares of stock sha be deemed owned by the sharehoder
upon ssuance.
MONSERRAT v CERAN
FACTS:
Enrque Monserrat was the presdent and manager of the Mana Yeow Taxcab Co., Inc. and
the owner of 1,200 shares of stock. In consderaton for the fnanca ad extended to hm by Caros
G. Ceron, Monserrat assgned to the former the usufruct of of hs shares. Sad assgnment ony
gave the transferee the rght to en|oy, durng hs fetme the profts, and n no way can he dspose of
the sad shares. Thus, Stock certfcate no. 7 was ssued n the name of Ceron. Thereafter, the
transfer was recorded on the Stock and Transfer book of the corp wheren the annotaton was ater
added.
Ceron thereafter mortgaged some shares of stocks to Eduardo Matute, presdent of Erma
corp., ncudng the 600 shares of stocks earer mentoned. Ceron endorsed to Matute the certfcate
of stock, when Ceron mortgaged the stocks, he dd not nform Matute of the annotaton.
ISSUE:
Whether or not t s necessary to enter upon the books of the corporaton a mortgage
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consttuted on common shares of stock n order that such mortgage may be vad and may have
force and effect as aganst thrd persons.
HELD:
The SC hed that Sec. 35 of the Corp Law does not requre any entry except of transfers of
shares of stock n order that such transfers may be vad as aganst thrd persons.
The transfer contempated n the Corp Law does not ncude a mortgage snce what the word
transfer means n Sec. 35 s an absoute conveyance of the ownershp of the tte to a share.
CHUA GUAN V. SAMAHANG MAGSASAKA, INC.
FACTS:
Gonzao Co Toco was the owner of 5,894 shares of the capa stock of Samahang Magsasaka,
Inc. He mortgaged sad shares to Chua Chu. Sad certfcate of stocks were devered wth the
mortgage to the mortgagee, Chua Chu. The sad mortgage was duy regstered n the regster of
Deeds, Ma. And n the offce of sad corporaton.
When Co Toco defauted, Chua Chu surrendered the certfcate of stocks to the sherff for
pubc aucton wheren Chua gave the hghest bd. After payment, pantff went to the offce of the
corp. to have the certfcates ssued n hs name. Defendants refused. Such refusa prompted
pantff to fe a case for mandamus.
Defendant corp. refuses to transfer ownershp because accordng to ther books sad stock
certfcates had nne attachments noted and that pantff ob|ected to the annotaton of sad
attachments to the new stock certfcates they woud ssue pantff. It must be noted that the frst 8
attachments were served to the corporaton before notce was served to the corporaton regardng
Chuas mortgage agreement wth Co Toco.
ISSUE:
Whether sad mortgage takes prorty over the sad wrts of attachments.
HELD:
In order to answer ths queston, we must frst answer the queston whether the regstraton of
the mortgage n the regster of deeds woud amount to constructve notce wth regards to the
mortgage?
Apparenty, the answer s NO. The SC hed that the sad attachng credtors have
prorty over the defectvey regstered mortgage. It s to be noted that Sec. 35 of the Corp. Law
enacts that shares of stock may be transferred by devery of the certfcate endorsed by the owner.
The use of the verb may does not excude the possbty that a transfer may be made n a dfferent
manner, thus eavng the credtor n an nsecure poston eenthough he has the certfcate n
possesson. Moreover, the shares st standng n the name of the debtor on the books of the
corporaton w be abe to sezure by attachment or evy on executon at the nstance of other
credtors.
Loans and stock securtes must be factated n order to foster economc deveopment. The
transfer by endorsement and devery of certfcate wth ntenton to pedge the shares covered
thereby shoud be suffcent to gve ega effect to that ntenton and to consummate the |urstc act
wthout necessty for regstraton.
USON V. DIOSOMITO
Torba Uson attached the shares of stocks owned by Vcente Dosomto, whch was gven by the
atter as securty for a oan obtaned from Uson. However, t was ater on found out that the same
shares were sod to |oye even before the attachment. But the probem s, the sae was not
Revsed Bagtas Revewer by Ve and Ocfe 2A
regstered n the stock and transfer book of the corporaton. The same was ony brought to the
attenton of the corporaton after nne months when the attachment was eved. The Court rued that
the attachment s to take precedence over the sae, and the same sha be respected.
NOTE: Why are we studyng Uson? Pror to the rung n Uson, regstraton merey meant notce to the
corporaton. The same has nothng to do wth the vadty or nvadty of the transacton. As such
actua knowedge > regstraton. However, Uson teaches us that regstraton accords vadty or
nvadty to the transfer. If the same s not regstered, the transacton s vod as to the fact of those
who have no notce and t s aso vod as to the transacton tsef. Does Uson then overturn Fua Cun
when t says that actua knowedge cannot defeat regstraton? No, what Uson says s that when the
corporaton s party to the transacton and t accepts the notce duy gven to t, then t bnds the
corporaton, even n the transfer of ownershp; most especay f the corporaton aready recognzed
the transferee as the owner. Wth the atter stuaton, the corporaton can no onger assert non-
regstraton. However, when the corporaton s not a party to the transacton, then the corporaton
cannot be bound by the notce. (I thnk the notce pertaned to here s the sae of the shares of stock
to |oye and not the attachment of Uson.)
ESCANO V. FILIPINAS MINING CORPORATION
FACTS:
Antono Escao obtaned |udgment n the CFI of Mana aganst Svero Savosa whereby the
Savosa was ordered to transfer and dever to the former 116 actve shares and an undetermned
number of shares n escrow of the Fpnas Mnng Corporaton (FMC) and to pay damages, wth the
provso that the escrow shares sha be transferred and devered to the pantff ony after they sha
have been reeased by the company. A wrt of garnshment was served by the sherff of Mana upon
the FMC to satsfy the sad |udgment. FMC then advsed the sherff of Mana that accordng to ts
books the |udgment debtor Svero Savosa was the regstered owner of 1,000 actve shares and
about 21,338 unssued shares hed n escrow by the sad corporaton. The sherff sod the 1,000
actve shares at pubc aucton, reazng therefrom ony the sum of P10, whch was apped n parta
satsfacton of the |udgment for damages.
The present case, whch was nsttuted by Antono Escao aganst the FMC and the Standard
Investment of the Phppnes (SIP), reates to the escrow shares nvoved n the garnshment
preceedng. In the orgna case, Savosa sod to |ose P. Bengson a hs rght, tte, and nterest n
and 18.580 shares of stock of the FMC hed n escrow whch the sad Savosa was entted to receve,
and whch Bengzon n turn subsequenty sod and transferred to SIP. Nether Savosa's sae to
Bengzon nor Bengzon's sae to the SIP was notfed to and recorded n the books of the FMC for more
than three years after the escrow shares n queston were attached by garnshment served on the
FMC. FMC then ssued n favor of the SIP certfcate of stock for the 18,580 shares formery hed n
escrow by Savosa and whch had been camed adversey by Escao on the one hand and the SIP.
The TC rued that snce the transfer of the escrow shares n queston from Savosa to Bengzon
and from Bengzon to the SIP, were not recorded n the books of the corporaton as requred by
secton 35 of the Corporaton Law, these coud not preva over the garnshment prevousy made by
Escao of the sad shares. SIP appeaed to the SC.
ISSUE:
WON secton 35 of the Corporaton Law, whch requres the regstraton of transfers of shares
of stock upon the books of the corporaton as a condton precedent to ther vadty aganst the
corporaton and thrd partes, s aso appcabe to unssued shares hed by the corporaton n escrow?
(YES)
HELD:
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Yes, t s appcabe.
Detas of the Appea to the SC:
o SIP sad: secton 35 of Act 1459 and the doctrne ad down n the case of Uson vs. Dosomto
were not appcabe to the case at bar.
o SC sad: It s admtted that under ths ega provson and the decson of SC n Uson vs.
Dosomto, the transfer of duy ssued shares of stock s not vad as aganst thrd partes and
the corporaton unt t s noted upon the books of the corporaton. Snce the sae, transfer, or
assgnment of unssued shares of stock hed n escrow s not specfcay provded for by aw,
the queston has to be resoved by resortng to anaogy. The SC hed that the reason of the
aw for requrng the recordng upon the books of the corporaton of transfers of shares of
stock as a condton precedent to ther vadty aganst the corporaton and thrd partes s aso
appcabe to unssued shares hed n escrow. These are as foows: (1) to enabe the
corporaton to know at a tmes who ts actua stockhoders are, because mutua rghts and
obgatons exst between the corporaton and ts stockhoders; (2) to afford to the corporaton
an opportunty to ob|ect or refuse ts consent to the transfer n case t has any cam aganst
the stock sought to be transferred, or for any other vad reason; and (3) to avod fcttous or
frauduent transfers. In both cases the corporaton s entted to know who the actua owners
of the shares are, and to ob|ect to the transfer upon any vad ground. Lkewse, n both cases
the possbty of fcttous or frauduent transfers exsts.
o SIP sad: the transfer of unssued shares shoud be exempted form recordng because n case
of unssued shares there s no certfcate number to be recorded.
o SC sad: the ack of such deta does not make t mpossbe to record the transfer upon the
books of the corporaton so as to show the names of the partes to the transacton, the date of
the transfer, and the number of shares transferred, whch are the most essenta data.
NAVA V. PEERS MARKETING CORP
FACTS:
Teofo Po as an ncorporator, subscrbed to 80 shares of Peers Marketng Corporaton (PMC).
Po pad 25 % of the amount of hs subscrpton. No certfcate of stock was ssued to hm or, for that
matter, to any ncorporator, subscrber or stockhoder. Po sod to Rcardo A. Nava 20 of hs 80 shares.
In the deed of sae Po represented that he was "the absoute and regstered owner of twenty shares"
of PMC.
Nava requested the offcers of the corporaton to regster the sae n the books of the
corporaton. The request was dened because Po has not pad fuy the amount of hs subscrpton.
Nava was nformed that Po was denquent n the payment of the baance due on hs subscrpton and
that the corporaton had a cam on hs entre subscrpton of 80 shares, whch ncuded the 20 shares
that had been sod to Nava.
Nava fed ths mandamus acton n the CFI of Negros Occdenta to compe the corporaton
and Renato R. Cus and Amparo Cus, ts executve vce-presdent and secretary, respectvey, to
regster the sad 20 shares n Nava's name n the corporaton's transfer book. The respondents n
ther answer peaded the defense that no shares of stock aganst whch the corporaton hods an
unpad cam are transferabe n the books of the corporaton.
After hearng, the TC dsmssed the petton. Nava appeaed on the ground that the tra court
erred n appyng the rung n Fua Con vs. Summers and Chna Bankng Corporaton, to |ustfy
respondents' refusa n regsterng the 20 shares n Nava's name n the books of the corporaton. The
rue enuncated n the Fua Cun case s that payment of one-haf of the subscrpton does not entte
the subscrber to a certfcate of stock for one-haf of the number of shares subscrbed.
ISSUE:
WON the offcers of PMC can be compeed by mandamus to enter n ts stock and transfer
book the sae made by Po to Nava of the 20 shares formng part of Po's subscrpton of 80 shares, t
beng admtted that the corporaton has an unpad cam of P6,000 as the baance due on Po's
subscrpton and that the twenty shares are not covered by any stock certfcate? (NO)
Revsed Bagtas Revewer by Ve and Ocfe 2A
HELD:
No. The SC affrmed the decson of the TC dsmssng the petton for mandamus. The SC hed
that the transfer made by Po to Nava s not the "aenaton, sae, or transfer of stock" that s
supposed to be recorded n the stock and transfer book, as contempated n secton 52 of the
Corporaton Law.
As a rue, the shares whch may be aenated are those whch are covered by certfcates of
stock. As prescrbed n secton 35, share of stock may be transferred by devery to the transferee of
the certfcate propery ndorsed. "Tte may be vested n the transferee by devery of the certfcate
wth a wrtten assgnment or endorsement thereof". There shoud be compance wth the mode of
transfer prescrbed by aw.
The usua practce s for the stockhoder to sgn the form on the back of the stock certfcate.
The certfcate may thereafter be transferred from one person to another. If the hoder of the
certfcate desres to assume the ega rghts of a sharehoder to enabe hm to vote at corporate
eectons and to receve dvdends, he fs up the banks n the form by nsertng hs own name as
transferee. Then he devers the certfcate to the secretary of the corporaton so that the transfer
may be entered n the corporaton's books. The certfcate s then surrendered and a new one ssued
to the transferee.
That procedure cannot be foowed n the nstant case because the 20 shares n queston are
not covered by any certfcate of stock n Po's name. Moreover, the corporaton has a cam on the
sad shares for the unpad baance of Po's subscrpton. A stock subscrpton s a subsstng abty
from the tme the subscrpton s made. The subscrber s as much bound to pay hs subscrpton, as
he woud be to pay any other debt. The rght of the corporaton to demand payment s no ess
ncontestabe.
A corporaton cannot reease an orgna subscrber from payng for hs shares wthout a
vauabe consderaton or wthout the unanmous consent of the stockhoders. Based on the facts of
ths case, there s no cear ega duty on the part of the offcers of the corporaton to regster the 20
shares n Nava's name. Hence, there s no cause of acton for mandamus.
NOTE: Summary of rues that appy to the dfferent type of dspostons: ULTIMATE RULE He who s
frst n tme and compes wth the requrement for such dsposton sha be frst n rght. (1) SALE -
must be regstered n the stock and transfer book of the corporaton (2) MORTGAGE - doube
regstraton, regster n the Regster of Deeds of the pace where the head offce of the corporaton s
ocated and n the Regster of Deeds of the pace where the stockhoder ves (3) ATTACHMENT -
upon notce to the corporaton. A of these must be done n good fath.
%a$ -alidity of ,ransfers' Under Sec. 63 of Corporaton Code, the sae of stocks sha not be
recognzed as vad uness regstered n the books of the corporaton nsofar as thrd
persons, ncudng the corporaton, are concerned-as between the partes to the sae, the
transfer sha be vad even f not recorded n the books of the corporaton. Baangas
Laguna Tayabas Bus Co. v. Bianga, 362 SCRA 635 (2001).
A transferee has no rght to ntervene as a stockhoder n corporate ssue on the
strength of the transfer of shares aegedy executed by a regstered stockhoder. It s
expct under Sec. 63 that the transfer must be regstered to affect the corporaton and
thrd persons. .agsaysay7Labra-or v. C), 180 SCRA 266 (1989).
The purpose of regstraton s two-fod: to enabe the transferee to exercse a the
rghts of a stockhoder, ncudng the rght to vote and to be voted for, and to nform the
corporaton of any change n share ownershp so that t can ascertan the persons entted
to the rghts and sub|ect to the abtes of a stockhoder. Unt chaenged n a proper
proceedng, a stockhoder of record has a rght to partcpate n any meetng; hs vote can
be propery counted to determne whether a stockhoders resouton was approved,
despte the cam of the aeged transferee. On the other hand, a person who has
purchased stock, and who desres to be recognzed as a stockhoder for the purpose of
votng, must secure such a standng by havng the transfer recorded on the corporate
books. Unt the transfer s regstered, the transferee s not a stockhoder but an outsder.
Baangas Laguna Tayabas Bus Com+any, Inc. v. Bianga, 362 SCRA 635 (2001).
A bona fi-e transfer of shares, not regstered n the corporate books, s not vad as
15
7
aganst a subsequent awfu attachment of sad shares, regardess of whether the
attachng credtor had actua notce of sad transfer or not. A transfers not so entered on
the books of the corporaton are absoutey vod; not because they are wthout notce or
frauduent n aw or fact, but because they are made so vod by statute. Garcia v.
3omoua-, 323 SCRA 424 (2000).
Pursuant to Sec. 63, a transfer of shares of stock not recorded n the stock and transfer
book s non-exstent as far as the corporaton s concerned. As between the corporaton on
the one hand, and ts sharehoders and thrd persons on the other, the corporaton ooks
ony nto ts books for the purpose of determnng who ts sharehoders are. Ponce v.
)lsons Cemen Cor+., 393 SCRA 602 (2002).
%!$ Who "ay "a.e /ntries' Entres made on the stock and transfer book by any person
other than the corporate secretary, such as those made by the Presdent and Charman,
cannot be gven any vad effect. Torres, 3r. v. Cour of )++eals, 278 SCRA 793 (1997)
%"$ Attachments' Attachments of shares of stock are not ncuded n the term "transfer" as
provded n Sec. 63 of Corporaton Code. Both the Revsed Rues of Court and the
Corporaton Code do not requre annotaton n the corporatons stock and transfer books
for the attachment of shares to be vad and bndng on the corporaton and thrd partes.
Chem+hil &'+or * Im+or Cor+. v. C), 251 SCRA 257 (1995).
%d$ "eaning of 0*npaid Claims1' "Unpad cams" under Sec. 63 refers to any unpad
subscrpton, and not to any ndebtedness whch a stockhoder may owe the corporaton
arsng from any other transactons, ke unpad monthy dues. China Ban$ing Cor+. v. C),
270 SCRA 503 (1997)
%e$ /%uitable "ortgage Assignment' It seems that the assgnment of votng shares as
securty for a oan operates to gve the assgnee not ony the rght to vote on the shares,
but woud aso treat the assgnee as the owner of the shares (not |ust an equtabe
mortgage): "It s true that the assgnment was predcated on the ntenton that t woud
serve as securty vis787vis DBPs fnanca accommodaton extended to P|I, but t was a
vad and duy executed assgnment, sub|ect to a resoutory condton, whch was the
settement of P|Is oan obgaton wth DBP." )PT v. San-iganbayan, 341 SCRA 551, 560
(2000).
;. Sits o0 Shares o0 Sto"-s (Sec. 55)
Secton 55. Rght to vote of pedgors, mortgagors, and admnstrators. - In case of pedged or
mortgaged shares n stock corporatons, the pedgor or mortgagor sha have the rght to attend and
vote at meetngs of stockhoders, uness the pedgee or mortgagee s expressy gven by the pedgor
or mortgagor such rght n wrtng whch s recorded on the approprate corporate books.
Executors, admnstrators, recevers, and other ega representatves duy apponted by the court
may attend and vote n behaf of the stockhoders or members wthout need of any wrtten proxy.
NOTE: stus of shares s the domce of the corporaton whe the stus of the certfcate of stock s the
domce of the person.
Stus of shares of stock s the domce of the corporaton to whch they pertan to.
9ells 0argo Ban$ an- 5nion v. Collecor, 70 Ph. 325 (1940); Tayag v. Bengue Consoli-ae-,
Inc., 26 SCRA 242 (1968); cf. Per$ins v. (izon, 69 Ph. 186 (1939).
Revsed Bagtas Revewer by Ve and Ocfe 2A
XII. RI6HTS O4 STOCKHOLDERS AND MEMBERS
1. ,hat Does <Share= Represe#t>
Whe shares of stock consttute persona property, they do not represent property of the
corporaton |i.e., they are propertes of the stockhoders who own them|. A share of stock ony
typfes an aquot part of the corporatons property, or the rght to share n ts proceeds to
that extent %hen -isribue- accor-ing o la% an- e:uiy, but the hoder s not the owner of
any part of the capta |propertes| of the corporaton, nor s he entted to the possesson of
any defnte porton of ts assets. The stockhoder s not a co-owner of corporate property.
Soc$hol-ers of 0. Guanson an- Sons, Inc. v. ,egiser of (ee-s of .anila, 6 SCRA 373 (1962).
The regstraton of shares n a stockhoders name, the ssuance of stock certfcates, and
the rght to receve dvdends whch pertan to the shares are a rghts that fow from
ownershp. Lim Tay v. Cour of )++eals, 293 SCRA 634 (1998); TCL Sales Cor+. v. Cour of
)++eals, 349 SCRA 35 (2001).
2. Ri*ht to Certi0i"ate o0 Sto"- 0or 4ll) (aid Shares (Sec. 64; Tan v. S&C, 206 SCRA 740
|1992|)
Secton 64. Issuance of stock certfcates. - No certfcate of stock sha be ssued to a subscrber unt
the fu amount of hs subscrpton together wth nterest and expenses (n case of denquent
shares), f any s due, has been pad.
&. (ree/pti'e Ri*hts (Sec. 39; (au Tagoranao Benio v. S&C, 123 SCRA 722 |1983|; (ee v.
S&C, 199 SCRA 238 |1991|).
Secton 39. Power to deny pre-emptve rght. - A stockhoders of a stock corporaton sha en|oy pre-
emptve rght to subscrbe to a ssues or dsposton of shares of any cass, n proporton to ther
respectve sharehodngs, uness such rght s dened by the artces of ncorporaton or an
amendment thereto: Provded, That such pre-emptve rght sha not extend to shares to be ssued n
compance wth aws requrng stock offerngs or mnmum stock ownershp by the pubc; or to
shares to be ssued n good fath wth the approva of the stockhoders representng two-thrds (2/3)
of the outstandng capta stock, n exchange for property needed for corporate purposes or n
payment of a prevousy contracted debt.
NOTE: Dstncton between rght of frst refusa - The rght of frst refusa arses ony by vrtue of
contractua stpuatons, n whch case the rght s construed strcty aganst the rght of persons to
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dspose or dea wth ther property. Pre-emptve rght on the other hand s a common aw rght and
pertans to unssued stocks and to re-ssuance of treasury shares, whe the former to ssued stocks.
NOTE: Pre-emptve rght refers to the common aw rght granted to the stockhoder of a corporaton
to be granted the frst opton to subscrbe the openng of the unssued capta stock or to any
ncrease, so as to protect hs proportonate nterest n the corporaton.
+. Ri*ht to Tra#s0er o0 Shareholdi#*s (Sec. 63)
Secton 63. Cerificae of soc$ an- ransfer of shares. - The capta stock of stock corporatons sha
be dvded nto shares for whch certfcates sgned by the presdent or vce presdent, countersgned
by the secretary or assstant secretary, and seaed wth the sea of the corporaton sha be ssued n
accordance wth the by-aws. Shares of stock so ssued are persona property and may be transferred
by devery of the certfcate or certfcates ndorsed by the owner or hs attorney-n-fact or other
person egay authorzed to make the transfer. No transfer, however, sha be vad, except as
between the partes, unt the transfer s recorded n the books of the corporaton showng the names
of the partes to the transacton, the date of the transfer, the number of the certfcate or certfcates
and the number of shares transferred.
No shares of stock aganst whch the corporaton hods any unpad cam sha be transferabe n the
books of the corporaton.
a$ &on-transferability of "embership (Secs. 90 and 91).
Secton 90. Non-transferabty of membershp. - Membershp n a non-stock corporaton and a rghts
arsng therefrom are persona and non-transferabe, uness the artces of ncorporaton or the by-
aws otherwse provde.
Secton 91. Termnaton of membershp. - Membershp sha be termnated n the manner and for the
causes provded n the artces of ncorporaton or the by-aws. Termnaton of membershp sha have
the effect of extngushng a rghts of a member n the corporaton or n ts property, uness
otherwse provded n the artces of ncorporaton or the by-aws.
%!$ Restriction on ,ransfers' aLamber v. 0o', 26 Ph. 588 (1914).
LAMBERT v FOX
Ths s an acton brought to recover a penaty prescrbed n a contract as punshment for the
breach thereof.
Eary n 1911 the frm known as |ohn R. Edgar & Co., engaged n the reta book and statonery
busness, found tsef n such condton fnancay that ts credtors, ncudng the pantff and the
defendant, together wth many others, agreed to take over the busness, ncorporate t and accept
stock theren n payment of ther respectve credts. Ths was done, the pantff and the defendant
becomng the two argest stockhoders n the new corporaton caed |ohn R. Edgar & Co.,
Incorporated. A few days after the ncorporaton was competed pantff and defendant entered nto
an agreement statng that:
"Therefore, the undersgned mutuay and recprocay agree not to se, transfer, or
otherwse dspose of any part of ther present hodngs of stock n sad |ohn R. Edgar & Co.,
Inc., t after one year from the date hereof."
Notwthstandng ths contract the defendant Fox sod hs stock n the sad corporaton to E. C.
McCuough of the frm of E. C. McCuough & Co. of Mana, a strong compettor of the sad |ohn,R.
Edgar & Co., Inc. Ths sae was made by the defendant aganst the protest of the pantff and wth
the warnng that he woud be hed abe under the contract herenabove set forth and n accordance
wth ts terms.
The earned TC decded the case n favor of the defendant upon the ground that the ntenton
of the partes as t appeared from the contract n queston was to the effect that the agreement
shoud be good and contnue ony unt the corporaton reached a sound fnanca bass, and that that
event havng occurred some tme before the expraton of the year mentoned n the contract, the
Revsed Bagtas Revewer by Ve and Ocfe 2A
purpose for whch the contract was made had been fufed and the defendant accordngy
dscharged of hs obgaton thereunder. The compant was dsmssed upon the merts. Lambert
appeaed urgng that the TC erred n ts constructon of the contract.
ISS5E9
WON Fox can se hs stocks before the perod stated n the agreement expres? (NO)
HELD9
No, Fox cannot se hs stocks. The ntenton of partes to a contract must be determned, n
the frst nstance, from the words of the contract tsef. It s to be presumed that persons mean what
they say when they speak pan Engsh. Interpretaton and constructon shoud be the nstruments
ast resorted to by a court n determnng what the partes agreed to. Where the anguage used by
the partes s pan, then constructon and nterpretaton are unnecessary and, f used, resut n
makng a contract for the partes.
In the case at bar the partes expressy stpuated that the contract shoud ast one year. No reason s
shown for sayng that t sha ast ony nne months. Whatever the ob|ect was n specfyng the year,
t was ther agreement that the contract shoud ast a year and t was ther |udgment and convcton
that ther purposes woud not be subserved n any ess tme.
Note that Fox sad, that the stpuaton n the contract suspendng the power to se the stock referred
to theren s an ega stpuaton, s n restrant of trade and, therefore, offends pubc pocy.
However, the SC sad that where the suspenson of the rght to se stock n a corporaton has a
benefca purpose and resuts n the protecton of the corporaton as we as of the ndvdua partes
to the contract and s reasonabe as to tme, the suspenson s ega.
The |udgment s reversed.
- Right of Refusal9 aPa-ge v. Babcoc$ * Tem+leon, Inc., 59 Ph. 232 (1933).
PADGETT v BABCOCK & TEMPLETON, INC
FACTS:
Padget was an empoyee of Babcock and Tempeton Inc. from 1923-1929. Padget bought 35 shares
of the corp. at P100 at the suggeston of the Presdent of the corp. Padget was aso a recpent of 9
shares by bonus gven durng the Chrstmas season. Hence, he was the owner of a tota of 44 shares,
wth the abe "non-transferabe" on each and every certfcate.
Before severng hs tes wth wth the corp. he offered the corp. to buy back hs shares at par vaue or
se t to another person.
The Presdent barganed for P85 then P80 but Padget dd not agree wth the prce.
ISSUE:
Was the abeng of "non-transferabe" on each certfcate vad? NO
HELD:
The court hed that the notaton shoud be consdered nu and vod because such s a mtaton on
the rght of ownershp and a restrant on trade. Hence, the SC rued that the abe "non-transferabe"
s vod.
Secton 63 contempates no restrcton as to whom the stocks may be transferred. It
does not suggest that any dscrmnaton may be created by the corporaton n favor of,
or aganst a certan purchaser. The owner of shares, as owner of persona property, s at
berty, under sad secton to dspose them n favor of whomever he peases, wthout
mtaton n ths respect, than the genera provsons of aw. a0leishcher v. Boica
#olasco, 47 Ph. 583 (1925).
FLEISHCHER v BOTICA NOLASCO
FACTS:
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Fescher bought from Gonzaes 5 shares of stock n Botca Noasco Inc. Gonzaes ndorsed the sad
transacton to the corp. but the corp. refuse- o regiser the shares of stock n the name of Fescher.
The corp. nvoked ts by-aws whch stated that they had the preferenta opton to buy the shares of
stock at P100.
ISSUE:
Was the by-aw provson vad? NO
HELD:
The SC hed that athough a corporaton s granted by aw to formuate ts own by-aws, the same
sha reman vad and bndng as ong as t does not confct the Corporaton Code. Snce, the Code
provdes that shares of stock may be transferred from one person to another by vrtue of a vad
transacton, there sha be no restrcton to trade or unreasonabe mtaton on ownershp.
Moreover, a by-aw provson may not bnd an nnocent thrd person.
Therefore, the by-aw provson s nvad because t s not n consonance wth the aw.
The ony mtaton mposed by Sec. 63 s when the corporaton hods any unpad
cam aganst the shares ntended to be transferred. A corporaton, ether by ts board,
ts by-aws, or the act of ts offcers, cannot create restrctons n stock transfers,
because "Restrctons n the traffc of stock must have ther source n egsatve
enactment, as the corporaton tsef cannot create such mpedment. By-aws are
ntended merey for the protecton of the corporaton, and prescrbe reaton, not
restrcton; they are aways sub|ect to the charter of the corporaton." ,ural Ban$ of
Salinas v. C), 210 SCRA 510 (1992).
- Restraint of ,rade' An agreement by whch a person obges hmsef not to engage n
compettve trade for fve years s vad and reasonabe and not an undue or
unreasonabe restrant of trade and s obgatory on the partes who vountary enter
nto such agreement. x!llen-orf v. )brahamson, 38 Ph. 585 (1918).
NOTES:
The underyng test on whether the restrctons are vad s whether the restrcton s suffcenty
reasonabe as to |ustfy the restrcton overrdng the genera pocy aganst restrant on aenaton
of persona property. It must aso be mted to a certan tme and a certan pace.
SEC GUIDELINES: (1) the restrcton sha not be more onerous than grantng the exstng
stockhoders of the corporaton the opton to purchase the shares of the transferrng
stockhoders wth such reasonabe terms, condtons or perods stated (2) not vad - f t
absoutey prohbts the sae or transfer wthout the consent of the exstng stockhoders (3)
reasonabe opton perod may range from 30-60 days (4) after the opton perod has expres, the
stockhoder s free to se hs property to anyone.
%"$ Remedy If Registration Refused' aPonce v. )lsons Cemen Cor+., 393 SCRA 602.
PONCE v ALSONS CEMENT CORP.
FACTS:
On |anuary 25, 1996, Vcente C. Ponce, fed a compant wth the SEC for mandamus and damages
aganst Asons Cement Corporaton and ts corporate secretary Francsco M. Gron, |r. In hs
compant, pettoner aeged, among others, that:
x x x 5. The ate Fausto G. Gad was an ncorporator of Vctory Cement Corporaton (VCC),
havng subscrbed to and fuy pad 239,500 shares of sad corporaton.
6. On February 8, 1968, pantff and Fausto Gad executed a "Deed of Undertakng" and
"Indorsement" whereby the atter acknowedges that the former s the owner of sad shares
and he was therefore assgnng/endorsng the same to the pantff. A copy of the sad
deed/ndorsement s attached as Annex "A".
7. On Apr 10, 1968, VCC was renamed Foro Cement Corporaton (FCC for brevty).
8. On October 22, 1990, FCC was renamed Asons Cement Corporaton (ACC for brevty) as
Revsed Bagtas Revewer by Ve and Ocfe 2A
shown by the Amended Artces of Incorporaton of ACC, a copy of whch s attached as Annex
"B".
9. From the tme of ncorporaton of VCC up to the present, no certfcates of stock
correspondng to the 239,500 subscrbed and fuy pad shares of Gad were ssued n the
name of Fausto G. Gad and/or the pantff.
10. Despte repeated demands, the defendants refused and contnue to refuse wthout any
|ustfabe reason to ssue to pantff the certfcates of stocks correspondng to the 239,500
shares of Gad, n voaton of pantffs rght to secure the correspondng certfcate of stock n
hs name.
Attached to the compant was the Deed of Undertakng and Indorsement upon whch pettoner
based hs petton for mandamus.
DEED O4 5NDERTAKIN6
KNOW ALL MEN BY THESE PRESENTS:
I, VICENTE C. PONCE, s the owner of the tota subscrpton of Fausto Gad wth Vctory
Cement Corporaton n the tota amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE
HUNDRED (P239,500.00) PESOS and that Fausto Gad does not have any abty whatsoever
on the subscrpton agreement n favor of Vctory Cement Corporaton x x x
INDORSEMENT
I, FAUSTO GAID s ndorsng the tota amount of TWO HUNDRED THIRTY NINE
THOUSAND FIVE HUNDRED (239,500.00) stocks of Vctory Cement Corporaton to VICENTE
C. PONCE. x x x
Wth these aegatons, pettoner prayed that |udgment be rendered orderng respondents (a) to
ssue n hs name certfcates of stocks coverng the 239,500 shares of stocks and ts ega
ncrements and (b) to pay hm damages.
Instead of fng an answer, respondents moved to dsmss the compant. They argued, iner
alia, that there beng no aegaton that the aeged "INDORSEMENT" was recorded n the books of
the corporaton, sad ndorsement by Gad to the pantff of the shares of stock n queston-
assumng that the ndorsement was n fact a transfer of stocks-was not vad aganst thrd persons
such as ALSONS under Secton 63 of the Corporaton Code. There was, therefore, no specfc ega
duty on the part of the respondents to ssue the correspondng certfcates of stock, and mandamus
w not e.
Pettoner fed hs opposton to the moton to dsmss on February 19, 1996 contendng that: (1)
mandamus s the proper remedy when a corporaton and ts corporate secretary wrongfuy refuse to
record a transfer of shares and ssue the correspondng certfcates of stocks; (2) he s the proper
party n nterest snce he stands to be benefted or n|ured by a |udgment n the case; (3) the statute
of mtatons dd not begn to run unt defendant refused to ssue the certfcates of stock n favor of
the pantff on Apr 13, 1992.
SEC granted the moton to dsmss sayng that there s no record of any assgnment or transfer n
the books of the defendant corporaton, and there s no nstructon or authorty from the transferor
(Gad) for such assgnment or transfer. There s not even any ndorsement of any stock certfcate to
speak of. What the pantff possesses s a document by whch Gad supposedy transferred the
shares to hm.
Pettoner appeaed the Order of dsmssa. On |anuary 6, 1997, the Commsson En Banc
reversed the appeaed Order and drected the Hearng Offcer to proceed wth the case. In rung
that a transfer or assgnment of stocks need not be regstered frst before t can take cognzance of
the case to enforce the pettoners rghts as a stockhoder. A transfer or assgnment of stocks need
not be regstered frst before the Commsson can take cognzance of the case to enforce hs rghts
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as a stockhoder. Aso, the probem encountered n securng the certfcates of stock made by the
buyer must be expedtousy taken up through the so-caed admnstratve mandamus proceedngs
wth the SEC than n the reguar courts. It aso found that the Hearng Offcer erred n hodng that
pettoner s not the rea party n nterest.
Ther MR havng been dened, respondents appeaed the decson of the SEC En Banc and the
resouton denyng ther MR to the CA. In ts decson, the CA hed that n the absence of any
aegaton that the transfer of the shares between Fausto Gad and Vcente C. Ponce was regstered
n the stock and transfer book of ALSONS, Ponce faed to state a cause of acton. Thus, sad the CA,
"the compant for mandamus shoud be dsmssed for faure to state a cause of acton. Pettoners
MR was kewse dened.
Pettoner frst contends that the act of recordng the transfer of shares n the stock and transfer
book and that of ssung a certfcate of stock for the transferred shares nvoves ony one contnuous
process. Thus, when a corporate secretary s presented wth a document of transfer of fuy pad
shares, t s hs duty to record the transfer n the stock and transfer book of the corporaton, ssue a
new stock certfcate n the name of the transferee, and cance the od one. A transferee who
requests for the ssuance of a stock certfcate need not spe out each and every act that needs to be
done by the corporate secretary, as a request for ssuance of stock certfcates necessary ncudes a
request for the recordng of the transfer. Ergo, the faure to record the transfer does not mean that
the transferee cannot ask for the ssuance of stock certfcates.
Secondy, accordng to pettoner, there s no aw, rue or reguaton requrng a transferor of
shares of stock to frst ssue express nstructons or execute a power of attorney for the transfer of
sad shares before a certfcate of stock s ssued n the name of the transferee and the transfer
regstered n the books of the corporaton. He contends that /ager vs. Bryan, 19 Ph. 138 (1911),
and ,ivera vs. 0loren-o, 144 SCRA 643 (1986), cted by respondents, do not appy to ths case.
These cases contempate a stuaton where a certfcate of stock has been ssued by the company
whereas n ths case at bar, no stock certfcates have been ssued even n the name of the orgna
stockhoder, Fausto Gad.
Fnay, pettoner mantans that snce he s under no compuson to regster the transfer or to
secure stock certfcates n hs name, hs cause of acton s deemed not to have accrued unt
respondent ALSONS dened hs request.
Respondents, n ther comment, mantan that the transfer of shares of stock not recorded n the
stock and transfer book of the corporaton s non-exstent nsofar as the corporaton s concerned and
no certfcate of stock can be ssued n the name of the transferee. Unt the recordng s made, the
transfer cannot be the bass of ssuance of a certfcate of stock. They add that pettoner s not the
rea party n nterest, the rea party n nterest beng Fausto Gad snce t s hs name that appears n
the records of the corporaton. They concude that pettoners cause of acton s barred by
prescrpton and aches snce 24 years eapsed before he made any demand upon ALSONS.
Issue: (1) W/N CA erred n hodng that pettoner has no cause of acton for a wrt of mandamus. (2)
W/N the transfer of shares of stocks not recorded n the stock and transfer book of the corporaton s
non-exstent(3) W/N notce to a corporaton of the sae of the shares and presentaton of certfcates
for transfer s equvaent to regstraton
Hed: No. The CA dd not err n rung that pettoner had no cause of acton, and that hs petton for
mandamus was propery dsmssed.
In ,ural Ban$ of Salinas, Inc., prvate respondent Meana Guerrero had a Speca Power of
Attorney executed n her favor by Cemente Guerrero, the regstered stockhoder. It gave
Guerrero fu authorty to se or otherwse dspose of the 473 shares of stock regstered n
Cementes name and to execute the proper documents therefor. Pursuant to the authorty so
gven, Meana assgned the 473 shares of stock owned by Guerrero and presented to the
Revsed Bagtas Revewer by Ve and Ocfe 2A
Rura Bank of Sanas the deeds of assgnment coverng the assgned shares. Meana
Guerrero prayed for the transfer of the stocks n the stock and transfer book and the ssuance
of stock certfcates n the name of the new owners thereof. Based on those crcumstances,
there was a cear duty on the part of the corporate secretary to regster the 473 shares n
favor of the new owners, snce the person who sought the transfer of shares had express
nstructons from and specfc authorty gven by the regstered stockhoder to cause the
dsposton of stocks regstered n hs name.
That cannot be sad of ths case. The deed of undertakng wth ndorsement presented by
pettoner does not estabsh, on ts face, hs rght to demand for the regstraton of the transfer and
the ssuance of certfcates of stocks. In /ager vs. Bryan, 19 Ph. 138 (1911), ths Court hed that a
petton for mandamus fas to state a cause of acton where t appears that the pettoner s not the
regstered stockhoder and there s no aegaton that he hods any power of attorney from the
regstered stockhoder, from whom he obtaned the stocks, to make the transfer.
Wthout dscussng or decdng the respectve rghts of the partes whch mght be
propery asserted n an ordnary acton or an acton n the nature of an equtabe sut, we are
a agreed that n a case such as that at bar, a mandamus shoud not ssue to compe the
secretary of a corporaton to make a transfer of the stock on the books of the company,
uness t affrmatvey appears that he has faed or refused so to do, upon the demand
ether of the person n whose name the stock s regstered, or of some person hodng a
power of attorney for that purpose from the regstered owner of the stock. There s no
aegaton n the petton that the pettoner or anyone ese hods a power of attorney from
the Bryan-Landon Company authorzng a demand for the transfer of the stock, or that the
Bryan-Landon Company has ever tsef made such demand upon the Vsayan Eectrc
Company, and n the absence of such aegaton we are not abe to say that there was such
a cear ndsputabe duty, such a cear ega obgaton upon the respondent, as to |ustfy the
ssuance of the wrt to compe hm to perform t.
Under the provsons of our statute touchng the transfer of stock (secs. 35 and 36 of Act
No. 1459), the mere ndorsement of stock certfcates does not n tsef gve to the ndorsee
such a rght to have a transfer of the shares of stock on the books of the company as w
entte hm to the wrt of mandamus to compe the company and ts offcers to make such
transfer at hs demand, because, under such crcumstances the duty, the ega obgaton, s
not so cear and ndsputabe as to |ustfy the ssuance of the wrt. As a genera rue and
especay under the above-cted statute, as between the corporaton on the one hand, and
ts sharehoders and thrd persons on the other, the corporaton ooks ony to ts books for
the purpose of determnng who ts sharehoders are, so that a mere ndorsee of a stock
certfcate, camng to be the owner, w not necessary be recognzed as such by the
corporaton and ts offcers, n the absence of express nstructons of the regstered owner to
make such transfer to the ndorsee, or a power of attorney authorzng such transfer.
(2) A transfer of shares of stock not recorded n the stock and transfer book of the corporaton s
non-exstent as far as the corporaton s concerned. As between the corporaton on the one hand,
and ts sharehoders and thrd persons on the other, the corporaton ooks ony to ts books for the
purpose of determnng who ts sharehoders are. It s ony when the transfer has been recorded n
the stock and transfer book that a corporaton may rghtfuy regard the transferee as one of ts
stockhoders. From ths tme, the consequent obgaton on the part of the corporaton to recognze
such rghts as t s mandated by aw to recognze arses.
Hence, wthout such recordng, the transferee may not be regarded by the corporaton as one
among ts stockhoders and the corporaton may egay refuse the ssuance of stock certfcates n
the name of the transferee even when there has been compance wth the requrements of Secton
64 of the Corporaton Code. Ths s the mport of Secton 63 whch states that "No transfer, however,
sha be vad, except between the partes, unt the transfer s recorded n the books of the
corporaton showng the names of the partes to the transacton, the date of the transfer, the number
of the certfcate or certfcates and the number of shares transferred." The stuaton woud be
16
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dfferent f the pettoner was hmsef the regstered owner of the stock whch he sought to transfer to
a thrd party, for then he woud be entted to the remedy of mandamus.
x x x unt regstraton s accompshed, the transfer, though vad between the partes,
cannot be effectve as aganst the corporaton. Thus, n the absence of any aegaton that
the transfer of the shares between Gad and the prvate respondent |heren pettoner| was
regstered n the stock and transfer book of the pettoner corporaton, the prvate
respondent has faed to state a cause of acton.
(3) Pettoners reance on our rung n )be1o vs. (e la Cruz, 149 SCRA 654 (1987), that notce gven
to the corporaton of the sae of the shares and presentaton of the certfcates for transfer s
equvaent to regstraton s mspaced. In the case, there s no aegaton n the compant that
pettoner ever gave notce to respondents of the aeged transfer n hs favor. Moreover, that case
arose between and among the prncpa stockhoders of the corporaton, Pocket Be, due to the
refusa of the corporate secretary to record the transfers n favor of Teectroncs of the corporatons
controng 56% shares of stock whch were covered by duy endorsed stock certfcates. As
aforesad, the request for the recordng of a transfer s dfferent from the request for the ssuance of
stock certfcates n the transferees name. Fnay, n )be1o, the Court dd not say that transfer of
shares need not be recorded n the books of the corporaton before the transferee may ask for the
ssuance of stock certfcates. The Courts statement, that "there s no requrement that a
stockhoder of a corporaton must be a regstered one n order that the Securtes and Exchange
Commsson may take cognzance of a sut seekng to enforce hs rghts as such stockhoder among
whch s the stock purchasers rght to secure the correspondng certfcate n hs name," was
addressed to the ssue of |ursdcton, whch s not pertnent to the ssue at hand.
NOTE: That pettoner was under no obgaton to request for the regstraton of the transfer s not n
ssue. It has no pertnence n ths controversy. One may own shares of corporate stock wthout
possessng a stock certfcate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occason to decare that
a certfcate of stock s not necessary to render one a stockhoder n a corporaton. But a certfcate
of stock s the tangbe evdence of the stock tsef and of the varous nterests theren. The
certfcate s the evdence of the hoders nterest and status n the corporaton, hs ownershp of the
share represented thereby. The certfcate s n aw, so to speak, an equvaent of such ownershp. It
expresses the contract between the corporaton and the stockhoder, but t s not essenta to the
exstence of a share n stock or the creaton of the reaton of sharehoder to the corporaton. In fact,
t rests on the w of the stockhoder whether he wants to be ssued stock certfcates, and a
stockhoder may opt not to be ssued a certfcate. In Won vs. Wack Wack Gof and Country Cub,
Inc., 104 Ph. 466 (1958), we hed that consderng that the aw does not prescrbe a perod wthn
whch the regstraton shoud be effected, the acton to enforce the rght does not accrue unt there
has been a demand and a refusa concernng the transfer. In the present case, pettoners compant
for mandamus must fa, not because of aches or estoppe, but because he had aeged no cause of
acton suffcent for the ssuance of the wrt.
Mandamus w not e to compe the corporate secretary to regster the transfer of
shares n the corporate books when the pettoner s not the regstered stockhoder nor
does he hod a power of attorney from the atter. Ths s under the genera rue that as
between the corporaton one the one hand and ts sharehoders on other, the corporaton
ooks ony to ts books for the purpose of determnng who ts sharehoders are, so that a
mere ndorsee of a certfcate of stock, camng to be the owner, w not necessary be
recognzed as such by the corporaton and ts offcers, n absence of express nstructons
of the regstered owner to make such transfer to the ndorsee, or a power of attorney
authorzng such transfer. /ager v. Bryan, 19 Ph. 138 (1911); ,ivera v. 0loren-o, 144
SCRA 643, 657 (1986).
The cam for damages of what the shares coud have sod had the demand been
comped wth s deemed to be specuatve damage and non-recoverabe Baong Buhay
Gol- .ines v. C), 147 SCRA 4 (1987)
Period to /nforce' Consderng that the aw does not prescrbe a perod wthn whch
the regstraton of purchase of shares shoud be effected, the acton to enforce the rght
does not accrue unt there has been a demand and a refusa concernng the transfer."
Revsed Bagtas Revewer by Ve and Ocfe 2A
Ponce v. )lsons Cemen Cor+., 393 SCRA 602 (2002).
A stpuaton on the stock certfcate that any assgnment woud not be bndng on the
corporaton uness regstered n the corporate books as requred under the by-aws and
wthout provdng when regstraton shoud be made, woud mean that the cause of acton
and the determnaton of prescrpton perod woud begn ony when demand for
regstraton s made and not at the tme of the assgnment of the certfcate. 9on v. 9ac$
9ac$ Golf * Counry Club, 104 Ph. 466 (1958).
.. Ri*hts to Di'ide#ds (Sec. 43)
Secton 43. Power to decare dvdends. - The board of drectors of a stock corporaton may decare
dvdends out of the unrestrcted retaned earnngs whch sha be payabe n cash, n property, or n
stock to a stockhoders on the bass of outstandng stock hed by them: Provded, That any cash
dvdends due on denquent stock sha frst be apped to the unpad baance on the subscrpton
pus costs and expenses, whe stock dvdends sha be wthhed from the denquent stockhoder
unt hs unpad subscrpton s fuy pad: Provded, further, That no stock dvdend sha be ssued
wthout the approva of stockhoders representng not ess than two-thrds (2/3) of the outstandng
capta stock at a reguar or speca meetng duy caed for the purpose.
Stock corporatons are prohbted from retanng surpus profts n excess of one hundred (100%)
percent of ther pad-n capta stock, except: (1) when |ustfed by defnte corporate expanson
pro|ects or programs approved by the board of drectors; or (2) when the corporaton s prohbted
under any oan agreement wth any fnanca nsttuton or credtor, whether oca or foregn, from
decarng dvdends wthout ts/hs consent, and such consent has not yet been secured; or (3) when
t can be ceary shown that such retenton s necessary under speca crcumstances obtanng n the
corporaton, such as when there s need for speca reserve for probabe contngences.
Athough stock certfcates grant the stockhoder the rght to receve quartery dvdends
of 1%, cumuatve and partcpatng, the stockhoders do not become entted to the payment
thereof as a matter of rght wthout necessty of a pror decaraton of dvdends. Sec. 43 of
Corporaton Code prohbts the ssuance of any stock dvdend wthout the approva of
stockhoders, representng not ess than two-thrds (2/3) of the outstandng capta stock,
whch underscores the fact that payment of dvdends to a stockhoder s not a matter of rght
but a matter of consensus. Furthermore, "nterest bearng stocks", on whch the corporaton
agrees absoutey to pay nterest before dvdends are pad to the common stockhoders, s
ega ony when construed as requrng payment of nterest as dvdends from net earnngs or
surpus ony. ,e+ublic Planers Ban$ v. )gana, 269 SCRA 1 (1997).
1. Ri*ht to ?ote a#d to Atte#d Meeti#*s (Secs. 6 and 89)
(NOTE: rght to manage ones property may aso be sod.)
Secton 6. Cassfcaton of shares. - The shares of stock of stock corporatons may be dvded nto
casses or seres of shares, or both, any of whch casses or seres of shares may have such rghts,
prveges or restrctons as may be stated n the artces of ncorporaton: Provded, That no share
may be deprved of votng rghts except those cassfed and ssued as "preferred" or "redeemabe"
shares, uness otherwse provded n ths Code: Provded, further, That there sha aways be a cass
or seres of shares whch have compete votng rghts. Any or a of the shares or seres of shares may
have a par vaue or have no par vaue as may be provded for n the artces of ncorporaton:
Provded, however, That banks, trust companes, nsurance companes, pubc uttes, and budng
and oan assocatons sha not be permtted to ssue no-par vaue shares of stock.
Preferred shares of stock ssued by any corporaton may be gven preference n the dstrbuton of
the assets of the corporaton n case of qudaton and n the dstrbuton of dvdends, or such other
preferences as may be stated n the artces of ncorporaton whch are not voatve of the provsons
of ths Code: Provded, That preferred shares of stock may be ssued ony wth a stated par vaue.
The board of drectors, where authorzed n the artces of ncorporaton, may fx the terms and
condtons of preferred shares of stock or any seres thereof: Provded, That such terms and
16
7
condtons sha be effectve upon the fng of a certfcate thereof wth the Securtes and Exchange
Commsson.
Shares of capta stock ssued wthout par vaue sha be deemed fuy pad and non-assessabe and
the hoder of such shares sha not be abe to the corporaton or to ts credtors n respect thereto:
Provded; That shares wthout par vaue may not be ssued for a consderaton ess than the vaue of
fve (P5.00) pesos per share: Provded, further, That the entre consderaton receved by the
corporaton for ts no-par vaue shares sha be treated as capta and sha not be avaabe for
dstrbuton as dvdends.
A corporaton may, furthermore, cassfy ts shares for the purpose of nsurng compance wth
consttutona or ega requrements.
Except as otherwse provded n the artces of ncorporaton and stated n the certfcate of stock,
each share sha be equa n a respects to every other share.
Where the artces of ncorporaton provde for non-votng shares n the cases aowed by ths Code,
the hoders of such shares sha nevertheess be entted to vote on the foowng matters:
1. Amendment of the artces of ncorporaton;
2. Adopton and amendment of by-aws;
3. Sae, ease, exchange, mortgage, pedge or other dsposton of a or substantay a of the
corporate property;
4. Incurrng, creatng or ncreasng bonded ndebtedness;
5. Increase or decrease of capta stock;
6. Merger or consodaton of the corporaton wth another corporaton or other corporatons;
7. Investment of corporate funds n another corporaton or busness n accordance wth ths
Code; and
8. Dssouton of the corporaton.
Except as provded n the mmedatey precedng paragraph, the vote necessary to approve a
partcuar corporate act as provded n ths Code sha be deemed to refer ony to stocks wth votng
rghts.
Secton 89. Rght to vote. - The rght of the members of any cass or casses to vote may be mted,
broadened or dened to the extent specfed n the artces of ncorporaton or the by-aws. Uness so
mted, broadened or dened, each member, regardess of cass, sha be entted to one vote.
Uness otherwse provded n the artces of ncorporaton or the by-aws, a member may vote by
proxy n accordance wth the provsons of ths Code.
Votng by ma or other smar means by members of non-stock corporatons may be authorzed by
the by-aws of non-stock corporatons wth the approva of, and under such condtons whch may be
prescrbed by, the Securtes and Exchange Commsson.
Unt chaenged successfuy n proper proceedngs, a regstered stockhoder has a rght to
partcpate n any meetng, and n the absence of fraud the acton of the stockhoders
meetng cannot be coateray attacked on account of such partcpaton, even f t be shown
ater on that the shares had been prevousy sod (but not recorded). Price an- Sulu (ev. Co.
v. .arin, 58 Ph. 707 (1933).
The sequestraton of shares does not entte the government to exercse acts of ownershp
over the shares; even sequestered shares may be voted upon by the regstered stockhoder.
Co1uangco 3r. v. ,o'as, 195 SCRA 797 (1991).
The rght to vote sequestered shares of stock regstered n the names of prvate
Revsed Bagtas Revewer by Ve and Ocfe 2A
ndvduas or enttes an- aeged to have been acqured wth -gotten weath sha, as a
rue, be exercsed by the regstered owner. The PCGG may, however, be granted such votng
rght provded t can (1) show +rima facie evdence that the weath and/or the shares are
ndeed -gotten; and (2) demonstrate mmnent danger of dsspaton of the assets, thus
necesstatng ther contnued sequestraton and votng by the government unt a decson,
rung wth fnaty on ther ownershp, s promugated by the proper court. Nevertheess, the
foregong "two-tered" test does not appy when the funds that are +rima facie pubc n
character or, at east, are affected wth pubc nterest. Inasmuch as the sub|ect UCPB shares
n the present case were undsputaby acqured wth coco evy funds whch are pubc n
character, then the rght to vote them sha be exercsed by the PCGG. In sum, the "pubc
character" test, not the "two-tered" one, appes. ,e+ublic v. C!C!0&(, 372 SCRA 462
(2001).
%a$ Instances When Stoc.holders /ntitled to -ote'
- Eecton of drectors and trustees (Sec. 24).
- Amendment of artces of ncorporaton (Sec. 16).
- Investment n another busness or corporaton (Secs. 36 and 42).
- Merger and consodaton (Sec. 72).
- Increase and Decrease of capta stock (Sec. 38).
- Adopton, amendment and repea of by-aws (Sec. 48).
- Decaraton of stock dvdends (Sec. 43).
- Management contracts (Sec. 44).
- Fxng of consderaton of no par vaue shares (Sec. 62).
%!$ 2oint O!nership (Sec. 56)
Secton 56. Votng n case of |ont ownershp of stock. - In case of shares of stock owned |onty by
two or more persons, n order to vote the same, the consent of a the co-owners sha be necessary,
uness there s a wrtten proxy, sgned by a the co-owners, authorzng one or some of them or any
other person to vote such share or shares: Provded, That when the shares are owned n an "and/or"
capacty by the hoders thereof, any one of the |ont owners can vote sad shares or appont a proxy
therefor.
%"$ ,reasury Share &o -oting Rights (Sec. 57)
Secton 57. Votng rght for treasury shares. - Treasury shares sha have no votng rght as ong as
such shares reman n the Treasury.
%d$ Pledgor3 "ortgagors and Administrators (Sec. 55)
Secton 55. Rght to vote of pedgors, mortgagors, and admnstrators. - In case of pedged or
mortgaged shares n stock corporatons, the pedgor or mortgagor sha have the rght to attend and
vote at meetngs of stockhoders, uness the pedgee or mortgagee s expressy gven by the pedgor
or mortgagor such rght n wrtng whch s recorded on the approprate corporate books. (n)
Executors, admnstrators, recevers, and other ega representatves duy apponted by the court
may attend and vote n behaf of the stockhoders or members wthout need of any wrtten proxy.
When shares are pedged by means of endorsement n bank and devery of the
coverng certfcates to a oan, the pedgee does not become the owner thereof smpy by
the faure of the regstered stockhoder to pay hs oan. Consequenty, wthout proper
forecosure, the ender cannot demand that the shares be regstered n hs name. Lim Tay
v. Cour of )++eals, 293 SCRA 634 (1998).
Athough the Rues of Court, whe permttng an executor or admnstrator to represent
or to brng suts on behaf of the deceased, do no prohbt the hers from representng the
deceased. When no admnstrator has been apponted, there s a the more reason to
recognze the hers as the proper representatves of the deceased. Gochan v. "oung, 354
SCRA 207 (2001).
16
9
%e$ Conduct of Stoc.holders4 or "embers4 "eetings'
%i$ Knds and Requrements of Meetngs (Secs. 49 and 50);
Secton 49. Knds of meetngs. - Meetngs of drectors, trustees, stockhoders, or members
may be reguar or speca. (n)
Secton 50. Reguar and speca meetngs of stockhoders or members. - Reguar meetngs of
stockhoders or members sha be hed annuay on a date fxed n the by-aws, or f not so
fxed, on any date n Apr of every year as determned by the board of drectors or trustees:
Provded, That wrtten notce of reguar meetngs sha be sent to a stockhoders or members
of record at east two (2) weeks pror to the meetng, uness a dfferent perod s requred by
the by-aws.
Speca meetngs of stockhoders or members sha be hed at any tme deemed necessary or
as provded n the by-aws: Provded, however, That at east one (1) week wrtten notce sha
be sent to a stockhoders or members, uness otherwse provded n the by-aws.
Notce of any meetng may be waved, expressy or mpedy, by any stockhoder or member.
Whenever, for any cause, there s no person authorzed to ca a meetng, the Securtes and
Exchange Commsson, upon petton of a stockhoder or member on a showng of good cause
therefor, may ssue an order to the pettonng stockhoder or member drectng hm to ca a
meetng of the corporaton by gvng proper notce requred by ths Code or by the by-aws.
The pettonng stockhoder or member sha presde thereat unt at east a ma|orty of the
stockhoders or members present have chosen one of ther number as presdng offcer.
%ii$ Pace and Tme of Meetng (Secs. 51 and 93);
Secton 51. Pace and tme of meetngs of stockhoders of members. - Stockhoder's or
member's meetngs, whether reguar or speca, sha be hed n the cty or muncpaty where
the prncpa offce of the corporaton s ocated, and f practcabe n the prncpa offce of the
corporaton: Provded, That Metro Mana sha, for purposes of ths secton, be consdered a
cty or muncpaty.
Notce of meetngs sha be n wrtng, and the tme and pace thereof stated theren.
A proceedngs had and any busness transacted at any meetng of the stockhoders or
members, f wthn the powers or authorty of the corporaton, sha be vad even f the
meetng be mpropery hed or caed, provded a the stockhoders or members of the
corporaton are present or duy represented at the meetng.
Secton 93. Pace of meetngs. - The by-aws may provde that the members of a non-stock
corporaton may hod ther reguar or speca meetngs at any pace even outsde the pace
where the prncpa offce of the corporaton s ocated: Provded, That proper notce s sent to
a members ndcatng the date, tme and pace of the meetng: and Provded, further, That
the pace of meetng sha be wthn the Phppnes.
%iii$ Ouorum (Sec. 52)
Secton 52. Ouorum n meetngs. - Uness otherwse provded for n ths Code or n the by-aws, a
quorum sha consst of the stockhoders representng a ma|orty of the outstandng capta stock
or a ma|orty of the members n the case of non-stock corporatons.
3. Ri*hts to I#spe"t a#d Cop) (Such rght may n no way be taken away, voaton may resut
to crmna prosecuton.
%a$ asis of Right (Go$ong%ei, 3r. v. S&C, 89 SCRA 336 |1979|). - based upon ther
ownershp - founded on the benefca nterest through ownershp for the purpose of
protectng ndvdua nterests.
%!$ (imitations on Right
Revsed Bagtas Revewer by Ve and Ocfe 2A
The ony express mtatons on the rght of nspecton under Sec. 74 of Corporaton
Code are: (a) t shoud be exercsed at reasonabe hours on busness days; (b) the person
demandng the rght to examne and copy excerpts from the corporate records and
mnutes has not mpropery used any nformaton secured through any prevous
examnaton of records; and (c) the demand s made n good fath or for a egtmate
purpose. )frica v. PCGG, 205 SCRA 39 (1992). ADDITION: (d) the exstence of ev motve
must be proven by the corporaton, the burden of proof s upon the corporaton.
Summary of Rulings' The rght to nspect corporate books and records:
Is exercsabe through agents and representatves, otherwse t
woud often be useess to the stockhoder who does not know
corporate ntrcaces. 9.G. Phil+os v. Phili++ine .anufacuring
Co., 40 Ph. 471 (1919).
Cannot be dened on the ground that the drector s on
unfrendy terms wth the offcers of the corporaton whose
records are sought to be nspected. Veraguh v. Isabela Sugar
Co., 57 Ph. 266 (1932).
Athough t ncudes the rght to make copes, does not
authorze brngng the books or records outsde of corporate
premses. Veraguh v. Isabela Sugar Co., 57 Ph. 266 (1932).
Does not ncude the rght of access to mnutes unt such
mnutes have been wrtten up and approved by the drectors.
Veraguh v. Isabela Sugar Co., 57 Ph. 266 (1932).
Cannot be mted to a perod of ten days shorty pror to the
annua stockhoders meetng, as such woud be an
unreasonabe restrcton and voates the ega provson
grantng the exercse of such rght "at reasonabe hours."
Par-o v. /ercules Lumber Co., 47 Ph. 964 (1924).
%"$ Specified Records (Secs. 74, 75 and 141)
Secton 74. Books to be kept; stock transfer agent. - Every corporaton sha keep and carefuy
preserve at ts prncpa offce a record of a busness transactons and mnutes of a meetngs of
stockhoders or members, or of the board of drectors or trustees, n whch sha be set forth n deta
the tme and pace of hodng the meetng, how authorzed, the notce gven, whether the meetng
was reguar or speca, f speca ts ob|ect, those present and absent, and every act done or ordered
done at the meetng. Upon the demand of any drector, trustee, stockhoder or member, the tme
when any drector, trustee, stockhoder or member entered or eft the meetng must be noted n the
mnutes; and on a smar demand, the yeas and nays must be taken on any moton or proposton,
and a record thereof carefuy made. The protest of any drector, trustee, stockhoder or member on
any acton or proposed acton must be recorded n fu on hs demand.
The records of a busness transactons of the corporaton and the mnutes of any meetngs sha be
open to nspecton by any drector, trustee, stockhoder or member of the corporaton at reasonabe
hours on busness days and he may demand, n wrtng, for a copy of excerpts from sad records or
mnutes, at hs expense.
Any offcer or agent of the corporaton who sha refuse to aow any drector, trustees, stockhoder or
member of the corporaton to examne and copy excerpts from ts records or mnutes, n accordance
wth the provsons of ths Code, sha be abe to such drector, trustee, stockhoder or member for
damages, and n addton, sha be guty of an offense whch sha be punshabe under Secton 144
of ths Code: Provded, That f such refusa s made pursuant to a resouton or order of the board of
drectors or trustees, the abty under ths secton for such acton sha be mposed upon the
drectors or trustees who voted for such refusa: and Provded, further, That t sha be a defense to
any acton under ths secton that the person demandng to examne and copy excerpts from the
corporaton's records and mnutes has mpropery used any nformaton secured through any pror
examnaton of the records or mnutes of such corporaton or of any other corporaton, or was not
actng n good fath or for a egtmate purpose n makng hs demand.
17
1
Stock corporatons must aso keep a book to be known as the "stock and transfer book", n whch
must be kept a record of a stocks n the names of the stockhoders aphabetcay arranged; the
nstaments pad and unpad on a stock for whch subscrpton has been made, and the date of
payment of any nstament; a statement of every aenaton, sae or transfer of stock made, the date
thereof, and by and to whom made; and such other entres as the by-aws may prescrbe. The stock
and transfer book sha be kept n the prncpa offce of the corporaton or n the offce of ts stock
transfer agent and sha be open for nspecton by any drector or stockhoder of the corporaton at
reasonabe hours on busness days.
No stock transfer agent or one engaged prncpay n the busness of regsterng transfers of stocks
n behaf of a stock corporaton sha be aowed to operate n the Phppnes uness he secures a
cense from the Securtes and Exchange Commsson and pays a fee as may be fxed by the
Commsson, whch sha be renewabe annuay: Provded, That a stock corporaton s not precuded
from performng or makng transfer of ts own stocks, n whch case a the rues and reguatons
mposed on stock transfer agents, except the payment of a cense fee heren provded, sha be
appcabe.
Secton 75. Rght to fnanca statements. - Wthn ten (10) days from recept of a wrtten request of
any stockhoder or member, the corporaton sha furnsh to hm ts most recent fnanca statement,
whch sha ncude a baance sheet as of the end of the ast taxabe year and a proft or oss
statement for sad taxabe year, showng n reasonabe deta ts assets and abtes and the resut
of ts operatons.
At the reguar meetng of stockhoders or members, the board of drectors or trustees sha present
to such stockhoders or members a fnanca report of the operatons of the corporaton for the
precedng year, whch sha ncude fnanca statements, duy sgned and certfed by an ndependent
certfed pubc accountant.
However, f the pad-up capta of the corporaton s ess than P50,000.00, the fnanca statements
may be certfed under oath by the treasurer or any responsbe offcer of the corporaton.
Secton 141. Annua report or corporatons. - Every corporaton, domestc or foregn, awfuy dong
busness n the Phppnes sha submt to the Securtes and Exchange Commsson an annua report
of ts operatons, together wth a fnanca statement of ts assets and abtes, certfed by any
ndependent certfed pubc accountant n approprate cases, coverng the precedng fsca year and
such other requrements as the Securtes and Exchange Commsson may requre. Such report sha
be submtted wthn such perod as may be prescrbed by the Securtes and Exchange Commsson.
%d$ Remedies If $enied' "andamus aGonzales v. P#B, 122 SCRA 489 (1983).
GONZALES v PNB
FACTS:
Gonzaes nsttuted a sut aganst the PNB for aeged anomaes commtted regardng the banks
extenson of credt to mport constructon machnery through the Dept. of Pubc Works.
The pettoners standng was rased because he owned no share n PNB. Consequenty, Gonzaes
bought 1 share of PNB stocks n order to gan standng as a stockhoder.
Gonzaes thereafter sought to nqure and ordered PNB to produce ts books and records whch the
Bank refused, nvokng provsons from ts charter created by Congress. The pettoner hence fed a
court acton to compe PNB the producton of books and records.
The RTC rued n favor of PNB.
ISSUE:
May Gonzaes compe PNB to produce ts books and records? NO
HELD:
The New Corporaton code provded a more restrctve tone on a rght of a stockhoder to nqure
about a corporatons books and records.
Among other new provsons, an nqury nto a corporatons books and records may ony be done
durng offce hours and must be reasonaby reated to a stockhoders nterest. Furthermore, the
Code provded that an nqury to the books and records must aso be couped wth good fath and not
Revsed Bagtas Revewer by Ve and Ocfe 2A
by specuaton.
Hence, snce Gonzaes ony bought a share of stock n order to gan standng n the case that he
earer fed aganst the bank, the SC found that ths was done to pry on certan Bank nformaton.
In addton, PNBs charter aso restrcted access on ts books and records, hence, books and records
of PNB may no onger be nqured nto by |ust any stockhoder.
NOTE: The new Code expressy provdes that the party requestng must not be guty of usng
mpropery any nformaton secured through a pror examnaton and that the person askng for such
examnaton must be actng n good fath and for a egtmate purpose n makng hs demand.
The burden of proof to show that examnaton s for mproper purpose s on the part of
the corporaton. ,e+ublic v. San-iganbayan, 199 SCRA 39 (1999).
%e$ Confidential &ature of S/C /5aminations (Sec. 142)
Secton 142. Confdenta nature of examnaton resuts. - A nterrogatores propounded by the
Securtes and Exchange Commsson and the answers thereto, as we as the resuts of any
examnaton made by the Commsson or by any other offca authorzed by aw to make an
examnaton of the operatons, books and records of any corporaton, sha be kept strcty
confdenta, except nsofar as the aw may requre the same to be made pubc or where such
nterrogatores, answers or resuts are necessary to be presented as evdence before any court.
NOTES:
Inspecton has to be germane to the pettoners nterest as a stockhoder and member and has to
be proper and awfu character not nmca to the nterest of the corporaton.
ALLOWABLE PURPOSES: (1) ascertan whether the corporaton s beng msmanaged (2) ascertan
the fnanca condton (3) ascertan the vaue of the shares of stock for sae (4) mang st of
sharehoders to soct proxes or nfuence votng.
REMEDIES: (1) mandamus (2) damages (3) crmna sut
EXAMPLE: I own 20,000 shares n San Mgue and I demand that I may be gven access to the
accountng records for the ast 6 months. My purpose for such request s to determne whether
the company was compyng wth envronmenta aws. San Mgue refused to gve me access to
the records. I fe for mandamus n Court, who w wn? San Mgue w wn. Such rght must ony
be exercsed akn to the propretary nterest of the stockhoder, other than for ths purpose, the
exercse of such rght w be dened.
NOTE: Records that are not yet approved or are confdenta may not be nspected.
:. Appraisal Ri*ht (Secs. 81 to 86 and 105)
NOTE: The exercse of ths rght sha ony pertan to the EXCLUSIVE ENUMERATION provded by aw
and must be exercsed n the same manner provded by aw. In other nstances that are not provded
n the enumeraton, the stockhoder may aways se hs shares to another person as he exercses the
rght of free transferabty of nterest.
Secton 81. Instances of apprasa rght. - Any stockhoder of a corporaton sha have the rght to
dssent and demand payment of the far vaue of hs shares n the foowng nstances:
1. In case any amendment to the artces of ncorporaton has the effect of changng or
restrctng the rghts of any stockhoder or cass of shares, or of authorzng preferences n any
respect superor to those of outstandng shares of any cass, or of extendng or shortenng the
term of corporate exstence;
2. In case of sae, ease, exchange, transfer, mortgage, pedge or other dsposton of a or
substantay a of the corporate property and assets as provded n the Code; and
17
3
3. In case of merger or consodaton. (n)
Secton 82. How rght s exercsed. - The apprasa rght may be exercsed by any stockhoder who
sha have voted aganst the proposed corporate acton, by makng a wrtten demand on the
corporaton wthn thrty (30) days after the date on whch the vote was taken for payment of the far
vaue of hs shares: Provded, That faure to make the demand wthn such perod sha be deemed a
waver of the apprasa rght. If the proposed corporate acton s mpemented or affected, the
corporaton sha pay to such stockhoder, upon surrender of the certfcate or certfcates of stock
representng hs shares, the far vaue thereof as of the day pror to the date on whch the vote was
taken, excudng any apprecaton or deprecaton n antcpaton of such corporate acton.
If wthn a perod of sxty (60) days from the date the corporate acton was approved by the
stockhoders, the wthdrawng stockhoder and the corporaton cannot agree on the far vaue of the
shares, t sha be determned and apprased by three (3) dsnterested persons, one of whom sha
be named by the stockhoder, another by the corporaton, and the thrd by the two thus chosen. The
fndngs of the ma|orty of the apprasers sha be fna, and ther award sha be pad by the
corporaton wthn thrty (30) days after such award s made: Provded, That no payment sha be
made to any dssentng stockhoder uness the corporaton has unrestrcted retaned earnngs n ts
books to cover such payment: and Provded, further, That upon payment by the corporaton of the
agreed or awarded prce, the stockhoder sha forthwth transfer hs shares to the corporaton. (n)
Secton 83. Effect of demand and termnaton of rght. - From the tme of demand for payment of the
far vaue of a stockhoder's shares unt ether the abandonment of the corporate acton nvoved or
the purchase of the sad shares by the corporaton, a rghts accrung to such shares, ncudng
votng and dvdend rghts, sha be suspended n accordance wth the provsons of ths Code, except
the rght of such stockhoder to receve payment of the far vaue thereof: Provded, That f the
dssentng stockhoder s not pad the vaue of hs shares wthn 30 days after the award, hs votng
and dvdend rghts sha mmedatey be restored. (n)
Secton 84. When rght to payment ceases. - No demand for payment under ths Tte may be
wthdrawn uness the corporaton consents thereto. If, however, such demand for payment s
wthdrawn wth the consent of the corporaton, or f the proposed corporate acton s abandoned or
rescnded by the corporaton or dsapproved by the Securtes and Exchange Commsson where such
approva s necessary, or f the Securtes and Exchange Commsson determnes that such
stockhoder s not entted to the apprasa rght, then the rght of sad stockhoder to be pad the far
vaue of hs shares sha cease, hs status as a stockhoder sha thereupon be restored, and a
dvdend dstrbutons whch woud have accrued on hs shares sha be pad to hm.
Secton 85. Who bears costs of apprasa. - The costs and expenses of apprasa sha be borne by the
corporaton, uness the far vaue ascertaned by the apprasers s approxmatey the same as the
prce whch the corporaton may have offered to pay the stockhoder, n whch case they sha be
borne by the atter. In the case of an acton to recover such far vaue, a costs and expenses sha be
assessed aganst the corporaton, uness the refusa of the stockhoder to receve payment was
un|ustfed.
Secton 86. Notaton on certfcates; rghts of transferee. - Wthn ten (10) days after demandng
payment for hs shares, a dssentng stockhoder sha submt the certfcates of stock representng
hs shares to the corporaton for notaton thereon that such shares are dssentng shares. Hs faure
to do so sha, at the opton of the corporaton, termnate hs rghts under ths Tte. If shares
represented by the certfcates bearng such notaton are transferred, and the certfcates
consequenty canceed, the rghts of the transferor as a dssentng stockhoder under ths Tte sha
cease and the transferee sha have a the rghts of a reguar stockhoder; and a dvdend
dstrbutons whch woud have accrued on such shares sha be pad to the transferee.
Secton 105. Wthdrawa of stockhoder or dssouton of corporaton. - In addton and wthout
pre|udce to other rghts and remedes avaabe to a stockhoder under ths Tte, any stockhoder of
a cose corporaton may, for any reason, compe the sad corporaton to purchase hs shares at ther
far vaue, whch sha not be ess than ther par or ssued vaue, when the corporaton has suffcent
assets n ts books to cover ts debts and abtes excusve of capta stock: Provded, That any
stockhoder of a cose corporaton may, by wrtten petton to the Securtes and Exchange
Revsed Bagtas Revewer by Ve and Ocfe 2A
Commsson, compe the dssouton of such corporaton whenever any of acts of the drectors,
offcers or those n contro of the corporaton s ega, or frauduent, or dshonest, or oppressve or
unfary pre|udca to the corporaton or any stockhoder, or whenever corporate assets are beng
msapped or wasted.
NOTES:
Apprasa rght refers to a stockhoders rght to demand payment of the far vaue of hs shares
after dssentng from a proposed corporate acton nvovng a fundamenta change n the
corporate settng. The apprasa rght s gven when a radca change n the contractua
reatonshp presumaby agreed upon between the stockhoders and the corporaton, a changer
whch the dssentng stockhoders coud not have reasonaby antcpated may happen at the tme
he nvested nto, or created hs contractua reatonshp wth, the corporaton.
INSTANCES WHEN RIGHT IS EXERCISABLE: (1) amendment to the AI (2) extendng or shortenng
term of corporate exstence (3) sae, ease, transfer, mortgage or pedge or other dsposton of a
or substantay a of the corporate property and assets (4) nvest ts funds n another corporaton
outsde ts prmary purpose (5) merger or consodaton.
NON-EXISTENCE OF URE - ths s not one of the grounds enumerated by whch the rght ceases -
the code provdes that f the dssentng stockhoder s not pad the vaue of hs shares wthn 30
days, hs votng and dvdend rghts sha be restored.
;. Deri'ati'e Sits (aInterm Rues for Intra-Corporate Controverses; aSan .iguel Cor+. v.
4ahn, 176 SCRA 447 |1989|)
It s one nsttuted by a sharehoder or a member of a corporaton for and n behaf of the
corporaton for ts protecton from acts commtted by drectors, trustee, corporate offcers and
even thrd persons.
SAN MIGUEL CORP. v KAHN
REOUISITES:
1) the party brngng a sut shoud be sharehoder as of the tme of the act or transacton
companed of, the number of hs shares beng mmatera (there must be prvty wth the
corporaton at the tme of the fng of the sut and at the tme of the transacton prvty
must exst on both nstances to avod cases of forum shoppng)
2) person has exhausted ntra-corporate remedes (otherwse, no cause of acton has yet
accrued, however, f t s fute to exhaust such remedes, resort to the courts may be had)
3) cause of acton actuay devoves on the corporaton, the wrongdong or harm havng been or
beng caused to the corporaton and not to the partcuar stockhoder brngng the sut. (The
stockhoders shoud brng the sut n the name of the corporaton and not for the beneft of
the stockhoders as the same woud consttute a voaton of the trust fund doctrne. Credtors
utmatey are to be protected and not the stockhoders. Stockhoders are not the ony ones
who sustan the n|ury but the credtors as we, and as they take precedence n rght over the
former, they sha be protected. When compensaton for n|ury s rendered to the
stockhoders, t n effect woud consttute a dstrbuton of property whch shoud be
subordnate to the rght of the credtors to receve such property or compensaton.)
REOUIREMENTS UNDER INTERIM RULES (SEC took out the cause of acton requrement provded n
|ursprudence. If one coud take notce, such requrements are harder as apprasa rght has nothng
to do wth the exercse of the rght to fe a dervatve sut. The former s a persona rght whe the
atter s not. From the requrements, t may be seen that by the fact that one dd not exercse hs
apprasa rght upon the acton of the Board, one s aready estopped to fe a dervatve sut. Whe
one who dssented and exercsed hs rght s not estopped to exercse ths rght.)
1) Pantff was stockhoder or member at the tme the questoned act or transacton sub|ect to
the acton occurred, as we as at the tme the acton was fed and remans as such durng
the pendency of the acton.
2) Pantff exercsed a reasonabe efforts and aeges wth partcuarty n the compant, to
exhaust a remedes avaabe under the artces of ncorporaton, by-aws or rues governng
the corporaton to obtan the reef he desres.
3) No apprasa rght are avaabe for the acts companed of. (If the same was avaabe, t
17
5
shoud have been exercsed.)
4) The sut s not a nusance or harassment sut (back ma sut s aganst the busness
|udgment rue of the corporaton.
NOTE: The rght of stockhoders or some of the Board members to brng a dervatve sut s a
common aw rght, and s an excepton to the genera rue, whch s the rght to sue and be sued s
wthn the busness |udgment rue of the Board of Drectors. But when t appears that the B| s no
onger wth the Board as when ther decsons are tanted wth (1) fraud, (2) dsoyaty, (3) confct of
nterest, (4) bad fath and (5) gross neggence. The next best guard of sharehoders s the exercse
of such rght. From the requrements of SEC, t appears that as to the ma|orty, the dervatve sut s
not avaabe as they consented to the transacton however as wth the mnorty, there s no apprasa
rght avaabe for them to be abe to exercse such rght. Dervatve sut has now become a cass
sut.

A dervatve sut s an acton brought by mnorty sharehoders n the name of the
corporaton to redress wrongs commtted aganst the corporaton, for whch the drectors
refuse to sue. It s a remedy desgned by equty and has been the prncpa defense of the
mnorty sharehoders aganst abuses by the ma|orty. a9esern Insiue of Technology, Inc.
v. Salas, 278 SCRA 216 (1997).
WESTERN INSTITUTE OF TECHNOLOGY v SALAS
Facts: The Saas famy are the ma|orty owners and controng members of the Board of Trustees of
Western Insttute of Technoogy (WIT), a stock corporaton n the busness of educaton. A speca
board meetng was hed and a resouton was passed grantng retroactve monthy compensaton to
the Saas as corporate offcers. A few years ater, the mnorty stockhoders, ncudng Vass who s
aso a member of the Board, fed 2 crmna compants chargng the pettoners of estafa and
fasfcaton of a pubc document camng that the ncome statements of the company for 1995-
1996 refected the dsbursement of corporate funds for the compensaton, makng t appear that the
resouton was passed by the Board March 30, 1986 nstead of |une 1, 1986 (the companys fsca
years ends on Apr 30 so n other words, the compensaton expense shoud have been recorded n
the 1996-1997 ncome statement nstead of 1995-1996 IS). In addton, they cam that the Saas
cannot receve compensaton because the Corporaton Code does not aow the gvng of
compensaton to drectors.
The tra court acqutted the Saas and pettoners fed an MR of the cv aspect.
Issue: W/N the resouton provded for compensaton of the Board members
Hed: No t dd not. Athough the Saas were drectors, the compensaton was for ther postons as
Charman, Vce-Charman and Corporate secretary.
There s no argument that drectors or trustees, as the case may be, are not entted to saary or
other compensaton when they perform nothng more than the usua and ordnary dutes of ther
offce. Ths rue s founded upon a presumpton that drectors/trustees render servce gratutousy,
and that the return upon ther shares adequatey furnshes the motves for servce, wthout
compensaton.

Under the foregong secton, there are ony two (2) ways by whch members of the
board can be granted compensaton apart from reasonabe per dems: (1) when there s a provson
n the by-aws fxng ther compensaton; and (2) when the stockhoders representng a ma|orty of
the outstandng capta stock at a reguar or speca stockhoders' meetng agree to gve t to them.
Ths however, s not a sweepng rue.
The phrase as such -irecors s not wthout sgnfcance for t demts the scope of the prohbton to
compensaton gven to them for servces performed purey n ther capacty as drectors or trustees.
The unambguous mpcaton s that members of the board may receve compensaton, n addton to
reasonabe per dems, when they render servces to the corporaton n a capacty other than as
drectors/trustees.

In the case at bench, Resouton No. 48, s. 1986 granted monthy compensaton to
prvate respondents not n ther capacty as members of the board, but rather as offcers of the
corporaton, more partcuary as Charman, Vce-Charman, Treasurer and Secretary of Western
Revsed Bagtas Revewer by Ve and Ocfe 2A
Insttute of Technoogy.
Ceary therefore, the prohbton wth respect to grantng compensaton to corporate
drectors/trustees as such s not voated n ths partcuar case.
Where corporate drectors have commtted a breach of trust ether by ther fraud, ulra
vires acts, or neggence, and the corporaton s unabe or unwng to nsttute sut to remedy
the wrong, a stockhoder may sue on behalf of himself an- oher soc$hol-ers and for the
beneft of the corporaton, to brng about a redress of the wrong done drecty to the
corporaton and ndrecty to the stockhoders. It s asetted s the doctrne that n a dervatve
sut, the corporaton s the rea party n nterest whe the stockhoder fng sut for the
corporatons behaf s ony nomna party. The corporaton shoud be ncuded as a party n
the sut. /ornilla v. Saluna, 405 SCRA 220 (2003).
REOURIEMENT UNDER SEC RULES:
In addton to what was sad n the San Mgue case - (1) no apprasa rght s avaabe (2) t s not
a nusance or harassment sut.
%a$ Who "ay ring the Suit
In the absence of a speca authorty from the Board of Drectors to nsttute a
dervatve sut for and n behaf of the corporaton, the presdent or managng drector s
dsquafed by aw to sue n her own name. The power to sue and be sued n any court by
a corporaton even as a stockhoder s odged n the Board that exercses ts corporate
powers and not n the presdent or offcer thereof. Biong v. Cour of )++eals, 292 SCRA
503 (1998).
A mnorty stockhoder and member of the board has no power or authorty to sue on
the corporatons behaf. Nor can we uphod ths as a dervatve sut, snce t s requred
that the mnorty stockhoder sung for and on behaf of the corporaton must aege n hs
compant that he s sung on a dervatve cause of acton on behaf of the corporaton an-
all oher soc$hol-ers similarly siuae- %ho may %ish o 1oin him in he sui. There s now
showng that pettoner has comped wth the foregong requstes. Tam 9ing Ta$ v.
.a$asiar, 350 SCRA 475 (2001).
The reators must be stockhoders both at tme of occurrence of the events
consttutng the cause of acton and at the tme of the fng of the dervatve sut. Gochan
v. "oung, 354 SCRA 207 (2001); Pascual v. !rozco, 19 Ph. 83 (1911).
A mnorty stockhoder can fe a dervatve sut aganst the presdent for dvertng
corporate ncome to hs persona accounts. Commar ;Phils.< Inc. v. S&C, 198 SCRA 73
(1991).
A awyer engaged as counse for a corporaton cannot represent members of the same
corporatons board of drectors n a dervatve sut brought aganst them. To do so woud
be tantamount to representng confctng nterests, whch s prohbted by the Code of
Professona Responsbty." /ornilla v. Saluna, 405 SCRA 220 (2003).
%!$ /5haustion of Intra-Corporate Remedies' &vere v. )sia Ban$ing Cor+., 49 Ph. 512
(1927); )ngeles v. Sanos, 64 Ph. 697 (1937).
A dervatve sut to queston the vadty of the forecosure of the mortgage on
corporate assets can be fed wthout pror demand upon the Board of Drectors where the
egaty of the consttuton of the Board es at the center of the ssues. (BP v. Pun-ogar,
218 SCRA 118 (1993).
NOTE: The genera rues s that a dervatve sut can ony be fed when there has been a
showng of exhauston of admnstratve remedes. An excepton s when t woud be fute or
useess because the board tsef woud not brng the sut for reason that they are aso guty of
the fraud commtted aganst the corporaton.
%"$ &ature of Relief' &vangelisa v. Sanos, 86 Ph. 387 |1950|; ,e+ublic Ban$ v. Cua-erno,
19 SCRA 671 (1967); ,eyes v. Tan, 3 SCRA 198 (1961).
The aegatons of n|ury to the reators can co-exst wth those pertanng to the
17
7
corporaton, and does not dsquafy them from fng a dervatve sut on behaf of the
corporaton. It merey gves rse to an addtona cause of acton for damages aganst the
errng drectors. Gochan v. "oung, 354 SCRA 207 (2001).
In a dervatve acton, the rea party n nterest s the corporaton tsef, not the
sharehoders who actuay nsttuted t. A sut to enforce preemptve rghts n a corporaton
s not a dervatve sut, and therefore a temporary restranng order en|onng a person
from representng the corporaton w not bar such acton, because t s nsttuted on
behaf and for the beneft of the sharehoder, not the corporaton. Lim v. Lim7"u, 352
SCRA 216 (2001).
Appontment of recever can be an ancary remedy n a dervatve sut. Chase v. C0I
of .anila, 18 SCRA 602 (1966)
1@. Ri*ht to (roportio#ate Share o0 Re/ai#i#* Assets 5po# Dissoltio#
%a$ $ifferent Rules for &on-stoc. Corporations and )oundations (Secs. 94 and 95;
Secton 34(H)(2)(c), 1997 NIRC).
Secton 94. Rues of dstrbuton. - In case dssouton of a non-stock corporaton n accordance wth
the provsons of ths Code, ts assets sha be apped and dstrbuted as foows:
1. A abtes and obgatons of the corporaton sha be pad, satsfed and dscharged, or
adequate provson sha be made therefore;
2. Assets hed by the corporaton upon a condton requrng return, transfer or conveyance,
and whch condton occurs by reason of the dssouton, sha be returned, transferred or
conveyed n accordance wth such requrements;
3. Assets receved and hed by the corporaton sub|ect to mtatons permttng ther use ony
for chartabe, regous, benevoent, educatona or smar purposes, but not hed upon a
condton requrng return, transfer or conveyance by reason of the dssouton, sha be
transferred or conveyed to one or more corporatons, socetes or organzatons engaged n
actvtes n the Phppnes substantay smar to those of the dssovng corporaton
accordng to a pan of dstrbuton adopted pursuant to ths Chapter;
4. Assets other than those mentoned n the precedng paragraphs, f any, sha be dstrbuted
n accordance wth the provsons of the artces of ncorporaton or the by-aws, to the extent
that the artces of ncorporaton or the by-aws, determne the dstrbutve rghts of members,
or any cass or casses of members, or provde for dstrbuton; and
5. In any other case, assets may be dstrbuted to such persons, socetes, organzatons or
corporatons, whether or not organzed for proft, as may be specfed n a pan of dstrbuton
adopted pursuant to ths Chapter. (n)
Secton 95. Pan of dstrbuton of assets. - A pan provdng for the dstrbuton of assets, not
nconsstent wth the provsons of ths Tte, may be adopted by a non-stock corporaton n the
process of dssouton n the foowng manner:
The board of trustees sha, by ma|orty vote, adopt a resouton recommendng a pan of dstrbuton
and drectng the submsson thereof to a vote at a reguar or speca meetng of members havng
votng rghts. Wrtten notce settng forth the proposed pan of dstrbuton or a summary thereof and
the date, tme and pace of such meetng sha be gven to each member entted to vote, wthn the
tme and n the manner provded n ths Code for the gvng of notce of meetngs to members. Such
pan of dstrbuton sha be adopted upon approva of at east two-thrds (2/3) of the members havng
votng rghts present or represented by proxy at such meetng.
Secton 34(H)(2)(c), 1997 NIRC Donatons to the foowng are deductbe n fu - Donatons to
Accredted Nongovernmenta Organzatons - The term "nongovernmenta organzaton" means a
nonproft domestc corporaton:
1) Organzed and operated excusvey for scentfc, research, educatona, character-
budng and youth and sports deveopment, heath, soca wefare, cutura or
Revsed Bagtas Revewer by Ve and Ocfe 2A
chartabe purposes, or a combnaton thereof, no part of the net ncome of
whch nures to the beneft of any prvate ndvdua;
2) Whch not ater than 15
th
of the 3
rd
month after the cose of the accredted
nongovernmenta organzatons taxabe year n whch contrbutons are receved,
makes utzaton drecty for the actve conduct of the actvtes consttutng the
purpose or functon for whch t s organzed and operated, uness an extended
perod s granted by the Secretary of Fnance n accordance wth the rues and
reguatons to be promugated, upon recommendaton of the Commssoner;
3) The eve of admnstratve expense of whch sha, on an annua bass, conform
wth the rues and reguatons to be prescrbed by the Secretary of Fnance, upon
recommendaton of the Commssoner, but n no case to exceed 30% of the tota
expenses; and
4) The assets of whch, n the even of dssouton woud be dstrbuted to another non-
proft domestc corporaton organzed for smar purpose or purposes, or the state
for pubc purpose, or woud be dstrbuted by a court to another organzaton to be
used n such manner as n the |udgment of sad court sha best accompsh the
genera purpose for whch the dssoved organzaton was organzed.
Sub|ect to the terms and condtons as may be prescrbed by the Secretary of Fnance, the
term "utzaton" means:
() Any amount n cash or n knd (ncudng admnstratve expenses) pad or utzed to
accompsh one or more purposes for whch the accredted nongovernment organzaton was
created or organzed.
() Any amount pad to acqure an asset used (or hed for use) drecty n carryng out one or
more purposes for whch the accredted nongovernment organzaton was created or
organzed.
An amount set asde for a specfc pro|ect whch comes wthn one or more purposes of the
accredted nongovernment organzaton may be treated as a utzaton, but ony f at the tme such
amount s set asde, the accredted nongovernment organzaton has estabshed to the satsfacton
of the Commssoner that the amount w be pad for the specfc pro|ect wthn a perod to be
prescrbed n rues and reguatons to be promugated by the Secretary of Fnance, upon
recommendaton of the Commssoner, but not to exceed 5 years and the pro|ect s one whch can be
better accompshed by settng asde such amount than by mmedate payment of funds.
11. Co#tra"ts a#d A*ree/e#t A00e"ti#* Shareholdi#*s
%a$ Pro5y (Sec. 58)
Secton 58. Proxes. - Stockhoders and members may vote n person or by proxy n a meetngs of
stockhoders or members. Proxes sha n wrtng, sgned by the stockhoder or member and fed
before the schedued meetng wth the corporate secretary. Uness otherwse provded n the proxy,
t sha be vad ony for the meetng for whch t s ntended. No proxy sha be vad and effectve for
a perod onger than fve (5) years at any one tme.
A proxy s a speca form of agency and governed by the aw of agency. It s generay revocabe,
an excepton however s when t s couped wth nterest.
REOUISITES: (1) sha be n wrtng (2) sgned by the stockhoder or member (3) fed before the
schedued meetng wth the corporate secretary.
%!$ -oting ,rust Agreements (Sec. 59; aLee v. C), 205 SCRA 752 |1992|).
Secton 59. Votng trusts. - One or more stockhoders of a stock corporaton may create a votng trust
for the purpose of conferrng upon a trustee or trustees the rght to vote and other rghts pertanng
to the shares for a perod not exceedng fve (5) years at any tme: Provded, That n the case of a
votng trust specfcay requred as a condton n a oan agreement, sad votng trust may be for a
17
9
perod exceedng fve (5) years but sha automatcay expre upon fu payment of the oan. A votng
trust agreement must be n wrtng and notarzed, and sha specfy the terms and condtons thereof.
A certfed copy of such agreement sha be fed wth the corporaton and wth the Securtes and
Exchange Commsson; otherwse, sad agreement s neffectve and unenforceabe. The certfcate or
certfcates of stock covered by the votng trust agreement sha be canceed and new ones sha be
ssued n the name of the trustee or trustees statng that they are ssued pursuant to sad
agreement. In the books of the corporaton, t sha be noted that the transfer n the name of the
trustee or trustees s made pursuant to sad votng trust agreement.
The trustee or trustees sha execute and dever to the transferors votng trust certfcates, whch
sha be transferabe n the same manner and wth the same effect as certfcates of stock.
The votng trust agreement fed wth the corporaton sha be sub|ect to examnaton by any
stockhoder of the corporaton n the same manner as any other corporate book or record: Provded,
That both the transferor and the trustee or trustees may exercse the rght of nspecton of a
corporate books and records n accordance wth the provsons of ths Code.
Any other stockhoder may transfer hs shares to the same trustee or trustees upon the terms and
condtons stated n the votng trust agreement, and thereupon sha be bound by a the provsons
of sad agreement.
No votng trust agreement sha be entered nto for the purpose of crcumventng the aw aganst
monopoes and ega combnatons n restrant of trade or used for purposes of fraud.
Uness expressy renewed, a rghts granted n a votng trust agreement sha automatcay expre at
the end of the agreed perod, and the votng trust certfcates as we as the certfcates of stock n
the name of the trustee or trustees sha thereby be deemed canceed and new certfcates of stock
sha be ressued n the name of the transferors.
The votng trustee or trustees may vote by proxy uness the agreement provdes otherwse.
LEE v CA
FACTS:
A compant for a sum of money was fed by the Internatona Corporate Bank, Inc. aganst prvate
respondents Sacoba Manufacturng Corp., Pabo Gonzaes, |r., and Thomas Gonzaes. PRs then fed a
3
rd
party compant aganst ALFA and pettoners Lee and Lacdao. The TC ssued an order requrng
the ssuance of an aas summons upon ALFA through the DBP as a consequence of the pettoners
etter nformng the court that the summons for ALFA was erroneousy served upon them consderng
that the management of ALFA had been transferred to the DBP. DBP camed that t was not
authorzed to receve summons of behaf of ALFA snce t had not taken over the company.
PRs fed a Manfestaton and Moton for the Decaraton of Proper Servce of Summons whch the TC
granted. Pettoner Lee and Lacdao fed a moton for recon snce they were no onger offcers of ALFA
and PRs shoud have avaed of another mode of servce, .e., pubcaton.
PRs argued that the votng trust agreement prevousy executed dd not dvest the pettoners of
ther postons as presdent and executve vce-presdent of ALFA so that servce of summons upon
ALFA through the pettoners as corporate offcers was proper. TC uphed the vadty of the servce of
summons on ALFA through pettoners, thus denyng atters moton for recon. A second moton for
recon was fed by pets, upon whch was attached a copy of the votng trust agreement between a
the stockhoders of ALFA and DBP, whereby the management and contro of ALFA became vested
upon DBP. TC then reversed tsef. CA reversed TC. Petton brought to the SC on certorar mputng
GAD.
ISSUE: W/N pets Lee and Lacdao, by vrtue of the votng trust agreement between ALFA and DBP,
have assgned and transferred a ther shares n ALFA to DBP?
HELD:
Every drector must own at east one share of the capta stock of the corporaton of whch he s a
drector whch share sha stand n hs name on the books of the corporaton. Any drector who
Revsed Bagtas Revewer by Ve and Ocfe 2A
ceases to be the owner of at east one share of the capta stock of the corporaton sha thereby
cease to be a drector.
The facts of ths case show that the pettoners, by vrtue of the votng trust agreement executed n
1981 dsposed of ALL THEIR SHARES THROUGH ASSIGNMENT AND DELIVERY IN FAVOR OF DBP, AS
TRUSTEE. Consequenty, the pettoners ceased to own at east one share standng n ther names on
the books of ALFA as requred under Sec. 23 of the Corp. Code. They aso ceased to have anythng to
do wth the management of the enterprse. The pettoners ceased to be drectors. Hence, the
transfer of the pets shares to the DBP created vacances n ther respectve postons as drectors of
ALFA. The transfer of shares from the stockhoders of ALFA to the DBP s the essence of the sub|ect
votng trust agreement.
At the tme of servce of summons on ALFA, the votng trust agreement n queston was not yet
termnated, so that the tte to the stocks of ALFA then st beonged to the DBP. Servce of summons
on ALFA through pets was therefore mproper.
Petton granted.
The trustor has a rght to termnate the VTA for breach thereof. &vere v. )sia Ban$ing
Cor+oraion, 49 Ph. 512 (1926).
Votng trust agreement as part of a oan arrangement. #I(C v. ):uino, 163 SCRA 153
(1988).
NOTE: In a trust agreement (1) votng rghts are separated from other attrbutes of ownershp (2)
votng rghts are ntended to be rrevocabe for a defnte perod of tme (3) prncpa purpose of the
grant s to acqure votng contro of the corporaton.
NOTE: REOUISITES: (1) n wrtng and notarzed and sha specfy the terms and condtons thereof (2)
certfed copy of such agreement sha be fed wth the corporaton and wth the SEC.
DISTINCTIONS BETWEEN PROXY, VOTING TRUST AGREEMENT and POOLING ARRANGEMENT
PROXY - agency VOTING TRUST AGREEMENT -
trust
POOLING ARRANGEMENT
- contract: I do that you
may do
(1) essentay an agency
reatonshp
(1) contractua reatonshp (1)
(2) fducary -- generay
revocabe -- representatve
fducary
(2) fducary - not revocabe -
propretary fducary
(2) contractua/non-
fducary (Tte on Cose
Corporatons)
(3) can ony act at specfed
stockhoders meetng
(3) not mted to any partcuar
meetng
(4) no rght to receve
dvdends
(4) w receve dvdends but
wth the obgaton to dspose
them for the beneft of the
benefca owner
(5) does not have the rght to
nspect
(5) entted to such rght
(6) does not have apprasa
rght
(6) trustee as the naked owner
w exercse the apprasa
rght.
(7) asts for ony fve years (7) asts aso for fve years
(8) n wrtng, sgned and fed
pror to the meetng
(8) n wrtng, sgned,
notarzed, fed wth
corporaton and SEC
18
1
NOTE: When the VTA s unenforceabe as when t s not fed wth the corporaton and wth the SEC, t
s at the very east a proxy agreement, however, a the other rghts n reaton to the VTA may not be
exercsed as the same s unenforceabe. The VTA f not regstered wth the SEC or not regstered wth
the corporaton sha be vad as between the partes f the trustor vadates such agreement,
however the vadaton of the trustor does not bnd the corporaton. Ths s the case because the
corporaton ony recognzes transfers whch are actuay regstered wth them, n the stock and
transfer book.
%"$ Pooling Agreements or Shareholders6 Agreements (Sec. 100)
Secton 100. Agreements by stockhoders. -
1. Agreements by and among stockhoders executed before the formaton and organzaton of
a cose corporaton, sgned by a stockhoders, sha survve the ncorporaton of such
corporaton and sha contnue to be vad and bndng between and among such stockhoders,
f such be ther ntent, to the extent that such agreements are not nconsstent wth the
artces of ncorporaton, rrespectve of where the provsons of such agreements are
contaned, except those requred by ths Tte to be emboded n sad artces of ncorporaton.
2. An agreement between two or more stockhoders, f n wrtng and sgned by the partes
thereto, may provde that n exercsng any votng rghts, the shares hed by them sha be
voted as theren provded, or as they may agree, or as determned n accordance wth a
procedure agreed upon by them.
3. No provson n any wrtten agreement sgned by the stockhoders, reatng to any phase of
the corporate affars, sha be nvadated as between the partes on the ground that ts effect
s to make them partners among themseves.
4. A wrtten agreement among some or a of the stockhoders n a cose corporaton sha not
be nvadated on the ground that t so reates to the conduct of the busness and affars of the
corporaton as to restrct or nterfere wth the dscreton or powers of the board of drectors:
Provded, That such agreement sha mpose on the stockhoders who are partes thereto the
abtes for managera acts mposed by ths Code on drectors.
5. To the extent that the stockhoders are actvey engaged n the management or operaton
of the busness and affars of a cose corporaton, the stockhoders sha be hed to strct
fducary dutes to each other and among themseves. Sad stockhoders sha be personay
abe for corporate torts uness the corporaton has obtaned reasonaby adequate abty
nsurance.
Revsed Bagtas Revewer by Ve and Ocfe 2A
XIII. CA(ITAL STR5CT5RE9 SHARES O4 STOCK
1. Co#"ept o0 <Capital Sto"-= (Cenral Te'ile .ills v. #aional 9age an- Pro-uciviy
Commission, 260 SCRA 368 |1996|).
18
3
EOUITY INVESTMENT DEBT CONTRACT
(1) One who makes ths n a
corporaton expects that hs return
sha be ted-up wth the success or oss
of the operatons of the corporaton.
Sharehoders, both common and
preferred, are consdered rsk takers
who nvest capta n the busness and
who can ook ony to what s eft after
corporate debts and abtes are fuy
pad.
He s gven a voce or say n
management n the sense that he
woud be entted to partcpate n the
eecton of the board of drectors, and
aso to cast votes on certan corporate
structura matters.
(1) One who makes ths expects that hs
return sha be gven back to hm regardess
of the success or oss of the operatons of the
corporaton. Credtors are not consdered rsk
takers.
(2) An equty nvestment n a corporate
enterprse s generay non-
wthdrawabe for so ong as the
corporaton has not been dssoved.
Ths assures the corporate enterprse
and ts managers that they w have
such resources at ther dsposa so ong
as the corporate enterprse remans a
gong concern.
In the case of an equty nvestor, snce
he has paced hs stake n the resuts of
the operatons, he generay
partcpates n a ncome earned by the
venture.
(2) A person who extends a oan or a debt to
the corporaton ony ooks at the fnanca
condton and operatons of the corporaton
as a means of gaugng the abty of the
corporaton to pay-back the oan at the
specfed perod. But a credtor puts no stake
on the operatons of the corporaton, and
therefore, the contractua obgatons of the
corporate enterprse to pay the stpuated
return remans even when the corporatons
are ncurrng osses.
Snce the nvestor paces no stake n the
resuts of the operatons, he can ony demand
the stpuated fxed return of hs nvestment
even f by the use of the borrowed funds, the
enterprse s abe to reap huge profts.
(3) Snce the equty nvestor ceary
undertook to pace ther nvestment to
the rsk of the venture, they can ony
receve a return of ther nvestment
ony from the remanng assets of the
venture, f any, after the payment of a
abtes to credtors.
(3) Snce a debt nvestor paces no stake n
the corporate operatons and hs rghts are
based on contract, then the corporate
venture must n case of nsovency, devote
and prefer a corporate assets towards the
payment of ts credtors.
By express provson of Sec. 13 of Corporaton Code, pad-up capta s that porton of the
authorzed capta stock whch has been both subscrbed and pad. . . Not a funds or assets
receved by the corporaton can be consdered pad-up capta, for ths term has a technca
sgnfcaton n Corporaton Law. Such must form part of the authorzed capta stock of the
corporaton, subscrbed and then actuay pad up. .SCI7#)C5SIP Local Cha+er v. #aional
9ages an- Pro-uciviy Commission, 269 SCRA 173 (1997).
The term "capta" and other terms used to descrbe the capta structure of a corporaton
are of unversa acceptance, and ther usages have ong been estabshed n |ursprudence.
Brefy, capta refers to the vaue of the property or assets of a corporaton. The capta
subscrbed s the tota amount of the capta that persons (subscrbers or sharehoders) have
agreed to take and pay for, whch need not necessary be, and can be more than, the par
vaue of the shares. In fne, t s the amount that the corporaton receves, ncusve of the
premum f any, n consderaton of the orgna ssuance of the shares. #TC v. Cour of
)++eals, 311 SCRA 508 (1999).
Revsed Bagtas Revewer by Ve and Ocfe 2A
NOTE: Subscrpton contract s a speces of a sae contract, but whe t s a speces of sae, t s
st the Corporaton Code that appes to t. Wth sae, rescsson as a remedy may be resorted to
when substanta breach occurs. But as wth subscrpton agreements, such may not be resorted to.
2. Classi0i"atio# o0 Shares (Sec. 6)
The defnton of capta stock ceary shows that t s composed of two tems, namey: (a) the porton
whch have been pad by the stockhoders, represented by the account "Pad-up Capta"; and (b) the
porton whch s to be pad on the subscrptons, represented by the account "Subscrpton
Recevabes."
POLICIES ON CLASSIFICATION OF SHARES: (1) It expressy recognzes the freedom and power of a
corporaton to cassfy shares (2) The Code expressy adopts the presumpton of equaty of rghts
and features of shares when nothng s expressed to the contrary (3) The Code aso provdes for
votng rghts for a types of shares on matters t consders as fundamenta measures.
NOTE: In the absence of stpuaton, a shares are equa. Restrctons and preferences n reaton to
ths must be stated n the artces of ncorporaton. ( In cose corporatons, such must the n the AI, BL
and certfcate tsef, n order that t may bnd the pubc.
Secton 6. Cassfcaton of shares. - The shares of stock of stock corporatons may be dvded nto
casses or seres of shares, or both, any of whch casses or seres of shares may have such rghts,
prveges or restrctons as may be stated n the artces of ncorporaton: Provded, That no share
may be deprved of votng rghts except those cassfed and ssued as "preferred" or "redeemabe"
shares, uness otherwse provded n ths Code: Provded, further, That there sha aways be a cass
or seres of shares whch have compete votng rghts. Any or a of the shares or seres of shares may
have a par vaue or have no par vaue as may be provded for n the artces of ncorporaton:
Provded, however, That banks, trust companes, nsurance companes, pubc uttes, and budng
and oan assocatons sha not be permtted to ssue no-par vaue shares of stock.
Preferred shares of stock ssued by any corporaton may be gven preference n the dstrbuton of
the assets of the corporaton n case of qudaton and n the dstrbuton of dvdends, or such other
preferences as may be stated n the artces of ncorporaton whch are not voatve of the provsons
of ths Code: Provded, That preferred shares of stock may be ssued ony wth a stated par vaue.
The board of drectors, where authorzed n the artces of ncorporaton, may fx the terms and
condtons of preferred shares of stock or any seres thereof: Provded, That such terms and
condtons sha be effectve upon the fng of a certfcate thereof wth the Securtes and Exchange
Commsson.
Shares of capta stock ssued wthout par vaue sha be deemed fuy pad and non-assessabe and
the hoder of such shares sha not be abe to the corporaton or to ts credtors n respect thereto:
Provded; That shares wthout par vaue may not be ssued for a consderaton ess than the vaue of
fve (P5.00) pesos per share: Provded, further, That the entre consderaton receved by the
corporaton for ts no-par vaue shares sha be treated as capta and sha not be avaabe for
dstrbuton as dvdends.
A corporaton may, furthermore, cassfy ts shares for the purpose of nsurng compance wth
consttutona or ega requrements.
Except as otherwse provded n the artces of ncorporaton and stated n the certfcate of stock,
each share sha be equa n a respects to every other share.
Where the artces of ncorporaton provde for non-votng shares n the cases aowed by ths Code,
the hoders of such shares sha nevertheess be entted to vote on the foowng matters:
1. Amendment of the artces of ncorporaton;
18
5
2. Adopton and amendment of by-aws;
3. Sae, ease, exchange, mortgage, pedge or other dsposton of a or substantay a of the
corporate property;
4. Incurrng, creatng or ncreasng bonded ndebtedness;
5. Increase or decrease of capta stock;
6. Merger or consodaton of the corporaton wth another corporaton or other corporatons;
7. Investment of corporate funds n another corporaton or busness n accordance wth ths
Code; and
8. Dssouton of the corporaton.
Except as provded n the mmedatey precedng paragraph, the vote necessary to approve a
partcuar corporate act as provded n ths Code sha be deemed to refer ony to stocks wth votng
rghts.
%a$ Common Shares
Common stock do not have any speca contract rghts or preferences. Frequenty t s the
ony cass of outstandng. It generay represents the greatest porton of the corporatons
capta structure and bears the greatest rsk of oss n the event of faure of the enterprse.
Bearng the rsk of oss, aong wth the partcpaton n corporaton assets after a cams are
pad, management of the corporaton, and partcpaton n profts are the foremost eements
of common shares.
"A common stock represents the resdua ownershp nterest n the corporaton. It s a
basc cass of stock ordnary and usuay ssued wthout extraordnary rghts or prveges
and enttes the sharehoder to a +ro raa dvson of profts." Commissioner of Inernal
,evenue v. Cour of )++eals, 301 SCRA 152 (1999).
%!$ Preferred Shares (a,e+ublic Planers Ban$ v. )gana, 269 SCRA 1 |1997|).
A preferred share of stock s one "whch enttes the hoder thereof to certan preferences
over the hoder of common stock...desgned to nduce persons to subscrbe for shares of a
corporaton. PREFERRED SHARES AS TO ASSETS gves the hoder thereof preference n the
dstrbuton of assets of the corporaton n case of qudaton. PREFERRED SHARES AS TO
DIVIDENDS gve the hoder the rght to receve dvdends on sad shares to the extent agreed
upon before any dvdends at a are pad to the hoders of the common stock.
REPUBLIC PLANTERS BANK v AGANA
The SC has hed that athough the certfcates of stock granted the stockhoder the rght to
receve quartery dvdends of 1% cumuatve and partcpatng, the stockhoders dd not become
entted to the payment thereof as a matter of rght wthout necessty of a pror decaraton of
dvdends.
Both Sec. 16 and 43 of the present Corporaton Code prohbt the ssuance of any stock dvdend
wthout the approva of stockhoders, representng not ess than 2/3 of the outstandng capta
stock at a reguar or speca meetng duy caed for the purpose. These provsons underscore the
fact that payment of dvdends to a stockhoder s not a matter of rght but a matter of consensus.
Furthermore, nterest bearng stock on whch the corporaton agrees absoutey to pay nterest
before dvdends are pad to the common stockhoders, s ega ony when construed as requrng
payment of nterest as dvdends from net earnngs or surpus ony.
In spte of specfc preferences granted to preferred shares, there s no guaranty, that the share
w receve any dvdends, or that the preferred sharehoders w have preference to corporate
assets greater than corporate credtors, thus, smary the present Corporaton Code provdes
that the board of drectors of a stock corporaton may decare dvdends ony out of unrestrcted
retaned earnngs. The Code n Sec. 43, adoptng the change made n accountng termnoogy,
Revsed Bagtas Revewer by Ve and Ocfe 2A
substtuted the phrase "unrestrcted retaned earnngs" whch may be a more precse term n
pace of "surpus arsng from ts busness" n the former aw. Thus, the decaraton of dvdends s
dependent upon the avaabty of surpus proft or unrestrcted retaned earnngs, as the case
may be. Preferences granted to preferred stockhoders, moreover, do not gve them a en upon
the property of the corporaton nor make them credtors of the corporaton, the rght of the
former beng aways subordnate to the atter. Dvdend thus payabe ony when there are profts
earned by the corporaton and as a genera rue, even f there are exstng profts, the board of
drectors has the dscreton to determne whether or not dvdends are to be decared.
Sharehoders both common and preferred are consdered rsk takers who nvest capta n the
busness and who can ook ony to what s eft after corporate debts and abtes are fuy pad.
Participating and &on-participating - PARTICIPATING entte the
sharehoders to partcpate wth the hoders of common shares n the
retaned earnngs after the amount of stpuated dvded has been pad
to the preferred shares. NON-PARTICIPATING are those that entte
hoders of preferred shares ony to the stpuated preferred dvdends
and no more.
Cumulative and &on-cumulative - CUMULATIVE entte the hoders
thereof to the payment not ony of current dvdends but aso of back
dvdends not prevousy pad, when and f the dvdends are decared to
the extent agreed upon before hoders of common shares are pad. Its
fundamenta characterstc s that f the preferred dvdend s not pad n
fu n any year, whether or not earned, the defcency must be made up
before any dvdend may be pad on the common stock. NON-
CUMULATIVE entte the hoders merey to the payment of current
dvdends that are pad to the extent agreed upon before the hoders of
common shares are pad.
Par -alue and &o Par -alue - PAR VALUE sha be deemed fuy pad
and non-assessabe and the hoder of such shares sha not be abe to
the corporaton or to ts credtor n respect thereto. NO PAR VALUE may
not be ssued for consderaton ess than the vaue of P5.00 per share
and that the entre consderaton receved by the corporaton for ts no-
par vaue shares be treated as capta and sha not be avaabe for
dstrbuton of dvdends. A NO PAR VALUE share does not purport to
represent any stated proportonate nterest n the capta stock
measured by vaue, but ony an aquot part of the whoe number of such
shares of the ssung corporaton. The hoder of no-par shares may see
from the certfcate tsef that he s ony an aquot sharer n the assets of
the corporaton. But ths character of proportonate nterest s not
hdden beneath a fase appearance of a gven sum of money, as n the
case of par vaue shares. The capta stock of a corporaton ssung ony
no-par vaue shares s not set forth by a stated amount of money but
nstead s expressed to be dvded nto a stated number of shares, such
as 1,000 shares. Ths ndcates that a sharehoder of 100 shares s an
aquot sharer n the assets of the corporaton, no matter what vaue
they may have, to the extent of 100/1000 or 1/10. Thus, by removng
the par vaue of shares, the attenton of persons nterested n the
fnanca condton of a corporaton s focused upon the vaue of the
assets and the amount of ts debts.
NOTE: In the absence of stpuaton as to stocks whch are non-cumuatve or cumuatve, or non-
partcpatng or partcpatng, the presumpton s n favor of the one whch provdes for ower rghts
.e. non-cumuatve and non-partcpatng.
"Preferred stocks are those whch entte the sharehoder to some prorty on dvdends
and asset dstrbuton." Commissioner of Inernal ,evenue v. Cour of )++eals, 301 SCRA
152 (1999).
18
7
EXAMPLES:
1.) 1000 common votng and 500 preferred non-votng do the 500 shares have preference as
to dstrbutons of dvdends? NO, the type of preference must be stated expressy n the artces of
ncorporaton, as such t s ony preferred as to ts name. The ony thng stated s the restrcton on ts
votng rghts.
2.) 1000 common non-votng shares VOID, the ony shares that may be restrcted as to
votng are preferred and redeemabe shares.
3.) 12% preferred non-votng Ths s a gray area n corporaton aw. The genera schoo of
thought wth regard to ths, s that t en|oys preference as to dvdends because the provson of the
fgure seemngy guarantees a certan amount of return.
%!$ Redeemable Shares (Sec. 8;a,e+ublic Planers Ban$ v. )gana, 269 SCRA 1)
Secton 8. Redeemabe shares. Redeemabe shares may be ssued by the corporaton when expressy
so provded n the artces of ncorporaton. They may be purchased or taken up by the corporaton
upon the expraton of a fxed perod, regardess of the exstence of unrestrcted retaned earnngs n
the books of the corporaton, and upon such other terms and condtons as may be stated n the
artces of ncorporaton, whch terms and condtons must aso be stated n the certfcate of stock
representng sad shares.
REDEEMABLE SHARES are shares of stock ssued by a corporaton whch the corporaton can
purchase or take up from ther hoders as expressy provded for n the artces of ncorporaton and
certfcates of stock representng sad shares.
NOTE: Redeemabe shares are an excepton
GR: The corporaton s not aowed to buy back shares.
ER: (1) denquency sae (2) redeemabe shares (3) Secton 41 of the Corporaton Code - ream
outsde redeemabe shares.
Secton 41. Power to acqure own shares. - A stock corporaton sha have the power to purchase or
acqure ts own shares for a egtmate corporate purpose or purposes, ncudng but not mted to
the foowng cases: Provded, That the corporaton has unrestrcted retaned earnngs n ts books to
cover the shares to be purchased or acqured:
1. To emnate fractona shares arsng out of stock dvdends;
2. To coect or compromse an ndebtedness to the corporaton, arsng out of unpad subscrpton, n
a denquency sae, and to purchase denquent shares sod durng sad sae; and
3. To pay dssentng or wthdrawng stockhoders entted to payment for ther shares under the
provsons of ths Code.
REPUBLIC PLANTERS BANK V. AGANA
It has been hed that when the certfcate of stock recognzes redempton but the opton to do so
s ceary vested n the corporaton, the redempton s ceary known as "optona" and rest
entrey wth the corporaton and the stockhoder s wthout rght to ether compe or refuse the
redempton of ts stock.
Redeemabe shares are shares usuay preferred whch by ther terms are redeemabe at a fxed
date, or at the opton of ether the ssung corporaton, or the stockhoder or both at a certan
redempton prce. A redempton by the corporaton of ts stock s, n a sense, a repurchase of t
for canceaton. The present Code aows redempton of shares even f there are no unrestrcted
retaned earnngs on the books of the corporaton. Ths s a new provson whch n effect quafes
the genera rue that the corporaton cannot purchase ts own shares except out of current
retaned earnngs. However, whe redeemabe shares may be redeemed regardess of the
exstence of unrestrcted retaned earnngs, ths s sub|ect to the condton that the corporaton
has, after such redempton, assets n ts books to cover debts and abtes ncusve of capta
stock. Redempton, therefore, may not be made where the corporaton s nsovent or f such
redempton w cause nsovency or nabty of the corporaton to meet ts debt as they mature.
"Redempton s repurchase, a reacquston of stock by a corporaton whch ssued the
stock n exchange for property, whether or not the acqured stock s canceed, retred or
Revsed Bagtas Revewer by Ve and Ocfe 2A
hed n the treasury. Essentay, the corporaton gets back some of ts stock,
dstrbutes cash or property to the sharehoder n payment for the stock, and contnues n
busness as before. The redempton of stock dvdends prevousy ssued s used as a ve
for the constructve dstrbuton of cash dvdends. Commissioner of Inernal ,evenue v.
Cour of )++eals, 301 SCRA 152 (1999).
ON TAXABILITY OF REDEMPTION OF STOCK DIVIDENDS - When the corporaton redeems shares
comng from those ssued upon estabshment of the corporaton or from nta capta nvestment,
the redempton to ther concurrent vaue of acquston woud not be sub|ect to tax because that
woud consttute merey a return of nvestment. On the other hand, f the redempton from prevousy
decared stock dvdends, the proceeds of the redempton consttute addtona weath, for t s no
onger merey a return of capta but a gan thereon, and sub|ect to tax.
%"$ )ounder Shares (Sec. 7)
Secton 7. Founders' shares. - Founders' shares cassfed as such n the artces of ncorporaton may
be gven certan rghts and prveges not en|oyed by the owners of other stocks, provded that where
the excusve rght to vote and be voted for n the eecton of drectors s granted, t must be for a
mted perod not to exceed fve (5) years sub|ect to the approva of the Securtes and Exchange
Commsson. The fve-year perod sha commence from the date of the aforesad approva by the
Securtes and Exchange Commsson.
NOTE: It must be understood that founders share are consdered as such not because of the
nomencature gven to them. It must be presumed that what makes shares as founders shares
woud be that they are gven the excusve rghts not gven to other stockhoders, and especay the
rght to vote and be voted for n the eecton of drectors. The exstence of founders shares must
necessary ncude the fact that there are other shares that not en|oy such rghts, and woud
necessary ncude the exstence of common shares, whch ordnary woud have the rght to vote
and be voted nto the board of drectors. It woud then be reasonabe to concude that a cass of
shares, even when not gven the nomencature of founders share woud necessary fa wthn the
provson of Sec. 7 whenever such cass of shares are gven the excusve rght to vote and be voted
for n the eecton of the drectors, and necessary such excusve rght sha have a mted perod of
fve years.
EFFECT WHEN EXCLUSIVITY PERIOD EXPIRES - The SEC has opned that upon the expraton of the
perod wthn whch the founders shares can exercse ther excusve rght to vote and be voted for n
the eecton of drectors, such excusve rght woud ony be transferred to common sharehoders who
are supposes to exercse such rght had there been no founders share. Other casses of shares such
as preferred shares are not affected.
%d$ ,reasury Shares (Sec. 9; Commissioner v. .anning, 66 SCRA 14 |1975|).
Secton 9. Treasury shares. - Treasury shares are shares of stock whch have been ssued and fuy
pad for, but subsequenty reacqured by the ssung corporaton by purchase, redempton, donaton
or through some other awfu means. Such shares may agan be dsposed of for a reasonabe prce
fxed by the board of drectors.
TREASURY SHARES are shares that a corporaton acqures after t has ssued them. The SEC has
opned that treasury shares have no effect on the stated capta of the corporaton uness and unt
there are canceed or retred n whch event the stated capta s reduced by the amount then
representng the shares. Treasury shares must be dstngushed from the authorzed but unssued
shares: the acquston of treasury shares does not reduce the number of ssued shares or the
amount of stated capta and ther sae does not ncrease the number of ssued shares or the amount
of the stated capta.
A corporaton may se treasury shares for any amount the board of drectors determnes, even f the
shares have a par vaue that s more than the sae prce. Treasury shares do not have votng rghts
nor pre-emptve rghts. In addton, no dvdends are pad on treasury shares.
VARIOUS FEATURES OF TREASURY SHARES: (1) Athough authortes dffer on the exact ega and
accountng statutes of so-caed treasury shares, they are more or ess n agreement that treasury
shares are stocks ssued and fuy pad for and re-acqured by the corporaton ether by purchase,
donaton, forfeture or other means; (b) Treasury shares are therefore ssued shares, but beng n the
18
9
treasury, they do not have the status of outstandng shares; (c) Consequenty, athough a treasury
share, not havng been retred by the corporaton, reacqurng t, may be ressued or sod agan, such
share, as ong as a treasury share, partcpates nether n dvdends, because dvdends cannot be
decared by the corporaton to tsef, nor n the meetngs of the corporaton as votng stock, for
otherwse equa dstrbuton of votng powers among stockhoders w be effectvey ost and the
drectors w be abe to perpetuate ther contro of the corporaton, though t st represents a pad-
for-nterest n the property of the corporaton.
Treasury shares do not revert to the unssued shares of the corporaton but are regarded as property
acqured by the corporaton whch may be ressued or sod by the corporaton at a prce to be fxed
by the Board of Drectors.
The amount of unrestrcted retaned earnngs equvaent to the cost of treasury shares beng hed
sha be restrcted from beng decared and ssued as dvdends. The dvdend restrcton on retaned
earnngs on account of the treasury shares sha be fted ony after the treasury shares causng the
restrcton are re-ssued or retred. The retrement of treasury shares sha be effected by decreasng
the capta stock of the corporaton n accordance wth Secton 38 of the Code, for the purpose of
emnatng treasury shares.
Treasury shares sha have no votng rghts as ong as such shares reman n the treasury.
Treasury shares may be decared as property dvdend to be ssued out of the retaned earnngs
prevousy used to support ther acquston, provded that the amount of the sad retaned earnngs
has not been subsequenty mpared by osses. Any decaraton and ssuance of treasury shares as
property dvdend sha be dscosed and propery desgnated as property dvdend n the books of eh
corporaton and n ts fnanca statement.
NOTE: These are sod va the Board at the prce whch s consdered to be the most feasbe sae
vaue to the Board as part of ts busness |udgment rue. It does not appear as assets n the baance
sheet. It s not entted to vote, to be counted as part of the quorum, and s not entted to dvdends.
It becomes a treasury share when t s purchased as such, when purchased n a denquency sae,
and when donated.
%e$ Stoc. Warrants
Stock warrant s a type of securty whch enttes the hoder the rght to subscrbe to, the
unssued capta stock of the corporaton or to purchase ssued shares n the future, evdenced by
a Warrant Certfcate, whether detachabe or not whch may be sod or offered for sae to the
pubc but does not appy to a rght granted under an Opton Pan duy approved by the SEC for
the beneft of the empoyees, offcers, and/or drectors of the ssung corporaton.
ISSUANCE OF WARRANTS: (1) a duy regstered domestc corporaton whch ssues or proposes to
ssue subscrpton warrants (2) A person or group of persons who ssues or proposes to ssue
covered warrants.
TYPES OF WARRANTS: (1) Subscrpton warrants - enttes the hoders thereof the rght to
subscrbe to a pre-determned number of shares out of the unssued capta stock of the Issuer (2)
Covered warrant - enttes the hder thereof the rght to purchase from the Issuer a
predetermned number of exstng shares.
TYPES OF WARRANT CERTIFICATES (1) Detachabe warrant - sod, transferred or assgned to any
person by the warrant hoder separate from, and ndependent of, the correspondng Benefcary
Securtes (2) Non-detachabe warrant - cannot be sod, transferred or assgned to any person by
the warrant hoder separate from, or ndependent of the Benefcary Securtes.
Warrant hoders may exercse ther rght granted under a warrant wthn the perod approved by
the SEC whch sha not be ess than 1 year nor more than 5 years from the date of the Issue of
the warrants. An Issuer of warrants must provde for a Warrants Regstry Book mantaned by the
warrants regstrar ndependent of the Issuer.
%0$ Stoc. Options
Stock opton s a prvege granted to a party to subscrbe to a certan porton of the unssued
Revsed Bagtas Revewer by Ve and Ocfe 2A
capta stock of a corporaton wthn a specfed perod and under the terms and condtons of
the grant, exercsed by the grantee at any tme wthn the perod granted. The Rues provde that
no corporaton sha grant any stock opton uness approva by the SEC s frst obtaned. Asde
from a forma board resouton authorzng the grant of the opton, the Rues requre that the
appcaton wth the SEC shoud contan a detaed statement as to the pan or scheme by whch
the opton sha be exercsed. No exercse of the rght of the opton sha be vad uness
accompaned by the payment of not ess than 40% of the tota prce of the shares so purchased,
whch payment sha be propery recepted for by the corporate treasurer, except where the
grantee s an empoyee or offcer who s not a drector of the corporaton n whch case ony 25%
of the tota prce sha be requred or aow a panned payro deducton scheme. If the opton sha
be for compensaton or payment of servce aready rendered, then the nta payment sha not
be requred.
The Rues provde for the foowng gudenes: (1) Stock optons may be granted on the bass of
proportonate nterests of stockhoders n the capta stock; (2) Stock optons granted to
empoyees or offcers who are not members of the board may aso be aowed after a revew of
the scheme snce t woud be n consonance wth the pocy of the government to wden corporate
base and to dstrbute corporate profts wder and more equtabe; (3) Stock optons granted to
non-stockhoders may be granted ony upon showng that the board has been duy authorzed to
grant the same by ts charter or by a resouton of the stockhoders ownng at east 2/3 of the
outstandng capta stock of the corporaton, both votng and non-votng; (4) Optons granted to
drectors, managng groups and corporate offcers must be approved n a stockhoders meetng
by stockhoders ownng at east 2/3 of a the outstandng capta stock, votng or non-votng; (5)
The optons must be exercse wthn a perod of three years from the approva thereof by the SEC
or upon extenson thereof duy approved by the SEC; and (6) No transfer of the rght to an opton
sha be made wthout the approva of the SEC.
The Rues provde that when a person has been aowed to subscrbe to 5% of the tota
subscrbed capta stock of the corporaton at a prce beow the current market prce, even when
the subscrpton s above par, such subscrpton sha be consdered and treated as stock opton
and the subscrber must be requred to tender payment thereof to the corporaton of at east 75%
of the tota prce of the subscrpton. Such subscrptons sha not aso be transferabe unt fu
payment. If they are to be sod, the prce shoud not be ower than par or ess than 80% of the
market prce at the tme of the exercse, or ts there s no transacton at the tme of the exercse.
Then the ast asked prce whchever s hgher; provded that f the shares are not sted, the 80%
referred to sha be based on the book vaue.
%*$ Re-Classification of Shares
"Recassfcaton of shares does not aways brng any substanta ateraton n the
subscrbers proportona nterest. But the exchange s dfferent-there woud be a shftng
of the baance of stock features ke prorty n dvdend decaratons or absence of votng
rghts. Yet nether the recassfcaton nor exchange +er se yeds ncome for tax
purposes. . . In ths case, the exchange of shares, wthout more, produces no reazed
ncome to the subscrber. There s ony a modfcaton of the subscrbers rghts and
prveges-whch s not a fow of weath for tax purposes. The ssue of taxabe dvdend
may arse ony once a subscrber dsposes of hs entre nterests and not when there s st
mantenance of propretary nterest." Commissioner of Inernal ,evenue v. Cour of
)++eals, 301 SCRA 152 (1999).
&. H)!rid Se"rities (aGovernmen v. Phil. Sugar &saes, 38 Ph. 15 |1918|; 3ohn 4eley Co. v.
Comm. of Inernal ,evenue, 326 U.S. 521, 66 S. Ct. 299, 90 L. Ed., 278 |1945|).
NOTE: Sae of equty securtes represent an ownershp nterest n the corporaton and ncude both
common and preferred stock. In addton, corporatons fnance much of ther contnued operatons
through debt securtes. Debt securtes or bonds do not represent an ownershp nterest n the
corporaton but rather create a debtor-credtor reatonshp between the corporaton and the
bondhoder.
GOVERNMENT v. PHIL SUGAR ESTATES
19
1
In ths case, the SC n determnng whether the arrangement between two corporatons was a
contract of partnershp or a oan arrangement between two corporatons was a contract of
partnershp or oan arrangement noted the foowng features n the contract n rung that t s an
equty arrangement: (1) there was no perod fxed n the contract for the repayment of the money
except that the frst return from sae of the and was to be devoted to the payment of the capta and
there was no date fxed for such payment; (2) the entre amount of the credt as not be turned over
at once but was to be used by the borrowng company as t was needed; (3) the return on the capta
was not by a fxed rate of nterest but 25% of the profts earned by the borrowng company n todos
os negocos; (4) the endng company agreed to pay 25% of a genera expendtures true and
necessary that the borrowng company must make for the deveopment of ts busness; (5) the
consent of the endng company was necessary when the borrowng company desred to se the and
beow an agreed market prce, but was not requred f the seng prce was over the benchmark
fgure; and (6) the endng company acted as treasurer of the entre enterprse.
The Court hed that t s dffcut to understand how ths contract can be consdered a oan. There was
no date fxed for the return of the money and there was no fxed return to be made for the use of the
money. The return was dependent soey upon the profts of the busness. It s possbe for the
defendant to receve a return from the busness even after the capta has been returned. The capta
was to be returned as soon as the and was sod and apparenty there were to be no profts unt ths
capta was returned. The defendant was not to receve anythng for the use of sad sum unt after
the capta has been fuy repad, whch s not consstent wth the dea of oan. It s not mpossbe to
provde that capta be repad frst but the usua method s to pay the nterest frst.
+. 7asi8Reor*a#iAatio#
a$ Reduction of Capital Stoc. (Sec. 38)
Secton 38. Power to ncrease or decrease capta stock; ncur, create or ncrease bonded
ndebtedness. - No corporaton sha ncrease or decrease ts capta stock or ncur, create or ncrease
any bonded ndebtedness uness approved by a ma|orty vote of the board of drectors and, at a
stockhoder's meetng duy caed for the purpose, two-thrds (2/3) of the outstandng capta stock
sha favor the ncrease or dmnuton of the capta stock, or the ncurrng, creatng or ncreasng of
any bonded ndebtedness. Wrtten notce of the proposed ncrease or dmnuton of the capta stock
or of the ncurrng, creatng, or ncreasng of any bonded ndebtedness and of the tme and pace of
the stockhoder's meetng at whch the proposed ncrease or dmnuton of the capta stock or the
ncurrng or ncreasng of any bonded ndebtedness s to be consdered, must be addressed to each
stockhoder at hs pace of resdence as shown on the books of the corporaton and deposted to the
addressee n the post offce wth postage prepad, or served personay.
A certfcate n dupcate must be sgned by a ma|orty of the drectors of the corporaton and
countersgned by the charman and the secretary of the stockhoders' meetng, settng forth:
(1) That the requrements of ths secton have been comped wth;
(2) The amount of the ncrease or dmnuton of the capta stock;
(3) If an ncrease of the capta stock, the amount of capta stock or number of shares of no-
par stock thereof actuay subscrbed, the names, natonates and resdences of the persons
subscrbng, the amount of capta stock or number of no-par stock subscrbed by each, and
the amount pad by each on hs subscrpton n cash or property, or the amount of capta
stock or number of shares of no-par stock aotted to each stock-hoder f such ncrease s for
the purpose of makng effectve stock dvdend therefor authorzed;
(4) Any bonded ndebtedness to be ncurred, created or ncreased;
(5) The actua ndebtedness of the corporaton on the day of the meetng;
(6) The amount of stock represented at the meetng; and
(7) The vote authorzng the ncrease or dmnuton of the capta stock, or the ncurrng,
creatng or ncreasng of any bonded ndebtedness.
Revsed Bagtas Revewer by Ve and Ocfe 2A
Any ncrease or decrease n the capta stock or the ncurrng, creatng or ncreasng of any
bonded ndebtedness sha requre pror approva of the Securtes and Exchange Commsson.
One of the dupcate certfcates sha be kept on fe n the offce of the corporaton and the other
sha be fed wth the Securtes and Exchange Commsson and attached to the orgna artces of
ncorporaton. From and after approva by the Securtes and Exchange Commsson and the ssuance
by the Commsson of ts certfcate of fng, the capta stock sha stand ncreased or decreased and
the ncurrng, creatng or ncreasng of any bonded ndebtedness authorzed, as the certfcate of
fng may decare: Provded, That the Securtes and Exchange Commsson sha not accept for fng
any certfcate of ncrease of capta stock uness accompaned by the sworn statement of the
treasurer of the corporaton awfuy hodng offce at the tme of the fng of the certfcate, showng
that at east twenty-fve (25%) percent of such ncreased capta stock has been subscrbed and that
at east twenty-fve (25%) percent of the amount subscrbed has been pad ether n actua cash to
the corporaton or that there has been transferred to the corporaton property the vauaton of whch
s equa to twenty-fve (25%) percent of the subscrpton: Provded, further, That no decrease of the
capta stock sha be approved by the Commsson f ts effect sha pre|udce the rghts of corporate
credtors.
Non-stock corporatons may ncur or create bonded ndebtedness, or ncrease the same, wth the
approva by a ma|orty vote of the board of trustees and of at east two-thrds (2/3) of the members
n a meetng duy caed for the purpose.
Bonds ssued by a corporaton sha be regstered wth the Securtes and Exchange Commsson,
whch sha have the authorty to determne the suffcency of the terms thereof.
Reducton of capta stock cannot be empoyed to avod the corporatons obgatons
under the Labor Code. '.a-rigal * Co. v. =amora, 151 SCRA 355 (1987).
%!$ Stoc. Splits - each of the ssued and outstandng shares s smpy broken up nto a
greater number of shares, each representng a proportonatey smaer nterest n the corporaton.
The usua purpose of a stock spt us to ower the prce per share to a more marketabe prce and
thus ncrease the number of the potenta sharehoders. They encourage nvestment.
%"$ Stoc. Consolidations - new shares are ssued n a repacement of od shares wth a
hgher par or ssued vaue, wthout affectng the tota vaue of the ssued shares. Stock consodatons
are resorted to make each share have a hgher par or ssued vaue and thereby make them more
expensve n acqurng and to brng the stock wthn hgher end of the market.
XI?. AC75ISITIONSB MER6ERS AND CONSOLIDATIONS
NOTE: In mergers, there s no break n the sub|ect matter that s why n a merger you end up wth a
super entty, and as such the magc of successorshp (as CLV woud put t) appes.
I.AC75ISITIONS AND TRANS4ERS
IN A NUTSHELL:

NATURE LIABILITIES EMPLOYEES
ASSETS-ONLY
LEVEL
The purchaser s
ony nterested n
the raw assets
and propertes of
the busness,
perhaps to be
used to estabsh
hs own busness
enterprse or to
be used for hs
on-gong busness
enterprse. In
The transferee s not
abe for the debts
and abtes of the
transferor EXCEPT
where he mpedy or
expressy agrees to
assume such debts
or when there was
fraud.
The transferee s not bound
to retan the empoyees of
the transferor, snce the
former does not reay step
nto the shoes of the atter.
The transferee s not abe
even f the sae of the
assets shoud resut n the
shuttng down of the
transferors operatons and
the ayng-off of empoyees.
(contract of empoyment s
19
3
such an
acquston, the
purchaser s not
nterested n the
entty of the
corporate owner
of the assets nor
of the goodw
and other factors
reatng to the
busness tsef.
n personam)
EXECPTION: (1) when
expressy assumed (2)
when contracts are entered
nto n bad fath
BUSINESS
ENTERPRISE
LEVEL
The purchasers
nterest goes
beyond the
assets or
propertes of the
busness
enterprse. Hs
prmary nterest
s essentay to
obtan the
earnng capabty
of the venture.
However, he s
not nterested n
obtanng the
|urdca entty
that owns the
busness
enterprse and
therefore
purchases
drecty the
busness from the
corporate entty.
The transferee s
abe for the debts
and abtes of the
transferor.
The transferee shoud be
bound to retan the servces
of the empoyees of the
busness that t has
acqured, athough t s not
abe for the voatons that
the transferor had
commtted n the past and
for whch the transferor
remans soey abe.
(Intay the court hed that
the sae of a busness does
not pso facto termnate the
EER nsofar as the
successor empoyer s
concerned, the change of
management s not one of
the |ust causes provded by
aw. However, the
termnaton and payment of
benefts pror to the sae s
recognzed as a proper
means to avod such a
stuaton. BUT REFER TO
CENTRAL AZUCARERA FOR
A VERY IMPORTANT
PRONOUNCEMENT!)
a. EMPLOYEES HAVE NO
EOUITY CLAIMS ON
BUSINESS ENTERPRISE -
when t comes to abor
cams, the transferee s not
obgated to absorb the
empoyment of the exstng
empoyees nor the
outstandng cams aganst
the transferor.
b. PIERCING APPLICABLE -
The case of YU v NLRC
carfes that n a BE
transfer, to make the
transferee abe, there
must be a showng of
contnuty of the same
busness by the same
owners usng the corporate
fcton as a shed, and that
Revsed Bagtas Revewer by Ve and Ocfe 2A
the transferor has ceased to
exst and operate on ts
own.
c. NEED FOR A CLEAR
BREAK IN OPERATIONS - for
a new enterprse to take
over the busness concerns
of the other as not to make
the new owners abe,
there must be a forma and
substanta termnaton and
break from the operatons
of the predecessor entty.
(Burden of proof s on the
transferee.)
EOUITY LEVEL Ths consttutes
ookng at the
entrety of the
busness
enterprse as t s
owned and
operated by the
corporaton. The
purchaser takes
contro and
ownershp of the
busness by
purchasng the
sharehodngs of
the corporate
owner. The
contro therefore
s ndrect, snce
the corporate
owner remans
the drect owner
of the busness,
and what the
purchaser has
actuay
purchased s the
abty to eect the
members of the
board of the
corporaton who
run the busness.
The transferee s not
abe for the debts
and abtes of the
transferor except
where the transferee
expressy or
mpedy aggress to
assume such debts.
Snce the ony resut of the
transacton s the change n
ownershp or contro, the
empoyees reman wth the
corporate empoyer n
exacty the same manner
as before the equty
transfer, and therefore the
purchaser does not assume
any persona abty to the
empoyees.
NOTES ON ASSETS-ONLY:
In such transfer, t s ogca that the transferee woud not be abe for the debts and abtes of
hs transferor snce there s no prvty of contract over the debt obgatons between the
transferee and transferors credtors. (DOCTRINE OF RELATIVITY - contracts are bndng ony as
between the partes)
COVERAGE OF BULK SALES LAW - f consttutng buk sae woud affect the transferee n the
sense that f the sae has not comped wth the requrements of the Law, the sae coud be
cassfed as frauduent and vod, and therefore the tte of the transferee over the assets woud
be vod, even f he were a purchaser n good fath.
SPECIAL RULE ON CORPORATE DISSOLUTION - when another corporaton takes over the assets of
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another corporaton whch s dssoved, the succeedng corporaton s abe for the cams aganst
the dssoved corporaton to the extent of the far vaue of the assets assumed.
See relevan +orion of VILLANUEVA, ,esaemen of he (ocrine of Piercing The Veil
of Cor+orae 0icion, 37 ATENEO L.|. 19 (No. 2, |une 1993)
1. Co#"ept o0 <E#terprise= or <E"o#o/i" #it= or <6oi#* "o#"er#=
2. T)pes o0 A"2isitio#sCTra#s0ers (a&-%ar- 3. #ell Co. v. Pacific, 15 SCRA 415; P#B v.
)n-ra-a &lecric * &ngineering Co., 381 SCRA 244 |2002|)9
EDWARD NELL v. PACIFIC
FACTS:
Appeant Edward |. Ne Co., appeant secured aganst Insuar Farms, a |udgment representng the
unpad baance of the prce of a pump sod by appeant E| Ne Co. to Insuar Farms. A wrt of
executon ssued. Thereafter, E| Ne Co. fed the present acton aganst Pacfc Farms Inc., appeee,
upon the theory that appeee s the ater ego of Insuar Farms. Muncpa court dsmssed appeants
compant. E| Ne appeaed. CFI dsmssed, CA dsmssed. Appea by certorar to SC.
ISSUE:
W/N Pacfc Farms s the ater ego of Insuar Farms because the former had purchased a or
substantay a the shares of stock, as we as rea and persona propertes of the atter, ncudng
the pumpng equpment sod by E| Ne to Insuar Farms.
HELD:
Record shows that Pacfc purchased 1,000 shares of stock of Insuar Farms and that appeee sod
shares of stock to certan ndvduas who reorganzed sad corporaton; and that the BOD caused ts
assets, ncudng ts easehod rghts over a pubc and n Pangasnan to be sod to appeee for
P10,000.
We agree wth CA that these facts do not prove that the appeee s an ater ego of Insuar Farms or s
abe for ts debts. In the case at bar, there s nether proof nor aegaton that appeee had
expressy or mpedy agreed to assume the debt of Insuar Farms n favor of appeant, or that the
appeee s a contnuaton of Insuar Farms, or that the sae of ether the shares of stock or the assets
of Insuar Farms has been entered nto frauduenty, n order to escape abty.
Appeee purchased the shares of stock of Insuar as the hghest bdder at an aucton sae at the
nstance of a bank to whch sad shares had been pedged as securty for an obgaton of Insuar
Farms n favor of sad bank.
Where one corporaton ses ts assets to another corporaton, atter not abe for debts of transferor,
except when:
1. purchaser mpedy or expressy agrees
2. transacton s a consodaton or merger
3. mere contnuaton of seng corporaton
4. transacton s entered nto frauduenty
Snce none of the exceptons appy, Pacfc s not deemed abe.
|udgment affrmed.
&. Bsi#ess E#terprise Tra#s0ers9 a).(. Sanos v. Vas:uez, 22 SCRA 1156 (1968);
aLaguna Trans+oraion Co., Inc. v. SSS, 107 Ph. 833 (1960).
NOTES:
A busness enterprse comprses more than |ust the propertes of the busness, but ncudes a
"concern" that covers the empoyees, the goodw, st of centee and suppers, etc. whch gve
t vaue separate and dstnct from ts owners or the |urdca entty under whch t operates. (The
Revsed Bagtas Revewer by Ve and Ocfe 2A
BE s consdered and accounted for as a separate accountng unt apart from the other assets
and busnesses of the propretor.)
A busness enterprse by tsef s a "concern" that has a separate economc unt or seng vaue
from ts owners other assets; and that the busnessmen evauatng whether to purchase such
busness enterprse do not ony ook at the propertes of the busness, but many other ntangbes
that reay have no defnte monetary vaue, except when expressed as goodw and assgned a
vaue under prncpes of Accountng, such as the mora and technca competence of the
empoyees and mdde-management, the st of ts vaued centee, ocaton of the busness, etc.
The buyer s "wng" to pay much more f he can get the goodw of the busness, meanng the
good w of the customers, that they may contnue to tread the od footpath to hs door and
mantan wth hm the busness reatons en|oyed by the seer.
RATIONALE BEHIND THE ABSORPTION OF LIABILITIES IN SUCH TYPE OF ACOUISITION - The
purpose s to protect the credtors of the busness by aowng them a remedy aganst the new
controer or owner of the busness enterprse. Other wse, credtors woud be eft hodng the bag
snce they may not be abe to recover from the transferor who has dsappeared wth the oot nor
aganst the transferee who can cam that he s a purchaser n good fath and for vaue. Athough
no forma mortgage contract s executed, credtors and suppers extend credt to the busness
enterprse because they see that the busness earnng capacty and assets as a securty to the
undertakng that they w eventuay be pad back. The doctrne therefore puts the burden on the
shouder of the person who s n the best poston to protect hmsef, namey the transferee, by
obtanng certan guarantees and protecton from the transferor.
FREE AND HARMLESS CLAUSE may be provded, by such s bndng ony as to the transferor and
transferee. It s not bndng on the credtors.
The transferee s made abe for the busness enterprse, even ts osses, as compared to a thrd
party mortgagor whose abty does not exceed the abtes of the assets that he acqured,
because the busness enterprse grows whe a mortgage does not. As the transferee s to receve
profts, he must aso suffer the osses that come wth t.
AD SANTOS v. VASOUEZ
FACTS:
Ventura Vasquez was pettoner AD Santos Inc.s tax drver. Whe drvng pettoners tax cab, he
vomted bood. He was sent to the companys physcan, Dr. Roman, who treated hm and sent hm to
Sto. Tomas Hospta where he was confned. He was then admtted at the Ouezon Insttute where he
was dagnosed wth pumonary tubercuoss. He has not resumed work.
Vasquez then fed a cam wth the Workmens Compensaton Commsson. Commsson ordered
pettoner to pay compensaton and remburse Vasquez the sum he had spent for hs treatment. Case
s now before SC on revew.
ISSUE:
W/n Vasquez has a cause of acton aganst pettoner.
HELD:
Pettoners averment that respondent drver had no cause of acton aganst pettoner s wthout
mert. Vasquezs cam for compensaton s drected aganst pettoner AD Santos Inc. Pettoner, n
answer to the cam, categorcay admtted that camant was ts tax drver. Add to ths the fact that
the camant contracted pumonary TB by reason of hs empoyment. Thus respondents cause of
acton aganst pettoner s compete.
But pettoner ctes the fact that respondent drver, n the course of hs testmony, mentoned that he
worked for the Cty Cab operated by Amador Santos. Ths w not detract from the vadty of
respondents rght to compensaton. For, the truth s that reay at one tme Amador Santos was the
soe owner and operator of the Cty Cab. It was subsequenty transferred to pettoner AD Santos Inc.,
n whch Amador Santos was an offcer. The menton by respondent of Amador Santos as hs
empoyer n the course of hs testmony, shoud not be aowed to confuse the facts reatng to
empoyer-empoyee reatonshp for when the ve of corporate fcton s made as a shed to
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perpetrate a fraud and/or confuse egtmate ssues (here, the reaton of empoyer-empoyee) the
same shoud be perced.
Decson of the WCC n favor of Vasquez affrmed.
LAGUNA TRANSPORTATION CO. INC. v. SSS
FACTS:
Pettoner Laguna s a domestc corporaton wth prncpa pace of busness n Ban, Laguna.
Respondent SSS has served notce upon pettoner requrng t to regster as member of the System
and to remt the premums due from a the empoyees of the pettoner and contrbuton of the atter
to the System begnnng month of September 1957.
In 1949, the Ban Transportaton Co., sod part of the nes and equpment to G. Mercado, A.
Mercado, Mata, and Vera Cruz. After the sae, the vendees formed an unregstered partnershp under
the name of Laguna Transportaton Co. whch contnued to operate the nes and equpment bought
from the Ban Transpo Co. The orgna partners formng the Laguna Transpo Co., wth the addton
of two new members, organzed a corporaton known as the Laguna Transportaton Company Inc.,
whch was regstered wth the SEC on |une 20, 1956. The corporaton contnued the same
transportaton busness of the unregstered partnershp.
Pror to November 11, 1957, pantff requested for exempton from coverage by the System on the
ground that t started operaton ony on |une 20, 1956, when t was regstered wth the SEC but on
Nov. 11, 1957, SEC nformed pantff that t was covered.
On the bass of the stpuaton of facts abovementoned, the court rendered a decson whch
regarded pettoner as beng n operaton for at east two years pror to enactment of RA 1161 as
amended by RA 1792 (creatng SSS) and therefore sub|ect to compusory coverage under the aw.
Pettoner appeaed to SC.
ISSUE: w/n Laguna s covered by the SSS.
HELD:
It s undsputed that Laguna Transportaton Company, an unregstered partnershp, commenced
operaton as a common carrer on Apr 1, 1949. The four orgna partners ater converted the
partnershp nto a corporate entty by regsterng ts artces of ncorporaton wth the SEC. Frm name
"Laguna Transportaton Co." was not atered, except wth the addton of the word "Inc." There was
n effect, ony a change n the form of the organzaton of the entty engaged n the busness of
transportaton of passengers. Hence, sad entty as an empoyer engaged n busness, was aready n
operaton for at east 3 years pror to the enactment of the SS Act on |une 18, 1954.
If any genera rue can be ad down, n the present state of authorty, t s that a corporaton w be
ooked upon as a ega entty as a genera rue, and unt suffcent reason to the contrary appears;
but, when the noton of ega entty s used to defeat pubc convenence, |ustfy wrong, protect fraud,
or defend crme, the aw w regard the corporaton as an assocaton of persons.
To adopt pettoners argument woud defeat, rather than promote, the ends for whch the Soca
Securty Act was enacted. An empoyer coud easy crcumvent the statute by smpy changng hs
form of organzaton every other year, and then cam exempton from contrbuton to the System as
requred, on the theory that, as a new entty, t has not been n operaton for a perod of at east 2
years. The door to frauduent crcumventon of the statute woud then be opened.
|udgment affrmed.
NOTE: Whe t s true that a corporaton once formed s conferred a |urdca personaty separate and
dstnct from the persons composng t, t s but a ega fcton ntroduced for the purpose of
convenence and to subserve the ends of |ustce. The concept cannot be extended to a pont beyond
Revsed Bagtas Revewer by Ve and Ocfe 2A
ts reasons and pocy, and when nvoked n support of an end n subversve of ths pocy, w be
dsregarded by the courts.
NOTE: The doctrne therefore s that where a corporaton s formed by, and conssted of members of
a partnershp whose busness and property was conveyed and transferred to the corporaton for the
purpose of contnung ts busness, n payment for whch corporate capta stock was ssued, such
corporaton s presumed to have assumed partnershp debts, and s prma face abe therefore.
Athough the busness enterprse was operated under a partnershp scheme and ater
transferred to a corporaton, the busness enterprse s deemed to have been n operaton
for the requred two-year perod as to come under the coverage of the SSS Law (San
Teo-oro (ev. v. SSS, 8 SCRA 96 |1963|); and snce the corporaton assumed a the assets
and abtes of the partnershp, then the corporaton cannot be regarded, for purposes of
the SSS Law, as havng come nto beng ony on the date of ts ncorporaton but from the
date the partnershp started the busness. (!romeca Lumber Co. v. SSS, 4 SCRA 1188
|1962|).
Where a corporaton s cosed for aeged osses and ts equpment are transferred to
another company whch engaged n the same operatons, the separate |urdca
personaty of the atter can be perced to make t abe for the abor cams of the
empoyees of the cosed company. #aional 0e-eraion of Labor 5nion v. !+le, 143 SCRA
124 (1986).
Athough a corporaton may have ceased busness operatons and an entrey new
company has been organzed to take over the same type of operatons, t does not
necessary foow that no one may now be hed abe for ega acts commtted by the
earer frm. aPe+si7Cola Boling Co., v. #L,C, 210 SCRA 277 (1992).
PEPSI v. NLRC
FACTS:
Prvate respondent Oscar Encabo was empoyed as a mantenance manager n Peps Coa
Dstrbutors (PCD). Hs empoyment was termnated because of hs neggence n reparng the
beverage pants CEM-72 soaker machne whch needed rehabtaton. Accordng to PCD, hs deays
n reparng the machne caused the company to ncur sgnfcant osses. Encabo fed a compant for
ega dsmssa and unfar abor practce camng that he was dened due process. The NLRC found
n favor of Encabo and ssued a wrt of executon addressed to Peps Coa Bottng Corp (PBC)
orderng PCD to renstate hm. The wrt was devered to Peps-Coa Products Phppnes (PCPPI).
PCCPI aeged that renstatement s no onger possbe snce PCD had cosed down ts busness on the
ground of serous busness osses and the new franchse hoder, PCPPI, s a new entty.
ISSUE:
W/N PCPPI s abe despte the fact that ts a new entty
HELD:
Yes, ts abe. Company s ordered to may 3 years worth of backwages n eu of renstatement.
PCD may have ceased busness operatons and PCPPI may be a new company but t does necessary
foow that one may now be hed abe for ega acts commtted by the earer frm. The compant
was fed when PCD was st n exstence. Peps-Coa never stopped dong busness n the
Phppnes. The same softdrnk products sod n 1988 when the compant was ntated contnue to
be sod now. The sae of products dd not stop at the tme PCD bowed out and PCPPI came nto
beng. There s no evdence presented showng that PCCPI, as the new entty or purchasng company
s free from any abtes ncurred by the former company.
In fact, n the surety bond put up by pettoners, both PCD and PCPPI bound themseves to answer for
mentary awards whch ceary mpes that the PCPPI as a resut of the transfer of the franchse bound
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tsef to answer for the abty of PCD to ts empoyees.
NOTE: What may have convnced the Court to rue as t dd, was the Courts fndng that n the surety
bond put to cover the appea, both PCD and PCPPI bound themseves to answer the monetary awards
of the prvate respondent n case of an adverse decson of the appea, whch ceary mped that
PCPPI as a resut of the transfer of the franchse bound tsef to answer for the abty of PCD to ts
empoyees.
"It shoud be rather cear that, as be%een he esae an- he cor+oraion, the
ntenton of ncorporaton was to make the corporaton abe for past and pendng
obgatons of the estate as the transportaton busness tsef was beng transferred to and
paced n the name of the corporaton. That abty on the part of the corporaton, vs--
vs the estate, shoud contnue to reman wth t even after the percentage of the estates
shares of stock n the corporaton shoud be duted." aBuan v. )lcanara, 127 SCRA 845
(1984).
BUAN v. ALCANTARA
NOTE: The Court hed that the new corporaton takng over a the mortgaged assets of an od
corporaton n exchange for a the od corporatons capta stock and contnung to operate the
busness formery operated by the od corporaton s an ater ego of the od corporaton so as to be
abe to pay the obgatons of the od corporaton, notwthstandng that the od corporaton retaned
tte to the mortgaged assets. Smary, where the admnstrator of the estate of a decedent
ncorporated the assets of the estate nto a corporaton and contnued the busness of the atter, the
admnstrator and the corporaton so formed are ater egos, each n respect to the other, so that the
admnstrator woud be abe for the obgatons of the corporaton |ust as the corporaton woud be
abe for the debts of the admnstrator.
+. E2it) Tra#s0ers (aPhivi-ec v. Cour of )++eals, 181 SCRA 669 |1990|).
NOTES:
The ogc of the doctrne on abty under ths headng fnds support n the man doctrne of
separate |urdca personaty, that by purchasng the shares n a corporaton that owns a
busness, the stockhoder does not by that reason aone become the owner drecty of the
busness assets and does not become personay abe for the debts and abtes of the
busness. In addton, the buyer of the controng shares of stock n a corporaton may take
advantage of the mted abty feature that s part of the corporate set-up.
PHIVIDEC v. CA
FACTS:
Borres was n|ured n an accdent that was ater hed to be due to the neggence of Phvdec
Raways Inc (PRI). The accdent occurred on March 29, 1979. On May 25, 1979, Phppne Veterans
Investment Devt. Corp (PHIVIDEC) sod a of ts rght and nterest n PRI to PHILSUCOM. 2 days ater,
PHILSUCOM caused the creaton of a whoy owned subsdary, Panay Raways to operate the assets
acqured from PHIVIDEC. A compant was fed by Borres aganst PRI and Panay. Panay dscamed
abty on the ground that n there s a stpuaton n the agreement concuded between PHIVIDEC
and PHILSUCOM whch frees PHILSUCOM from "any acton or abty that may arse out of or resut
from acts or omssons, contracts or transactons pror to the turnover."
ISSUE:
W/N PHILSUCOM s abe to abty ncurred pror to the transfer.
HELD: No t s not abe.
Generay where one corporaton ses or otherwse transfers a of ts assets to another corporaton,
the atter s not abe for the debts and abtes of the transferor, except: (1) where the purchaser
expressy or mpedy agrees to assume such debts; (2) where the transacton amounts to a
Revsed Bagtas Revewer by Ve and Ocfe 2A
consodaton or merger of the corporatons; (3) where the purchasng corporaton s merey a
contnuaton of the seng corporaton; and (4) where the transacton s entered nto frauduenty n
order to escape abty for such debts.
Besdes, PHIVIDEC'S act of seng PRI to PHILSUCOM shows that PHVIDEC had compete contro of
PRI's busness. Ths crcumstance renders appcabe the rue cted by thrd-party pantff-appeee
(Costan v. Mana Eectrc, 24 F 2nd 383) that f a parent- hodng company (PHIVIDEC n the present
case) assumes compete contro of the operatons of ts subsdary's busness, the separate corporate
exstence of the subsdary must be dsregarded, such that the hodng company w be responsbe
for the neggence of the empoyees of the subsdary as f t were the hodng company's own
empoyees.
It s cear from the evdence of record that by vrtue of the agreement between PHIVIDEC and
PHILSUCOM, partcuary the stpuaton exemptng the atter from any "cam or abty arsng out of
any act or transacton" pror to the turn-over, PHIVIDEC had expressy assumed abty for any cam
aganst PRI. Snce the accdent happened before that agreement and PRI ceased to exst after the
turn-over, t shoud foow that PHIVIDEC cannot evade ts abty for the n|ures sustaned by the
prvate respondent.
NOTE: The genera rue therefore s that n an equty transfer, the transferee does not become
personay abe for the obgatons of the corporate enterprse under the man doctrne of separate
|urdca personaty, uness ether the transferee by contract assumes such obgatons, or there s
bass for percng the ve of corporate fcton.
.. Aspe"ts as to E/plo)ees (aCom+le' &lecronics &m+loyees )ssn. v. #L,C, 310 SCRA
403 |1999|).
COMPLEX ELECTRONICS EMPLOYEES ASSOCIATION v. NLRC
B. MER6ER AND CONSOLIDATION
NOTE: The power to merge and consodate s an expressed power of the corporaton. (NOT
INHERENT)
MERGER CONSOLIDATION
(1) Unon whereby one or more exstng
corporatons are absorbed by another
corporaton whch survves and contnues the
combned busness.
(1) Unon of two or more exstng
corporatons to form a new corporaton
caed the consodated corporaton. It s a
combnaton by agreement between two or
more corporatons by whch ther rghts,
franchse, prveges and propertes are
unted and become those of a snge, new
corporaton, composed generay, athough
not necessary, of the SHs of the orgna
corporatons.
(2) A consttuent corporatons except the
survvng one s dssoved.
(2) A consttuent corporatons are dssoved
and absorbed by the new consodated
enterprse.
(3) No qudaton occurs and the survvng
corporaton assumes pso |ure the abtes
of the dssoved corporaton, regardess of
whether the credtors have consented or not.
(3) No qudaton occurs and the survvng
corporaton assumes pso |ure the abtes
of the dssoved corporaton, regardess of
whether the credtors have consented or not.
1. Co#"epts
A consodaton s the unon of two or more exstng enttes to form a new entty caed
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the consodated corporaton. A merger, on the other hand, s a unon whereby one or more
exstng corporatons are absorbed by another corporaton that survves and contnues the
combned busness. Snce a merger or consodaton nvoves fundamenta changes n the
corporaton, as we as n the rghts of stockhoders and credtors, there must be an express
provson of aw authorzng them. P#B v. )n-ra-a &lecric * &ngineering Co., 381 SCRA 244
(2002).
2. (ro"edre9
%a$ Plan of "erger or Consolidation (Sec. 76)
Secton 76. Pan or merger of consodaton. - Two or more corporatons may merge nto a snge
corporaton whch sha be one of the consttuent corporatons or may consodate nto a new snge
corporaton whch sha be the consodated corporaton.
The board of drectors or trustees of each corporaton, party to the merger or consodaton, sha
approve a pan of merger or consodaton settng forth the foowng:
1. The names of the corporatons proposng to merge or consodate, herenafter referred to
as the consttuent corporatons;
2. The terms of the merger or consodaton and the mode of carryng the same nto effect;
3. A statement of the changes, f any, n the artces of ncorporaton of the survvng
corporaton n case of merger; and, wth respect to the consodated corporaton n case of
consodaton, a the statements requred to be set forth n the artces of ncorporaton for
corporatons organzed under ths Code; and
4. Such other provsons wth respect to the proposed merger or consodaton as are deemed
necessary or desrabe.
%!$ Stoc.holders4 or "embers4 Approval (Sec. 77)
Secton 77. Stockhoder's or member's approva. - Upon approva by ma|orty vote of each of the
board of drectors or trustees of the consttuent corporatons of the pan of merger or consodaton,
the same sha be submtted for approva by the stockhoders or members of each of such
corporatons at separate corporate meetngs duy caed for the purpose. Notce of such meetngs
sha be gven to a stockhoders or members of the respectve corporatons, at east two (2) weeks
pror to the date of the meetng, ether personay or by regstered ma. Sad notce sha state the
purpose of the meetng and sha ncude a copy or a summary of the pan of merger or consodaton.
The affrmatve vote of stockhoders representng at east two-thrds (2/3) of the outstandng capta
stock of each corporaton n the case of stock corporatons or at east two-thrds (2/3) of the
members n the case of non-stock corporatons sha be necessary for the approva of such pan. Any
dssentng stockhoder n stock corporatons may exercse hs apprasa rght n accordance wth the
Code: Provded, That f after the approva by the stockhoders of such pan, the board of drectors
decdes to abandon the pan, the apprasa rght sha be extngushed.
Any amendment to the pan of merger or consodaton may be made, provded such amendment s
approved by ma|orty vote of the respectve boards of drectors or trustees of a the consttuent
corporatons and ratfed by the affrmatve vote of stockhoders representng at east two-thrds (2/3)
of the outstandng capta stock or of two-thrds (2/3) of the members of each of the consttuent
corporatons. Such pan, together wth any amendment, sha be consdered as the agreement of
merger or consodaton.
%"$ Articles of "erger or Consolidation (Sec. 78)
Secton 78. Artces of merger or consodaton. - After the approva by the stockhoders or members
as requred by the precedng secton, artces of merger or artces of consodaton sha be executed
by each of the consttuent corporatons, to be sgned by the presdent or vce-presdent and certfed
by the secretary or assstant secretary of each corporaton settng forth:
1. The pan of the merger or the pan of consodaton;
Revsed Bagtas Revewer by Ve and Ocfe 2A
2. As to stock corporatons, the number of shares outstandng, or n the case of non-stock
corporatons, the number of members; and
3. As to each corporaton, the number of shares or members votng for and aganst such pan,
respectvey.
%d$ Approval by S/C (Sec. 79)
Secton 79. Effectvty of merger or consodaton. - The artces of merger or of consodaton, sgned
and certfed as heren above requred, sha be submtted to the Securtes and Exchange
Commsson n quadrupcate for ts approva: Provded, That n the case of merger or consodaton of
banks or bankng nsttutons, budng and oan assocatons, trust companes, nsurance companes,
pubc uttes, educatona nsttutons and other speca corporatons governed by speca aws, the
favorabe recommendaton of the approprate government agency sha frst be obtaned. If the
Commsson s satsfed that the merger or consodaton of the corporatons concerned s not
nconsstent wth the provsons of ths Code and exstng aws, t sha ssue a certfcate of merger or
of consodaton, at whch tme the merger or consodaton sha be effectve.
If, upon nvestgaton, the Securtes and Exchange Commsson has reason to beeve that the
proposed merger or consodaton s contrary to or nconsstent wth the provsons of ths Code or
exstng aws, t sha set a hearng to gve the corporatons concerned the opportunty to be heard.
Wrtten notce of the date, tme and pace of hearng sha be gven to each consttuent corporaton
at east two (2) weeks before sad hearng. The Commsson sha thereafter proceed as provded n
ths Code.
Submission of )inancial Statements Re%uirements' For appcatons of merger,
the audted fnanca statements of the consttuent corporatons (survvng and absorbed)
as of the date not earer than 120 days pror to the date of fng of the appcaton and the
ong-form audt report for absorbed corporaton(s) are aways requred. Long form audt
report for the survvng corporaton s requred f t s nsovent. (SEC Opnon 14, s. of
2002, 15 November 2002).
&. E00e"ts o0 Mer*er or Co#solidatio# (Sec. 80; )ssociae- Ban$ v. Cour of )++eals, 291
SCRA 511 |1998|)
Secton 80. Effects of merger or consodaton. - The merger or consodaton sha have the foowng
effects:
1. The consttuent corporatons sha become a snge corporaton whch, n case of merger,
sha be the survvng corporaton desgnated n the pan of merger; and, n case of
consodaton, sha be the consodated corporaton desgnated n the pan of consodaton;
2. The separate exstence of the consttuent corporatons sha cease, except that of the
survvng or the consodated corporaton;
3. The survvng or the consodated corporaton sha possess a the rghts, prveges,
mmuntes and powers and sha be sub|ect to a the dutes and abtes of a corporaton
organzed under ths Code;
4. The survvng or the consodated corporaton sha thereupon and thereafter possess a the
rghts, prveges, mmuntes and franchses of each of the consttuent corporatons; and a
property, rea or persona, and a recevabes due on whatever account, ncudng
subscrptons to shares and other choses n acton, and a and every other nterest of, or
beongng to, or due to each consttuent corporaton, sha be deemed transferred to and
vested n such survvng or consodated corporaton wthout further act or deed; and
5. The survvng or consodated corporaton sha be responsbe and abe for a the abtes
and obgatons of each of the consttuent corporatons n the same manner as f such
survvng or consodated corporaton had tsef ncurred such abtes or obgatons; and any
pendng cam, acton or proceedng brought by or aganst any of such consttuent
corporatons may be prosecuted by or aganst the survvng or consodated corporaton. The
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rghts of credtors or ens upon the property of any of such consttuent corporatons sha not
be mpared by such merger or consodaton.
When the procedure for merger/consodaton prescrbed under the Corporaton Code
are not foowed, there can be no merger or consodaton, and corporate separateness
between the consttuent corporatons remans, and the abtes of one entty cannot be
enforced aganst another entty. P#B v. )n-ra-a &lecric * &ngineering Co., 381 SCRA
244 (2002).
It s setted that n the merger of two exstng corporatons, one of the corporatons
survves and contnues the busness, whe the other s dssoved and a ts rghts,
propertes and abtes are acqured by the survvng corporaton. The survvng
corporaton therefore has a rght to nsttute a coecton sut on accounts of one of one of
the consttuent corporatons. Babs v. Cour of )++eals, 350 SCRA 341 (2001).
ADVANTAGES: (1) contnuous fow of |urdca personates and busness enterprse (2) aows
corporate panners certan ends not avaabe to other forms of transfer (3) advantages n the
fed of taxaton.
DE FACTO MERGER - can be pursued by one corporaton acqurng a or substantay a of the
propertes of another corporaton n exchange of shares of stock of the acqurng corporaton. The
acqurng corporaton woud end up wth the busness enterprse of the target corporaton;
whereas the target corporaton woud end up bascay ts ony remanng assets beng the shares
of stock of the acqurng corporaton.
C. E44ECTS ON EM(LODEES O4 COR(ORATION
1. Assets O#l) Tra#s0ers (Sun-o%ner (ev. Cor+. v. (rilon, 180 SCRA 14 |1989|)
"There s no aw requrng that the purchaser of MDIIs assets shoud absorb ts
empoyees . . . the most that the NLRC coud do, for reasons of pubc pocy and soca
|ustce, was to drect |the buyer| to gve preference to the quafed separated empoyees
of MDII n the fng up of vacances n the factes. .(II Su+ervisors * Confi-enial
&m+loyees )sso. v. Pres. )ssisance on Legal )ffairs, 79 SCRA 40.
2. Bsi#ess8E#terprise Tra#s0ers (aCenral )zucarera -el (anao v. C), 137 SCRA 295
|1985|; "u v. #L,C, 245 SCRA 134 |1995|; Sunio v. #L,C, 127 SCRA 390 |1984|; San
0eli+e #eri School of .an-aluyong, Inc. v. #L,C, 201 SCRA 478 (1991).
CENTRAL AZUCARERA DEL DAVAO v. CA
FACTS:
Prvate respondents n ths case were reguar empoyees of Centra Azucarera de Danao
(Centra). Centra sod ts sugar m and other propertes to Danao Devt. Corporaton (DADECO) by
vrtue of a Deed of Sae. The deed made no express menton of the contnued empoyment status of
the od empoyees but DADECO hred the od empoyees anyway but n accordance wth ts own
hrng and seecton poces. Noneon Bana-ay and others were termnated and subsequenty fed
compants for recovery of termnaton pay aganst DADECO and Centra as common defendants.
They aeged that DADECO frauduenty dsmssed them wthout |ustfabe cause or any advance
notce.
DADECO dened abty for termnaton pay assertng ack of cause of acton snce the atter
was not ther empoyer for the perod n queston. Centra camed that DADECO assumed abty to
pay termnaton pay correspondng to the aeged years of empoyment. CFI ordered Centra to pay
the companants. The compants were dsmssed as aganst DADECO. CA affrmed the rung of the
ower court.
Centra further argued that empoyees were not termnated as woud entte them to termnaton
pays when t sod ts assets to Dadeco. Instead, they were absorbed and contnued workng n the
sugar m upon Dadecos takeover.
ISSUE:
Revsed Bagtas Revewer by Ve and Ocfe 2A
w/n a change of the ownershp or mgt of a corp by vrtue of a sae of a or substantay a of t
assets operates to nsuate the seng corp from ts obgaton to ts empoyees under the
Termnaton Pay Law
HELD:
It s a we-recognzed prncpe that t s wthn the empoyers egtmate sphere of mgt
contro of busness to adopt economc poces or to make some changes or ad|ustment or
organzaton or operatons that woud nsure proft or protect the nvestments of ts stockhoders. As
n the exercse of such mgt prerogatve, t may se or dspose a or substantay a of ts assets and
propertes that may brng about termnaton or dsmssa of ts empoyees n the process. Such
dsmssa shoud not however be nterpreted s such a manner that woud aow the empoyer to
escape payment of termnaton pay. The sae must be motvated by good fath as an eement of
exempton from abty. Indeed, an nnocent transferees has no abty to the empoyees of the
transferor to contnue empoyng them.
The most that the purchasng company can do for reasons of pubc pocy and soca |ustce s
to gve od empoyees preference. The Deed of Sae made no express stpuaton of the contnued
empoyment of Centras empoyees. Ceary, there was n fact an nterrupton of the empoyment.
The empoyees were rehred hred anew by Dadeco, ther new empoyer.
However, n as much as there was no notce of termnaton whatsoever gven to the
empoyees of Centra couped wth the fact the Centra made no effort n apprsng ts empoyees of
the consequences of the sae (sae was done behnd the back of the empoyees; empoyees were
surprsed) |ustce and equty dctate that the empoyees be entted to ther termnaton or separaton
pay correspondng to the years of servce wth centra.
By way of remnder, empoyers shoud exercse cauton and care n deang wth ts empoyees
to prevent suspcon that the adopton of certan corporate combnatons such as merger or
consodaton or outrght sae of assets s but a scheme to evade termnaton pay of the empoyees.
NOTE: Why are empoyees not consdered as credtors who kewse have cam wth the busness
enterprse? Norma credtors have en on the busness enterprse whe the empoyees do not.
Credtors extend oans to the company n consderaton for the proft-makng abty of the busness
enterprse whe empoyees extend ther servces to the corporaton whether or not the same s
proftabe or not. That s why the rue on assets-ony transfer are apped to cams of empoyees.
&. E2it) Tra#s0ers (aPe+si Cola (isribuors v. #L,C, 247 SCRA 386 (1995); a.anlimos v.
#L,C, 242 SCRA 145 |1995|; ,oble-o v. #L,C, 238 SCRA 52 |1994|; Pe+si7Cola Boling
Co. v. #L,C, 210 SCRA 277 (1992); (BP v. #L,C, 186 SCRA 841 |1990|; Coral v. #L,C,
258 SCRA 704 |1996|; )von (ale Garmens, Inc. v. #L,C, 246 SCRA 733 |1995|).
PEPSI COLA DISTRIBUTORS v. NLRC
FACTS:
Prvate respondent Tertuano Yute started workng wth Peps-Coa Bottng Company of the
Phppnes (PCBCP) as contractua mantenance eectrcan n 1979 and when Peps Coa Dstrbutors
(PCD) took over the companys manufacturng operatons n 1981, he was absorbed as a reguar
empoyee.
In December 15, 1988, PCD termnated Yute for aeged abandonment of work and/or absence
wthout eave. He fe a compant for ega; dsmssa before the NLRC wheren the abor arbter
decared the dsmssa ega and ordered PCD to renstate hm. In |uy 25, 1989, (33 days after hs
renstatement) , PCD stopped payment of Yutes saary on the ground that t aegedy sod ts
busness nterest wth Pes Coa Products Phppnes, Inc. (PCPPI) effectve |uy 24 of the same year.
NLRC ssued a wrt of executon orderng PCD to pat ther saares from |uy 25 to September
30. PCPPI fed n the case a manfestaton/moton prayng that the change of ownershp of the
company be taken cognzance of by the NLRC sayng that PCPPI has a separate personaty from PCD
and therefore, not a party to the cases fed. Not beng a party, they can not be sub|ected to the
ssue wrt of executon.
The NLRC n resovng the moton for recon that was fed by PCD modfed ts decson by
orderng both PCD and PCPPI to renstate Yute. PCD s further ordered to pay Yutes separaton pay.
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Hence, ths petton for grave abuse of dscreton on the part of NLRC.
ISSUE:
w/n there was GAD on the part of NLRC n orderng both PCD and PCPPI to renstate Yute and the
former to pay Yute hs separaton pay.
(note that there were two dsmssas referred to n ths case- December 15, 1988 and the stop
payment n |uy 25, 1989)
HELD:
As to the frst dsmssa, the court hed that the penaty of dsmssa as dsproportonate for
an nfracton whch under the attendant crcumstances appears to be excusabe. He experenced
stomachache and hs supervsor gave hm a vacaton eave the foowng day so that he can go to the
companys physcan for check-up. Yute was not abe to formay nform the management that he w
be absent for 25 days (for rest) as prescrbed by the companys physcan.
The court however dd not sustan the second dsmssa by PCD by removng hm from the
payro on the ground that t aegedy sod ts busness nterest to PCPPI. The contenton that the
second dsmssa s a separate and dstnct from the ssue of the frst dsmssa s nothng but an
attempt of PCD to evade ts abty for egay dsmssng Yute and to shed the purchasng corp,
PCPPI, from the sad abty. The court noted that the ssue of w/n PCPPI can be abe for the ega
acts of ts predecessor, PCD, as n the nstant case has aready been setted n Pe+si Cola Boling vs.
#L,C where the court hed that: PCD may have ceased ts operatons and that PCPPI s a new
company but t does not necessary foow that no one may now be abe for the ega acts
commtted by the earer frm. The compant was fed when PCD was st n exstence. Peps Coa
never stopped dong busness. There s no showng that PCPPI as the new entty s free from any
abty ncurred by the former corp.
Hence, the court affrmed the rung of NLRC n orderng both PCD and PCPPI to renstate Yute
wth fu backwages from |uy 25, 1989 upto actua renstatement.
MANLIMOS v. NLRC
FACTS:
Pettoners were among the reguar empoyees of Super Mahogany Pywood Corporaton. A
new owner/mgt group headed by Afredo Roxas acqured compete ownershp of the corp.
Pettoners were advsed of such change of ownershp. They contnued to work for the new owner
unt Dec 1991. Each of them executed on Dec 1991 a Reease and Waver whch was acknowedged
before DOLEs hearng offcer.
The new owner caused the pubcaton of a notce for the hrng of new workers. The
pettoners then apped and were subsequenty hred on probatonary bass for 6mos as patchers or
tapers, bur were compensated on pece-rate or task bass.
Two empoyees were consdered to have abandoned ther work whe the rest were dsmssed
because they aegedy commtted acts pre|udca to the nterests of the new mgt whch conssted of
ther
" ncudng unrepared veneers n ther reported productons on output as we as untaped corestock
or whoe sheets n ther supposed taped veneers/corestock." They, thus, fe a compant for ega
dsmssa before the sub-Regona Arbtraton Branch of the NLRC
Pettoners were argung that they remaned reguar empoyees regardess of the change of
mgt and the executon of the Reease and Waver. They argued that beng a corp, the |urdca
personaty was unaffected even f the ownershp of ts shares of stock changed hands and that ther
sgnng of the Reease was on no moment not ony because the consderaton was nadequate but
aso because the empoyees who receve ther separaton pay are not barred from contestng the
egaty of ther dsmssa and qutcams executed by aborers are frowned upon.
Labor Arbter rued n favor of the pettoners and ordered renstatement and payment of
backwages. However, the NLRC reversed the decson.
HELD: decson of NLRC affrmed.
The change of ownershp was done bona fi-e and the pettoners dd not for any moment
before the fng of the compants rase any doubt as to the motve of change. On the contrary, upon
Revsed Bagtas Revewer by Ve and Ocfe 2A
beng nformed thereof and ther eventua termnaton, they freey accepted ther separaton pay
and other benefts and ndvduay executed the Reease and Waver.
A change of ownershp s not proscrbed by aw, In Cenral )zucarera -el (anao vs. C) the
court hed that t s wthn the empoyers egtmate sphere of mgt contro of busness to make some
changes or ad|ustment or organzaton or operatons that woud nsure proft. It may se or dspose
a or substantay a of ts assets that may brng about termnaton or dsmssa of ts empoyees.
Such dsmssa shoud not however be nterpreted s such a manner that woud aow the empoyer to
escape payment of termnaton pay. The sae must be motvated by good fath as an eement of
exempton from abty.
Where such transfer of ownershp s done n good fath, the transferee s under no ega duty
to absorb the transferors empoyees. The most that the transferee may do, for reasons of pubc
pocy and soca |ustce, s to gve preference.
The court affrmed the rung of the NLRC but for the empoyees who aegedy abandoned
ther work, the court ordered payment of backwages snce there was no cear and deberate ntent
on the part the sad empoyees to dscontnue empoyment
NOTE: The reasonng s fawed, snce wth the change of ma|orty ownershp of a corporaton, the
reatonshp of empoyer-empoyee n the busness does not change, and the corporaton-empoyer
whch has a separate |urdca personaty, remans the same empoyer to the empoyees of the
busness.
+. Mer*ers a#d Co#solidatio#s (a0ili+inas Por Services v. #L,C, 177 SCRA 203 |1989|;
0ili+inas Por Services v. #L,C, 200 SCRA 773 |1991|; #aional 5nion Ban$ &m+loyees v.
Lazaro, 156 SCRA 123 |1988|); 0irs Gen. .ar$eing Cor+. v. #L,C, 223 SCRA 337 (1993).
NOTE: It woud be ogca to expect that the contractua rghts of empoyees and the exstng CBA
woud have to be absorbed by the survvng or consodated corporaton.
FILIPINAS PORT SERVICES v. NLRC
FACTS:
Stevedorng and arrastre servces for coastwse or domestc cargoes oaded at the Sta. Ana
Per and Sasa Wharf of the Port of Davao were handed by severa cargo handng operators, wheren
one s DAMASTICOR.
Durng the exstence of DAMASTICOR, prvate respondent |osefno Sva was empoyed by sad
company.
Subsequenty, the government adopted a pocy that there shoud be ony one cargo handng
operator n every port. Accordngy a the exstng arrastre and stevedorng frms whch were then
operatng ndvduay n the Port of Davao were ntegrated nto a snge and unfed servce whch
resuted n the formaton of a new corporaton known as the Davao Dockhanders, Inc. The name was
ater changed to Fpnas Port Servces, Inc. (FILPORT).
By mandate, however, of the PPA's Admnstratve Order, pettoner drew ts necessary abor
force, together wth ts personne compement, from the mergng operators. Of the empoyees
absorbed, prvate respondent was among them. He contnued to work unt hs retrement.
Prvate respondent was pad hs retrement pay correspondng ony to the perod that he
actuay worked wth pettoner. Hs ength of servce wth DAMASTICOR was not ncuded.
Prvate respondent odged a compan aganst pettoner and/or DAMASTICOR wth the DOLE
demandng payment of separaton pay coverng the perod of hs empoy wth DAMASTICOR.
Pettoner dened owng any monetary abty to prvate respondent, camng that t coud not
be hed abe for the payment of prvate respondent's separaton pay correspondng to the perod of
the atter's empoyment wth DAMASTICOR snce t s not the successor-empoyer of the atter.
Labor Arbter rendered a Decson orderng respondent FILPORT as the survvor- empoyer to
pay retrement pay to companant computed from 1960 unt hs retrement on |une 29, 1987.
Compant aganst DAMASTICOR s ordered Dsmssed nasmuch as sad corporaton no onger
exsts.
NLRC promugated ts Decson affrmng the abor arbter's Decson.
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Pettoner now cams the NLRC commtted a grave abuse of dscreton.
ISSUE:
Whether or not the successor-n-nterest of an empoyer s abe for the dfferenta retrement
pay of an empoyee earned by hm when he was st under the empoyment of the predecessor-n-
nterest.
HELD:
A cose scrutny of the record of ths case nevtaby and ceary shows that pettoner came
nto exstence as a |urdca person ony as a drect resut of the merger among dfferent cargo
handng operators.
In Fernando vs. Angat Labor Unon,
.
ths Court hed that, uness expressy assumed, abor
contracts are not enforceabe aganst a transferee of an enterprse, abor contracts beng n
+ersonam. On the other hand, a transferor n bad fath may be hed responsbe to empoyees
dscharged n voaton of the Industra Peace Act.
1

Pettoner cannot be hed abe for the payment of the retrement pay of prvate respondent whe n
the empoy of DAMASTICOR. It s the atter who s responsbe for the same as the abor contract of
prvate respondent wth DAMASTICOR s n personam and cannot be passed on to the pettoner. The
adverted memorandum of the PPA Assstant Genera Manager to ths effect s we taken.
.. Spi#8O00s (aS.C &m+loyees 5nion7PTG9! v. Confessor, 262 SCRA 81 |1996|).
A spn off has the opposte effect of a merger or consodaton whereby a department, dvson or
portons of the corporate busness enterprse s sod-off or assgned nto a new corporaton that
w arse by the process whch may consttute nto a new subsdary of the orgna corporaton.
Amercan terature descrbes such to exst when a parent corporaton organzes a subsdary to
whch s transferred part of parents assets n exchange of a capta stock of subsdary and stock
of subsdary s transferred to parents sharehoders wthout surrender of ther stock n parent. It
s aso descrbed as one where part of assets of corporaton s transferred to a new corporaton
and stock of transferee s dstrbuted to sharehoders or transferor wthout surrender by them of
stock n the transferor.
Spn-offs are not reguated by the Code, the cosest provson that woud govern t woud be
Secton 40.
Secton 40. Sae or other dsposton of assets. - Sub|ect to the provsons of exstng aws on ega
combnatons and monopoes, a corporaton may, by a ma|orty vote of ts board of drectors or
trustees, se, ease, exchange, mortgage, pedge or otherwse dspose of a or substantay a of ts
property and assets, ncudng ts goodw, upon such terms and condtons and for such
consderaton, whch may be money, stocks, bonds or other nstruments for the payment of money or
other property or consderaton, as ts board of drectors or trustees may deem expedent, when
authorzed by the vote of the stockhoders representng at east two-thrds (2/3) of the outstandng
capta stock, or n case of non-stock corporaton, by the vote of at east to two-thrds (2/3) of the
members, n a stockhoder's or member's meetng duy caed for the purpose. Wrtten notce of the
proposed acton and of the tme and pace of the meetng sha be addressed to each stockhoder or
member at hs pace of resdence as shown on the books of the corporaton and deposted to the
addressee n the post offce wth postage prepad, or served personay: Provded, That any
dssentng stockhoder may exercse hs apprasa rght under the condtons provded n ths Code.
A sae or other dsposton sha be deemed to cover substantay a the corporate property and
assets f thereby the corporaton woud be rendered ncapabe of contnung the busness or
accompshng the purpose for whch t was ncorporated.
After such authorzaton or approva by the stockhoders or members, the board of drectors or
trustees may, nevertheess, n ts dscreton, abandon such sae, ease, exchange, mortgage, pedge
or other dsposton of property and assets, sub|ect to the rghts of thrd partes under any contract
reatng thereto, wthout further acton or approva by the stockhoders or members.
Nothng n ths secton s ntended to restrct the power of any corporaton, wthout the authorzaton
Revsed Bagtas Revewer by Ve and Ocfe 2A
by the stockhoders or members, to se, ease, exchange, mortgage, pedge or otherwse dspose
of any of ts property and assets f the same s necessary n the usua and reguar course of busness
of sad corporaton or f the proceeds of the sae or other dsposton of such property and assets be
approprated for the conduct of ts remanng busness.
In non-stock corporatons where there are no members wth votng rghts, the vote of at east a
ma|orty of the trustees n offce w be suffcent authorzaton for the corporaton to enter nto any
transacton authorzed by ths secton.
SMC v. CONFESSOR
NOTE: The SC hed that spn-offs were done for vad busness cause and n good fath, and therefore
vad. The Court dened the Unons petton to ncude the empoyees n the spun-off dvsons to be
wthn the SMC barganng unt, and hed that the empoyees n the new corporatons consttute new
barganng unts.
X?. 5REHABILITATION AND INSOL?ENCD
See VILLANUEVA, ,evisiing he Phili++ine >La%s2 on Cor+orae ,ehabiliaion, XLIII
ATENEO L.|., No. 2 (May, 1999).
1. Corporate Bankruptcy Laws n Genera
(a) Governing La%s (Insovency Act, PD 902-A, Securtes Reguaton Code |RA 8799|)
(b) Ty+es of Ban$ru+cy Procee-ings in he Phili++ines
(c) ,esoluion on 3uris-icion Issues in Ban$ru+cy Procee-ings? Ching v. Lan- Ban$ of he
Phili++ines, 201 SCRA 190 (1991).
2. Suspenson of Payments
(a) Insolvency La% (Secs. 2 to 13)
- Stuaton of the corporate debtor
- Nature of petton
- Requred vote of credtors
- Consequences of approva/non-approva
(b) P.(. @AB7) (Sec. 5|d|), Sec. 5.10 of Securtes Reguaton Code
(c) Inerim ,ules on Cor+oraion ,ehabiliaion (suppanted SEC Rues on Petton, SEC Memo,
dated 7 October 1997)
3. Corporate Rehabtaton
(a) #aure of >,ehabiliaion2 (,uby In-usrial Cor+. v. C), 284 SCRA 445 (1998).
(b) Basis of ,TC Po%er o 5n-era$e Cor+orae ,ehabiliaion (Secs. 5|d| and 6, PD 902-A,
Sec. 5.10, Securtes Reguaton Code)
On 15 December 2000, the Supreme Court, n A.M. No. 00-8-10-SC, adopted the
Interm Rues of Procedure on Corporate Rehabtaton and drected to be transferred from
the SEC to Regona Tra Courts, a pettons for rehabtaton fed by corporatons,
partnershps, and assocaton under P.D. 902-A n accordance wth the amendatory
provsons of Repubc Act No. 8799. The rues requre tra courts to ssue, among other
thngs, a stay order n the "enforcement of a cams, whether for money or otherwse,
and whether such enforcement s by court acton or otherwse," aganst the corporaton
under rehabtaton, ts guarantors and suretes not sodary abe wth t. Phili++ine
)irlines v. 4urang$ing, 389 SCRA 588 (2002).
(c) SC Inerim ,ules on Cor+orae ,ehabiliaion
20
9
,e:uiremens of Peiion? The contents of the petton for corporate rehabtaton are
provded under Rue 4, Secton 2(k) of the Interm Rues on Corporate Rehabtaton,
whch among other thngs, prescrbe that the petton needs for a certfcaton. Chas
,ealy an- (ev. Cor+. v. Talavera, 397 SCRA 84 (2004).
If extraordnary corporate acton mentoned n Rue 4, Secton 2(k), of the Interm
Rues are to be done under the proposed rehabtaton pan, the pettoner woud be
bound to make t known that t has receved the approva of a ma|orty of the drectors
and the affrmatve votes of stockhoders representng at east two-thrds (2/3) of the
outstandng capta stock. Where no such extraordnary corporate acts, or one that under
the aw woud ca for a two-thrds (2/3) vote are contempated to be done n carryng out
the proposed rehabtaton pan, then the approva of stockhoders woud ony be by a
ma|orty, not necessary a two-thrds (2/3), vote, as ong as, of course, there s a quorum.
Chas ,ealy an- (ev. Cor+. v. Talavera, 397 SCRA 84 (2004).
(e) )++oinmen of .anagemen Commiee or a ,ehabiliaion ,eceiver
In exercsng the dscreton to appont a management commttee, the offcer or
trbuna before whom the appcaton was made must take nto account a the
crcumstances and facts of the case, the presence of condtons and grounds |ustfyng the
reef, the ends of |ustce, the rghts of a the partes nterests n the controversy and the
adequacy and effectveness of other avaabe remedes. The dscreton must be exercsed
wth great cauton and crcumspecton and ony for a reason strongy appearng to the
trbuna or offcer exercsng |ursdcton. Once the dscreton has been exercsed, the
presumpton to be consdered s that the offcer or trbuna has fary weghed and
apprased the evdence submtted by the partes. 3acino v. 0irs 9omenCs Cre-i Cor+.,
410 SCRA 140 (2003).
(f) )uomaic Say
- 9hen I Becomes &ffecive? The appontment of a management commttee or
rehabtaton recever may ony take pace after the fng wth the SEC of an
approprate petton for suspenson of payments. The concuson s nevtabe that
pursuant to Secton 6(c), taken together wth Sectons 5(d) and (d), a court acton s
i+so 1ure suspended only u+on he a++oinmen of a managemen commiee or a
rehabiliaion receiver. Baroac Sugar .ills, Inc. v. C), 275 SCRA 497 (1997); 5nion
Ban$ v. C), 290 SCRA 198 (1998).
- (uraion? B.0. /omes, Inc. v. Cour of )++eals, 190 SCRA 262 (1990).
The stay order s effectve from the date of ts ssuance unt the dsmssa of the
petton or the termnaton of the rehabtaton proceedngs. P)L v. 4urang$ing, 389
SCRA 588 (2002).
- Paries Covere-DBenefie-? 5nion Ban$ of he Phili++ines v. C), 290 SCRA 198 (1998);
.o-ern Pa+er Pro-ucs, Inc. v. C), 286 SCRA 749 (1998); Tra-ers ,oyal Ban$ v. C),
177 SCRA 788 (1989); Chung 4a Bio v. I)C, 163 SCRA 534 (1988).
- Claims Covere-? PCIB v. C), 172 SCRA 436 (1989); )lemarCs Sibal * Sons, Inc. v.
&lbinias, 186 SCRA 94 (1990); ,CBC v. I)C, 213 SCRA 830 (1992); BPI v. C), 229 SCRA
223 |1994|).
Interm Rues must be read and apped aong wth Secton 6(c) of P.D. 902-A,
drectng that upon the appontment of a management commttee, rehabtaton
recever, board or body pursuant to the decree, "a actons" for cams aganst the
dstressed corporaton "pendng before any court, trbuna, board or body sha be
suspended accordngy." P)L v. 4urang$ing, 389 SCRA 588 (2002).
- Ty+es of >Claims2 Covere- (0inasia Invesmens v. C), 237 SCRA 446 |1994|)
A "cam" s sad to be "a rght to payment, %heher or no t s reduced to
|udgment, qudated or unqudated, fxed or contngent, matured or unmatured,
dsputed or undsputed, ega or equtabe, and secured or unsecured." Very, the
cam aganst an arne company s a money cam for the mssng uggages, a fnanca
Revsed Bagtas Revewer by Ve and Ocfe 2A
demand, that the aw requres to be suspended pendng the rehabtaton
proceedngs. P)L v. 4urang$ing, 389 SCRA 588 (2002).
The |ustfcaton for the automatc stay of a pendng actons for cams s to
enabe the management commttee or the rehabtaton recever to effectvey
exercse ts/hs powers free from any |udca or extra-|udca nterference that mght
unduy hnder or prevent the "rescue" of the debtor company. To aow abor cams to
contnue woud ony add to the burden of the management commttee or rehabtaton
recever, whose tme, effort and resources woud be wasted defendng cams aganst
the corporaton nstead of beng drected toward ts restructurng and rehabtaton.
,ubber%orl- EPhils.F, Inc. v. #L,C, 305 SCRA 721 (1999); 336 SCRA 433 (2000).
(g) Po%ers of .anagemen Commiee or he ,ehabiliaion ,eceiver (Sec. 6, PD 902-A;
Interm Rues on Corporate Rehabtaton)
(h) S&C Po%er o Li:ui-ae Cor+oraion
() Basic (ifferences Be%een Sus+ension of Paymens Procee-ings un-er he Insolvency La%
an- 5n-er P( @AB7)
4. Insovency Proceedngs
Lqudaton proceedng s one in rem so that a other nterested persons whether known to
the partes or not may be bound by such proceedngs. Chua v. #L,C, 190 SCRA 558 (1990).
(a) Governing La% an- 3uris-icion
(b) General &ffec of Cor+orae Insolvency Procee-ings
(c) Vountary Insovency
(d) 0iling of Peiion (Sec. 14, Insovency Law)
(e) &ffec of !r-er of Insolvency (Sec. 18, Insovency Law; (e )muzaegui v. .acleo-, 33 Ph.
80 |1915|).
Secton 18 on the automatc stay s no sef-executory; appcatons for suspenson of
proceedngs must be made n the varous courts where actons n pendng. 5nson v.
)beo, 47 Ph. 42 (1924).
(f) Invountary Insovency (Sec. 20 to 33)
(g) Qualificaions of Peiioning Cre-iors
A foregn corporaton whch shows that t s a resdent of the Phppnes has ega
standng to petton for nvountary nsovency of a corporate debtor. Sae Invesmen
/ouse, Inc. v. Ciiban$, #.)., 203 SCRA 9 (1991).
(h) !r-er o Sho% Cause (Sec. 21); /earing of +eiion (Sec. 24)
() )cs of Insolvency an- !r-er of )-1u-icaion (Sec. 20)
(|) .eeing of Cre-iors o &lec )ssignee (Secs. 29 and 30)
(k) &ffecs of !r-er of Insolvency an- )++oinmen of ,eceiver (Secs. 32, 34 and 35; ,a-iola7
Toshiba Phil. v. I)C, 199 SCRA 373 |1991|)
() Li:ui-aion of )sses an- Paymen of (ebs (Sec. 33)
(m) ,eme-ies of Secure- Cre-iors (Sec. 29, 43 and 59)
(n) Com+osiion (Sec. 63)
(o) (ischarge (Secs. 52, 64, and 66)
(p) )++eal in cerain cases (Sec. 82)
21
1
X?I. DISSOL5TION
INTRODUCTORY LECTURE: Note that the treatments of contractua expectatons n these three
dfferent eves dffer.
PRE-INCORPORATION INCORPORATION DISSOLUTION
Set asde the ssue of
consent (the corporaton
cannot yet consent snce t s
not yet n exstence) n order
to uphod the ntenton of the
One party presumes that he
enters nto a contract wth a
|urdca entty, and even n
the absence of the atter, the
contract must be fufed as
Revsed Bagtas Revewer by Ve and Ocfe 2A
partes to promote the
corporaton.
expected by the partes.
EXAMPLE: ABC enters nto a
contract wth |uan Dea Cruz,
the atter beevng that ABC
had |P - ABC cannot rase ts
ack of |P to avod the
performance of ts obgaton
to |uan.
PUBLIC POLICY that the
pubc shoud be protected n
ts deangs wth the
corporaton w uphod such
contract.
EXAMPLE: |DC entered nto a
contract wth ABC on March
11, 2005 where ABCs term
ended on October 31. 2004.
|DC refused to dever, the
Board demanded devery
and sued for specfc
performance. Who w wn?
|DC w wn. The corporaton
s ony entted to enter nto
contracts wthn 3 years after
the expraton of ts term,
provded that these contracts
are reated to the qudaton
and dssouton of the
corporaton. In ths case, the
contract entered nto s
unreated to the dssouton
and qudaton of the
corporaton. Hence, the
contract s VOID.
WHY IS THE TREATMENT
DIFFERENT wth the
ncorporaton exampe and
the dssouton exampe? In
dssouton, a hgher pubc
pocy must be uphed -
Credtors must be protected
- protecton of the trust fund
doctrne.
NOTES:
Termnaton of the fe of a |urdca entty does not by tsef mpy the dmnuton or extncton of
rghts demandabe aganst a |urdca entty. When the entty s taken over by another, the
successor entty must be hed abe for the obgatons of the dssoved entty pertanng to the
assets so assumed, "to the extent of the far vaue of assets actuay taken over.
Dssouton of a corporaton sgnfes the extngushment of ts franchse and the termnaton of
the corporate exstence for busness purpose. The mere fact that the corporaton ceased to do
busness does not necessary consttute dssouton, f t s st sovent and has not gone nto
qudaton.
DE |URE DISSOLUTION - one ad|udged and determned by admnstratve or |udca sentence or
brought about by an act of the soveregn power or whch resuts from the expraton of the
charter perod of corporate fe.
DE FACTO DISSOLUTION - one whch takes pace n substance and n fact when the corporaton
by reason of nsovency, cessaton of busness, or suspenson of a ts operatons, as the case
may be goes nto qudaton, st retanng ts prmary franchse to be a corporaton; dssouton
ony of the busness enterprse. The busness enterprse coapses, but the |urdca personaty
remans. (Ths mpes that one can form a corporaton wthout the busness enterprse and that
one can have a busness enterprse wthout a |urdca person - corporaton by estoppe.)
DISSOLUTION concerns tsef wth the |URIDICAL PERSONALITY of the corporaton, whe
LIOUIDATION concerns tsef wth the BUSINESS ENTERPRISE. Can dssouton be had wthout
qudaton? No, the busness enterprse s aways affected, t s ony n ths stage where the trust
fund doctrne kcks n. Is qudaton possbe wthout dssouton? Yes, n de facto dssouton.
1. No ?ested Ri*hts to Corporate 4i"tio#. aGonzales v. Sugar ,egulaory )-minisraion, 174
SCRA 377 (1989).
21
3
GONZALES v. SUGAR REGULATORY ADMINISTRATION
FACTS:
Spouses Gonzaes, fed a compant seekng canceaton of a mortgage and recovery of a
sum of money aganst the Repubc Panters Bank ("RPBank"), Phppne Sugar Commsson
("Phsucom") and the SRA. The compant aeged that pettoners obtaned a oan secured by a rea
estate mortgage. The compant aso stated that pettoners receved a statement of account from
the RPBank settng forth that pettoners had an outstandng oan baance due to the bank. On the
bass of the promssory notes and the st of re-payments made, t seemed that the pettoners had
aready more than fuy repad ther oan. The compant further averred that Phsucom had deducted
from the export sugar proceeds of pettoners the amount of P 421,517.32 wthout the authorty and
consent of pettoners wth the resut that pettoners had overpad the RPBank. Pettoners prayed
that the rea estate mortgage be canceed, and that Phsucom and SRA be requred |onty and
severay to remburse the pettoners the amount of P 289,260.88.
SRA moved to dsmss the compant upon the ground of ack of cause of acton.
SRA aso noted that whe the deductons companed of were made by the Phsucom durng
the perod from 1980 to 1984, the SRA tsef had been created by Executve Order No. 18 ony on 18
May 1986 and that t was not a party to the rea estate mortgage between pettoners and the
RPBank.
Pettoners urged that the aboton of the Phsucom by Executve Order No. 18 n effect
destroyed the pettoners' rght to recover from Phsucom. Pettoners hence assert that they had
been deprved of property wthout due process of aw and that the aboton of Phsucom and the
transfer of assets from Phsucom to respondent SRA are unconsttutona and neffectve.
The mpct theory of pettoners s that they have a rght to foow Phsucom's assets n the
hands of the SRA.
HELD:
.One who asserts a cam aganst a |urdca entty has no consttutona rght to the perpetua
exstence of such entty. |urdca persons, whether ncorporated or not, whether owned by the
government or the prvate sector, may come to an end at one tme or another for a varety of
reasons Thus, the Corporaton Code provdes for termnaton of corporate fe, the dssouton of the
corporaton, the wndng up of ts operatons, the qudaton of ts assets, the payment of ts
obgatons and dstrbuton of any resdua assets to ts stockhoders. The termnaton of the fe of a
|urdca entty does not by tsef mpy the dmnuton or extncton of rghts demandabe aganst
such |urdca entty.
We note that Executve Order No. 18 dd not provde for unversa successon, as t were, of
SRA to Phsucom, or more specfcay to the assets and abtes of Phsucom. The successon of the
SRA to the assets and records of the Phsucom s thus mted n nature; the extent of such
successon s eft to the dscretonary determnaton of the SRA tsef. More mportanty, Executve
Order No. 18 s sent as to the abtes of Phsucom; t does not speak of assumpton of such
abtes by the SRA.
Secton 13 of Executve Order No. 18 s not to be nterpreted as authorzng respondent SRA
to dsabe Phsucom from payng Phsucom's demandabe obgatons by smpy takng over
Phsucom's assets and mmunzng them from egtmate cams aganst Phsucom. The rght of
those who have prevousy contracted wth, or otherwse acqured awfu cams aganst, Phsucom,
to have the assets of Phsucom apped to the satsfacton of those cams, s a substantve rght and
not merey a procedura remedy. Secton 13 cannot be read as permttng the SRA to destroy that
substantve rght. To avod such a resut, we beeve and so hod that shoud the assets of Phsucom
remanng n Phsucom at the tme of ts aboton not be adequate to pay for a awfu cams aganst
Phsucom, respondent SRA must be hed abe for such cams aganst Phsucom to the extent of the
far vaue of assets actuay taken over by the SRA from Phsucom, f any. To ths extent, camants
Revsed Bagtas Revewer by Ve and Ocfe 2A
aganst Phsucom do have a rght to foow Phsucom's assets n the hands of SRA or any other
agency for that matter.
Pettoners have a cause of acton aganst SRA to the extent that they are abe to prove awfu
cams aganst Phsucom, whch cams Phsucom s or may be unabe to satsfy, and to the extent
respondent SRA dd, or does, n fact take over a or some of the assets of Phsucom.
2. ?ol#tar) Dissoltio# (Sec. 117)
Secton 117. Methods of dssouton. - A corporaton formed or organzed under the provsons of ths
Code may be dssoved vountary or nvountary.
%a$ &o Creditors Affected (Sec. 118)
Secton 118. Vountary dssouton where no credtors are affected. - If dssouton of a corporaton
does not pre|udce the rghts of any credtor havng a cam aganst t, the dssouton may be
effected by ma|orty vote of the board of drectors or trustees, and by a resouton duy adopted by
the affrmatve vote of the stockhoders ownng at east two-thrds (2/3) of the outstandng capta
stock or of at east two-thrds (2/3) of the members of a meetng to be hed upon ca of the drectors
or trustees after pubcaton of the notce of tme, pace and ob|ect of the meetng for three (3)
consecutve weeks n a newspaper pubshed n the pace where the prncpa offce of sad
corporaton s ocated; and f no newspaper s pubshed n such pace, then n a newspaper of
genera crcuaton n the Phppnes, after sendng such notce to each stockhoder or member ether
by regstered ma or by persona devery at east thrty (30) days pror to sad meetng. A copy of
the resouton authorzng the dssouton sha be certfed by a ma|orty of the board of drectors or
trustees and countersgned by the secretary of the corporaton. The Securtes and Exchange
Commsson sha thereupon ssue the certfcate of dssouton.
%!$ ,here Are Creditors Affected (Secs. 119 and 122).
Secton 119. Vountary dssouton where credtors are affected. - Where the dssouton of a
corporaton may pre|udce the rghts of any credtor, the petton for dssouton sha be fed wth the
Securtes and Exchange Commsson. The petton sha be sgned by a ma|orty of ts board of
drectors or trustees or other offcers havng the management of ts affars, verfed by ts presdent
or secretary or one of ts drectors or trustees, and sha set forth a cams and demands aganst t,
and that ts dssouton was resoved upon by the affrmatve vote of the stockhoders representng at
east two-thrds (2/3) of the outstandng capta stock or by at east two-thrds (2/3) of the members
at a meetng of ts stockhoders or members caed for that purpose.
If the petton s suffcent n form and substance, the Commsson sha, by an order rectng the
purpose of the petton, fx a date on or before whch ob|ectons thereto may be fed by any person,
whch date sha not be ess than thrty (30) days nor more than sxty (60) days after the entry of the
order. Before such date, a copy of the order sha be pubshed at east once a week for three (3)
consecutve weeks n a newspaper of genera crcuaton pubshed n the muncpaty or cty where
the prncpa offce of the corporaton s stuated, or f there be no such newspaper, then n a
newspaper of genera crcuaton n the Phppnes, and a smar copy sha be posted for three (3)
consecutve weeks n three (3) pubc paces n such muncpaty or cty.
Upon fve (5) day's notce, gven after the date on whch the rght to fe ob|ectons as fxed n the
order has expred, the Commsson sha proceed to hear the petton and try any ssue made by the
ob|ectons fed; and f no such ob|ecton s suffcent, and the matera aegatons of the petton are
true, t sha render |udgment dssovng the corporaton and drectng such dsposton of ts assets
as |ustce requres, and may appont a recever to coect such assets and pay the debts of the
corporaton.
Secton 122. Corporate qudaton. - Every corporaton whose charter expres by ts own mtaton or
s annued by forfeture or otherwse, or whose corporate exstence for other purposes s termnated
n any other manner, sha nevertheess be contnued as a body corporate for three (3) years after
the tme when t woud have been so dssoved, for the purpose of prosecutng and defendng suts
by or aganst t and enabng t to sette and cose ts affars, to dspose of and convey ts property
and to dstrbute ts assets, but not for the purpose of contnung the busness for whch t was
21
5
estabshed.
At any tme durng sad three (3) years, the corporaton s authorzed and empowered to convey a of
ts property to trustees for the beneft of stockhoders, members, credtors, and other persons n
nterest. From and after any such conveyance by the corporaton of ts property n trust for the
beneft of ts stockhoders, members, credtors and others n nterest, a nterest whch the
corporaton had n the property termnates, the ega nterest vests n the trustees, and the benefca
nterest n the stockhoders, members, credtors or other persons n nterest.
Upon the wndng up of the corporate affars, any asset dstrbutabe to any credtor or stockhoder or
member who s unknown or cannot be found sha be escheated to the cty or muncpaty where
such assets are ocated.
Except by decrease of capta stock and as otherwse aowed by ths Code, no corporaton sha
dstrbute any of ts assets or property except upon awfu dssouton and after payment of a ts
debts and abtes.
When a corporaton s contempatng dssouton, t ust submt tax return on the ncome
earned by t from the begnnng of the year up to the date of ts dssouton and pay the
correspondng tax due. BPI v. Cour of )++eals, 363 SCRA 840 (2001).
NOTE:
OTHER TYPES: (1) shortenng of corporate term by the amendment of the artces of ncorporaton
(2) aowng the expraton of the corporate term as provded for n the artces of ncorporaton.
Mnorty stockhoders do not have a common aw rght, much ess a statutory rght to demand for
dssouton of the corporaton.
&. I#'ol#tar) Dissoltio# (Sec. 121; Sec. 6(), P.D. 902-A; Sec. 2, Rue 66, Rues of Court)
Secton 121. Invountary dssouton. - A corporaton may be dssoved by the Securtes and
Exchange Commsson upon fng of a verfed compant and after proper notce and hearng on the
grounds provded by exstng aws, rues and reguatons.
Sec. 2 Rue 66 When Soctor Genera or pubc prosecutor must commence acton. - The Soctor
Genera or a pubc prosecutor, when drected by the Presdent of the Phppnes, or when upon
compant or otherwse he has good reason to beeve that any case specfed n the precedng
secton can be estabshed by proof, must commence such acton.
%a$ #uo Warranto (,e+ublic v. Bisaya Lan- Trans+oraion Co., 81 SCRA 9 |1978|; ,e+ublic
v. Securiy Cre-i * )cce+ance Cor+., 19 SCRA 58 |1967|; Governmen v. &l /ogar
0ili+ino, 50 Ph. 399 |1927|).
%!$ /5piration of ,erm
%"$ Shortening of Corporate ,erm (Sec. 120)
Secton 120. Dssouton by shortenng corporate term. - A vountary dssouton may be effected by
amendng the artces of ncorporaton to shorten the corporate term pursuant to the provsons of
ths Code. A copy of the amended artces of ncorporaton sha be submtted to the Securtes and
Exchange Commsson n accordance wth ths Code. Upon approva of the amended artces of
ncorporaton of the expraton of the shortened term, as the case may be, the corporaton sha be
deemed dssoved wthout any further proceedngs, sub|ect to the provsons of ths Code on
qudaton.
%d$ &on-user of Charter and Continuous Inoperation (Sec. 22)
Secton 22. Effects on non-use of corporate charter and contnuous noperaton of a corporaton. - If a
corporaton does not formay organze and commence the transacton of ts busness or the
constructon of ts works wthn two (2) years from the date of ts ncorporaton, ts corporate powers
cease and the corporaton sha be deemed dssoved. However, f a corporaton has commenced the
transacton of ts busness but subsequenty becomes contnuousy noperatve for a perod of at east
fve (5) years, the same sha be a ground for the suspenson or revocaton of ts corporate franchse
or certfcate of ncorporaton. (19a)
Ths provson sha not appy f the faure to organze, commence the transacton of ts busnesses or
Revsed Bagtas Revewer by Ve and Ocfe 2A
the constructon of ts works, or to contnuousy operate s due to causes beyond the contro of
the corporaton as may be determned by the Securtes and Exchange Commsson.
NOTE: The essence of the corporatons |urdca personaty s the exstence of the busness
enterprse (however t s qute ronc that the ths s the case when the |urdca person may be
separated from the busness enterprse.)
O: Why s t that after the apse of two years wth the non-organzaton of the corporaton, t apses
nto nothngness, whe after the fve years and after organzaton, t cannot apse nto nothngness?
A: Because n the atter the busness enterprse s aready n exstence. Note that the busness
enterprse s not ony comprsed of assets but aso of the goodw of the corporaton. Its exstence
creates certan common aw rghts, and by the coapse of the corporaton, t must be made sure that
these rghts are not pre|udced.
"Organze" nvoves the eecton of offcers, provdng for the subscrpton and payment
of the capta stock, the adopton of by-aws, and such other steps as are necessary to endow
the ega entty wth the capacty to transact the egtmate busness for whch the corporaton
was created. "Organzaton" reates merey to the systematzaton and ordery arrangement of
the nterna and managera affars and organs of the corporaton. Bengue Consoli-ae-
.ining Co. v. Pine-a, 98 Ph. 711.
The faure to fe the by-aws does not automatcay operate to dssove a corporaton
but s now consdered ony a ground for such dssouton. Chung 4a Bio v. Inerme-iae
)++ellae Cour, 163 SCRA 534 (1988).
%0$ $emand of "inority Stoc.holders for $issolution. 0inancing Cor+. of he Phil. v.
Teo-oro, 93 Ph. 404 (1953).
Corporate dssouton due to msmanagement of ma|orty stockhoder s too drastc a
remedy, especay when the stuaton can be remeded such as gvng mnorty
stockhoders a veto power to any decson. Chase v. Buencamino, 136 SCRA 365 (1985).
+. Le*al E00e"ts o0 Dissoltio#
The termnaton of the fe of a |urdca entty does not by tsef cause the extncton or
dmnuton of the rghts and abty of such entty, snce t s aowed to contnue as a |urdca
entty for 3 years for the purpose of prosecutng and defendng suts by or aganst t and
enabng t to sette and cose ts affars, to dspose of and convey ts property, and to
dstrbute ts assets. ,e+ublic v. Tancinco, 394 SCRA 386 (2002).
A board resouton to dssove the corporaton does not operate to so dssove the |urdca
entty. For dssouton to be effectve "|t|he requrements mandated by the Corporaton Code
shoud have been strcty comped wth." Vesagas v. Cour of )++eals, 371 SCRA 509, 516
(2002).
A corporaton cannot extend ts fe by amendment of ts artces of ncorporaton effected
durng the three-year statutory perod for qudaton when ts orgna term of exstence had
aready expred, as the same woud consttute new busness. )lhambra Cigar * Cigaree
.anufacuring Com+any, Inc. v. S&C, 24 SCRA 269 (1968).
When the perod of corporate fe expres, the corporaton ceases to be a body corporate
for the purpose of contnung the busness for whch t was organzed. P#B v. Cour of 0irs
Insance of ,izal, Pasig, Br. GGI, 209 SCRA 294 (1992).
.. Methods o0 Li2idatio# (Sec. 122; aBoar- of Li:ui-aors v. 4ala%, 20 SCRA 987 |1967|;
Sumera v. Valencia, 67 Ph. 721 |1939|; Buenaflor v. Camarines In-usry, 108 Ph. 472
|1960|).
Secton 122. Corporate qudaton. - Every corporaton whose charter expres by ts own mtaton or
s annued by forfeture or otherwse, or whose corporate exstence for other purposes s termnated
n any other manner, sha nevertheess be contnued as a body corporate for three (3) years after
the tme when t woud have been so dssoved, for the purpose of prosecutng and defendng suts
21
7
by or aganst t and enabng t to sette and cose ts affars, to dspose of and convey ts property
and to dstrbute ts assets, but not for the purpose of contnung the busness for whch t was
estabshed.
At any tme durng sad three (3) years, the corporaton s authorzed and empowered to convey a of
ts property to trustees for the beneft of stockhoders, members, credtors, and other persons n
nterest. From and after any such conveyance by the corporaton of ts property n trust for the
beneft of ts stockhoders, members, credtors and others n nterest, a nterest whch the
corporaton had n the property termnates, the ega nterest vests n the trustees, and the benefca
nterest n the stockhoders, members, credtors or other persons n nterest.
Upon the wndng up of the corporate affars, any asset dstrbutabe to any credtor or stockhoder or
member who s unknown or cannot be found sha be escheated to the cty or muncpaty where
such assets are ocated.
Except by decrease of capta stock and as otherwse aowed by ths Code, no corporaton sha
dstrbute any of ts assets or property except upon awfu dssouton and after payment of a ts
debts and abtes.
LIOUIDATION - settement of the affars of a corporaton whch conssts of ad|ustng the debts and
cams, that s, of coectng a that s due to the corporaton, the settement and ad|ustment of
cams aganst t and the payment of ts |ust debts.
It s the process by whch a assets of the corporaton are converted nto qud assets n order to
pay for a cams of corporate credtors and the remanng baance f any s to be dstrbuted to
the stockhoders or members of the corporaton. It s a proceedng n rem.
BOARD OF LIOUIDATORS v. KALAW
The Court hed that the pacng of the affars and assets of the NACOCO n the hands of a Board of
Lqudators upon dssouton, dd not termnate the power of the Board to contnue wth the
qudaton process of NACOCO even after the apse of the three year perod because the Board of
Lqudators became the trustees; the Board took the pace of the corporaton after the expraton of
ts affars. Snce no tme mt has been tacked to the exstence of the Board and ts functons of
cosng the affars of the corporaton, t was hed that the Board can st .cases pendng even after
the three year perod.
Lqudaton, n corporaton aw, connotes a wndng up or settng wth credtors and
debtors. It s the wndng up of a corporaton so that assets are dstrbuted to those entted to
receve them. It s the process of reducng assets to cash, dschargng abtes and dvdng
surpus or oss. PVB &m+loyees 5nion7#.5.B.&. v. Vega, 360 SCRA 33 (2001).
There can be no doubt that under Secs. 77 and 78 of Corporaton Law, the Legsature
ntended to et the sharehoders have the contro of the assets of the corporaton upon
dssouton n wndng up ts affars. The norma method of procedure s for the drectors and
executve offcers to have charge of the wndng up operatons, though there s the aternatve
method of assgnng the property of the corporaton to the trustees for the beneft of ts
credtors and sharehoders. "Whe the appontment of a recever rests wthn the sound
|udca dscreton of the court, such dscreton must, however, aways be exercsed wth
cauton and governed by ega and equtabe prncpes, the voaton of whch w amount to
ts abuse, and n makng such appontment the court shoud take nto consderaton a the
facts and wegh the reatve advantages and dsadvantages of appontng a recever to wnd
up the corporate busness." China Ban$ing Cor+. v. .. .ichelin * Cie, 58 Ph. 261 (1933)
There s nothng n Sec. 122 whch bars an acton for the recovery of the debts of the
corporaton aganst the qudator thereof, after the apse of the sad three-year perod. "It
mmatera that the present acton was fed after the expraton of the three years . . . for at
the very east, and assumng that |udca enforcement of taxes may not be ntated after sad
three years despte the fact that actua qudaton has not termnated and the one n charge
thereof s st hodng the assets of the corporaton, obvousy for the beneft of a the
credtors thereof, the assessment aforementoned, made wthn the three years, defntey
Revsed Bagtas Revewer by Ve and Ocfe 2A
estabshed the Government as a credtor of the corporaton for whom the qudator s
supposed to hod assets of the corporaton." ,e+ublic v. .arsman (ev. Co., 44 SCRA 418
(1972).
1. ,ho Are Lia!le A0ter Dissoltio# a#d ,i#di#*85p> (a#aional )baca Cor+. v. Pore, 2
SCRA 989 |1961|; aTan Tiong Bio v. Commissioner, 100 Ph. 86 |1956|; aGelano v. Cour of
)++eals, 103 SCRA 90 |1981|).
NATIONAL ABACA CORP. v. PORE
FACTS:
On November 14, 1953, pantff fed a compant, aganst defendant Apoona Pore, for the recovery
of P1,213.34, aegedy advanced to her for the purchase of hemp for the account of the former and
for whch she had aegedy faed to account. Defendant aeged that she had accounted for a cash
advances. The court found that the defendant had not accounted for cash advances n the sum of
P272.49.
Natona Abaca fed a moton for reconsderaton of ths decson as we as a moton for new tra.
Pore moved to dsmss the compant upon the ground that pantff has no ega capacty to sue, t
havng been aboshed by Executve Order No. 372 of the Presdent of the Phppnes, dated
November 24,1950.
Natona Abaca ob|ected upon the ground that pursuant to sad executve order, pantff "sha
nevertheess be contnued as a body corporate for a perod of three (3) years from the effectve
date" of sad executve order, whch was November 30, 1950, "for the purpose of prosecutng and
defendng suts by or aganst t and of enabng the Board of Lqudators" - thereby created -
"graduay to sette and cose ts affars", . . . and that ths case was begun on November 14, 1953, or
before the expraton of the perod aforementoned.
The then ssued an order dated August 1, 1956, drectng pantff to amend the compant, wthn ten
(10) days from notce, by ncudng the Board of Lqudators as co-party pantff, wth the admonton
that otherwse the case woud be dsmssed.
Athough a copy of the amended compant was receved by the counse of Pore, no such compant
was receved by the court. As such, on September 1, 1956, sad court ssued another order
dsmssng the case. On September 13, 1956, pantff's counse receved copy of the order of
September 1, 1956. He then nqured from pantff's mang cerk whether or not hs nstructons,
concernng the mang of copes of sad amended compant, had been comped wth. He found out
that, athough sad copes of the amended compant were entered n the record book of pantff's
outgong correspondence on August 24, 1956, ony the copy addressed to defendant's counse had
actuay been maed. The orgna copy of the amended compant, addressed to the cerk of court,
coud not be ocated, despte dgent efforts made to fnd the same. Pantff prayed, therefore, that
the dsmssa order of September 1, 1956 be reconsdered and set asde and that ts aforementoned
amended compant be admtted.
ISSUES:
1.) Whether an acton, commenced wthn three (3) years after the aboton of pantff, as a
corporaton, may be contnued by the same after the expraton of sad perod.
2.) Whether, under the facts set forth above, the ower court shoud have granted pantff's moton
for reconsderaton of ts order of September 1, 1956.
HELD:
1.) No, n the absence of statutory provson to the contrary, pendng actons by or aganst a
21
9
corporaton are abated upon expraton of the perod aowed by aw for the qudaton of ts affars.
It s generay hed, that where a statute contnues the exstence of a corporaton for a certan
perod after ts dssouton for the purpose of prosecutng and defendng suts, etc., the
corporaton becomes defunct upon the expraton of such perod, at east n the absence of a
provson to the contrary, so that no acton can afterwards be brought by or aganst t, and must
be dsmssed. Actons pendng by or aganst the corporaton when the perod aowed by the
statute expres, ordnary abate.
Our Corporaton Law contans no provson authorzng a corporaton, after three (3) years from
the expraton of ts fetme, to contnue n ts corporate name actons nsttuted by t wthn sad
perod of three (3) years. n fact, secton 77 of sad aw provdes that the corporaton sha "be
contnued as a body corporate for three (3) years after the tme when t woud have been . . .
dssoved, for he +ur+ose- of +rosecuing an- -efen-ing suis by or agains i . . .", so that,
thereafter, t sha no onger en|oy corporate exstence for such purpose. For ths reason, secton
78 of the same aw authorzes the corporaton, "at any tme durng sad three years . . . to convey
a of ts property to trustees for the beneft of members, stockhoders, credtors and other
nterested", evdenty for the purpose, among others, of enabng sad trustees to prosecute and
defend suts by or aganst the corporaton begun before the expraton of sad perod.
It s to be noted that the tme durng whch the corporaton, through ts own offcers, may conduct
the qudaton of ts assets and sue and be sued as a corporaton s mted to three years from the
tme the perod of dssouton commences; but that there s no tme mted wthn the trustees must
compete a qudaton paced n ther hands. It s provded ony (Corp. Law, Sec. 78) that the
conveyance to the trustees must be made wthn the three-year perod. It may be found mpossbe
to compete the work of qudaton wthn the three-year perod or to reduce dsputed cams to
|udgment. The authortes are to the effect that suts by or aganst a corporaton abate when t
ceased to be an entty capabe of sung or beng sued (7 R.C.L. Corps., Par. 750); but trustees to
whom the corporate assets have been conveyed pursuant to the authorty of secton 78 may sue and
be sued as such n a matters connected wth the qudaton. By the terms of the statute the effect
of the conveyance s to make the trustees the ega owners of the property conveyed, sub|ect to the
benefca nterest theren of credtors and stockhoders.
2.) The record satsfactory shows that pantff had prepared an amended compant, as drected n
the order of August 1, 1956, upon recept thereof; that copy of sad amended compant had actuay
been sent by regstered ma to defendant's counse; that pantff's counse had gven to ts mang
cerk the proper nstructons for the fng of the orgna of sad amended compant wth the offce of
the Court of Frst Instance of Leyte; that sad mang cerk had endeavored to compy wth the
aforementoned nstructons, as evdenced by the correspondng entry n the record book of pantff's
outgong correspondence; and that the faure to fe n court sad orgna of the amended compant
must have been due, therefore, ether to accdent or to excusabe neggence on the part of sad
mang cerk. Therefore, the court shoud have granted the moton for reconsderaton.
Pantff's amended compant s hereby admtted, and the record remanded to the ower court for
further proceedngs, wth the costs of ths nstance aganst defendant-appeee, Apoono Pore.
NOTE: In the absence of a statutory provson to the contrary, pendng actons by or aganst a
corporaton are abated upon the expraton of the 3 year perod aowed by aw for the qudaton of
ts affars.
TAN TIONG BIO v. COMMISSIONER
Revsed Bagtas Revewer by Ve and Ocfe 2A
NOTE: Even after the three year perod of qudaton, corporate credtors can st pursue ther
cams aganst corporate assets aganst the offcers or stockhoders who have taken over the
propertes of the corporaton. Forget peope concentrate on the assets. Credtors may cam aganst
those who are n possesson of the property even f they are not the domnca owners of such.
GELANO v. COURT OF APPEALS
FACTS:
Prvate respondent Insuar Sawm, Inc. s a corporaton organzed on September 17, 1945 wth a
corporate fe of ffty (50) years, or up to September 17, 1995, wth the prmary purpose of carryng
on a genera umber and sawm busness. It was easng a property from the spouses Geano n
order to conduct ts busness. Between November 19, 1947 to December 26, 1950 pettoner Caros
Geano obtaned from Insuar Sawm cash advances of P25,950.00. The sad sum was taken and
receved by pettoner Caros Geano on the agreement that prvate respondent coud deduct the
same from the monthy rentas of the eased premses unt sad cash advances are fuy pad. Ony
P5,950.00 was pad. The Geanos refused to pay the rest of the amount despte repeated demands.
Guermna M. Geano refused to pay on the ground that sad amount was for the persona account of
her husband asked for by, and gven to hm, wthout her knowedge and consent and dd not beneft
the famy. There were other occasons when the spoused purchased materas on credt from nsuar.
they aso made nsuar an accomodaton party for a oan from Chna Bank. n the sad nstances, the
Geanos were not abe to pay, nspte of repeated demands from nsuar.
On May 29, 1959 the corporaton fed a compant for coecton aganst heren pettoners before the
Court of Frst Instance of Mana. In the meantme, prvate respondent amended ts Artces of
Incorporaton to shorten ts term of exstence up to December 31, 1960 ony. The amended Artces
of Incorporaton was fed wth, and approved by the Securtes and Exchange Commsson, but the
tra court was not notfed of the amendment shortenng the corporate exstence and no substtuton
of party was ever made. On November 20, 1964 and amost four (4) years after the dssouton of the
corporaton, the tra court rendered a decson n favor of prvate respondent the dspostve porton
of whch reads as foows:
WHEREFORE, |udgment s rendered, orderng:
1. Defendant Caros Geano to pay pantff the sum of:
(a) P19,650.00 wth nterest thereon at the ega rate from the date of the fng of the
compant on May 29, 1959, unt sad sum s fuy pad;
(b) P4,106.00, wth nterest thereon at the ega rate from the date of the fng of the
compant unt sad sum s fuy pad;
2. Defendants Caros Geano and Guermna Mendoza to pay |onty and severay the sum of:
(a) P946.46, wth nterest thereon, at the agreed rate of 12% per annum from October
6, 1946, unt sad sum s fuy pad;
(b) P550.00, wth nterest thereon at the ega rate from the date of the fng of the
compant unt the sad sum s fuy pad;
(c) Costs of the sut; and
3. Defendant Caros Geano to pay the pantff the sum of P2,000.00 attorney's fees.
The Countered of defendants are dsmssed.
SO ORDERED.
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1
Both partes appeaed to the Court of Appeas, prvate respondent aso appeang because t nssted
that both Caros Geano and Guermna Geano shoud be hed abe for the substanta porton of
the cam.
On August 23, 1973, the Court of Appeas rendered a decson modfyng the |udgment of the tra
court by hodng pettoner spouses |onty and severay abe on prvate respondent's cam and
ncreasng the award of P4,106.00.
After pettoners receved a copy of the decson on August 24, 1973, they came to know that the
Insuar Sawm Inc. was dssoved way back on December 31, 1960. The Geanos fed a moton to
dsmss the case and/or reconsderaton of the decson of the Court of Appeas on grounds that the
case was prosecuted even after dssouton of prvate respondent as a corporaton. After recept of
pettoners' moton to dsmss and/or reconsderaton or on October 28, 1973, prvate respondent thru
ts former drectors fed a Petton for Recevershp before the Court of Frst Instance of Mana,
docketed as Speca Proceedngs No. 92303.
ISSUE:
Whether a corporaton, whose corporate fe had ceased by the expraton of ts term of exstence,
coud st contnue prosecutng and defendng suts after ts dssouton and beyond the perod of
three years provded for under Act No. 1459, otherwse known as the Corporaton aw, to wnd up ts
affars, wthout havng undertaken any step to transfer ts assets to a trustee or assgnee.
HELD:
Yes, t can.
It s we setted that, uness the statutes otherwse provde, a pendng suts and actons by and
aganst a corporaton are abated by a dssouton of the corporaton.
.
Secton 77 of the Corporaton
Law provdes that the corporaton sha "be contnued as a body corporate for three (3) years after
the tme when t woud have been ... dssoved, for the purpose of prosecutng and defendng suts By
or aganst t ...," so that, thereafter, t sha no onger en|oy corporate exstence for such purpose. For
ths reason, Secton 78 of the same aw authorzes the corporaton, "at any tme durng sad three
years ... to convey a of ts property to trustees for the beneft of members, Stockhoders, credtors
and other nterested," evdenty for the purpose, among others, of enabng sad trustees to
prosecute and defend suts by or aganst the corporaton begun before the expraton of sad perod.
1
Commentng on sad sectons, |ustce Fsher sad:
It s to be noted that the tme durng whch the corporaton, through ts own offcers, may
conduct the qudaton of ts assets and sue and be sued as a corporaton s mted to three
years from the tme the perod of dssouton commences; but that there s no tme mted
wthn whch the trustees must compete a qudaton paced n ther hands. It s provded ony
(Corp. Law, Sec. 78) that the conveyance to the trustees must be made wthn the three-year
perod. It may be found mpossbe to compete the work of qudaton wthn the three-year
perod or to reduce dsputed cams to |udgment. The authortes are to the effect that suts by
or aganst a corporaton abate when t ceased to be an entty capabe of sung or beng sued
(7 R.C.L. Corps., Par. 750); but trustees to whom the corporate assets have been conveyed
pursuant to the authorty of Secton 78 may sue and be sued as such n a matters connected
wth the qudaton. By the terms of the statute the effect of the conveyance s to make the
trustees the ega owners of the property conveyed, sub|ect to the benefca nterest theren
of credtors and stockhoders.
3
When Insuar Sawm, Inc. was dssoved on December 31, 1960, under Secton 77 of the Corporaton
Law, t st has the rght unt December 31, 1963 to prosecute n ts name the present case. After
the expraton of sad perod, the corporaton ceased to exst for a purposes and t can no onger sue
or be sued. However, a corporaton that has a pendng acton and whch cannot be termnated wthn
the three-year perod after ts dssouton s authorzed under Secton 78 to convey a ts property to
trustees to enabe t to prosecute and defend suts by or aganst the corporaton beyond the Three-
year perod athough prvate respondent (dd not appont any trustee, yet the counse who
prosecuted and defended the nterest of the corporaton n the nstant case and who n fact appeared
Revsed Bagtas Revewer by Ve and Ocfe 2A
n behaf of the corporaton may be consdered a trustee of the corporaton at east wth respect
to the matter n tgaton ony. Sad counse had been handng the case when the same was pendng
before the tra court unt t was appeaed before the Court of Appeas and fnay to ths Court. We
therefore hod that there was a substanta compance wth Secton 78 of the Corporaton Law and as
such, prvate respondent Insuar Sawm, Inc. coud st contnue prosecutng the present case even
beyond the perod of three (3) years from the tme of ts dssouton.
The trustee may commence a sut whch can proceed to fna |udgment even beyond the three-year
perod. No reason can be conceved why a sut aready commenced By the corporaton tsef durng
ts exstence, not by a mere trustee who, by fcton, merey contnues the ega personaty of the
dssoved corporaton shoud not be accorded smar treatment aowed - to proceed to fna
|udgment and executon thereof.
The supreme court uphed the vew of the court of appeas that "any tgaton fed by or aganst the
corporaton nsttuted wthn the perod, but whch coud not be termnated, must necessary proong
that perod unt the fna termnaton of sad tgaton as otherwse corporatons n qudaton woud
ose what shoud |usty beong to them or woud be exempt from the payment of |ust obgatons
through a mere techncaty, somethng that courts shoud prevent"
NOTE: "Trustee" must be understood n ts genera concept whch woud ncude the counse to whom
was entrusted n a pendng case, the prosecuton of the sut fed by the corporaton.
Athough a corporate offcer s not abe for corporate obgatons, such as cams for
wages, however, when such corporate offcer ceases corporate property to appy to hs own
cams aganst the corporaton, he sha be abe to the extent thereof to corporate abtes,
snce knowng fuy we that certan credtors had smary vad cams, he took advantage of
hs poston as genera manager and apped the corporaton's assets n payment excusvey
to hs own cams. (e Guzman v. #L,C, 211 SCRA 723 (1992).
If the 3-year extended fe has expred wthout a trustee or recever havng been
desgnated, the Board of Drectors tsef, foowng the ratonae of the decson n Gelano, may
be permtted to so contnue as "trustees" to compete qudaton; and n the absence of a
Board, those havng pecunary nterest n the assets, ncudng the sharehoders and the
credtors of the corporaton, actng for and n ts behaf, mght make proper representatons
wth the approprate body for workng out a fna settement of the corporate concerns.
Clemene v. Cour of )++eals, 242 SCRA 717 (1995).
In Gelano case, the counse of the dssoved corporaton was consdered a trustee. In the
ater case of Clemene v. Cour of )++eals, the Board of Drectors was permtted to compete
the corporate qudaton by contnung as "trustees". Under Sec. 145 "No rght of remedy n
favor or aganst any corporaton . . . sha be removed or mpared ether by the subsequent
dssouton of sad corporaton or by any subsequent amendment or repea of ths Code or of
any part thereof." Ths provson safeguards the rghts of a corporaton whch s dssoved
pendng tgaton. ,eburiano v. Cour of )++eals, 301 SCRA 342 (1999); 4nech v. 5nie-
Cigaree Cor+., 384 SCRA 48 (2002).
METHODS OF LIOUIDATION:
THROUGH BOARD OF DIRECTORS OR TRUSTEES
THROUGH TRUSTEE
THROUGH RECEIVER
Dstncton - A recever n qudaton stands on a dfferent ega bass from a trustee n a
qudaton. It s bascay a contractua reatonshp and generay centered upon property such
that the trustee assumes naked tte to the property paced n trust. He s not apponted by the
court, but he s actuay a transferee who hods ega tte to the corporate assets and he s
accountabe under the terms of the trust agreement. A recevershp on the other hand, s created
by means of a |udca or quas-|udca appontment of the recever. He s actuay an offcer of the
22
3
court and must therefore be accountabe to the Court.
SUMMARY OF PRINCIPLES:
The termnaton of the fe of a |urdca entty does not by tsef cause the extncton or dmnuton
of the rghts and abtes of such entty nor those of ts owners and credtors.
The corporaton contnues to be a body corporate for 3 years after ts dssouton for purposes of
prosecutng and defendng suts by and aganst t and for enabng t to sette and cose ts affars,
cumnatng n the dsposton and dstrbuton of ts remanng assets.
It may durng the term appont a trustee or a recever who may act beyond that perod.
If the 3 year extended fe has expred wthout such appontment, the Board may contnue as
trustees by ega mpcaton to compete the corporate qudaton.
St n the absence of the Board, those havng any pecunary nterest, mght make proper
representatons wth the SEC.
3. Rei#"orporatio#9 aChung 4a Bio v. I)C, 163 SCRA 534 (1988).
NOTE: One cannot overcome the rghts of credtors, f they are not pre|udced, the stockhoders
rghts may not be pre|udced.
O: Is the busness enterprse vabe at ths pont?
A: No.
CHUNG KA BIO v. IAC
FACTS:
Phppne Boomng Ms (PBM) was ncorporated n 1952 wth a term of 25 years whch expred n
|anuary of 1977. In May of 1977, the members of ts board of drectors executed a deed of
assgnment of a of ts recevabes and propertes n favor of Chung Song Pek, n hs capacty as
treasurer of the new PBM, whch was then n the process of ncorporaton. In |une of 1977, the new
PBM was ssued a certfcate of ncorporaton by the SEC.
In May of 1981, Chung Ka Bo and other stockhoders of the od PBM fed a petton for qudaton of
both the od and the new PBM. The aegaton was that the former had become egay non-exstent
for faure to extend ts corporate fe and that the atter had kewse been pso facto dssoved for
non-use of the charter and contnuous faure to operate wthn 2 years from ncorporaton.
ISSUES:
1.) Does the BOD of an aready dssoved corp. have the nherent power wthout the express consent
of the stockhoders to convey a of ts assets to a new corp?
2.) Has the new corporaton comped wth the 2 year requrement n the new corporaton code on
non-user because ts stockhoders faed to adopt a set of by-aws, and therefore become dssoved?
HELD:
1.) The frst contenton s based on the averment that no stockhoders meetng was hed and there
was no 2/3 vote to approve the dsposton of a the property. Even so, there s a presumpton of
reguarty whch must operate n favor of the prvate respondents who nsst that the proper
authorzaton as requred by the corp aw was duy obtaned at a meetng caed for the purpose. That
authorzaton was emboded n a unanmous resouton dated March 19, 1977, whch was reproduced
verbatm n the deed of assgnment. Otherwse, the new PBM woud not have been ssued a
certfcate of ncorporaton, whch shoud aso be presumed to have been done reguary.

Whe the board of drectors s not ordnary permtted to undertake an actvty other than the usua
qudaton of the busness of the dssoved corporaton, there s nothng to prevent the stockhoders
from conveyng ther respectve sharehodngs toward the creaton of a new corporaton to contnue
the busness of the od. Wndng up s the soe actvty of a dssoved corporaton that does not ntend
to ncorporate anew. If t does, however, t s not unawfu for the od BOD to negotate and transfer
the assets of the dssoved corporaton to the new corporaton ntended to be created as ong as the
Revsed Bagtas Revewer by Ve and Ocfe 2A
stockhoders have gven ther consent.
What s ntrugng n ths case s that the deed of assgnment was ssued n 1977, t was ony n 1981
that t occured to the pettoners to queston ts vadty. Four years had eapsed before the acton for
qudaton was fed. By ths tme the new PBM was n fu operaton, openy and qute vsby
conductng the same busness undertaken by the od and dssoved PBM. The new corporaton
empoys the same personne as the od PBM. the pettoners and the respondents are not strangers
but reatves and cose busness assocates, so t was qute key that they were aware of the
happenngs n the new PBM from the begnnng. these crcumstances operate to bar the pettoners
from questonng the deed of assgnment. Latches has operated aganst them.
2.) Non-fng of the by-aws does not operate as an automatc dssouton of the corp. Under sec. 6 of
P.D. 902-A, the SEC s empowered to suspend or revoke, after proper notce and hearng, the
franchse or the certfcate of regstraton of a corporaton on the ground of faure to fe by-aws
wthn the requred perod. It s cear from ths provson that there must frst be a hearng to
determne the exstence of the ground, and secondy, assumng such fndng, the penaty s not
necessary revocaton, but may ony be suspenson of the charter. In fact under the rues of the SEC,
there s a possbty that t may ony be penazed wth an admnstratve fne. In any case, the
defcency companed of was corrected n 1981, when the new PBM adopted and fed ts by-aws.
thus renderng ths ssue moot and academc.
NOTE: Dstncton between extenson of charter and the grant of new one - to renew a charter s to
revve a charter whch has expred or n other words, to gve a new exstence to one whch has been
forfeted or whch has ost ts vtaty by apse of tme. To ncrease a charter s to ncrease the tme
for the exstence of one whch woud otherwse reach ts mt at an earer perod. On the other hand,
the renewa of a corporate charter by extendng the term of corporate fe has been consdered, n
ega effect as amountng to the grant of a new charter so as to sub|ect the corporaton to the aws n
effect at the tme of renewa.
X?II. CLOSE COR(ORATION
See VILLANUEVA, The Phili++ine Close Cor+oraion, 32 ATENEO L.|. (No. 2, March, 1988)
1. De0i#itio# (Sec. 96; a.anuel ,. (ulay &ner+rises v. Cour of )++eals, 225 SCRA 678 |1993|;
aSan 3uan Srucural v. Cour of )++eals, 296 SCRA 631 |1998|).
Secton 96 Defnton and appcabty of Tte. - A cose corporaton, wthn the meanng of ths Code,
s one whose artces of ncorporaton provde that: (1) A the corporaton's ssued stock of a
casses, excusve of treasury shares, sha be hed of record by not more than a specfed number of
persons, not exceedng twenty (20); (2) a the ssued stock of a casses sha be sub|ect to one or
more specfed restrctons on transfer permtted by ths Tte; and (3) The corporaton sha not st n
any stock exchange or make any pubc offerng of any of ts stock of any cass. Notwthstandng the
foregong, a corporaton sha not be deemed a cose corporaton when at east two-thrds (2/3) of ts
votng stock or votng rghts s owned or controed by another corporaton whch s not a cose
corporaton wthn the meanng of ths Code.
Any corporaton may be ncorporated as a cose corporaton, except mnng or o companes, stock
exchanges, banks, nsurance companes, pubc uttes, educatona nsttutons and corporatons
decared to be vested wth pubc nterest n accordance wth the provsons of ths Code.
The provsons of ths Tte sha prmary govern cose corporatons: Provded, That the provsons of
other Ttes of ths Code sha appy suppetory except nsofar as ths Tte otherwse provdes.
MANUEL DULAY v CA
FACTS:
The corporaton was descrbed to have ts controng stockhoders, members of the Duay famy, to
compose the board of drectors and offcers, wth nomna shares sted n the names of two other
nomnees, and whch corporaton was the regstered owner of the Duay Apartments. The corporaton
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obtaned varous oans for the constructon of ts hote pro|ect, Duay Contnenta Hote, and
borrowed money from one of ts drectors, Vrgo Duay to contnue the pro|ect. As a resut, Vrgo
Duay occuped one of the apartment unts snce 1973 whe at the same tme managed the Duay
Apartments.
In 1976, the corporaton through ts Presdent, sod the Duay Apartments under a sae wth opton to
purchase wthn 2 years, to one Veoso who mortgaged the property n favor of one Torres, who
eventuay forecosed on the property and become the hghest bdder at the aucton sae. When the
redempton perod expred, Torres sought to consodate tte and fed an acton to recover
possesson of the property. The corporaton fed an acton aganst Torres and Veoso for the
canceaton of the sae at forecosure on the ground tat the sae of the property to Veoso was done
by the Presdent wthout actua board approva.
HELD:
By vrtue of Secton 101 of the Corporaton Code, the court sad that the pettoner corporaton s
cassfed as a cose corporaton and consequenty, a board resouton to authorze the sae or
mortgage of the sub|ect property s not necessary to bnd the corporaton for the acton of ts
presdent. At any rate, a corporate acton taken at a board meetng wthout proper ca or notce n a
cose corporaton s deemed ratfed by the absent drector uness the atter prompty fes hs wrtten
ob|ecton wth the secretary of the corporaton after havng knowedge of the meetng whch n ths
case, Duay faed to do so.
O: But why was t mportant to pace the corporaton under the cassfcaton of a cose corporaton
where the same may have been acheved f t were consdered a pubcy hed corporaton?
A: In the ream of ordnary corporatons or pubcy-hed corporatons, ony the Board of Drectors may
be estopped wth regard to the authorty ts Presdent exercses but stockhoders are not so
estopped. However, n the ream of cose corporatons, snce the Board and the stockhoders are
cosey ntertwned, the atter may not set up the defense that the doctrne of estoppe does not
appy to them. In short, nvocaton of the presence of a cose corporaton s mportant as to attach
abty to stockhoders by vrtue of the doctrne of estoppe.
NOTE: In ths case, the sae of rea property was contracted by the presdent of a cose corporaton
wth the knowedge and acquescence of ts Board of Drectors.
SAN |UAN STRUCTURAL v CA
The Court hed that |ust because the corporate treasurer and her husband together owned 99.866%
of the outstandng capta stock of the corporaton does not |ustfy a concuson that t s a cose
corporaton whch can be bound by the acts of ts prncpa stockhoder who needs no specfc
authorty.
The determnaton of when a corporaton s a cose corporaton s determned by the requstes
provded n Sec. 96 of the Corporaton Code. In ths case the artces of ncorporaton do not contan
any provson statng that (1) the number of stockhoders sha not exceed 20 or (2) a preempton of
shares s restrcted n favor of any stockhoder of the corporaton, or (3) stng ts stock n any stock
exchange or makng a pubc offerng of such stocks s prohbted. The corporaton does not become
a cose corporaton by the mere fact that the spouses owned 99.866% of the capta stock. The mere
ownershp by a snge stockhoder or by another corporaton of a or neary a of the capta stock of
a corporaton s not of tsef suffcent ground for dsregardng the separate corporate personates.
So too, a narrow dstrbuton of ownershp, does not, by tsef, make a cose corporaton.
The concept of a cose corporaton organzed for the purpose of runnng a famy busness or
managng famy property has formed the backbone of Phppne commerce and ndustry.
Through ths devce, Fpno fames have been abe to turn ther humbe, hard-earned fe
savngs nto gong concerns capabe of provdng them and ther fames wth a modcum of
matera comfort and fnanca securty as a reward for years of hard work. A famy
corporaton shoud serve as a reward for years of hard work. A famy corporaton shoud
serve as a rayng pont for famy unty and prosperty, not as a fashpont for fama strfe. It
s hoped that peope reacquant themseves wth the concepts of mutua ad and securty that
Revsed Bagtas Revewer by Ve and Ocfe 2A
are the orgna drvng forces behnd the formaton of famy corporatons and use these
tenets n order to factate more cv, f not more amcabe, settements of famy corporate
dsputes. aGala v. &llice )gro7In-usrial Cor+., 418 SCRA 431 (2003).
GALA v. ELLICE AGRO-INDUSTRIAL CORP.
2. Arti"les o0 I#"orporatio# Re2ire/e#ts (Sec. 97)
Secton 97. Artces of ncorporaton. - The artces of ncorporaton of a cose corporaton may
provde:
1. For a cassfcaton of shares or rghts and the quafcatons for ownng or hodng the same
and restrctons on ther transfers as may be stated theren, sub|ect to the provsons of the
foowng secton;
2. For a cassfcaton of drectors nto one or more casses, each of whom may be voted for
and eected soey by a partcuar cass of stock; and
3. For a greater quorum or votng requrements n meetngs of stockhoders or drectors than
those provded n ths Code.
The artces of ncorporaton of a cose corporaton may provde that the busness of the corporaton
sha be managed by the stockhoders of the corporaton rather than by a board of drectors. So ong
as ths provson contnues n effect:
1. No meetng of stockhoders need be caed to eect drectors;
2. Uness the context ceary requres otherwse, the stockhoders of the corporaton sha be
deemed to be drectors for the purpose of appyng the provsons of ths Code; and
3. The stockhoders of the corporaton sha be sub|ect to a abtes of drectors.
The artces of ncorporaton may kewse provde that a offcers or empoyees or that specfed
offcers or empoyees sha be eected or apponted by the stockhoders, nstead of by the board of
drectors.
%a$ Pre-/mptive Rights (Sec. 102)
Secton 102. Pre-emptve rght n cose corporatons. - The pre-emptve rght of stockhoders n cose
corporatons sha extend to a stock to be ssued, ncudng ressuance of treasury shares, whether
for money, property or persona servces, or n payment of corporate debts, uness the artces of
ncorporaton provde otherwse.
%!$ Amendment (Sec. 103)
Secton 103. Amendment of artces of ncorporaton. - Any amendment to the artces of
ncorporaton whch seeks to deete or remove any provson requred by ths Tte to be contaned n
the artces of ncorporaton or to reduce a quorum or votng requrement stated n sad artces of
ncorporaton sha not be vad or effectve uness approved by the affrmatve vote of at east two-
thrds (2/3) of the outstandng capta stock, whether wth or wthout votng rghts, or of such greater
proporton of shares as may be specfcay provded n the artces of ncorporaton for amendng,
deetng or removng any of the aforesad provsons, at a meetng duy caed for the purpose.
&. Restri"tio# o# Tra#s0er o0 Shares (Secs. 98 and 99)
Secton 98. Vadty of restrctons on transfer of shares. - Restrctons on the rght to transfer shares
must appear n the artces of ncorporaton and n the by-aws as we as n the certfcate of stock;
otherwse, the same sha not be bndng on any purchaser thereof n good fath. Sad restrctons
sha not be more onerous than grantng the exstng stockhoders or the corporaton the opton to
purchase the shares of the transferrng stockhoder wth such reasonabe terms, condtons or perod
stated theren. If upon the expraton of sad perod, the exstng stockhoders or the corporaton fas
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to exercse the opton to purchase, the transferrng stockhoder may se hs shares to any thrd
person.
Secton 99. Effects of ssuance or transfer of stock n breach of quafyng condtons. -
1. If stock of a cose corporaton s ssued or transferred to any person who s not entted
under any provson of the artces of ncorporaton to be a hoder of record of ts stock, and f
the certfcate for such stock conspcuousy shows the quafcatons of the persons entted to
be hoders of record thereof, such person s concusvey presumed to have notce of the fact
of hs negbty to be a stockhoder.
2. If the artces of ncorporaton of a cose corporaton states the number of persons, not
exceedng twenty (20), who are entted to be hoders of record of ts stock, and f the
certfcate for such stock conspcuousy states such number, and f the ssuance or transfer of
stock to any person woud cause the stock to be hed by more than such number of persons,
the person to whom such stock s ssued or transferred s concusvey presumed to have
notce of ths fact.
3. If a stock certfcate of any cose corporaton conspcuousy shows a restrcton on transfer
of stock of the corporaton, the transferee of the stock s concusvey presumed to have
notce of the fact that he has acqured stock n voaton of the restrcton, f such acquston
voates the restrcton.
4. Whenever any person to whom stock of a cose corporaton has been ssued or transferred
has, or s concusvey presumed under ths secton to have, notce ether (a) that he s a
person not egbe to be a hoder of stock of the corporaton, or (b) that transfer of stock to
hm woud cause the stock of the corporaton to be hed by more than the number of persons
permtted by ts artces of ncorporaton to hod stock of the corporaton, or (c) that the
transfer of stock s n voaton of a restrcton on transfer of stock, the corporaton may, at ts
opton, refuse to regster the transfer of stock n the name of the transferee.
5. The provsons of subsecton (4) sha not be appcabe f the transfer of stock, though
contrary to subsectons (1), (2) or (3), has been consented to by a the stockhoders of the
cose corporaton, or f the cose corporaton has amended ts artces of ncorporaton n
accordance wth ths Tte.
6. The term "transfer", as used n ths secton, s not mted to a transfer for vaue.
7. The provsons of ths secton sha not mpar any rght whch the transferee may have to rescnd
the transfer or to recover under any appcabe warranty, express or mped.
+. A*ree/e#ts !) Sto"-holder (Sec. 100)
Secton 100. )greemens by soc$hol-ers. -
1. Agreements by and among stockhoders executed before the formaton and organzaton of
a cose corporaton, sgned by a stockhoders, sha survve the ncorporaton of such
corporaton and sha contnue to be vad and bndng between and among such stockhoders,
f such be ther ntent, to the extent that such agreements are not nconsstent wth the
artces of ncorporaton, rrespectve of where the provsons of such agreements are
contaned, except those requred by ths Tte to be emboded n sad artces of ncorporaton.
2. An agreement between two or more stockhoders, f n wrtng and sgned by the partes
thereto, may provde that n exercsng any votng rghts, the shares hed by them sha be
voted as theren provded, or as they may agree, or as determned n accordance wth a
procedure agreed upon by them.
3. No provson n any wrtten agreement sgned by the stockhoders, reatng to any phase of
the corporate affars, sha be nvadated as between the partes on the ground that ts effect
s to make them partners among themseves.
Revsed Bagtas Revewer by Ve and Ocfe 2A
4. A wrtten agreement among some or a of the stockhoders n a cose corporaton sha
not be nvadated on the ground that t so reates to the conduct of the busness and affars of
the corporaton as to restrct or nterfere wth the dscreton or powers of the board of
drectors: Provded, That such agreement sha mpose on the stockhoders who are partes
thereto the abtes for managera acts mposed by ths Code on drectors.
5. To the extent that the stockhoders are actvey engaged n the management or operaton
of the busness and affars of a cose corporaton, the stockhoders sha be hed to strct
fducary dutes to each other and among themseves. Sad stockhoders sha be personay
abe for corporate torts uness the corporaton has obtaned reasonaby adequate abty
nsurance.
.. No Ne"essit) o0 Board (Sec. 101; aSergio 0. #aguia v. #L,C, 269 SCRA 564 |1997|).
Secton 101. When board meetng s unnecessary or mpropery hed. - Uness the by-aws provde
otherwse, any acton by the drectors of a cose corporaton wthout a meetng sha nevertheess be
deemed vad f:
1. Before or after such acton s taken, wrtten consent thereto s sgned by a the drectors; or
2. A the stockhoders have actua or mped knowedge of the acton and make no prompt
ob|ecton thereto n wrtng; or
3. The drectors are accustomed to take nforma acton wth the express or mped
acquescence of a the stockhoders; or
4. A the drectors have express or mped knowedge of the acton n queston and none of
them makes prompt ob|ecton thereto n wrtng.
If a drector's meetng s hed wthout proper ca or notce, an acton taken theren wthn the
corporate powers s deemed ratfed by a drector who faed to attend, uness he prompty fes
hs wrtten ob|ecton wth the secretary of the corporaton after havng knowedge thereof.
SERGIO NAGUIAT v. NLRC
FACTS:
Pettoner Cark Fed Tax, Inc. (CFTI) hed a concessonares contract wth the Army Ar Force
Exchange Servce (AAFES) for the operaton of tax servces wthn Cark Ar Base. Sergo F. Naguat
was Presdent of CFTI and Anton T. Naguat (Sergos son) was vce-presdent. Both CFTI and Sergo
F. Naguat Enterprses, Inc. (a tradng frm) are famy-owned corporatons.
Respondents were tax drvers of CFTI. Ther servces were termnated when AAFES was
dssoved due to the phasng out of US mtary bases n the Phppnes n 1991. The AAFES Tax
Drvers Assocaton negotated wth CFTI as to separaton benefts. They agreed on P500/yr of servce
but respondents refused to accept so they dsaffated themseves from sad Unon and |oned the
Natona Organzaton of Workngmen (NOWM), through whch they fed a compant aganst Sergo F.
Naguat dong busness under the name and stye Sergo F. Naguat Enterprses, Inc., AAFES and
AAFES Tax Drvers Assocaton for payment of separaton pay due to termnaton/phase-out. They
amended the compant to ncude other tax drvers as companants and, as respondents, CFTI wth
Anton Naguat as VP and genera manager.
Prvate respondents aeged that they were reguar empoyees of Naguat Enterprses,
athough ther ndvdua appcatons for empoyment were approved by CFTI. They camed to have
been assgned to Naguat Enterprses after havng been hred by CFTI, and that Naguat Enterprses
thus managed, controed and supervsed ther empoyment.
Pettoners submtted a poston paper to the abor arbter, camng that CFTIs cessaton of
busness was due to "great fnanca osses and ost busness opportunty" resutng from the phase-
out of Cark Ar Base brought about by the Mt. Pnatubo erupton and expraton of the RP-US mtary
bases agreement. They admtted that CFTI had agreed wth the drvers unon to pay P500/yr of
22
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servce.
Labor Arbter ordered CFTI to pay companants P1,200/yr of servce "for humantaran
consderaton" and not as separaton pay. Separaton pay wasnt granted on the ground that t woud
be nhuman to exempt CFTI, but t woud aso be unfar and un|ust to mpose a monetary obgaton
on an empoyer whose busness was shot down by force ma|eure. Respondents appeaed to NLRC,
whch modfed by grantng separaton pay and hodng Naguat Enterprses, Sergo & Anton
sodary abe. NLRC dened pettoners MR. The SC ssued a TRO en|onng executon of the
assaed Resoutons after pettoners posted a surety bond.
ISSUES:
1. W/N NLRC commtted grave abuse of dscreton n unateray ncreasng the amount of
severance pay granted by the abor arbter - NO MERIT
2. W/N NOWM cannot make ega representatons n behaf of ndvdua respondents who
shoud, nstead, be bound by the decson of the AAFES Tax Drvers Assn. of whch they were
members - NO MERIT
3. W/N Naguat Enterprses s a separate and dstnct |urdca entty whch cannot be hed |onty
& severay abe for the obgatons of CFTI - HAS MERIT; W/N Sergo & Anton were merey
offcers and stockhoders of CFTI and, thus, coud not be hed personay accountabe for
corporate debts - NO MERIT
4. W/N Sergo & Anton may be hed sodary abe by the NLRC despte not havng been
mpeaded as partes to the compant (dena of due process) - NO MERIT
HELD: Petton s party mertorous.
I. )moun of Se+araion Pay - Evdence nsuffcent to prove grave abuse of dscreton. Pettoners are
n estoppe for not havng questoned the prvate respondents cam that ther separaton pay shoud
be based on $240, aegedy ther monthy earnngs. The factua fndngs of the NLRC are bndng.
Pettoners fa to prove wth cear and satsfactory evdence that they are exempted from payment of
separaton pay on the ground of busness osses or fnanca reverses to sustan retrenchment of
personne or cosure of busness. The abor arbter correcty found that the tax busness was earnng
proftaby at the tme of ts cosure.
II. #!9.Cs Personaliy o ,e+resen In-ivi-ual ,es+on-ens7&m+loyees - Pettoners estopped for not
havng seasonaby rased ths ssue before the abor arbter or NLRC.
III. Liabiliy of Peiioner7Cor+oraions an- Their ,es+ecive !fficers
The NLRC dd not dscuss or gve any expanaton for hodng Naguat Enterprses and ts
offcers |onty and severay abe n dschargng CFTIs abty for payment of separaton pay.
Naguat Enterprses Not Labe
The abor arbter correcty found that respondents were reguar empoyees of CFTI who receved
wages on a boundary or commsson bass. There s no substanta bass to hod that Naguat
Enterprses s an ndrect empoyer much ess a abor ony contractor. Respondents faed to show
that they were managed, supervsed and controed by Naguat Enterprses. Apparenty, they were
confused as to the personates of Sergo F. Naguat as an ndvdua who was the presdent of CFTI,
and Sergo F. Naguat Enterprses, nc., as a separate corporate entty wth a separate busness. They
presumed that Naguat, who was aso a stockhoder & drector of Naguat Enterprses, was managng
and controng the tax busness on behaf of the atter. In reaty, n supervsng the tax drvers and
determnng ther empoyment terms, Naguat was carryng out hs responsbtes as presdent of
CFTI. Hence, Naguat Enterprses as a separate corporaton does not appear to be nvoved at a n
the tax busness.
CFTI Presdent sodary abe
Case cted-A.C. Ransom Unon v. NLRC-A.C. Ransom Corp, whch was a famy corporaton, fed an
appcaton for cearance to cose or cease operatons. The Mnstry of Labor & Empoyment granted
the appcaton wthout pre|udce to empoyees rghts to seek redress. Backwages of 22 empoyees,
who hed a strke before cosure, were computed, and for amost 3 years, the unon fed about 10
motons for executon aganst the corporaton, but none coud be mpemented for faure to fnd
Revsed Bagtas Revewer by Ve and Ocfe 2A
evabe assets. In the ast of sad motons, the unon asked that offcers and agents of the
company be hed personay abe and t was granted. An ssue rased by the Corp on appea was
W/N the |udgment aganst a corporaton to renstate ts dsmssed empoyees wth backwages s
enforceabe aganst ts offcers and agents n ther ndvdua, prvate and persona capactes, who
were not partes n the case where the |udgment s rendered. NLRC sad no, on the ground that
offcers are abe personay for offca acts ony when they have exceeded the scope of ther
authorty. SC reversed the NLRC, mposng sodary abty on the Presdent. Reason: The Labor Code
defnton of empoyer s any person actng n the nterest of an empoyer, drecty or ndrecty.
Snce Ransom s an artfca person, t must have an offcer who can be presumed to be the
empoyer, beng the person actng n the nterest of Ransom. The corporaton, ony n the technca
sense, s the empoyer. In the absence of defnte proof wth regard to the responsbe offcer/s, t
shoud be presumed that the responsbe offcer s the Presdent of the corporaton who can be
deemed the chef operaton offcer thereof. Thus, n RA 602 (mnmum wage aw), crmna
responsbty s wth the Manager or n hs defaut, the person actng as such. In Ransom, the
Presdent appears to be the Manager.
Case a barHSergo Naguat s the presdent of CFTI who actvey managed the busness and thus
fas wthn the meanng of an empoyer who may be hed |onty & severay abe for the
obgatons of the corp to ts dsmssed empoyees. Moreover, pettoners aso conceded that both
CFTI and Naguat Enterprses were "cose famy corporatons" owned by the Naguat Famy. Sec.
100(5) of the Corp Code states: To the extent that the stockhoders are actvey engage(d) n the
management or operaton of the busness and affars of a cose corporaton, the stockhoders sha be
hed to strct fducary dutes to each other and among themseves. Sad stockhoders sha be
personay abe for corporate torts uness the corporaton has obtaned reasonaby adequate abty
nsurance.
It has not been shown that CFTI obtaned such nsurance, so the queston s whether there
was "corporate tort." |ursprudence has not gven the defnte scope of ths term, but essentay, a
"tort" s the voaton of a rght gven or the omsson of a duty mposed by aw; a breach of a ega
duty. Art. 283, Labor Code, mandates the empoyer to grant separaton pay to empoyees n case of
cosure or cessaton of operatons of estabshment or undertakng not due to serous busness osses
or fnanca reverses, whch s the condton obtanng at bar. CFTI faed to compy wth ths aw-
mposed duty or obgaton. Thus, ts stockhoder who was actvey engaged n the management or
operaton of the busness shoud be hed personay abe.
It was aso hod n MAM Reaty Devt v. NLRC that a drector or offcer may st be hed
sodary abe wth a corporaton by specfc provson of aw, whch n ths case s Sec. 100(5),
Corporaton Code. In fact, n postng the surety bond, ony Naguat n hs persona capacty,
prncpay bound hmsef to compy wth the obgaton. The SC cannot appy the rue that a corporate
offcer cannot be hed sodary abe wth a corporaton n the absence of evdence that he acted n
bad fath or wth mace.
A#toli# Na*iat #ot perso#all) lia!le
Anton was the VP and "genera manager" of CFTI, but t was not shown that he acted n the
atter capacty. The extent of hs partcpaton n the management or operaton of the busness was
aso not made known. Thus, he cannot be hed sodary abe.
I?. No De#ial o0 De (ro"ess
There was no dena of due process for faure to mpead the ndvdua Naguats as partes to
the compant. In AC Ransom, the offcers of the corp were not partes to the case when the |udgment
n favor of the empoyees was rendered, but the Court nonetheess hed the Presdent sodary
abe. Moreover, the Naguats vountary submtted themseves to the |ursdcton of the abor arbter
when they, n ther ndvdua capactes, fed a poston paper together wth CFTI, before the arbter.
They were gven the opportunty to present ther postons.
Pettoner CFTI & Sergo Naguat, presdent and co-owner thereof, are ordered to pay, |onty and
severay $120/yr of servce or ts peso equvaent. Naguat Enterprses and Anton Naguat are
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absoved.
NOTE: In ths case, the Supreme Court hed personay and sodary abe the Presdent and Vce-
Presdent of two corporatons under the fndngs that both offcers admtted that the two corporatons
were "cose famy corporatons" owned by the Naguat famy. The two offcers are abe sodary
wth the Cark Fed Taxs, Inc. for the empoyees of Cark Fed Taxs. Secton 100 par. 5 of the
Corporaton Code provdes that to the extent that the stockhoders are actvey engaged n the
management or operaton of the busness and affars of the cose corporaton, the stockhoders sha
be hed to strct fducary dutes to each other and among themseves; sad stockhoders sha be
personay abe for corporate torts uness the corporaton has obtaned reasonaby adequate abty
nsurance.
NOTE: The Duay and Sergo rungs demonstrate a tendency that may be foowed n the future: (a)
the coverage of cose corporatons may expand beyond the defnton provded for n the Corporaton
Code; or (b) prncpes pertanng pecuary to cose corporatons under Tte XII of the Corporaton
Code woud be expanded to appy even to non-cose corporatons .e. de facto cose corporatons or
even pubcy-hed corporatons.
NOTE: In norma corporatons, stockhoders en|oy the rght of mted abty, but n cose
corporatons, such s not the case. Snce n the atter, stockhoders run the company that s why they
may be hed abe as though they were Board of Drectors. They may be hed personay abe n
nstances of tort, when they exceed ther authorty or when they perform acts n bad fath. In ths
case, even n the absence of bad fath, they were hed abe because of subsdary abty, because
what was performed was a coectve act; thus, one s abe as to hs co-actors.
1. Deadlo"-s (Sec. 104)
Secton 104. Deadocks. - Notwthstandng any contrary provson n the artces of ncorporaton or
by-aws or agreement of stockhoders of a cose corporaton, f the drectors or stockhoders are so
dvded respectng the management of the corporaton's busness and affars that the votes requred
for any corporate acton cannot be obtaned, wth the consequence that the busness and affars of
the corporaton can no onger be conducted to the advantage of the stockhoders generay, the
Securtes and Exchange Commsson, upon wrtten petton by any stockhoder, sha have the power
to arbtrate the dspute. In the exercse of such power, the Commsson sha have authorty to make
such order as t deems approprate, ncudng an order: (1) canceng or aterng any provson
contaned n the artces of ncorporaton, by-aws, or any stockhoder's agreement; (2) canceng,
aterng or en|onng any resouton or act of the corporaton or ts board of drectors, stockhoders, or
offcers; (3) drectng or prohbtng any act of the corporaton or ts board of drectors, stockhoders,
offcers, or other persons party to the acton; (4) requrng the purchase at ther far vaue of shares
of any stockhoder, ether by the corporaton regardess of the avaabty of unrestrcted retaned
earnngs n ts books, or by the other stockhoders; (5) appontng a provsona drector; (6)
dssovng the corporaton; or (7) grantng such other reef as the crcumstances may warrant.
A provsona drector sha be an mparta person who s nether a stockhoder nor a credtor of the
corporaton or of any subsdary or affate of the corporaton, and whose further quafcatons, f
any, may be determned by the Commsson. A provsona drector s not a recever of the
corporaton and does not have the tte and powers of a custodan or recever. A provsona drector
sha have a the rghts and powers of a duy eected drector of the corporaton, ncudng the rght
to notce of and to vote at meetngs of drectors, unt such tme as he sha be removed by order of
the Commsson or by a the stockhoders. Hs compensaton sha be determned by agreement
between hm and the corporaton sub|ect to approva of the Commsson, whch may fx hs
compensaton n the absence of agreement or n the event of dsagreement between the provsona
drector and the corporaton.
3. ,ithdraEal a#d Dissoltio# (Sec. 105)
Secton 105. Wthdrawa of stockhoder or dssouton of corporaton. - In addton and wthout
pre|udce to other rghts and remedes avaabe to a stockhoder under ths Tte, any stockhoder of
a cose corporaton may, for any reason, compe the sad corporaton to purchase hs shares at ther
far vaue, whch sha not be ess than ther par or ssued vaue, when the corporaton has suffcent
assets n ts books to cover ts debts and abtes excusve of capta stock: Provded, That any
Revsed Bagtas Revewer by Ve and Ocfe 2A
stockhoder of a cose corporaton may, by wrtten petton to the Securtes and Exchange
Commsson, compe the dssouton of such corporaton whenever any of acts of the drectors,
offcers or those n contro of the corporaton s ega, or frauduent, or dshonest, or oppressve or
unfary pre|udca to the corporaton or any stockhoder, or whenever corporate assets are beng
msapped or wasted.
Even pror to the passage of Corporaton Code whch recognzed cose corporatons, the Supreme
Court had on mted nstances recognzed the common aw rghts of mnorty stockhoders to seek
dssouton of the corporaton. 0inancing Cor+. of he Phil. v. Teo-oro, 93 Ph. 404 (1953).
X?III. NON8STOCK COR(ORATIONS AND 4O5NDATIONS
See VILLANUEVA, (isinguishing 0oun-aions from !her #on7Soc$ Cor+oraions.
(Unpubshed)
1. Theor) o# No#8Sto"- Corporatio# (Secs. 14(2), 43, 87, 88 and 94(5); aCollecor of
Inernal ,evenue v. Club 0ili+ino Inc. -e Cebu, 5 SCRA 321 |1962|; aCollecor of Inernal
,evenue v. 5niversiy of Visayas, 1 SCRA 669 |1961|).
Secton 14. Contents of the artces of ncorporaton. - A corporatons organzed under ths code sha
fe wth the Securtes and Exchange Commsson artces of ncorporaton n any of the offca
anguages duy sgned and acknowedged by a of the ncorporators, contanng substantay the
foowng matters, except as otherwse prescrbed by ths Code or by speca aw: (2) The specfc
purpose or purposes for whch the corporaton s beng ncorporated. Where a corporaton has more
than one stated purpose, the artces of ncorporaton sha state whch s the prmary purpose and
whch s/are the secondary purpose or purposes: Provded, That a non-stock corporaton may not
ncude a purpose whch woud change or contradct ts nature as such;
Secton 43. Power to decare dvdends. - The board of drectors of a stock corporaton may decare
dvdends out of the unrestrcted retaned earnngs whch sha be payabe n cash, n property, or n
stock to a stockhoders on the bass of outstandng stock hed by them: Provded, That any cash
dvdends due on denquent stock sha frst be apped to the unpad baance on the subscrpton
pus costs and expenses, whe stock dvdends sha be wthhed from the denquent stockhoder
unt hs unpad subscrpton s fuy pad: Provded, further, That no stock dvdend sha be ssued
wthout the approva of stockhoders representng not ess than two-thrds (2/3) of the outstandng
capta stock at a reguar or speca meetng duy caed for the purpose.
Stock corporatons are prohbted from retanng surpus profts n excess of one hundred (100%)
percent of ther pad-n capta stock, except: (1) when |ustfed by defnte corporate expanson
pro|ects or programs approved by the board of drectors; or (2) when the corporaton s prohbted
under any oan agreement wth any fnanca nsttuton or credtor, whether oca or foregn, from
decarng dvdends wthout ts/hs consent, and such consent has not yet been secured; or (3) when
t can be ceary shown that such retenton s necessary under speca crcumstances obtanng n the
corporaton, such as when there s need for speca reserve for probabe contngences.
Secton 87. Defnton. - For the purposes of ths Code, a non-stock corporaton s one where no part
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of ts ncome s dstrbutabe as dvdends to ts members, trustees, or offcers, sub|ect to the
provsons of ths Code on dssouton: Provded, That any proft whch a non-stock corporaton may
obtan as an ncdent to ts operatons sha, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for whch the corporaton was organzed, sub|ect to the
provsons of ths Tte.
The provsons governng stock corporaton, when pertnent, sha be appcabe to non-stock
corporatons, except as may be covered by specfc provsons of ths Tte.
Secton 88. Purposes. - Non-stock corporatons may be formed or organzed for chartabe, regous,
educatona, professona, cutura, fraterna, terary, scentfc, soca, cvc servce, or smar
purposes, ke trade, ndustry, agrcutura and ke chambers, or any combnaton thereof, sub|ect to
the speca provsons of ths Tte governng partcuar casses of non-stock corporatons.
Secton 94. Rues of dstrbuton. - In case dssouton of a non-stock corporaton n accordance wth
the provsons of ths Code, ts assets sha be apped and dstrbuted as foows: (5) In any other
case, assets may be dstrbuted to such persons, socetes, organzatons or corporatons, whether or
not organzed for proft, as may be specfed n a pan of dstrbuton adopted pursuant to ths
Chapter. (n)
COLLECTOR OF INTERNAL REVENUE v CLUB FILIPINO DE CEBU
FACTS:
Cub Fpno, Inc. de Cebu (Cub) s a cvc domestc corporaton. Its artces and by-aws do
not provde for dvdends and ther dstrbuton, athough t s provded that upon ts dssouton, the
Cubs remanng assets, after payng debts, sha be donated to a chartabe Phppne Insttuton n
Cebu. The Cub owns and operates a cub house, a bowng aey, a gof course (on a ot eased from
the govt), and a bar-restaurant where t ses wnes and quors, soft drnks, meas and short orders
to ts members and guests.
The bar-restaurant was a necessary ncdent to the operaton of the cub and ts gof-course.
The cub s operated many wth funds from membershp fees and dues. Whatever profts t had were
used to defray ts overhead expenses and mprove ts gof-course. In 1951, as a resut of a capta
surpus from the re-vauaton of ts rea propertes, the Cub decared stock dvdends; but no actua
cash dvdends were dstrbuted to the stockhoders.
In 1952, a BIR agent dscovered that the Cub had never pad percentage tax on the gross
recepts of ts bar and restaurant. The CIR assessed aganst and demanded P12,068.84 as fxed and
percentage taxes, surcharge and compromse penaty, from Cub Fpno, Inc. de Cebu, aegedy due
from t as a keeper of bar and restaurant. The CTA reversed. Hence, ths petton.
ISSUE:
W/N Cub Fpno s engaged n busness as a barkeeper-restaurateur and s thus abe for taxes- NO.
HELD: CTA affrmed.
Cub Fpno s not abe because t s not engaged n the busness of an operator of a bar and
restaurant. Labty for fxed and percentage taxes does not attach pso facto by mere reason of the
operaton of a bar and restaurant. For the abty to attach, the operator must be engaged n such
busness, the pan and ordnary meanng of whch s: actvtes or affars for proft or vehood.
The ff. facts prove that the Cub s not engaged n the busness of an operator of a bar and
restaurant: the Cub was organzed to deveop and cutvate sports; ts remanng assets sha be
donated to a chartabe Ph. Insttuton n Cebu; t s operated many wth funds derved from
membershp fees and dues; the Cubs bar and restaurant catered ony to ts members and ther
guests; there was n fact no cash dvdend dstrbuton to ts stockhoders and whatever was derved
on reta from ts bar and restaurant was used to defray ts overa overhead expenses and to
mprove ts gof-course.
Revsed Bagtas Revewer by Ve and Ocfe 2A
It s conceded that the Cub derved proft from the operaton of ts bar and restaurant, but
ths does not necessary convert t nto a proft-makng enterprse snce these were necessary
ad|uncts of the Cub to foster ts purposes, and the profts derved from t are necessary ncdenta
to the prmary ob|ect. A cub shoud aways strve, whenever possbe, to have surpus.
Lkewse, the fact that the capta stock of the Cub s dvded nto shares s not essenta
because what s determnatve of ts beng engaged n such busness s ts ob|ect or purpose as
stated n ts artces and by-aws. It s a famar rue that the actua purpose s not controed by the
corporate form or by the commerca aspect of the busness prosecuted, but may be shown by
extrnsc evdence, ncudng the by-aws and the method of operaton.
Aso, for a stock corporaton to exst, two requstes must be comped wth: (1) a capta stock
dvded nto shares and (2) an authorty to dstrbute to the hoders of such shares, dvdends or
aotments of the surpus profts on the bass of the shares hed. In the case at bar, the Cubs artces
of ncorporaton and by-aws do not provde an authorty for the dstrbuton of ts dvdends or
surpus profts. Therefore, t cannot be consdered a stock corporaton wthn the contempaton of
the corporaton aw.
NOTE: The Cub Fpno Inc. de Cebu was organzed to deveop and cutvate sports of a cass and
denommaton, for the heathfu recreaton and entertanment of ts stockhoders and members; that
upon ts dssouton, ts remanng assets after payng debts sha be donated to a chartabe
Phppne Insttuton n Cebu; that t s operated many wth funds derved from membershp fees
and dues; that the Cubs bar and restaurant catered ony to ts members and ther guests; that there
was n fact no cash dvdend dstrbuton to ts stockhoders and that whatever was derved on reta
from ts bar and restaurant was used to defray ts overa overhead expenses and to mprove ts gof
course. It stands to reason that the Cub s not engaged n the busness of an operator of bar and
restaurant.
COLLECTOR OF INTERNAL REVENUE v UNIVERSITY OF VISAYAS
FACTS:
In 1919, Vcente Guas estabshed a schoo n Cebu Cty known as the Vsayan Insttute and
for a few years remaned ts soe owner. Two years ater, Vcente Guas, Pantaeon E. de Rosaro, et
a. formed a non-stock corporaton wth an authorzed capta of P20K for the purpose of estabshng
and mantanng a schoo to be named as the "Vsayan Insttute." The pan was to fnance the schoo
by seng bonds wth a par vaue of P100 each payabe out of the funds of the corporaton to the
pubc, wth the nterest to be fxed by the by-aws. However, the fnancng pan was abandoned and
nstead of seng bonds to the pubc, Vcente Guas and hs wfe put n ther own money. Nne years
ater, ts artces of ncorporaton were amended by convertng t nto a stock corporaton wth an
authorzed capta of P50K. In 1949 the Vsayan Insttute was rased to the category of a unversty
and renamed "Unversty of the Vsayas."
The respondent dd not fe wth the BIR returns of net ncome for 1949-1950. After
nvestgaton, the examner fed returns for sad years based upon proft & oss statements shown
and submtted to hm by respondents accountant. Pettoner assessed the respondent for ncome
durng 1946-1950 and the tax due thereon, surcharges and penates. On Dec. 1 & 2, 1951 the
respondent sent teegrams to pettoner requestng that t be aowed to pay by nstament at
P1K/month. Pettoner reped that respondent coud pay n 12 monthy nstaments at P5808.02 per
month, provded that t woud fe a surety bond to nsure payment. Respondent pad P1,000. and
wrote a etter to pettoner requestng that 25% surcharge mposed for non-payment of ncome tax
be emnated because ts faure to fe ncome tax returns and to pay ncome tax for 1946-1950 was
due to the honest beef that prvate schoos were exempted from taxaton. Pettoner granted
respondents request and reduced the monthy nstament to P4,603.77, provded that the 1
st
nstament woud be due on or before Feb. 29 and that the surety bond woud be fed on or before
the same. On Feb. 29, Apr 3 and May 5, the respondent pad monthy nstaments.
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On 1 March 1954 respondent wrote to pettoner requestng a refund of P14,811.31 on the
ground that beng a corporaton organzed and operated excusvey for educatona purpose, t was
exempt from the payment of ncome tax. On the same day, respondent brought an acton aganst
the pettoner for recovery of sad sum wth the CFI, but the case was ater certfed to the CTA due to
the enactment of RA 1125.
The CTA rued that the Unversty of the Vsayas s exempt from payment of ncome tax and
that the assessments made by the pettoner CIR for 1946-1951 (P46,592.03) are nu and vod, and
ordered the CIR to refund P13,811.31 for ncome tax erroneousy pad. Hence, ths appea.
Pettoner cams that the respondent s a corporaton organzed for proft whch nures to the
beneft of Vcente Guas, ts presdent. Respondent denes ths cam.
ISSUE: W/N CTA was correct n rung that the Unversty s exempt from payment of ncome tax -
YES.
HELD: CTA affrmed.
A corporaton or assocaton camng exempton from the payment of ncome tax as provded
for n Sec. 27(e) of the NIRC, must show that t s organzed and operated excusvey for regous,
chartabe, scentfc, athetc, cutura or educatona purposes, or for the rehabtaton of veterans
and that no part of ts ncome nures to the beneft of any prvate stockhoder or ndvdua.
Respondent has satsfactory estabshed ts cam that t s organzed and operated
excusvey for educatona purposes and that no part of ts ncome has nured to the beneft of any
stockhoder or ndvdua. The purposes of the respondent stated n the orgna and amended artces
of ncorporaton show that t s engaged n an educatona endeavor and n no other. Its proft and
oss statements show that ts ncome was soey derved from fees pad by students for admsson,
tuton, dpoma, graduaton, ROTC, and aboratory.
The fact that the orgna artces of ncorporaton was amended to convert the corporaton
from a non-stock to a stock corporaton s not a concusve proof that the respondent s engaged n a
proft-makng busness, part of whch nures to the beneft of a snge stockhoder or ndvdua. As
hed by the CTA, Sec. 27 of the NIRC does not make any dstncton between stock and non-stock
corporatons, and t s not for ths Court to make the dstncton.
The fact that when t was converted nto a stock corporaton, ts assets had ncreased from
P6K cash and P3K worth of books nto assets worth P50K whch were dstrbuted n the form of shares
of stock to the members of the non-stock corporaton, predecessor of the stock corporaton and that
at the meetng of the Board of Trustees of the respondent, there was a move to doube the stock
dvdend of the corporaton, whch was not actuay carred out, s not enough for an nference that
the respondent has been turned nto a corporaton for busness and proft. The fact s that snce ts
ncorporaton, the respondent has not decared any cash dvdend and no part of ts profts has
nured tot the beneft of any stockhoder or ndvdua. The mere reazaton of profts out of ts
operaton does not automatcay resut n the oss of ts prvege of exempton from the payment of
ncome tax as ong as no part of ts profts nures to the beneft of any stockhoder or ndvdua.
Pettoners cam that respondent has nvested n other schoos estabshed n other paces s
dened by Presdent Guas, who testfed that the respondent s merey supervsng these schoos
and does not receve any fee for such. Nether the fact that there was an offer to purchase the assets
of the Unversty for P4K, nor the fact that the respondents profts are beng kept for future
dstrbuton to stockhoders woud deprve the respondent of the prvege of exempton.
As ong as t contnues to engage soey n the operaton and mantenance of the schoo and
no dvdend nures to the beneft of any stockhoder or ndvdua, the respondent woud en|oy the
exempton. The acton for refund, as far as the sum of P1K pad by respondent s aready barred. The
respondent does not nsst on askng for a refund of ths sum. As for the P4,603.77 the CTA correcty
rued that t s not barred.
NOTES:
Revsed Bagtas Revewer by Ve and Ocfe 2A
The fact that an educatona nsttuton charges tuton fees and other fees for the dfferent
servces t renders to the students, does not n tsef make the schoo a proft-makng enterprse
that woud pace t beyond the purvew of the aw exemptng t from ncome.
Whe the acquston of addtona factes may redound to the beneft of the nsttuton tsef, t
cannot be postvey asserted that the same w redound to the beneft of ts stockhoders, for no
one can predct the fnanca condton of the nsttuton upon ts dssouton.
The fact that the orgna artces of ncorporaton of an educatona nsttuton was amended to
convert t from a non-stock to a stock corporaton s not concusve proof that t s engaged n a
proft-makng busness, part of whch nures to the beneft of a snge stockhoder or ndvdua.
The mere reazaton of profts out of ts operaton does not automatcay resut n the oss of an
educatona nsttutons exempton from ncome tax as ong as no part of ts profts nures to the
beneft of any stockhoder or ndvdua.
A non-stock corporaton may ony be formed or organzed for chartabe, regous,
educatona, professona, cutura, fraterna, terary, scentfc, soca, cvc or other smar
purposes. It may not engage n undertakngs such as the nvestment busness where proft s
the man or underyng purpose. Athough the non-stock corporaton may obtan profts as an
ncdent to ts operaton such profts are not to be dstrbuted among ts members but must be
used for the furtherance of ts purposes. Peo+le v. .enil, G.R. 115054-66, 12 September
1999 |unrep.|)
The ncurrng of proft or osses does not determne whether an actvty s for proft or non-
proft, and the courts w consder whether dvdends have been decared or ts members or
that s property, effects or proft was ever used for persona or ndvdua gan, and not for the
purpose of carryng out the ob|ectves of the enterprse. .anila Saniarium an- /os+ial v.
Gabuco, 7 SCRA 14 (1963).
2. No#8Appli"a!ilit) o0 the Natio#aliAatio# LaEs
A foregner may a member or an offcer of a non-stock corporaton. Save for the poston of
the Secretary, who must be a Fpno ctzen and a resdent of the Phppnes, the prohbton
of foregn ctzens becomng offcers n corporatons engaged n busness does not appy to
the actvtes of a non-stock corporaton whch do not fa wthn the coverage of a natonazed
ndustry or area of busness reserved by aw excusvey to Fpno ctzens. (SEC Opnon No.
12, seres of 2002, 21 November 2002).
&. Co#'ersio# o0 No#8Sto"- Corporatio# to Sto"- Corporatio#
The converson of a non-stock educatona nsttuton nto a stock corporaton s not egay
feasbe, as t voates Sec. 87 of Corporaton Code that no part of the ncome of a non-stock
corporaton may be dstrbutabe as dvdends to ts members, trustees or offcers. "Thus, the
Commsson has prevousy rued that a non-stock corporaton cannot be converted nto a
stock corporaton by a mere amendment of the Artces of Incorporaton. For purposes of
transformaton, t s fundamenta that the non-stock corporaton be dssoved frst under any
of the methods specfed Tte XIV of the Corporaton Code. Thereafter, the members may
organze as a stock corporaton drected to brng profts or pecunary gans to themseves.
(SEC Opnon dated 24 February 2003; SEC Opnon dated 10 December 1992).
In the event of dssouton of a non-stock corporaton, ts assets sha be dstrbuted n
accordance wth the rues as provded for under Secs. 94 and 95 of Corporaton Code. Uness,
t s so provded n the Artces of Incorporaton or By-Laws, the members are not entted to
any benefca or vested nterest over the assets of the non-stock corporaton. In other words,
non-stock, non-proft corporatons hod ther funds n trust for the carryng out of the
ob|ectves and purposes expressed n ts charter. (SEC Opnon dated 24 February 2003; SEC
Opnon dated 13 May 1992).
+. ,hat Is a 4o#datio#> (Secs. 30 and 34(H), NIRC of 1997; Sec. 24, Revenue Reguatons No.
2; BIR-NEDA Reguatons No. 1-81, as amended)
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Sec. 30 Exemptons from Tax on Corporatons - The foowng organzatons sha not be taxed under
ths Tte n respect to ncome receved by them as such:
A) Labor, agrcutura or hortcutura organzaton not organzed prncpay for proft;
B) Mutua savngs bank not havng a capta stock represented by shares, and cooperatve bank
wthout capta stock organzed and operated for mutua purposes and wthout proft;
C) A benefcary socety, order or assocaton, operatng for the excusve beneft of the members
such as a fraterna organzaton operatng under the odge system, or a mutua ad assocaton
or a non-stock corporaton organzed by empoyees provdng for the payment of fe,
sckness, accdent or other benefts excusvey to the members of such socety, order or
assocaton, or nonstck corporaton or ther dependents
D) Cemetery company owned and operated excusvey for the beneft of ts members;
E) Nonstock corporaton or assocaton organzed and operated excusvey for regous,
chartabe, scentfc, athetc or cutura purposes, or for the rehabtaton of veterans, no part
of ts net ncome or asset sha beong to or nure to the beneft of any member, organzer,
offcer or any specfc person;
F) Busness eague, chamber of commerce, or board of trade not organzed for proft and no part
of the net ncome of whch nures to the beneft of any prvate stockhoder or ndvdua;
G) Cvc eague or organzaton not organzed for proft but operated excusvey for the
promoton of soca wefare;
H) A nonstock nonproft educatona nsttuton;
I) Government educatona nsttuton;
|) Farmers or other mutua typhoon or fre nsurance company, mutua dtch or rrgaton
company, mutua or cooperatve teephone company, or ke organzaton of a purey oca
character, the ncome of whch conssts soey of assessments, dues, and fees coected from
members for the soe purpose of meetng ts expenses; and
K) Farmers, frut growers, or ke assocatons organzed and operated as a saes agent for the
purpose of marketng the products of ts members and turnng back to them the proceeds of
saes, ess the necessary seng expenses on the bass of the quantty produce fnshed by
them;
Notwthstandng the provsons n the precedng paragraphs, the ncome of whatever knd and
character of the foregong organzatons from any of ther propertes, rea or persona or from any
of ther actvtes conducted for proft regardess of the dsposton made for such ncome, sha be
sub|ect to tax mposed under ths Code.
Secton 34(H) Such may be deducted on the gross ncome - Chartabe and Other Contrbutons -
1) In Genera - Contrbutons or gfts actuay pad or made wthn the taxabe year to, or for the
use of the Government of the Phppnes or any of ts agences or any potca subdvson
thereof excusvey for pubc purposes, or to accredted domestc corporatons or assocatons
organzed and operated excusvey for regous, chartabe, scentfc, youth, and sports
deveopment, cutura, educatona purposes or for the rehabtaton of veterans, or to soca
wefare nsttutons, or to non-governmenta organzatons, n accordance wth the rues and
reguatons promugated by the Secretary of Fnance, upon recommendaton of the
Commssoner, no par of the net ncome of whch nures to the beneft of any prvate
stockhoder or ndvdua n an amount n excess of 10% n the case of an ndvdua, and 5%
n the case of a corporaton, of the taxpayers taxabe ncome derved from trade, busness or
Revsed Bagtas Revewer by Ve and Ocfe 2A
professon as computed wthout the beneft of ths and the foowng subparagraphs.
2) Contrbutons Deductbe n Fu - Notwthstandng the provsons of the precedng
subparagraph, donatons to the foowng nsttuton or enttes sha be deductbe n fu:
(a) Donatons to the Government - Donatons to the Government of the Phppnes or to
any of ts agences or potca subdvsons, ncudng fuy-owned government
corporatons, excusvey to fnance, to provde for, or to be used n undertakng
prorty actvtes n educaton, heath, youth and sports deveopment, human
settements, scence and cuture, and n economc deveopment accordng to the
Natona Prorty Pan determned by the Natona Economc and Deveopment
Authorty (NEDA), n consutaton wth approprate government agences, ncudng ts
regona deveopment councs and prvate phanthropc persons and nsttutons:
Provded, that any donaton whch s made to the government or any of ts agences or
potca subdvsons not n accordance wth the sad annua prorty pan sha be
sub|ect to the mtatons prescrbed n paragraph (1) of ths Subsecton;
(b) Donatons to Certan Foregn Insttutons or Internatona Organzatons - Donatons to
foregn nsttutons or nternatona organzatons whch are fuy deductbe n
pursuance of or n compance wth agreements, treates or commtments entered nto
by the Government of the Phppnes and the foregn nsttutons or nternatona
organzatons or n pursuance of speca aws;
(c)Donatons to Accredted Nongovernmenta Organzatons - The term "nongovernmenta
organzaton" means a nonproft domestc corporaton:
5) Organzed and operated excusvey for scentfc, research, educatona, character-
budng and youth and sports deveopment, heath, soca wefare, cutura or
chartabe purposes, or a combnaton thereof, no part of the net ncome of whch
nures to the beneft of any prvate ndvdua;
6) Whch not ater than 15
th
of the 3
rd
month after the cose of the accredted
nongovernmenta organzatons taxabe year n whch contrbutons are receved,
makes utzaton drecty for the actve conduct of the actvtes consttutng the
purpose or functon for whch t s organzed and operated, uness an extended
perod s granted by the Secretary of Fnance n accordance wth the rues and
reguatons to be promugated, upon recommendaton of the Commssoner;
7) The eve of admnstratve expense of whch sha, on an annua bass, conform
wth the rues and reguatons to be prescrbed by the Secretary of Fnance, upon
recommendaton of the Commssoner, but n no case to exceed 30% of the tota
expenses; and
8) The assets of whch, n the even of dssouton woud be dstrbuted to another non-
proft domestc corporaton organzed for smar purpose or purposes, or the state
for pubc purpose, or woud be dstrbuted by a court to another organzaton to be
used n such manner as n the |udgment of sad court sha best accompsh the
genera purpose for whch the dssoved organzaton was organzed.
Sub|ect to the terms and condtons as may be prescrbed by the Secretary of Fnance,
the term "utzaton" means:
() Any amount n cash or n knd (ncudng admnstratve expenses) pad or
utzed to accompsh one or more purposes for whch the accredted
nongovernment organzaton was created or organzed.
() Any amount pad to acqure an asset used (or hed for use) drecty n
carryng out one or more purposes for whch the accredted nongovernment
organzaton was created or organzed.
An amount set asde for a specfc pro|ect whch comes wthn one or more purposes of
the accredted nongovernment organzaton may be treated as a utzaton, but ony f
23
9
at the tme such amount s set asde, the accredted nongovernment organzaton has
estabshed to the satsfacton of the Commssoner that the amount w be pad for
the specfc pro|ect wthn a perod to be prescrbed n rues and reguatons to be
promugated by the Secretary of Fnance, upon recommendaton of the Commssoner,
but not to exceed 5 years and the pro|ect s one whch can be better accompshed by
settng asde such amount than by mmedate payment of funds.
Forma requrements of Rev. Reg. No. 2 are not mandatory and an entty may, n the
absence of compance wth such requrements, st show that t fas under the provsons of
Sec. of NIRC. Collecor v. V.G. Sinco &-ucaional Cor+., 100 Ph. 127 (1956).
.. Dissoltio# (Secs. 94 and 95)
Secton 94. Rues of dstrbuton. - In case dssouton of a non-stock corporaton n accordance wth
the provsons of ths Code, ts assets sha be apped and dstrbuted as foows:
1. A abtes and obgatons of the corporaton sha be pad, satsfed and dscharged, or
adequate provson sha be made therefore;
2. Assets hed by the corporaton upon a condton requrng return, transfer or conveyance,
and whch condton occurs by reason of the dssouton, sha be returned, transferred or
conveyed n accordance wth such requrements;
3. Assets receved and hed by the corporaton sub|ect to mtatons permttng ther use ony
for chartabe, regous, benevoent, educatona or smar purposes, but not hed upon a
condton requrng return, transfer or conveyance by reason of the dssouton, sha be
transferred or conveyed to one or more corporatons, socetes or organzatons engaged n
actvtes n the Phppnes substantay smar to those of the dssovng corporaton
accordng to a pan of dstrbuton adopted pursuant to ths Chapter;
4. Assets other than those mentoned n the precedng paragraphs, f any, sha be dstrbuted
n accordance wth the provsons of the artces of ncorporaton or the by-aws, to the extent
that the artces of ncorporaton or the by-aws, determne the dstrbutve rghts of members,
or any cass or casses of members, or provde for dstrbuton; and
5. In any other case, assets may be dstrbuted to such persons, socetes, organzatons or
corporatons, whether or not organzed for proft, as may be specfed n a pan of dstrbuton
adopted pursuant to ths Chapter. (n)
Secton 95. Pan of dstrbuton of assets. - A pan provdng for the dstrbuton of assets, not
nconsstent wth the provsons of ths Tte, may be adopted by a non-stock corporaton n the
process of dssouton n the foowng manner:
The board of trustees sha, by ma|orty vote, adopt a resouton recommendng a pan of dstrbuton
and drectng the submsson thereof to a vote at a reguar or speca meetng of members havng
votng rghts. Wrtten notce settng forth the proposed pan of dstrbuton or a summary thereof and
the date, tme and pace of such meetng sha be gven to each member entted to vote, wthn the
tme and n the manner provded n ths Code for the gvng of notce of meetngs to members. Such
pan of dstrbuton sha be adopted upon approva of at east two-thrds (2/3) of the members havng
votng rghts present or represented by proxy at such meetng.
NOTE: It s mportant to determne whether a corporaton s stock or non-stock as to determne
whether t s tax exempt or not, whether straght or cumuatve votng sha appy, whether
dstrbutons of dvdends may be had (such s an nherent power of stock corporatons but s a
prohbted acton of a non-stock corporaton.)
NOTE: The key requrements n determnng the exstence of a non-stock corporaton are the
exstence of ts eeemosynary purpose and the non-dstrbuton of ts profts. (A stock corporaton
may have an eeemosynary purpose.) The atter s the eement that anmates a non-stock
Revsed Bagtas Revewer by Ve and Ocfe 2A
corporaton. Usuay, such provson s found n ts artces of ncorporaton or by-aws, n ts
absence, or n the sence of these documents as to such matters, one must ook at the actua
practce of the corporaton.
XIX. 4OREI6N COR(ORATION
See VILLANUEVA, Phili++ine (ocrine of "(oing Business," THE LAWYERS REVIEW, - Part I -
Vo. VII, No. 4, (Apr, 1993); Part II - Vo. VII, No. 6 (|une, 1993).
1. De0i#itio# (Sec. 123)
24
1
Secton 123. Defnton and rghts of foregn corporatons. - For the purposes of ths Code, a foregn
corporaton s one formed, organzed or exstng under any aws other than those of the Phppnes
and whose aws aow Fpno ctzens and corporatons to do busness n ts own country or state. It
sha have the rght to transact busness n the Phppnes after t sha have obtaned a cense to
transact busness n ths country n accordance wth ths Code and a certfcate of authorty from the
approprate government agency.
A foregn corporaton s one whch owes ts exstence to the aws of another state, and
generay, has no ega exstence wthn the state n whch t s foregn. )von Insurance PLC v.
Cour of )++eals, 278 SCRA 312 (1997)
A fundamenta rue of nternatona |ursdcton s that no state can by ts aws, and no
court whch s ony a creature of the state, can by ts |udgments and decrees, drecty bnd or
affect property or persons beyond the mts of that state. Times, Inc. v. ,eyes, 39 SCRA 303
(1971).
2. Stattor) Co#"ept o0 <$oing usiness= (Art. 44, Executve Order No. 226, Omnbus
Investment Code; Sec. 3(d), R.A. No. 7042, Foregn Investment Act of 1991).
%a$ Application for (icense (Secs. 124 and 125; Art. 48, Omnbus Investment Code)
Secton 124. Appcaton to exstng foregn corporatons. - Every foregn corporaton whch on the
date of the effectvty of ths Code s authorzed to do busness n the Phppnes under a cense
therefore ssued to t, sha contnue to have such authorty under the terms and condton of ts
cense, sub|ect to the provsons of ths Code and other speca aws.
Secton 125. Appcaton for a cense. - A foregn corporaton appyng for a cense to transact
busness n the Phppnes sha submt to the Securtes and Exchange Commsson a copy of ts
artces of ncorporaton and by-aws, certfed n accordance wth aw, and ther transaton to an
offca anguage of the Phppnes, f necessary. The appcaton sha be under oath and, uness
aready stated n ts artces of ncorporaton, sha specfcay set forth the foowng:
1. The date and term of ncorporaton;
2. The address, ncudng the street number, of the prncpa offce of the corporaton n the
country or state of ncorporaton;
3. The name and address of ts resdent agent authorzed to accept summons and process n
a ega proceedngs and, pendng the estabshment of a oca offce, a notces affectng the
corporaton;
4. The pace n the Phppnes where the corporaton ntends to operate;
5. The specfc purpose or purposes whch the corporaton ntends to pursue n the transacton
of ts busness n the Phppnes: Provded, That sad purpose or purposes are those
specfcay stated n the certfcate of authorty ssued by the approprate government
agency;
6. The names and addresses of the present drectors and offcers of the corporaton;
7. A statement of ts authorzed capta stock and the aggregate number of shares whch the
corporaton has authorty to ssue, temzed by casses, par vaue of shares, shares wthout
par vaue, and seres, f any;
8. A statement of ts outstandng capta stock and the aggregate number of shares whch the
corporaton has ssued, temzed by casses, par vaue of shares, shares wthout par vaue,
and seres, f any;
9. A statement of the amount actuay pad n; and
10. Such addtona nformaton as may be necessary or approprate n order to enabe the
Securtes and Exchange Commsson to determne whether such corporaton s entted to a
Revsed Bagtas Revewer by Ve and Ocfe 2A
cense to transact busness n the Phppnes, and to determne and assess the fees
payabe.
Attached to the appcaton for cense sha be a duy executed certfcate under oath by the
authorzed offca or offcas of the |ursdcton of ts ncorporaton, attestng to the fact that the aws
of the country or state of the appcant aow Fpno ctzens and corporatons to do busness theren,
and that the appcant s an exstng corporaton n good standng. If such certfcate s n a foregn
anguage, a transaton thereof n Engsh under oath of the transator sha be attached thereto.
The appcaton for a cense to transact busness n the Phppnes sha kewse be accompaned by
a statement under oath of the presdent or any other person authorzed by the corporaton, showng
to the satsfacton of the Securtes and Exchange Commsson and other governmenta agency n the
proper cases that the appcant s sovent and n sound fnanca condton, and settng forth the
assets and abtes of the corporaton as of the date not exceedng one (1) year mmedatey pror
to the fng of the appcaton.
Foregn bankng, fnanca and nsurance corporatons sha, n addton to the above requrements,
compy wth the provsons of exstng aws appcabe to them. In the case of a other foregn
corporatons, no appcaton for cense to transact busness n the Phppnes sha be accepted by
the Securtes and Exchange Commsson wthout prevous authorty from the approprate
government agency, whenever requred by aw.
A foregn corporaton wthout a cense s not i+so faco ncapactated from brngng an
acton n Phppne courts. A cense s necessary ony f a foregn corporaton s
"transactng" or "dong busness" n the country. )gilen Technologies Singa+ore ;PT&<
L-. v. Inegrae- Silicon Tech., G.R No. 154618, 14 Apr (2004).
%!$ Rationale for Re%uiring (icense to $o usiness
The purpose of the aw n requrng that foregn corporatons dong busness n the
country be censed to do so, t to sub|ect the foregn corporatons dong busness n the
Phppnes to the |ursdcton of the courts. Otherwse, a foregn corporaton egay dong
busness here because of ts refusa or negect to obtan the requred cense and authorty
to do busness may successfuy though unfary pead such negect or ega act so as to
avod servce and thereby mpugn the |ursdcton of the oca courts. )von Insurance PLC
v. Cour of )++eals, 278 SCRA 312 (1997).
The same danger does not exst among foregn corporatons that are ndubtaby not
dong busness n the Phppnes. Indeed, f a foregn corporaton does not do busness
here, there woud be no reason for t to be sub|ect to the States reguaton. As we
observed, n so far as the State s concerned, such foregn corporaton has no ega
exstence. Therefore, to sub|ect such foregn corporaton to the courts |ursdcton woud
voate the essence of soveregnty. )von Insurance PLC v. Cour of )++eals, 278 SCRA 312
(1997).
%"$ Issuance of (icense (Sec. 126; Art. 49, Omnbus Investment Code)
Secton 126. Issuance of a cense. - If the Securtes and Exchange Commsson s satsfed that the
appcant has comped wth a the requrements of ths Code and other speca aws, rues and
reguatons, the Commsson sha ssue a cense to the appcant to transact busness n the
Phppnes for the purpose or purposes specfed n such cense. Upon ssuance of the cense, such
foregn corporaton may commence to transact busness n the Phppnes and contnue to do so for
as ong as t retans ts authorty to act as a corporaton under the aws of the country or state of ts
ncorporaton, uness such cense s sooner surrendered, revoked, suspended or annued n
accordance wth ths Code or other speca aws.
Wthn sxty (60) days after the ssuance of the cense to transact busness n the Phppnes, the
cense, except foregn bankng or nsurance corporaton, sha depost wth the Securtes and
Exchange Commsson for the beneft of present and future credtors of the censee n the
Phppnes, securtes satsfactory to the Securtes and Exchange Commsson, consstng of bonds or
other evdence of ndebtedness of the Government of the Phppnes, ts potca subdvsons and
nstrumentates, or of government-owned or controed corporatons and enttes, shares of stock n
24
3
"regstered enterprses" as ths term s defned n Repubc Act No. 5186, shares of stock n domestc
corporatons regstered n the stock exchange, or shares of stock n domestc nsurance companes
and banks, or any combnaton of these knds of securtes, wth an actua market vaue of at east
one hundred thousand (P100,000.) pesos; Provded, however, That wthn sx (6) months after each
fsca year of the censee, the Securtes and Exchange Commsson sha requre the censee to
depost addtona securtes equvaent n actua market vaue to two (2%) percent of the amount by
whch the censee's gross ncome for that fsca year exceeds fve mon (P5,000,000.00) pesos. The
Securtes and Exchange Commsson sha aso requre depost of addtona securtes f the actua
market vaue of the securtes on depost has decreased by at east ten (10%) percent of ther actua
market vaue at the tme they were deposted. The Securtes and Exchange Commsson may at ts
dscreton reease part of the addtona securtes deposted wth t f the gross ncome of the
censee has decreased, or f the actua market vaue of the tota securtes on depost has ncreased,
by more than ten (10%) percent of the actua market vaue of the securtes at the tme they were
deposted. The Securtes and Exchange Commsson may, from tme to tme, aow the censee to
substtute other securtes for those aready on depost as ong as the censee s sovent. Such
censee sha be entted to coect the nterest or dvdends on the securtes deposted. In the event
the censee ceases to do busness n the Phppnes, the securtes deposted as aforesad sha be
returned, upon the censee's appcaton therefor and upon proof to the satsfacton of the Securtes
and Exchange Commsson that the censee has no abty to Phppne resdents, ncudng the
Government of the Repubc of the Phppnes.
A foregn corporaton censed to do busness shoud be sub|ected to no harsher rues
that s requred of domestc corporaton and shoud not generay be sub|ect to attachment
on the pretense that such foregn corporaton s not resdng n the Phppnes. Clau-e
#eon Lighs v. Phil. )-verising Cor+., 57 Ph. 607 (1932).
%d$ Amendment of (icense (Sec. 131)
Secton 131. Amended cense. - A foregn corporaton authorzed to transact busness n the
Phppnes sha obtan an amended cense n the event t changes ts corporate name, or desres to
pursue n the Phppnes other or addtona purposes, by submttng an appcaton therefor to the
Securtes and Exchange Commsson, favoraby endorsed by the approprate government agency n
the proper cases.
&. Frisprde#tial Co#"epts o0 <Doi#* Bsi#ess=
%a$ <$oing usiness= mpes a contnuty of commerca deangs and arrangements and
the performance of acts or works or the exercse of some of the functons normay
ncdent to the purpose or ob|ect of ts organzaton. .enholaum v. .angaliman, 72 Ph.
525 (1941); a)gilen Technolgies Singa+ore v. Inegrae- Silicon Technology Phil. Cor+.,
G.R No. 154618, 14 Apr 2004.
MENTHOLATUM v. MANGALIMAN
FACTS
Menthoatum Co, Inc. s a Kansas corp whch manufactures Menthoatum and medcament
save for the treatment of cods, nasa rrtatons, chapped skn and other externa aments of the
body. It s regstered wth the Bureau of Commerce and Industry the word "Menthoatum" as
trademark for ts products.
Hoever, the Mangaman brothers prepared a medacament and save named Menthoman
whch they sod to the pubc packed n a contaner of the same sze, coor and shape as
Menthoatum (tsk tsk, sneaky, sneaky! Goum ssss a ssssneak.).
As a consequence Menthoatum suffered damages from the dmnuton of saes and the oss of
goodw and reputaton of ther products. So they nsttuted acton aganst the Mangaman brothers
and the drector of Bureau of Commerce for the nfrngement of trademark and unfar competton.
HELD
Menthoatum cannot prosecute ths acton snce t was dong busness n the Phppnes
wthout a cense.
In the present case no dspute exsts as to the fact that Menthoatum s a foregn corp and t s
not censed to do busness n the Phs. So what does "dong busness" mean?
Revsed Bagtas Revewer by Ve and Ocfe 2A
No genera rue or governng prncpe can be ad down as what consttutes "dong busness." It
must be |udged n the ght of pecuar crcumstances. The test, however, seems to be that "Dong
Busness" mpes a contnuty of the commerca deangs and arrangements and the performance of
acts or works or the exercse of some of the functons normay ncdent to the purpose or ob|ect of
ts organzaton.
AGILENT TECHNOLGIES SINGAPORE V. INTEGRATED SILICON TECHNOLOGY PHIL. CORP.
FACTS: Agent Technooges Sngapore s a foregn corporaton not censed to do busness n the
Phppnes. Integrated Scon Technoogy s a prvate domestc corporaton, 100% foregn owned,
whch s engaged n the manufacturng and assembng eectroncs components.
Hewett-Packard Sngapore (HP Sngapore) & Sngapore Components Operaton entered nto a
5-year Vaue Added Assemby Servces Agreement (VAASA) wth Integrated Scon. Under the terms
of the VAASA, Integrated Scon was to ocay manufacture and assembe fber optcs for export to
HP Sngapore.
HP Sngapore, for ts part, was to consgn raw materas to Integrated Scon; transport
machnery to the pant of Integrated Scon; and pay Integrated Scon the purchase prce of the
fnshed products. Subsequenty, HP Sngapore assgned a ts rghts & obgatons n the VAASA to
Agent.
Integrated Scon fed a compant for specfc performance & damages aganst Agent and
ts offcers. It aeged that Agent breached the partes' ora agreement to extend the VAASA.
Integrated Scon prayed that the defendant be ordered to execute a wrtten extenson of the VAASA
for a perod of fve years as earer promsed.
Agent fed a separate compant aganst Integrated Scon for specfc performance,
recovery of possesson & sum of money wth repevn, premnary n|uncton & damages before the
Regona Tra Court of Caamba, Laguna.
Agent prayed that a wrt of repevn be ssued to order Integrated Scon to mmedatey
return and dever to Agent ts equpment, machneres and the materas to be sued for fber-optc
components whch were eft n the pant of the defendant.
Integrated Scon fed a Moton to Dsmss sad case on the grounds of ack of Agent's ega
capacty to sue, ts pendenta, forum shoppng and faure to state a cause of acton. The RTC
DENIED the Moton. The Court of Appeas GRANTED Integrated Scon's petton for certorar and
ordered the dsmssa of the case ntated by Agent.
ISSUE: W/N Agent Technooges has the ega capacty to sue.

HELD: YES. Integrated Scon argues that snce Agent s an uncensed foregn corporaton dong
busness n the Phppnes, t acks the ega capacty to fe sut.
The assaed acts of Agent, purportedy n the nature of "dong busness" n the Phppnes
are the foowng: (1) mere enterng nto the VAASA, whch s n the nature of a "servce contract"; (2)
appontment of a fu-tme representatve n Integrated Scon, to "oversee and supervse the
producton" of Agent products, among others.
A foregn corporaton wthout a cense s not pso facto ncapactated from brngng an acton
n Phppne courts. A cense s necessary ony f a foregn corporaton s "transactng" or "dong
busness" n the country (Sec. 133 of the Corporaton Code).
The prncpes regardng the rght of a foregn corporaton to brng sut n Phppne courts
may thus be condensed n four statements: (a) f a foregn corporaton does busness n the
Phppnes wthout a cense t cannot sue before the Phppne courts;
(b) f a foregn corporaton s not dong busness n the Phppnes, t needs no cense to sue
before Phppne courts on an soated transacton or on a cause of acton entrey dependent of any
busness transacton;
(c) f a foregn corporaton does busness n the Phppnes wthout a cense, a Phppne
ctzen or entty whch has contracted wth sad corporaton may be estopped from chaengng the
foregn corporaton's corporate personaty n a sut brought before Phppne courts; and
(d) f a foregn corporaton does busness n the Phppnes wth the requred cense, t can
sue before Phppne courts n any transacton.
The term "dong", "engagng n," or "transactng" busness n the Phppnes mpes a
contnuty of commerca deangs and arrangements, and contempates the performance of acts or
24
5
works or the exercse of some of the functons normay ncdent to or n progressve prosecuton of
the purpose and sub|ect of ts organzaton.
There are two genera tests to determne whether or not a foregn corporaton can be
consdered as "dong busness" n the Phppnes. The frst of these s the substance test:
The true test |for dong busness|, however, seems to be whether the foregn
corporaton s contnung the body of the busness or enterprse for whch t was
organzed or whether t has substantay retred from t and turned over to another.
The second test s the contnuty test:
The term |dong busness| mpes a contnuty of commerca deangs and
arrangements, and contempates, to that extent, the performance of acts or works or
the exercse of some of the functons normay ncdent to, and n the progressve
prosecuton of, the purpose and ob|ect of the organzaton.
Athough each case must be |udged n ght of ts attendant crcumstances, |ursprudence has
evoved severa gudng prncpes for the appcaton of these tests.
For nstance, consderng that t transacted wth ts Phppne counterpart for seven years,
engagng n futures contracts, t was concuded that the foregn corporaton n Merr Lynch Futures,
Inc. v. Court of Appeas and Spouses Lara, was dong busness n the Phppnes. In Commssoner of
Interna Revenue v. |apan Arnes ("|AL"), the Court hed that |AL was dong busness n the
Phppnes, .e., ts commerca deangs n the country were contnuous - despte the fact that no |AL
arcraft anded n the country - as t sod tckets n the Phppnes through a genera saes agent, and
opened a promotons offce here as we.
In Genera Corp. of the Phs. v. Unon Insurance Socety of Canton and Fremans Fund
Insurance, a foregn nsurance corporaton was hed to be dong busness n the Phppnes, as t
apponted a settng agent here, and ssued 12 marne nsurance poces. It was hed that these
transactons were not soated or casua, but manfested the contnuty of the foregn corporatons
conduct and ts ntent to estabsh a contnuous busness n the country.
In Erks PTE Ltd. v. Court of Appeas and Enrquez, the foregn corporaton sod ts products to
a Fpno buyer who ordered the goods 16 tmes wthn an eght-month perod. Accordngy, t was
rued that the corporaton was dong busness n the Phppnes, as there was a cear ntenton on ts
part to contnue the body of ts busness here, despte the reatvey short span of tme nvoved.
Communcaton Materas and Desgn, Inc., et a. v. Court of Appeas, ITEC, et a. and Top-Wed
Manufacturng v. ECED, IRTI, et a. both nvoved the Lcense and Technca Agreement and
Dstrbutor Agreement of foregn corporatons wth ther respectve oca counterparts that were the
prmary bases for the Courts rung that the foregn corporatons were dong busness n the
Phppnes.
In partcuar, the Court cted the hghy restrctve nature of certan provsons n the
agreements nvoved, such that, as stated n Communcaton Materas, the Phppne entty s
reduced to a mere extenson or nstrument of the foregn corporaton. For exampe, n
Communcaton Materas, the Court deemed the "No Competng Product" provson of the
Representatve Agreement theren restrctve.
The case aw defnton has evoved nto a statutory defnton, havng been adopted wth
some quafcatons n varous peces of egsaton. The Foregn Investments Act of 1991 (the "FIA";
Repubc Act No. 7042, as amended), defnes "dong busness" as foows:
Sec. 3, par. (d). The phrase "dong busness" sha ncude soctng orders, servce
contracts, openng offces, whether caed "ason" offces or branches; appontng
representatves or dstrbutors domced n the Phppnes or who n any caendar year
stay n the country for a perod or perods totang one hundred eghty (180) days or
more; partcpatng n the management, supervson or contro of any domestc busness,
frm, entty, or corporaton n the Phppnes; and any other act or acts that mpy a
contnuty of commerca deangs or arrangements, and contempate to that extent the
performance of acts or works, or the exercse of some of the functons normay ncdent
to, and n the progressve prosecuton of, commerca gan or of the purpose and ob|ect
of the busness organzaton.
An anayss of the reevant case aw, n con|uncton wth Secton 1 of the Impementng Rues
and Reguatons of the FIA (as amended by Repubc Act No. 8179), woud demonstrate that the acts
Revsed Bagtas Revewer by Ve and Ocfe 2A
enumerated n the VAASA do not consttute "dong busness" n the Phppnes.
Secton 1 of the Impementng Rues and Reguatons of the FIA provdes that the foowng
sha not be deemed "dong busness":
(1) Mere nvestment as a sharehoder by a foregn entty n domestc corporatons duy
regstered to do busness, and/or the exercse of rghts as such nvestor;
(2) Havng a nomnee drector or offcer to represent ts nterest n such corporaton;
(3) Appontng a representatve or dstrbutor domced n the Phppnes whch
transacts busness n the representatves or dstrbutors own name and account;
(4) The pubcaton of a genera advertsement through any prnt or broadcast meda;
(5) Mantanng a stock of goods n the Phppnes soey for the purpose of havng the
same processed by another entty n the Phppnes;
(6) Consgnment by a foregn entty of equpment wth a oca company to be used n
the processng of products for export;
(7) Coectng nformaton n the Phppnes; and
(8) Performng servces auxary to an exstng soated contract of sae whch are not
on a contnung bass, such as nstang n the Phppnes machnery t has
manufactured or exported to the Phppnes, servcng the same, tranng domestc
workers to operate t, and smar ncdenta servces.
By and arge, to consttute "dong busness", the actvty to be undertaken n the Phppnes s
one that s for proft-makng. By the cear terms of the VAASA, Agents actvtes n the Phppnes
were confned to (1) mantanng a stock of goods n the Phppnes soey for the purpose of havng
the same processed by Integrated Scon; and (2) consgnment of equpment wth Integrated Scon
to be used n the processng of products for export.
As such Agent cannot be deemed to be "dong busness" n the Phppnes. Respondents
contenton that Agent acks the ega capacty to fe sut s unmertorous. As a foregn corporaton
not dong busness n the Phppnes, t needed no cense before t can sue before our courts.
The Decson of the Court of Appeas dsmssng the Cv Case s REVERSED & SET ASIDE. The
order of the RTC of Caamba s REINSTATED. Agents appcaton for a Wrt of Repevn s GRANTED.
Single ,ransaction' Where a snge act or transacton, however, s not merey
ncdenta or casua but ndcates the foregn corporaton's ntenton to do other busness
n the Phppnes, sad snge act or transacton consttutes dong busness. 0ar &as InIl.
v. #an$ai 4ogyo, 6 SCRA 725 (1962).
It s not reay the fact that there s ony a snge act done that s matera for
determnng whether a corporaton s engaged n busness n the Phppnes, snce other
crcumstances must be consdered. Where a snge act or transacton of a foregn
corporaton s not merey ncdenta or casua but s of such character as dstncty to
ndcate a purpose on the part of the foregn corporaton to do other busness n the state,
such act w be consdered as consttutng busness. Lion .ills, Inc. v. Cour of )++eals,
256 SCRA 696 (1996).
Acts of Soliciations' Soctaton of busness contracts consttutes dong busness n
the Phppnes. .arubeni #e-erlan- B.V. v. Tensuan, 190 SCRA 105.
On Insurance usiness' A foregn corporaton wth a settng agent n the Phppnes
whch ssues tweve marne poces coverng dfferent shpments to the Phppnes s
dong busness n the Phppnes. General Cor+. of he Phil. v. 5nion Insurance Sociey of
Canon, L-., 87 Ph. 313 (1950).
A foregn corporaton whch had been coectng premums on outstandng poces s
dong busness n the Phppnes. .anufacuring Life Ins. v. .eer, 89 Ph. 351 (1951).
Summary of $oing usiness9 The prncpes regardng the rght of a foregn
corporaton to brng sut n Phppne courts may thus be condensed n four statements:
(1) f a foregn corporaton does busness n the Phppnes wthout a cense, t cannot sue
before the Phppne courts; (2) f a foregn corporaton s not dong busness n the
Phppnes, t needs no cense to sue before Phppne courts on an soated transacton or
on a cause of acton entrey ndependent of any busness transacton; (3) f a foregn
24
7
corporaton does busness n the Phppnes wthout a cense, a Phppne ctzen or entty
whch has contracted wth sad corporaton may be estopped from chaengng the foregn
corporatons corporate personaty n a sut brought before the Phppne courts; and (4) f
a foregn corporaton does busness n the Phppnes wth the requred cense, t can sue
before Phppne courts on any transacton. a.,. /ol-ings, L-. V. Ba1ar, 380 SCRA 617
(2002); )gilen Technolgies Singa+ore ;PT&< L-. v. Inegrae- Silicon Technology Phil.
Cor+., G.R No. 154618, 14 Apr (2004).
MR. HOLDINGS, LTD. V. BA|AR
FACTS: Asan Deveopment Bank (ADB), a mutatera deveopment fnance nsttuton, agreed to
extend to Marcopper Mnng Corporaton (Marcopper) a oan n the aggregate amount of
US$40,000,000.00 to fnance the atters mnng pro|ect at Sta. Cruz, Marnduque.
The prncpa oan of US$ 15,000,000 was sourced from ADBs ordnary capta resources,
whe the compementary oan of US$ 25,000,000 was funded by the Bank of Nova Scota, a
partcpatng fnance nsttuton.
ADB & Pacer Dome, Inc., a foregn corporaton whch owns 40% of Marcopper, executed a
"Support and Standby Credt Agreement" whereby the atter agreed to provde Marcopper wth cash
fow support for the payment of ts obgatons to ADB.
To secure the oan, Marcopper executed n favor of ADB a "Deed of Rea Estate and Chatte
Mortgage" coverng substantay a of Marcoppers propertes and assets n Marnduque.
When Marcopper defauted n the payment of ts oan obgaton, Pacer Dome, n fufment of
ts undertakng under the "Support and Standby Credt Agreement," agreed to have ts subsdary
corporaton, MR Hodng, Ltd., assumed Marcoppers obgaton to ADB n the amount of US$
18,453,450.02.
In an "Assgnment Agreement", ADB assgned to pettoner a ts rghts, nterests and
obgatons under the prncpa and compementary oan agreements, ("Deed of Rea Estate and
Chatte Mortgage," and "Support and Standby Credt Agreement").
Marcopper kewse executed a "Deed of Assgnment" n favor of pettoner. Under ts
provsons, Marcopper assgns, transfers, cedes and conveys to pettoner, ts assgns and/or
successors-n-nterest a of ts (Marcoppers) propertes, mnng equpment and factes
Meanwhe, Sodbank Corporaton (Sodbank) obtaned a Parta |udgment

aganst Marcopper
from the RTC of Mana. The RTC ordered Marcopper to pay Sodbank the sum of P52,970,756.89.
Upon Sodbanks moton, the RTC of Mana ssued a wrt of executon pendng appea to
requre Marcopper to pay the sums of money to satsfy the Parta |udgment. Thereafter, two notces
of evy were ssued on Marcoppers persona and rea propertes, and over a ts stocks of scrap ron
& unservceabe mnng equpment. Two notces settng the pubc aucton sae of the eved
propertes were made.
Havng earned of the schedued sae, pettoner commenced wth the RTC of Boac,
Marnduque, a compant for revndcaton of propertes, etc., wth prayer for premnary n|uncton
and temporary restranng order aganst respondents Sodbank and the sherffs.
The RTC dened pettoners appcaton on the ground that: (1) pettoner has no ega
capacty to sue, t beng a foregn corporaton dong busness n the Phppnes wthout cense; & (2)
the vadty of the "Assgnment Agreement" and the "Deed of Assgnment" has been "put nto
serous queston by the tmng of ther executon and regstraton." The Court of Appeas dd not
fnd grave abuse of dscreton.
ISSUES: (1) W/N pettoner has ega capacty to sue & seek redress from Phppne courts.
(2) W/N the Deed of Assgnment between Marcopper & pettoner was executed n fraud of
credtors.
(3) W/N pettoner MR Hodngs, Ltd., Pacer Dome, and Marcopper are one and the same
entty.
HELD: (1) YES. Sodbank avers that: a) pettoner s "dong busness" n the Phppnes evdenced by
the "huge nvestment" t poured nto the assgnment contracts; b) grantng that pettoner s not
dong busness n the Phppnes, the transacton reveas an "ntenton to do busness" or "to begn a
seres of transacton" n the country; and c) pettoner, Marcopper and Pacer Dome are the same
entty, pettoner beng then a whoy-owned subsdary of Pacer Dome, whch, n turn, owns 40% of
Revsed Bagtas Revewer by Ve and Ocfe 2A
Marcopper.
Whether or not a foregn corporaton s dong busness s dependent prncpay upon the facts
& crcumstances of each partcuar case, consdered n the ght of the purposes and anguage of the
pertnent statutes nvoved and of the genera prncpes governng the |ursdctona authorty of the
state over such corporatons.
The Corporaton Code s sent as to what consttutes "dong" or "transactng" busness n the
Phppnes. |ursprudence has supped the defcency and has hed that the term "mpes a
contnuty of commerca deangs and arrangements, and contempates, to that extent, the
performance of acts or works or the exercse of some of the functons normay ncdent to, and n
progressve prosecuton of, the purpose and ob|ect for whch the corporaton was organzed."
In Menthoatum Co. Inc., vs. Mangaman, the Court ad down the test to determne whether a
foregn company s "dong busness:"
"The true test, however, seems to be whether the foregn corporaton s contnung the
body or substance of the busness or enterprse for whch t was organzed or whether t
has substantay retred from t and turned t over to another."
Repubc Act No. 7042, known as the "Foregn Investment Act of 1991," defnes "dong
busness" as foows:
"d) The phrase dong busness sha ncude soctng orders, servce contracts,
openng offces, whether caed ason offces or branches; appontng representatves
or dstrbutors domced n the Phppnes or who n any caendar year stay n the
country for a perod or perods totang one hundred eght(y) (180) days or more;
partcpatng n the management, supervson or contro of any domestc busness, frm,
entty, or corporaton n the Phppnes; and any other act or acts that mpy a
contnuty of commerca deangs or arrangements, and contempate to that extent the
performance of acts or works; or the exercse of some of the functons normay
ncdent to, and n progressve prosecuton of, commerca gan or of the purpose and
ob|ect of the busness organzaton; Provded, however, That the phrase dong
busness sha not be deemed to ncude mere nvestment as a sharehoder by a
foregn entty n domestc corporatons duy regstered to do busness x x x ."

Secton 1 of Repubc Act No. 5455 provdes that:
"SECTION. 1. Defnton and scope of ths Act. - (1) x x x the phrase dong busness
sha ncude soctng orders, purchases, servce contracts, openng offces x x x ;
partcpatng n the management, supervson or contro of any domestc busness frm,
entty or corporaton n the Phppnes; and any other act or acts that mpy a
contnuty of commerca deangs or arrangements, and contempate to that extent the
performance of acts or works, or the exercse of some of the functons normay
ncdent to, and n progressve prosecuton of, commerca gan or of the purpose and
ob|ect of the busness organzaton."
In ths case the Court of Appeas categorzed as "dong busness" pettoners partcpaton
under the "Assgnment Agreement" and the "Deed of Assgnment." Ths s ncorrect. The expresson
"dong busness" shoud not be gven such a strct and tera constructon as to make t appy to any
corporate deang.
At ths eary stage and wth pettoners acts mted to the assgnment contracts, t cannot be
sad that t had performed acts ntended to contnue the busness for whch t was organzed.
The purpose for whch pettoner was organzed s not dscernbe n the records. No effort was
exerted by the Court of Appeas to estabsh the nexus between pettoners busness and the acts
supposed to consttute "dong busness." Thus, whether the assgnment contracts were ncdenta to
pettoners busness or were contnuaton thereof s beyond determnaton.
The case cted by the CA s nappcabe. Far East Int Import and Export Corp. vs. Nanka
Kogyo Co., Ltd., hed that a snge act may st consttute "dong busness" f "t s not merey
ncdenta or casua, but s of such character as dstncty to ndcate a purpose on the part of the
foregn corporaton to do other busness n the state."
In the sad case, there was an express admsson from an offca of the foregn corporaton
that he was sent to the Phppnes to ook nto the operaton of mnes, thereby reveang the foregn
corporatons desre to contnue engagng n busness here. But n ths case, there s no evdence of
24
9
smar ntent.
Unarguaby, pettoner may decde to operate Marcoppers mnng busness but that s a mere
specuaton. Or t may decde to se the credt secured by the mnng propertes to an offshore
nvestor, n whch case the acts w st be soated transactons.
The Court of Appeas hodng that pettoner was determned to be "dong busness" n the
Phppnes s based many on specuaton. In concudng that the "unmstakabe ntenton" of
pettoner s to contnue Marcoppers busness, the CA hangs on the wobby premse that "there s no
other way for pettoner to recover ts huge fnanca nvestments whch t poured nto Marcoppers
rehabtaton wthout t (pettoner) contnung Marcoppers busness n the country."
Ths s a mere presumpton. There s absence of any overt acts from whch the pettoner's
ntenton to contnue Marcopper's busness s drecty nferred. A vew subscrbed upon by many
authortes s that the mere ownershp by a foregn corporaton of a property n a certan state,
unaccompaned by ts actve use n furtherance of the busness for whch t was formed, s
nsuffcent n tsef to consttute dong busness.
In Chttm vs. Bee Fourche Bentonte Products Co., t was hed that even f a foregn
corporaton purchased and took conveyances of a mnng cam, dd some assessment work thereon,
and endeavored to se t, ts acts w not consttute the dong of busness so as to sub|ect the
corporaton to the statutory requrements for the transactng of busness.
In the same ven, pettoner, a foregn corporaton, whch becomes the assgnee of mnng
propertes, factes and equpment cannot be automatcay consdered as dong busness, nor
presumed to have the ntenton of engagng n mnng busness.
Long before pettoner assumed Marcoppers debt to ADB and became ther assgnee under
the two assgnment contracts, there aready exsted a "Support and Standby Credt Agreement"
between ADB and Pacer Dome whereby the atter bound tsef to provde cash fow support for
Marcoppers payment of ts obgatons to ADB.
Pettoners payment of $18,453,450.12 to ADB was more of a fufment of an obgaton
under the "Support and Standby Credt Agreement" rather than an nvestment. That pettoner had
to step nto the shoes of ADB as Marcoppers credtor was |ust a necessary ega consequence of the
transactons that transpred. Aso, the "Support and Standby Credt Agreement" was executed four
years pror to Marcoppers nsovency. Thus, the aeged "ntenton of pettoner to contnue
Marcoppers busness" coud have no bass for at that tme.
Pettoner was engaged ony n soated acts or transactons. Snge or soated acts, contracts,
or transactons of foregn corporatons are not regarded as a dong or carryng on of busness. Typca
exampes of these are the makng of a snge contract, sae, sae wth the takng of a note and
mortgage n the state to secure payment therefor, purchase, or note, or the mere commsson of a
tort. In these nstances, there s no purpose to do any other busness wthn the country.
(2) NO. Sodbank contends that from the tmng of events, t s evdent that there exsted a
preset pattern of response on Marcopper to defeat whatever court rung that may be rendered n
favor of Sodbank.
Whe t may appear that the assgnment contracts are n the nature of frauduent
conveyances, a coser ook at the events that transpred pror to the executon of those contracts
gves rse to a concuson that the CA eft out some events.
Artce 1387 of the Cv Code provdes:
"A contracts by vrtue of whch the debtor aenates property by gratutous tte are
presumed to have been entered nto n fraud of credtors, when the donor dd not
reserve suffcent property to pay a debts contracted before the donaton."
Aenatons by onerous tte are aso presumed frauduent when made by persons aganst
whom some |udgment has been rendered n any nstance or some wrt of attachment has been
ssued. The decson or attachment need not refer to the property aenated, and need not have been
obtaned by the party seekng rescsson.
Ths presumpton of fraud s not concusve and may be rebutted by satsfactory and
convncng evdence. A that s necessary s to estabsh affrmatvey that the conveyance s made n
good fath and for a suffcent and vauabe consderaton.
The "Assgnment Agreement" & the "Deed of Assgnment" were executed for vauabe
consderatons. Patent from the "Assgnment Agreement" s the fact that pettoner assumed the
payment of $18,453,450.12 to ADB n satsfacton of Marcoppers remanng debt.
Facts show that the assgnment contracts were executed n good fath. The executon of the
Revsed Bagtas Revewer by Ve and Ocfe 2A
"Assgnment Agreement" and the "Deed of Assgnment" s not the apha of ths case. Whe the
executon of these concded wth the Parta |udgment by the RTC, there was, however, no ntenton
on the part of pettoner to defeat Sodbanks cam.
It s nconcevabe that ADB, a reputabe fnanca organzaton, w connve wth Marcopper to
fegn or smuate a contract |ust to defraud Sodbank for ts cam four years. And t s ncredbe for
pettoner to be payng the huge sum of $18,453,450.12 to ADB ony for the purpose of defraudng
Sodbank of the sum of P52,970.756.89.
(3) NO. The record s ackng n crcumstances that woud suggest that pettoner corporaton,
Pacer Dome and Marcopper are one and the same entty. Whe admttedy, pettoner s a whoy-
owned subsdary of Pacer Dome, whch n turn was then a mnorty stockhoder of Marcopper,
however, the mere fact that a corporaton owns a of the stocks of another corporaton, taken aone
s not suffcent to |ustfy ther beng treated as one entty.
If used to perform egtmate functons, a subsdarys separate exstence sha be respected,
and the abty of the parent corporaton as we as the subsdary w be confned to those arsng n
ther respectve busness.
Phppne Natona Bank vs. Rtratto Group Inc. outnes the crcumstances whch are usefu n
the determnaton of whether a subsdary s but a mere nstrumentaty of the parent-corporaton:
"(a) The parent corporaton owns a or most of the capta stock of the subsdary.
(b) The parent and subsdary corporatons have common drectors or offcers.
(c) The parent corporaton fnances the subsdary.
(d) The parent corporaton subscrbes to a the capta stock of the subsdary or
otherwse causes ts ncorporaton.
(e) The subsdary has grossy nadequate capta.
(f) The parent corporaton pays the saares and other expenses or osses of the
subsdary.
(g) The subsdary has substantay no busness except wth the parent corporaton or
no assets except those conveyed to or by the parent corporaton.
(h) In the papers of the parent corporaton or x x x, the subsdary s descrbed as a
department or dvson of the parent corporaton, or ts busness or fnanca
responsbty s referred to as the parent corporatons own. x x x."
There are no other factors ndcatve that pettoner s a mere nstrumentaty of Marcopper or
Pacer Dome. The fact that Pacer Dome agreed, under the terms of the "Support and Standby Credt
Agreement" to provde Marcopper wth cash fow support n payng ts obgatons, does not mean
that ts personaty has merged wth Marcopper.
Ths snguar undertakng, performed by Pacer Dome wth ts own stockhoders n Canada and
esewhere, s not a suffcent ground to merge ts corporate personaty wth Marcopper whch has ts
own set of sharehoders, domnated mosty by Fpno ctzens. The same appes to pettoners
payment of Marcoppers remanng debt to ADB.
Wth the absence of fraud n the transacton of the three foregn corporatons, t s mproper to
perce the ve of corporate fcton - that equtabe doctrne deveoped to address stuatons where
the corporate personaty of a corporaton s abused or used for wrongfu purposes.
The Decson of the Court of Appeas s SET ASIDE. The sherffs are restraned from further
mpementng the wrt of executon ssued by the Regona Tra Court.
%!$ *nrelated or Isolated ,ransactions. a&asboar- #avigaion, L-. v. 3uan "smael an-
Co., Inc., 102 Ph. 1 (1957);a)nam Consoli-ae- v. C), 143 SCRA 288 (1986).
EASTBOARD NAVIGATION, LTD. V. |UAN YSMAEL AND CO., INC.
FACTS: Atkns, Kro & Co., Inc., Mana (Atkns) wrote |uan Ysmae & Co., Inc. (Ysmae) nformng the
atter that Eastboard Navgaton, Ltd. of Toronto, Canada agreed to the terms of payment for the
charter of the S/S Eastwater. Eastboard owned the vesse. Ths etter s aso referred to as the charter
party agreement.
The sea vesse was to be used n oadng cargo of scrap ron n the Phppnes for Buenos
Ares. Atkns acted as an agent for and n behaf of Eastboard by cabe authorty.
25
1
Ysmae sgned the charter party agreement sgnfyng ts confrmaton. The etter contaned
the cause: "x x x t s mutuay agreed that shoud any dspute arse between Owners and
Charterers, the matter n dspute sha be referred to three persons at New York for arbtraton, one
to be apponted by each of the partes hereto, and the thrd by the two so chosen x x x"
Atkns, foowng the nstructons of ts prncpa, subsequenty wrote Ysmae requestng the
defendant company to mmedatey nomnate ts arbtrator. A controversy exsted between the
partes concernng the abty of Ysmae for demurrage, dschargng expenses, wharfage, extra
meas, agency fees, crew overtme and other msceaneous expenses.
Ysmae and Eastboard executed an arbtraton agreement where both agreed to observe an
award made by the arbtrators. It aso read: "And t s hereby further mutuay agreed that a
|udgment of the Unted States Dstrct Court x x x for New York sha be rendered upon the award
made pursuant to ths submsson."
The three arbtrators rendered ther decson and such was presented by Eastboard to the
New York Dstrct Court for confrmaton. The sad court confrmed the arbtraton decson whch
aowed Eastboard to recover from Ysmae $53,566.13 wth nterest unt the fu amount s pad.
Eastboard fed an acton wth the Court of Frst Instance of Mana (CFI) to enforce the sad
order. Ysmae set up the defense that sad |udgment cannot be enforced because the New York
Dstrct Court had no |ursdcton over the person of the defendant and that the proceedng where
|udgment was rendered was summary.
Durng the hearng n the CFI, the foowng facts were agreed upon: (a) Eastboard was not
censed to transact busness n the Phppnes; and (b) the charter party agreement wth Ysmae was
not ts frst busness transacton made ocay. Eastboard's vesse was prevousy chartered by the
Natona Rce & Corn Corporaton to carry rce cargo to the Phppnes.
The CFI affrmed the decree of the New York Dstrct Court and ordered ts enforcement.
Ysmae appeaed the decson. Eastboard kewse appeaed but ony on the score that the court dd
not decare defendant abe for the amount of the foregn exchange tax due on the |udgment and for
fees t agreed to pay ts counse.
One of ssues rased by Ysmae on appea s the capacty of Eastboard, beng a foregn
corporaton, to sue wthn Phppne |ursdcton.
ISSUE: W/N Eastboard Navgaton has the capacty to sue.
HELD: YES. Whe Eastboard Navgaton s a foregn corporaton wthout cense to transact busness
n the Phppnes, t does not foow that t has to no capacty to sue. Such cense s not necessary
because t s not engaged n busness n the Phppnes.
The transacton nvoved n ths case s the frst busness undertaken by Eastboard n the
Phppnes, athough on a prevous occason Eastboard's vesse was chartered by the Natona Rce
and Corn Corporaton to carry rce cargo from abroad to the Phppnes.
These two soated transactons do not consttute engagng n busness n the Phppnes
wthn the purvew of Sectons 68 and 69 of the Corporaton Law so as to bar pantff from seekng
redress n Phppne courts.
The decson of the Court of Frst Instance s AFFIRMED.
Snge or soated acts, contracts, or transactons of foregn corporatons are not
regarded as a dong or carryng on of busness. Typca exampes of these are the makng
of a snge contract, sae, sae wth the takng of a note and mortgage n the state to
secure payment thereof, purchase, or note, or the mere commsson of a tort. In these
nstances, there s no purpose to do any other busness wthn the country. .,. /ol-ings,
L-. V. Ba1ar, 380 SCRA 617 (2002).
Case-(a! /5amples'
Coson of two vesses at the Mana Harbor. (am+fschieffs
,he-erei 5nion v. La Cam+a6ia Transalanica, 8 Ph. 766
(1907).
Loss of goods bound for Hongkong but erroneousy
dscharged n Mana. The S%e-ish &as )sia Co., L-. v.
.anila Por Service, 25 SCRA 633 (1968).
Revsed Bagtas Revewer by Ve and Ocfe 2A
Infrngement of trade name. General Garmens Cor+. v.
(irecor of Paens, 41 SCRA 50 (1971); 5niversal ,ubber
Pro-ucs, Inc. v. Cour of )++eals, 130 SCRA 104 (1988).
Recovery of damages sustaned by cargo shpped to the
Phppnes. Bula$hi-as v. #avarro, 142 SCRA 1 (1986).
Sae constructon equpment to the Government wth no
ntent of contnuty of transacton. Gonzales v. ,a:uiza, 180
SCRA 254 (1989).
Recovery on a Hongkong |udgment aganst a Mana resdent.
/ang Lung Ba$ v. Saulog, 201 SCRA 137 (1991).
Appontment of oca awyer by foregn move companes who
have regstered nteectua property rghts over ther moves
n the Phppnes, to protect such rghts for pracy: "We fa to
see how exercsng one's ega and property rghts and takng
steps for the vgant protecton of sad rghts, partcuary the
appontment of an attorney-n-fact, can be deemed by and of
themseves to be dong busness here." Columbia Picures
Inc. v. Cour of )++eals, 261 SCRA 144 (1996).
&eed to Allege' The fact that a foregn corporaton s not dong busness n the
Phppnes must be aeged f a foregn corporaton desres to sue n Phppnes courts
under the "soated transactons rue." a)lanic .uual Inc. Co. v. Cebu Seve-oring Co.,
17 SCRA 1037 (1966); Commissioner of Cusoms v. 4...4. Gani, 182 SCRA 591 (1990).
2
%"$ 0Contract ,est1 of $oing usiness' aPacific Vegeable !il Cor+. v. Singson, Advanced
Decson Supreme Court, Apr 1955 Vo., p. 100-A; a)ena Casualy * Surey Co. v. Pacific
Sar Line, 80 SCRA 635 (1977); 5niversal Shi++ing Lines, Inc. v. I)C, 188 SCRA 170 (1990).
PACIFIC VEGETABLE OIL CORP. V. SINGSON
Sngzon, actng through ts own broker n San Francsco, Ca., sod to Pacfc Vegetabe O 500
ong tons of copra at $142 per short ton CIF Pacfc Coast. The agreed prce was to be covered by an
rrevocabe etter of credt for 100% of the K prce. Pursuant to the K, the Bank of Caforna, on behaf
of Pacfc, opened an rrevocabe credt wth Chna Bank n the Phs. However, Sngzon faed to shp
the copra. An agreement however was reached where Sngzon promsed to dever 300 ong tons
durng the months of |an and Feb wth penaty cause wheren stated that Sngzon w be abe for
$10,00 as damages and w st be bound to dever the orgna 500 ong tons n case he st fas to
dever pursuant to the "2
nd
" agreement.
Sngzon st faed to dever so Pacfc fed for damages. Snzon fed MtD on ground that
Pacfc had no personaty to fe the acton as t had no cense to do busness n the Phs.
HELD
Pacfc had personaty to sue.
Pacfc dd not transact busness n the Phs. It ceary appears that the copra was actuay
sod by Sngzon n the US-t was entered nto the US by Sngzons broker who was n Caforna. Not
ony was the K entered nto the US, t was agreed to be consummated there.
Therefore, Pacfc O has not transacted busness n the Phs, as such, t s not requred to
obtan a cense before t coud have personaty to brng a court acton.
%d$ ,ransactions !ith Agents and ro.ers' aGranger )ssociaes v. .icro%ave Sysems,
Inc., 189 SCRA 631 (1990); La Chemise Lacose, S.). v. 0ernan-ez, 129 SCRA 373 (1984);
Schmi- * !berly v. ,3L, 166 SCRA 493 |1988|; 9ang Laboraories, Inc. v. .en-oza, 156
SCRA 44 (1974).
2Ths overturned the prevous doctrne n .arshall79ells (as we as n In re Li:ui-aion of he
.ercanile Ban$ of China, ec., 65 Ph. 385 (1938), that the ack of authorty of foregn corporaton to
sue n Phppne courts for faure to obtan the cense s a matter of affrmatve defense.
25
3
GRANGER ASSOCIATES V. MICROWAVE SYSTEMS, INC.
FACTS
Granger s a US corp wthout a cense to do busness n the Phs. It entered nto a sees of
agreements wth Mcrowave Sytems (MSI), a domestc corp: Granger censed MSI to manufacture
and se ts products n the Phs and extended to the atter certan oans, equpment, and parts;
Granger was to se Mutpex Eqpt to MSI; a suppementa and mandatory agreement n 1979. MSI
dd not pay so Granger fed sut.
HELD
Granger was dong busness. Wthout a cense, t cannot sue.
Dong busness ncudes: a) soctng orders, purchase, servce contracts, openng offces,
whether caed ason offces or branches; b) appontng reps or dstrbutors domced n the Phs
who stays more than 180 days at east; c) partcpaton n the mgt, supervson or contro of any
domestc busness frm, entty or corp n the Phs; and d) any other act mpyng contnuty of
commerca deangs.
The dfferent agreements entered nto were consdered a seres of agreements showng that
Granger was dong busness. Even f the sub|ect matter of the dfferent agreements were a the
same, that aone woud not necessary sgnfy that a such agreements ere merey auxary to the
frst. As ong as t coud be shown that the partes entered nto a seres of agreements, as n
successve saes of the companys reguar products, that company sha be deemed as dong
busness.
The stpuatons show that Granger had extended ts personaty n the Phs, and woud
receve orders for t products and dscharge ts warranty obgatons through MSI as agent. It woud
even appear that Granger ntended to transact busness through MSI not ony for the sae and
warranty of ts products but aso to act as representatve n the deveopment of possbe markets for
Granger products.
Aso, Granger saw to t that t was assured at east one seat n the BoD of MSI. Athough Granger
ctes the reguatons of the Board of Investments that mere nvestment n a oca company by a
foregn corp shoud not be construed as dong busness n the Phs., t cannot be dened that the
nvestment was qute substanta (30%), enabng t to partcpate n the actua mgt and contro.
+. Di00ere#t Rles o# Trade/ar- a#d Trade#a/es (a9esern &:ui+men * Su++ly Co. v.
,eyes, 51 Ph. 115 |1927|; Levion In-usries v. Salva-or, 114 SCRA 420 |1982|; Converse
,ubber v. 5niversal ,ubber, 147 SCRA 154 |1987|; Converse ,ubber Cor+. v. 3acino ,ubber
* Plasic Co., 97 SCRA 158 |1980|; 5niversal ,ubber Pro-ucs, Inc. v. C), 130 SCRA 104
|1984|; Puma S+orschunhfabri$en ,u-olf (assler, 4.G. v. I)C, 158 SCRA 233 |1988|; Phili+s
&'+or B.V. v. C), 206 SCRA 457 |1992|).
.. E00e"ts o0 4ailre to O!tai# Li"e#se9
%a$ On the Contract /ntered Into' a/ome Insurance Co. v. &asern Shi++ing Lines, 123
SCRA 424 (1983).
HOME INSURANCE CO. V. EASTERN SHIPPING LINES
FACTS
Ths s a consodaton of 2 cases.
1
st
case: S. Ka|ta & Co., on behaf of Atas Consodated Corp shpped on board the SS Eastern
|upter cos of back hot roed copper wre rod (shpment was nsured). The sad vesse s owned and
operated by Eastern Shppng Lnes.
Some of the cos dscharged from the vesse were n bad order and had to be consdered as
scrap. So Home Insurance Co. pad under ts nsurance pocy the amt of P3, 60.44. Home Insurance
made demands for payment aganst Eatern and Ange |ose Transpo for rembursemnt of the amt but
each refused to pay the same.
2
nd
case: Hansa Transport Kontor shpped from Bremen, Germany, 30 packages of Servce Parts
Revsed Bagtas Revewer by Ve and Ocfe 2A
of Farm Eqpmt and Impements on oard the vesse SS NEDER RI|N owned by the defendant N.V.
Nedoyd L|nen and represented n the Phs by ts oca agent, Coumban Phs, Inc. Shpment was
aso nsured. Agan, some packages were n bad order. So Home Insurance pad the amt of P2,
426.98. Demands were made on L|nen for rembursement but dd nopt get anywhere.
In both cases, pettoner-appeant avers that t s a foregn nsurance company duy authorzed
to do busness n the Phs through ts agent Vctor Beo.
HELD
When the compants n these 2 cases were fed, Home Insurance aready secured the
necessary cense to conduct ts busness and coud therefore aready fe sut.
The SC has aready rued that the ob|ect of Secs 68 and 69 of the Corp Law was to sub|ect the
foregn corp dong busness n the Phs to the |ursdcton of our courts. The ob|ect of the statute was
not to prevent the foregn corp from performng snge acts, but to prevent t from acqurng a
domce for the purpose of busness wthout takng the necessary steps to render t amenabe to sut
n the oca courts. The mpcaton therefore s that t was never the purpose of the egsature to
excude a foregn corp whch happens to obtan an soated order for busness from the Phs from
seekng redress n Ph courts and thus, n effect, to permt persons to avod ther contracts made
wth such foregn corps.
Sec. 69 of od Corporaton Law was ntended to sub|ect the foregn corporaton dong
busness n the Phppnes to the |ursdcton of our courts and not to prevent the foregn
corporaton from performng snge acts, but to prevent t from acqurng domce for the
purpose of busness wthout takng the necessary steps to render t amenabe to sut n
the oca courts. .arshall79ells Co., v. &lser, 46 Ph. 70 (1924).
%!$ Standing to Sue (Sec. 133; .arshall79ells v. &lser, 46 Ph. 71 |1924|)
Secton 133. Dong busness wthout a cense. - No foregn corporaton transactng busness n the
Phppnes wthout a cense, or ts successors or assgns, sha be permtted to mantan or ntervene
n any acton, sut or proceedng n any court or admnstratve agency of the Phppnes; but such
corporaton may be sued or proceeded aganst before Phppne courts or admnstratve trbunas on
any vad cause of acton recognzed under Phppne aws.
%"$ Criminal (iability under Sec. 788 a/ome Insurance Co. v. &asern Shi++ing Lines, 123
SCRA 424 (1983).
Secton 144. Voatons of the Code. - Voatons of any of the provsons of ths Code or ts
amendments not otherwse specfcay penazed theren sha be punshed by a fne of not ess than
one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by
mprsonment for not ess than thrty (30) days but not more than fve (5) years, or both, n the
dscreton of the court. If the voaton s commtted by a corporaton, the same may, after notce and
hearng, be dssoved n approprate proceedngs before the Securtes and Exchange Commsson:
Provded, That such dssouton sha not precude the nsttuton of approprate acton aganst the
drector, trustee or offcer of the corporaton responsbe for sad voaton: Provded, further, That
nothng n ths secton sha be construed to repea the other causes for dssouton of a corporaton
provded n ths Code.
%d$ Pari $elicto $octrine' The oca party to a contract wth a foregn corporaton that does
busness n the Phppnes wthout cense cannot mantan sut aganst the foregn
corporaton |ust as the foregn corporaton cannot mantan sut, under the prncpe of +ari
-elico. aTo+79el- .fg. v. &C&(, 119 SCRA 118 (1985).
ut See'aCommunicaion .aerials v. Cour of )++eals, 260 SCRA 673 (1996).
%e$ /stoppel $octrine' A foregn corporaton dong busness n the Phppnes may sue n
Phppne courts athough t s wthout cense to do busness here aganst a Phppne
ctzen who had contracted wth and been benefted by sad corporaton and knew t to be
wthout the necessary cense to do busness, under the prncpe of estoppe. a.errill
25
5
Lynch 0uures, Inc. v. C), 211 SCRA 824 (1992); Georg Gro1ahn G.B/ * C. v. Isnani, 235
SCRA 216 (1994); )gilen Technolgies Singa+ore ;PT&< L-. v. Inegrae- Silicon
Technology Phil. Cor+., G.R No. 154618, 14 Apr (2004).
MERRILL LYNCH FUTURES, INC. V. CA
FACTS
Merr Lynch Futures Inc s a foregn corp organzed under the aws of Deaware. It entered
nto a Customer Agreement wth the Lara spouses where the cor agreed to act as the spouses
broker for the purchase of the sae of Futures contracts n the US. (Futures contract - contractua
commtment to buy and se standardzed quantty of a partcuar tem at a specfed future
settement date and at a prce agreed upon, wth the purchase of sae beng executed on a reguated
Futures exchange).
Transactons between the partes were to be made through the agent of MLF n the Phs-
Merr Lynch Phs Inc (MLPI), a Ph corp. So transactons were made but n 3 partcuar transactons,
the spouses ncurred a oss. After MLF set off the amount of ths oss wth a debt t owed to the Lara
spouses, the spouses became ndebted to MLF for the baance but the atter refused to pay the same
aegng that MLF had not been dong busness n the Phs athough not censed to do so. Therefore,
MLF s prohbted by aw to mantan an acton n Ph courts and that they were never nformed that
MLPI was not authorzed to operate as a futures tradng advsor.
HELD
Case s remanded for further proceedngs.
If t be true that durng a the tme that they were transactng wth MLF, the Laras were fuy
aware of ts ack of cense to do busness n the Phppnes, and n reaton to those transactons had
made payments to, and receved money from t for severa years, the queston s whether or not the
Lara spouses are estopped to mpugn MLF capacty to sue them n the courts of the forum. The rue
s that a party s estopped to chaenge the personaty of a corporaton after havng acknowedged
the same by enterng nto a contract wth t. And the "doctrne of estoppe to deny corporate
exstence appes to foregn as we as to domestc corporatons;" " one who has deat wth a
corporaton of foregn orgn as a corporate entty s estopped to deny ts corporate exstence and
capacty." Athough there s authorty that sad doctrne "does not, by anaogy, requre that such
person be hed estopped to deny that the corporaton has comped wth the oca statutes mposng
condtons, restrctons and reguatons on foregn corporatons and that t has acqured thereby the
rght to do busness n the state"| The prncpe " w be apped to prevent a person contractng wth
a foregn corporaton from ater takng advantage of ts noncompance wth the statutes, chefy n
cases where such person has receved the benefts of the contract where such person has acted as
agent for the corporaton and has voated hs fducary obgatons as such, and where the statute
does not provde that the contract sha be vod, but merey fxed a speca penaty for voaton of the
statute." The doctrne was adopted by ths Court as eary as 1924 n Asa Bankng Corporaton v.
Standard Products Co., n whch the foowng pronouncement was made" "The genera rue that n
the absence of fraud a person who has contracted or otherwse deat wth an assocaton n such a
way as to recognze and n effect admt ts ega exstence as corporate body s thereby estopped to
deny ts corporate exstence n any acton eadng out of or nvovng such contract or deang, uness
ts exstence s attacked for causes whch have arsen snce makng the contract or other deang
reed on as an estoppe and ths appes to foregn as we as domestc corporatons."
The Mer Lynch estoppe doctrne w effectvey remove the sancton provded for by aw on
the faure of the foregn corp to obtan a cense before t engages n busness n the Phs, and
therefore there woud be ess motve on the part of such foregn corp to obtan the cense snce t
can aways sue n Phs courts.
%0$ Proper $octrine' a&ric$s L-. v. Cour of )++eals, 267 SCRA 567 (1997).
ERICKS LTD. V. COURT OF APPEALS
FACTS
Erks Pte. Ltd. Is a non-resdent foregn corp organzed under the aws of Sngapore. It states n
ts compant that t s engaged n the manufacture and sae of eements used n seang pumps,
vave, etc. and other ndustra equpment. It s not cense to do busness n the Phs.
Revsed Bagtas Revewer by Ve and Ocfe 2A
Over a span of 5 months (|an-Aug 1989), Defn Enrquez, under Derene EB Contros Center
ordered and receved varous eements from Erks. The transfers were perfected n Sngapore and
Derene was gven a 90-day credt term to pay. Derene faed to pay so Erks fes sut n RTC Makat.
Derene fed MtD for ack of Erks capacty to sue. RTC dsmssed the acton. CA affrmed.
HELD
Decson affrmed. Erks has no capacty to sue.
It was never the ntent of the egsature to bar court access to a foregn corporaton or entty
whch happens to obtan an soated order for busness n the Phppnes. Nether, dd I ntend to
shed debtors from ther egtmate abtes or obgatons. But t cannot aow foregn corporatons
or enttes whch conduct reguar busness (Erks as found to be "dong busness" n the Phs) any
acess to courts wthout the fufment by such corporatons of the necessary requstes to be
sub|ected to our governments reguaton and authorty. By securng a cense, the foregn entty
woud be gvng assurance that t w abde by the decsons of our courts, even f adverse to t.
Other Remedy St Avaabe: By th |udgement, we are not forewcosng pettoners rght to
coect payment. Res |udcata does not set n a case dsmssed for ack of capacty to sue, because
there has been no determnaton on the merts. 16 Morever, ths Court has rued that subsequent
acquston of the cense w cure the ack of capacty at the tme of the executon of the contract.
The requrement of cense s not meant to put foregn corporatons at a dsadvantage. Rather,
the doctrne of ack of capacty to sue s based on consderatons of sound pubc pocy. Thus, t has
been rued n Home Insurance that:
".The prmary purpose of our statute s to compe a foregn corporaton desrng to do
busness wthn the state to submt tsef to the |ursdcton of the courts of ths state. The
statute was not ntended to excude foregn corporatons from the state.The better reason,
the wser and farer pocy, and the greater weght e wth those decsons whch hod that
where, as here, there s a prohbton wth a penaty, wth no express or mped decaratons
respectng the vadty of enforceabty of contracts made by quafed foregn corporatons, the
contracts.are enforceabe.upon compance wth the aw.
Whe we agree wth the pettoner that the country needs to deveop trade reatons and foster
frendy commerca reatons wth other states, we aso need to enforce our aw that reguate the
conduct of foregners who desre to do busness here. Such strangers must foow our aws and must
sub|ect themseves to reasonabe reguaton by our government.
1. Sits A*ai#st 4orei*# Corporatio#s9
%a$ 2urisdiction Over )oreign Corporations (Sec. 14, Rue 14, Rues of Court; General
Cor+. of he Phil. v. 5nion Insurance Sociey of Canon, L-., 87 Ph. 313 |1950|; 3ohnlo
Tra-ing Co., v 0lores, 88 Ph. 741 |1951|; 3ohnlo Tra-ing Co. v. =uluea, 88 Ph. 750
|1951|; Pacific .icronisian Line, Inc. v. (el rosario, 96 Ph. 23 |1954|; 0ar &as InCl Im+or
an- &'+or Cor+. v. #an$ai 4ogyo Co., L-., 6 SCRA 725 |1962|).
For purpose servng summons a foregn corporaton n accordance wth Rue 14,
Secton 14, t s suffcent that t be aeged n the compant that t s dong busness n the
Phppnes. /ahn v. Cour of )++eals, 266 SCRA 537 (1997).
When t s shown that a foregn corporaton s dong busness n the Phppnes,
summons may be served on (a) ts resdent agent desgnated n accordance wth aw; (b)
f there s no resdent agent, the government offca desgnated by aw to that effect; or
(c) any of ts offcers or agent wthn the Phppnes. The mere aegaton n the compant
that a oca company s the agent of the foregn corporaton s not suffcent to aow
proper servce to such aeged agent; t s necessary that there must be specfc
aegatons that estabshes the connecton between the prncpa foregn corporaton and
ts aeged agent wth respect to the transacton n queston. 0rench !il .ills .achinery
Co.v. C), 295 SCRA 462 (1998).
%!$ Ob9ection to 2urisdiction' Appearance of a foregn corporaton to a sut precsey to
queston the trbunas |ursdcton over ts person s not equvaent to servce of summons,
nor does t consttute an acquescence to the courts |ursdcton. )von Insurance PLC v.
Cour of )++eals, 278 SCRA 312, 327 (1997).
25
7
%"$ Odd $octrine' a0aciliies .anagemen Cor+. v. (e la !sa, 89 SCRA 131 (1979); 0B)
)ircraf v. =osa, 110 SCRA 1 (1981); ,oyal Cro%n InCl v. #L,C, 178 SCRA 569 (1989);
9ang Laboraories, Inc. v. .en-oza, 156 SCRA 44 (1987).
FACILITIES MANAGEMENT CORP. V. DE LA OSA
FACTS
Pet. Factes Mgt Corp, a non-resdent foregn corp recruted Fpno workers to work n Wake
Isand. Respondent, who was recruted by pet. through the atters agent n the Phs, sought to
recover from pet. hs overtme compensaton, as we as hs swng shft and graveyard shft
premums. On the bass of the fndngs of the Hearng Examner, the Court of Industra Reatons
rendered |udgment n favor of respondent.
In ts petton for revew, pet. cams that the CIR cannot affrm a |udgment aganst persons
domced outsde and not dong busness n the Phs.
HELD
Petton dened.
Indeed, f a foregn corp not engaged n dong busness n the Phs, s not barred from seekng
redress from courts n the Phs, a fortor, that same corp cannot cam exempton from beng sued n
Ph courts for acts done aganst a person/s n the Phs.
Contra9 The sine :ua non requrement for servce of summons and other ega processes
or any such agent or representatve s that the foregn corporaton s dong
busness n the Phppnes. /yo+sung .ariime Co., L-. v. C), 165 SCRA 258
1988); aSigneics Cor+. v. C), 225 SCRA 737 (1993<.
ut &o! See' )von Insurance PLC v. Cour of )++eals, 278 SCRA 312 (1997).
%d$ Stipulation on -enue' When the contract sued upon has a venue cause wthn the
Phppnes, t s deemed a confrmaton by the foregn corporaton, even though not dong
busness n the Phppnes, to be sued n oca courts. Linger * 0isher G.B/ v. I)C, 125
SCRA 522 (1983).
3. Reside#t A*e#t (Sec. 127 and 128)
Secton 127. Who may be a resdent agent. - A resdent agent may be ether an ndvdua resdng n
the Phppnes or a domestc corporaton awfuy transactng busness n the Phppnes: Provded,
That n the case of an ndvdua, he must be of good mora character and of sound fnanca standng.
Secton 128. Resdent agent; servce of process. - The Securtes and Exchange Commsson sha
requre as a condton precedent to the ssuance of the cense to transact busness n the Phppnes
by any foregn corporaton that such corporaton fe wth the Securtes and Exchange Commsson a
wrtten power of attorney desgnatng some person who must be a resdent of the Phppnes, on
whom any summons and other ega processes may be served n a actons or other ega
proceedngs aganst such corporaton, and consentng that servce upon such resdent agent sha be
admtted and hed as vad as f served upon the duy authorzed offcers of the foregn corporaton at
ts home offce. Any such foregn corporaton sha kewse execute and fe wth the Securtes and
Exchange Commsson an agreement or stpuaton, executed by the proper authortes of sad
corporaton, n form and substance as foows:
"The (name of foregn corporaton) does hereby stpuate and agree, n consderaton of ts beng
granted by the Securtes and Exchange Commsson a cense to transact busness n the Phppnes,
that f at any tme sad corporaton sha cease to transact busness n the Phppnes, or sha be
wthout any resdent agent n the Phppnes on whom any summons or other ega processes may
be served, then n any acton or proceedng arsng out of any busness or transacton whch occurred
n the Phppnes, servce of any summons or other ega process may be made upon the Securtes
and Exchange Commsson and that such servce sha have the same force and effect as f made
upon the duy-authorzed offcers of the corporaton at ts home offce."
Whenever such servce of summons or other process sha be made upon the Securtes and
Revsed Bagtas Revewer by Ve and Ocfe 2A
Exchange Commsson, the Commsson sha, wthn ten (10) days thereafter, transmt by ma a
copy of such summons or other ega process to the corporaton at ts home or prncpa offce. The
sendng of such copy by the Commsson sha be necessary part of and sha compete such servce.
A expenses ncurred by the Commsson for such servce sha be pad n advance by the party at
whose nstance the servce s made.
In case of a change of address of the resdent agent, t sha be hs or ts duty to mmedatey notfy
n wrtng the Securtes and Exchange Commsson of the new address.
%a$ Concept of 0residence1' Sae Invesmen /ouse v. Ciiban$, 203 SCRA 9 (1991).
%!$ A compant fed by a foregn corporaton s fatay defectve for fang to aege ts duy
authorzed representatve or resdent agent n Phppne |ursdcton. #e% "or$ .arine
.anagers, Inv. c. Cour of )++eals, 249 SCRA 416 (1995).
%"$ When a corporaton has desgnated a person to receve servce of summon pursuant to
the Corporaton Code, the desgnaton s excusve and servce of summons on any other
person s neffcacous. /.B. =achry Com+any InCl v. C), 232 SCRA 329 (1994)
:. Appli"a!le LaEs to 4orei*# Corporatio#s (Sec. 129; Grey v. Insular Lumber Co., 67 Ph.
139 |1938|)
Secton 129. Law appcabe. - Any foregn corporaton awfuy dong busness n the Phppnes sha
be bound by a aws, rues and reguatons appcabe to domestc corporatons of the same cass,
except such ony as provde for the creaton, formaton, organzaton or dssouton of corporatons or
those whch fx the reatons, abtes, responsbtes, or dutes of stockhoders, members, or
offcers of corporatons to each other or to the corporaton.
;. A/e#d/e#t o0 Arti"les o0 I#"orporatio# (Sec. 130)
Secton 130. Amendments to artces of ncorporaton or by-aws of foregn corporatons. - Whenever
the artces of ncorporaton or by-aws of a foregn corporaton authorzed to transact busness n the
Phppnes are amended, such foregn corporaton sha, wthn sxty (60) days after the amendment
becomes effectve, fe wth the Securtes and Exchange Commsson, and n the proper cases wth
the approprate government agency, a duy authentcated copy of the artces of ncorporaton or by-
aws, as amended, ndcatng ceary n capta etters or by underscorng the change or changes
made, duy certfed by the authorzed offca or offcas of the country or state of ncorporaton. The
fng thereof sha not of tsef enarge or ater the purpose or purposes for whch such corporaton s
authorzed to transact busness n the Phppnes.
1@. Mer*er a#d Co#solidatio# (Sec. 132; Art. 51, Omnbus Code)
Secton 132. Merger or consodaton nvovng a foregn corporaton censed n the Phppnes. - One
or more foregn corporatons authorzed to transact busness n the Phppnes may merge or
consodate wth any domestc corporaton or corporatons f such s permtted under Phppne aws
and by the aw of ts ncorporaton: Provded, That the requrements on merger or consodaton as
provded n ths Code are foowed.
Whenever a foregn corporaton authorzed to transact busness n the Phppnes sha be a party to
a merger or consodaton n ts home country or state as permtted by the aw of ts ncorporaton,
such foregn corporaton sha, wthn sxty (60) days after such merger or consodaton becomes
effectve, fe wth the Securtes and Exchange Commsson, and n proper cases wth the approprate
government agency, a copy of the artces of merger or consodaton duy authentcated by the
proper offca or offcas of the country or state under the aws of whch merger or consodaton was
effected: Provded, however, That f the absorbed corporaton s the foregn corporaton dong
busness n the Phppnes, the atter sha at the same tme fe a petton for wthdrawa of ts cense
n accordance wth ths Tte.
11. Re'o"atio# o0 Li"e#se (Secs. 134 and 135; Art. 50, Omnbus Investment Code)
Secton 134. Revocaton of cense. - Wthout pre|udce to other grounds provded by speca aws, the
cense of a foregn corporaton to transact busness n the Phppnes may be revoked or suspended
by the Securtes and Exchange Commsson upon any of the foowng grounds:
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1. Faure to fe ts annua report or pay any fees as requred by ths Code;
2. Faure to appont and mantan a resdent agent n the Phppnes as requred by ths Tte;
3. Faure, after change of ts resdent agent or of hs address, to submt to the Securtes and
Exchange Commsson a statement of such change as requred by ths Tte;
4. Faure to submt to the Securtes and Exchange Commsson an authentcated copy of any
amendment to ts artces of ncorporaton or by-aws or of any artces of merger or
consodaton wthn the tme prescrbed by ths Tte;
5. A msrepresentaton of any matera matter n any appcaton, report, affdavt or other
document submtted by such corporaton pursuant to ths Tte;
6. Faure to pay any and a taxes, mposts, assessments or penates, f any, awfuy due to
the Phppne Government or any of ts agences or potca subdvsons;
7. Transactng busness n the Phppnes outsde of the purpose or purposes for whch such
corporaton s authorzed under ts cense;
8. Transactng busness n the Phppnes as agent of or actng for and n behaf of any foregn
corporaton or entty not duy censed to do busness n the Phppnes; or
9. Any other ground as woud render t unft to transact busness n the Phppnes.
Secton 135. Issuance of certfcate of revocaton. - Upon the revocaton of any such cense to
transact busness n the Phppnes, the Securtes and Exchange Commsson sha ssue a
correspondng certfcate of revocaton, furnshng a copy thereof to the approprate government
agency n the proper cases.
The Securtes and Exchange Commsson sha aso ma to the corporaton at ts regstered offce n
the Phppnes a notce of such revocaton accompaned by a copy of the certfcate of revocaton.
12. ,ithdraEal o0 4orei*# Corporatio# (Sec. 136)
Secton 136. Wthdrawa of foregn corporatons. - Sub|ect to exstng aws and reguatons, a foregn
corporaton censed to transact busness n the Phppnes may be aowed to wthdraw from the
Phppnes by fng a petton for wthdrawa of cense. No certfcate of wthdrawa sha be ssued by
the Securtes and Exchange Commsson uness a the foowng requrements are met;
1. A cams whch have accrued n the Phppnes have been pad, compromsed or setted;
2. A taxes, mposts, assessments, and penates, f any, awfuy due to the Phppne
Government or any of ts agences or potca subdvsons have been pad; and
3. The petton for wthdrawa of cense has been pubshed once a week for three (3)
consecutve weeks n a newspaper of genera crcuaton n the Phppnes.
Revsed Bagtas Revewer by Ve and Ocfe 2A
XX. (ENALTD (RO?ISIONS O4 THE CODE
See VILLANUEVA, The Penal Provision 5n-er Sec. JKK of he Cor+oraion Co-e, THE
LAWYERS REVIEW, Vo. X, No. 2 (29 February 1996).
1. (e#alt) Clase 0or ?iolatio#s o0 the (ro'isio#s o0 the Code (Sec. 144)
Secton 144. Voatons of the Code. - Voatons of any of the provsons of ths Code or ts
amendments not otherwse specfcay penazed theren sha be punshed by a fne of not ess than
one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by
mprsonment for not ess than thrty (30) days but not more than fve (5) years, or both, n the
dscreton of the court. If the voaton s commtted by a corporaton, the same may, after notce and
hearng, be dssoved n approprate proceedngs before the Securtes and Exchange Commsson:
Provded, That such dssouton sha not precude the nsttuton of approprate acton aganst the
drector, trustee or offcer of the corporaton responsbe for sad voaton: Provded, further, That
nothng n ths secton sha be construed to repea the other causes for dssouton of a corporaton
provded n ths Code.
2. Cross8re0ere#"e (Sec. 27).
Secton 27. Dsquafcaton of drectors, trustees or offcers. - No person convcted by fna |udgment
of an offense punshabe by mprsonment for a perod exceedng sx (6) years, or a voaton of ths
Code commtted wthn fve (5) years pror to the date of hs eecton or appontment, sha quafy as
a drector, trustee or offcer of any corporaton.
&. Spe"i0i" appli"atio# (Sec. 74).
Secton 74. Books to be kept; stock transfer agent. - Every corporaton sha keep and carefuy
preserve at ts prncpa offce a record of a busness transactons and mnutes of a meetngs of
stockhoders or members, or of the board of drectors or trustees, n whch sha be set forth n deta
the tme and pace of hodng the meetng, how authorzed, the notce gven, whether the meetng
was reguar or speca, f speca ts ob|ect, those present and absent, and every act done or ordered
done at the meetng. Upon the demand of any drector, trustee, stockhoder or member, the tme
when any drector, trustee, stockhoder or member entered or eft the meetng must be noted n the
mnutes; and on a smar demand, the yeas and nays must be taken on any moton or proposton,
and a record thereof carefuy made. The protest of any drector, trustee, stockhoder or member on
any acton or proposed acton must be recorded n fu on hs demand.
The records of a busness transactons of the corporaton and the mnutes of any meetngs sha be
open to nspecton by any drector, trustee, stockhoder or member of the corporaton at reasonabe
hours on busness days and he may demand, n wrtng, for a copy of excerpts from sad records or
mnutes, at hs expense.
Any offcer or agent of the corporaton who sha refuse to aow any drector, trustees, stockhoder or
member of the corporaton to examne and copy excerpts from ts records or mnutes, n accordance
wth the provsons of ths Code, sha be abe to such drector, trustee, stockhoder or member for
damages, and n addton, sha be guty of an offense whch sha be punshabe under Secton 144
of ths Code: Provded, That f such refusa s made pursuant to a resouton or order of the board of
drectors or trustees, the abty under ths secton for such acton sha be mposed upon the
drectors or trustees who voted for such refusa: and Provded, further, That t sha be a defense to
any acton under ths secton that the person demandng to examne and copy excerpts from the
corporaton's records and mnutes has mpropery used any nformaton secured through any pror
examnaton of the records or mnutes of such corporaton or of any other corporaton, or was not
actng n good fath or for a egtmate purpose n makng hs demand.
Stock corporatons must aso keep a book to be known as the "stock and transfer book", n whch
must be kept a record of a stocks n the names of the stockhoders aphabetcay arranged; the
nstaments pad and unpad on a stock for whch subscrpton has been made, and the date of
payment of any nstament; a statement of every aenaton, sae or transfer of stock made, the date
thereof, and by and to whom made; and such other entres as the by-aws may prescrbe. The stock
and transfer book sha be kept n the prncpa offce of the corporaton or n the offce of ts stock
transfer agent and sha be open for nspecton by any drector or stockhoder of the corporaton at
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reasonabe hours on busness days.
No stock transfer agent or one engaged prncpay n the busness of regsterng transfers of stocks
n behaf of a stock corporaton sha be aowed to operate n the Phppnes uness he secures a
cense from the Securtes and Exchange Commsson and pays a fee as may be fxed by the
Commsson, whch sha be renewabe annuay: Provded, That a stock corporaton s not precuded
from performng or makng transfer of ts own stocks, n whch case a the rues and reguatons
mposed on stock transfer agents, except the payment of a cense fee heren provded, sha be
appcabe.
+. Stri"t (ri#"iples i# Cri/i#al LaEG the isse o0 /ali"e.
.. Histori"al Ba"-*ro#d o0 Se". 1++ %Se". 1;@ 1H3 o0 the Corporatio# LaE$
Sec. 190 was not ntended to make every casua voaton of one of the Corporaton Law
provsons ground for nvountary dssouton of the corporaton and that the court was
entted to exercse dscreton n such matters. Governmen of P.I. v. &l /ogar 0ili+ino,

50
Ph. 399 (1927).
The penates mposed n Sec. 190(A) of Corporaton Law for the voaton of the
prohbton n queston are of such nature that they can be enforced ony by a crmna
prosecuton or by an acton of :uo %arrano. Bu hese +rocee-ings can be mainaine- only
by he )orney7General in re+resenaion of he Governmen. /ar-en v. Bengue
Consoli-ae- .ining Co., 58 Ph. 141 (1933).
1. ?iolatio# o0 Se". 1&& !) 4orei*# Corporatio#s
Secton 133. Dong busness wthout a cense. - No foregn corporaton transactng busness n the
Phppnes wthout a cense, or ts successors or assgns, sha be permtted to mantan or ntervene
n any acton, sut or proceedng n any court or admnstratve agency of the Phppnes; but such
corporaton may be sued or proceeded aganst before Phppne courts or admnstratve trbunas on
any vad cause of acton recognzed under Phppne aws.
Sec. 133 of Corporaton Code, whch unke ts counterpart Sec. 69 of Corporaton Law
provded specfcay for pena sanctons for foregn corporatons engagng n busness n the
Phppnes wthout obtanng the requste cense, shoud be deemed to have a pena
sancton by vrtue of Secton 144 of the Corporaton Code. /ome Insurance Co. v. &asern
Shi++ing Lines, 123 SCRA 424 (1983).
Revsed Bagtas Revewer by Ve and Ocfe 2A
XXI. MISCELLANEO5S
1. SEC (oEer a#d Sper'isio# (Secs. 108 and 143; PD 902-A).
Secton 108. Board of trustees. - Trustees of educatona nsttutons organzed as non-stock
corporatons sha not be ess than fve (5) nor more than ffteen (15): Provded, however, That the
number of trustees sha be n mutpes of fve (5).
Uness otherwse provded n the artces of ncorporaton on the by-aws, the board of trustees of
ncorporated schoos, coeges, or other nsttutons of earnng sha, as soon as organzed, so cassfy
themseves that the term of offce of one-ffth (1/5) of ther number sha expre every year. Trustees
thereafter eected to f vacances, occurrng before the expraton of a partcuar term, sha hod
offce ony for the unexpred perod. Trustees eected thereafter to f vacances caused by expraton
of term sha hod offce for fve (5) years. A ma|orty of the trustees sha consttute a quorum for the
transacton of busness. The powers and authorty of trustees sha be defned n the by-aws.
For nsttutons organzed as stock corporatons, the number and term of drectors sha be governed
by the provsons on stock corporatons.
Secton 143. Rue-makng power of the Securtes and Exchange Commsson. - The Securtes and
Exchange Commsson sha have the power and authorty to mpement the provsons of ths Code,
and to promugate rues and reguatons reasonaby necessary to enabe t to perform ts dutes
hereunder, partcuary n the preventon of fraud and abuses on the part of the controng
stockhoders, members, drectors, trustees or offcers.
2. Spe"ial Corporatio#s (Sec. 4)
Secton 4. Corporatons created by speca aws or charters. - Corporatons created by speca aws or
charters sha be governed prmary by the provsons of the speca aw or charter creatng them or
26
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appcabe to them, suppemented by the provsons of ths Code, nsofar as they are appcabe.
&. NeE Re2ire/e#ts o# EIisti#* Corporatio#s (Sec. 148).
Secton 148. Appcabty to exstng corporatons. - A corporatons awfuy exstng and dong
busness n the Phppnes on the date of the effectvty of ths Code and heretofore authorzed,
censed or regstered by the Securtes and Exchange Commsson, sha be deemed to have been
authorzed, censed or regstered under the provsons of ths Code, sub|ect to the terms and
condtons of ts cense, and sha be governed by the provsons hereof: Provded, That f any such
corporaton s affected by the new requrements of ths Code, sad corporaton sha, uness otherwse
heren provded, be gven a perod of not more than two (2) years from the effectvty of ths Code
wthn whch to compy wth the same.
+. Appli"a!ilit) o0 Other (ro'isio# o0 old Corporatio# LaE (Sec. 145 and 146).
Secton 145. Amendment or repea. - No rght or remedy n favor of or aganst any corporaton, ts
stockhoders, members, drectors, trustees, or offcers, nor any abty ncurred by any such
corporaton, stockhoders, members, drectors, trustees, or offcers, sha be removed or mpared
ether by the subsequent dssouton of sad corporaton or by any subsequent amendment or repea
of ths Code or of any part thereof.
Secton 146. Repeang cause. - Except as expressy provded by ths Code, a aws or parts thereof
nconsstent wth any provson of ths Code sha be deemed repeaed.