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Corporation Law After Midterms Reviewer

Corporation Law After Midterms Reviewer

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Published by Joseph Plazo, Ph.D
Bagtas Corp Reviewer
Bagtas Corp Reviewer

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Revised Bagtas Reviewer by Ve and Ocfe 2A XI.

STOCKHOLDERS AND MEMBERS

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Shares of stock in a corporation constitute personal property of the stockholder, which he can contract with as in any other form of property. Shares of stock however do not represent proprietary rights of stockholders to the assets or properties of the corporation. Its holder do not own any part of the assets represented by the capital of the corporation; nor are the stockholders entitled to the possession of any definite portion of the corporation’s assets or properties. POWERS OF CORPORATION WITH RESPECT TO THE SHARES OF STOCK ALREADY ISSUED (1) Subject to any contrary stipulation in the subscription agreement, to call for the payment of the unpaid subscription, together with interest accrued, if any, on the date specified in the contract of subscription or on the date stated in the call made by the board; (2) To impose interest on the unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in, the by-laws; (3) To refuse to issue to the subscriber the certificates of stock covering shares where the subscription has not been fully paid; (4) To refuse to recognize and register the sale or assignment of any share where the subscription has not been fully paid; (5) To refuse to recognize a sale or assignment of shares of stock which have not been duly registered in the stock and transfer book. 1. Shareholders Not Corporate Creditors. aGarcia v. Lim Chu Sing, 59 Phil. 562 (1934). GARCIA v. LIM CHU SING FACTS: Lim CUAN SY had an account with the Mercantile Bank of China (Plaintiff Bank) in the form of "trust receipts" guaranteed by Lim CHU SING (defendant) as surety & with chattel mortgage securities. Lim CUAN SY failed to comply with his obligations. The Plaintiff Bank required Lim CHU SING, as surety, to delivered a promissory note for P19,605.17 with interest thereon at 6% per annum, payable monthly. One of the conditions stipulated in the said note is that in case of defendant's default in the payment of any of the monthly installments the entire amount, together with interest thereon at 6% per annum, shall become due & payable on demand. The defendant had been making partial payments leaving an unpaid balance of P9,105.17. However, he defaulted in the payment of several installments by reason of which the unpaid balance on the promissory note had ipso facto become due & demandable. The Mercantile Bank of China, without the knowledge & consent of the defendant, foreclosed the chattel mortgage and privately sold the property covered thereby. The POWERS WHICH CORPORATION DOES NOT HAVE (1) Demand for the repurchase of its shares of stock unless the shares are classified as redeemable shares in the articles of incorporation;

(2) Refuse to pay to the stockholders dividends declared on shares which have not been declared delinquent to apply them to the payment of the unpaid subscription, and (3) Bid delinquent shares, and thereby obtain for itself profit, for value greater than the balance due on the unpaid subscription, plus accrued interest, cost of advertisement and expenses of sale.

defendant is the owner of shares of stock of the Plaintiff Bank of China amounting to P10,000. The Plaintiff Bank was subsequently placed under liquidation. The defendant filed a motion for the inclusion of the principal debtor Lim Cuan Sy as party defendant with the CFI-Manila so that he could avail himself of the benefit of the exhaustion of the property of said Lim Cuan Sy. The motion was denied. The proceeds of the sale of the mortgaged chattels together with other payments made were applied to the amount of the promissory note in question, leaving the balance which the plaintiff now seeks to collect. ISSUE: W/N it is proper to COMPENSATE the defendant-appellant's indebtedness of P9,105.17 with the sum of P10,000 representing the value of his shares of stock with the Mercantile Bank of China. HELD: NO. According to the weight of authority, a share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit. Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine of the American courts that the capital stock of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stock. The shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and, therefore, the latter is not a creditor of the former for such shares. The indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of his shares therein, there being no relation of creditor & debtor with respect to such shares. Therefore, the defendant-appellant Lim CHU SING not being a creditor of the Plaintiff Bank, although the latter is a creditor of the former, there is no sufficient ground to justify a compensation. 2. Subscription Contract (Sec. 60 & 72; Trillana v. Quezon Colegialla, 93 Phil. 383 [1953]). Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. PURCHASE OF ISSUED SHARES (1) TRADITION/DELIVERY – upon full payment of the price; sale constitutes merely a title and not a mode by which ownership of the subject matter is transferred. SUBSCRIPTION OF UNISSUED SHARES (1) UPON PERFECTION – ISSUANCE of shares of stock even without full payment; upon the mere meeting of the minds, the effects of a real contract take place. Furthermore, the registration of the subscription in the stock and transfer book is not also essential to constitute subscription and issuance of the shares. (Such is meant to govern the binding effects of sale and dispositions of shares as far as third parties are concerned, but not with respect to the corporation and stockholders.) Such constitutes the very mode by which the covered shares are thereby issued and then owned by the subscriber. (2) Even in the case of breach, the subscriber cannot rescind (3) When the corporation becomes insolvent, the corporation becomes immediately liable to pay for the shares of stock subscribed to. IN RELATION TO LIMITED LIABILITY OF STOCKHOLDERS – Stockholders are liable to the extent of how much they promised to subscribe – this is the price the stockholder

(2) SUBSTANTIAL BREACH – remedies à rescission or specific performance (3) Bankruptcy or insolvency of the corporation will terminate its claim against the purchaser on the theory that it can no longer perform its side of an executory contract by delivery of a valid certificate and that the consideration has failed.

Revised Bagtas Reviewer by Ve and Ocfe 2A (4) Can be subject to a resolutory or suspensive condition – non occurrence of which does not give rise to the sale pays for enjoying limited liability. (4) Can be subject to terms and conditions but such must not excuse buyer from paying. Terms and conditions and stipulations may be agreed upon in a subscription agreement. Such varying terms are valid and effective between the parties for so long as they do not undermine the ultimate obligation of the subscriber to pay the subscription in order to protect the claims of the corporate creditors. (5) The unpaid subscription is a debt of subscriber.

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(5) Purchaser is not a debtor, and according to some courts, the measure of liability of the purchaser if he defaults, is in damages for the difference between the contract price and the market value of the shares (6) The provision of the Corporation Law regarding calls for unpaid subscriptions and assessment of stock do not apply. (7) The rule that the corporation has no legal capacity to release an original subscriber to its capitals stock from the obligation to pay for his shares is inapplicable to a contract of purchase of shares.

NOTE: CONSIDERATION for subscription is always onerous for the protection of the creditors. This is another enforcement of the trust fund doctrine. ISSUANCE OF STOCK BELOW THE PAR VALUE is a violation of the trust fund doctrine. ISSUANCE OF STOCKS WITH NO PAR VALUE must be declared in the books. CLV: Subscription agreements are not covered by Statute of Frauds, and the corporation has a right to enforce and collect, and to adduce oral evidence, upon an oral subscription agreement, on the following grounds: (1) the special treatment accorded to subscription agreement under Corporate Law requires that subscription agreements, even when they have been entered into orally, should be allowed to be proved and enforced by oral evidence, in order to fully protect corporate creditors under the trust fund doctrine; and (2) even if subscription agreements are covered by the Statute of Frauds, but by their nature which upon consent would make the subscriber a stockholder and owner of the covered shares, which would constitute partial execution, they are deemed to be exempted from the prohibition against the presenting of oral evidence to prove and enforce them. CHARACTERISTICS: 1) Original issuance from authorized capital stock at the time of incorporation; 2) The opening, during the life of the corporation of the portion of the original authorized capital stock previously unissued; 3) The increase of authorized capital stock achieved through a formal amendment of the articles of incorporation and registration thereof with SEC. NOTE: Any transaction covering issued shares of stock is a not a subscription agreement, and therefore is governed by the Law on Sales. a) Purchase Agreement. aBayla v. Silang Traffic Co., Inc., 73 Phil. 557 (1942). BAYLA v SILANG TRAFFIC CO. INC. FACTS: Petitioners in G.R. No. 48195 instituted this action in the CFI of Cavite against the respondent Silang

Traffic Co., Inc. (cross-petitioner in G.R. No. 48196), to recover certain sums of money which they had paid severally to the corporation on account of shares of stock they individually agreed to take and pay for under certain specified terms and conditions: “(1)That the subscriber promises to pay personally or by his duly authorized agent to the seller at the Municipality of Silang, Province of Cavite, Philippine Islands, the sum of one thousand five hundred pesos (P1,500), Philippine currency, as purchase price of FIFTEEN (15) shares of capital stock, said purchase price to be paid as follows, to wit: five (5%) per cent upon the execution of the contract, the receipt whereof is hereby acknowledged and confessed, and the remainder in installments of five per cent, payable within the first month of each and every quarter thereafter, commencing on the 1st day of July, 1935, with interest on deferred payments at the rate of SIX (6%) per cent per annum until paid. (2)That the said subscriber further agrees that if he fails to pay any of said installment when due, or to perform any of the aforesaid conditions, or if said shares shall be attached or levied upon by creditors of the said subscriber, then the said shares are to revert to the seller and the payments already made are to be forfeited in favor of said seller, and the latter may then take possession, without resorting to court proceedings. (3)The said seller upon receiving full payment, at the time and manner hereinbefore specified, agrees to execute and deliver to said subscriber, or to his heirs and assigns, the certificate of title of said shares, free and clear of all encumbrances.” The petitioners agreed to purchase the following number of shares and, up to April 30, 1937, had paid the following sums on account thereof: Sofronio Bayla....... Venancio Toledo........ Josefa Naval.............. Paz Toledo................ T. 8 shares P360

8 shares

375

15 shares 15 shares

675

675

Petitioners' action for the recovery of the sums above mentioned is based on a resolution by the board of directors of the respondent corporation on August 1, 1937. The respondent corporation set up the following defenses: (1) resolution is not applicable to the petitioners Bayla, Naval, and Toledo because on the date thereof "their subscribed shares of stock had already automatically reverted to the defendant, and the installments paid by them had already been forfeited"; and (2) resolution of August 1, 1937, was revoked and cancelled by a subsequent resolution of the board of directors of the defendant corporation dated August 22, 1937. The trial court absolved the defendant from the complaint and declared forfeited in favor of the defendant the shares of stock in question. It held that the resolution of August 1, 1937, was null and void, citing Velasco vs. Poizat (37 Phil., 802), wherein this Court held that "a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for shares; and any agreement to this effect is invalid" CA modified the decision of the trial court. It affirmed the dismissal of the plaintiff’s complained part thereof declaring their subscription canceled is reversed. Defendant is directed to grant plaintiffs 30 days after final judgment within which to pay the arrears on their subscription. Both parties appealed to this Court by petition and cross-petition for certiorari. The parties litigant, the trial court, and the Court of Appeals have interpreted or considered the said agreement as a contract of subscription to the capital stock of the respondent corporation. It should be noted, however, that said agreement is entitled "Agreement for Installment Sale of Shares in the Silang Traffic Company, Inc.,"; that while the purchaser is designated as "subscriber," the corporation

Revised Bagtas Reviewer by Ve and Ocfe 2A

is described as "seller"; that the agreement was entered into on March 30, 1935, long after the incorporation and organization of the corporation, which took place in 1927; and that the price of the stock was payable in quarterly installments spread over a period of five years. It also appears that in civil case No. 3125 of the Court of First Instance of Cavite mentioned in the resolution of August 1, 1937, the right of the corporation to sell the shares of stock to the person named in said resolution (including herein petitioners) was impugned by the plaintiffs in said case, who claimed a preferred right to buy said shares. ISSUES: (1) W/N the contracts are subscriptions or sales of stock (2) W/N under the contract between the parties, the failure of the purchaser to pay any of the quarterly installments on the purchase price automatically gave rise to the forfeiture of the amounts already paid and the reversion of the shares to the corporation. HELD: (1) They are contracts of sale and not of subscription. "A subscription, properly speaking, is the mutual agreement of the subscribers to take and pay for the stock of a corporation, while a purchase is an independent agreement between the individual and the corporation to buy shares of stock from it at stipulated price." (2) No. The contract provides for interest of the rate of six per centum per annum on deferred payments. The provision regarding interest on deferred payments would not have been inserted if it had been the intention of the parties to provide for automatic forfeiture and cancellation of the contract. Moreover, the contract did not expressly provide that the failure of the purchaser to pay any installment would give rise to forfeiture and cancellation without the necessity of any demand from the seller; and under article 1100 of the Civil Code persons obliged to deliver or do something are not in default until the moment the creditor demands of them judicially or extra-judicially the fulfillment of their obligation, unless (1) the obligation or the law expressly provides that demand shall not be necessary in order that default may arise, (2) by reason of the nature and circumstances of the obligation it shall appear that the designation of the time at which that thing was to be delivered or the service rendered was the principal inducement to the creation of the obligation. Is the resolution of August 1, 1937, valid? The contract in question being one of purchase and not subscription as we have heretofore pointed out, we see no legal impediment to its rescission by agreement of the parties. According to the resolution of August 1, 1937, the recission was made for the good of the corporation and in order to terminate the then pending civil case involving the validity of the sale of the shares in question among others. To that rescission the herein petitioners apparently agreed, as shown by their demand for the refund of the amounts they had paid as provided in said resolution. It appears from the record that said civil case was subsequently dismissed, and that the purchasers of shares of stock, other than the herein petitioners, who were mentioned in said resolution were able to benefit by said resolution. It would be an unjust discrimination to deny the same benefit to the herein petitioners. (b) Pre-Incorporation Subscription (Sec. 61) Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. When properties were assigned pursuant to a pre-incorporation subscription agreement, but the corporation fails to issue the covered shares, the return of such properties to the subscriber is a direct consequence of rescission and does not amount to corporate distribution of assets prior to dissolution. aOn Yong v. Tiu, 375 SCRA 614 (2002). NOTE: The present Code recognized that the subscription agreement is a contract between the subscriber and the corporation. Although the corporation is still non-existent since it is still in the process of incorporation, it is still bound under the pre-incorporation agreement. The latter is replaced by the promoter’s contract although it is merely an expectancy. A subscription agreement is in a sense a contract among several subscribers, and no one of the subscribers can thus withdraw from the contract without the consent of all the others and thereby diminish, without the universal

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consent of all the others, the common fund in which all have acquired an interest. (c) Release from Subscription Obligation (aOng Yong v. Tiu, 401 SCRA 1 (2003); Velasco v. Poizat, 37 Phil. 802 [1918]; PNB v. Bitulok Sawmill, Inc., 23 SCRA 1968 [1968]; National Exchange Co. v. Dexter, 51 Phil. 601 [1928])  The accepted rule in Phil. jurisdiction is that a corporation can release a subscriber from liability on the subscription, in whole or in part, only with the express or implied consent of all the shareholders and only when there is no prejudice to corporate creditors.

Jurisprudence has allowed certain exceptions to this rule: in the case of a bona fide compromise or to set-off a debt due from the corporation, a release, supported by consideration, which will be effectual as against dissenting stockholders and subsequent and existing creditors. NOTE: There must still be valuable consideration. ONG YONG v. TIU Facts: In 1994, the construction of the Masagana Citimall in Pasay City by First Landlink Asia Development Corporation (FLADC) owned by the Tiu family was threatened by the foreclosure by the PNB for their P 190 M debt. In order to stave off the threat the Tiu family together with the Ong family agreed to restructure FLADC and created a pre-subscription agreement and each were to maintain equal shareholdings. The Ong family invested a total sum of P 190 M to the corporation while the Tiu family included several real estate properties as added capital for the restructured corporation. The Ong and Tiu families now owned 1,000,000 shares each of FLADC. After all the debts were paid, the peace between Ong and Tiu did not last. Tiu claimed rescission based on substantial breach by Ong upon the pre-subscription agreement. Ong, on the other hand maintained that it was Tiu who committed the breach because one of the properties that they were supposed to include in the agreement was in fact already in the real estate owned by FLADC. The SEC approved the rescission (both parties were return to status quo, P 190 M to the Ong family and all the remaining FLADC assets to the Tiu family, which included the now finished mall valued at more than P 1B) and the CA affirmed the decision with slight modifications.  Held: 1.) Is rescission the proper remedy for an intra-corporate dispute à No, the Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so (because it is a corporation, Tiu family is not the corporation) and the requirements of the law therefore have not been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corp. Code. 2.) Granting rescission is a proper remedy, does it violate the TFD à Yes it will violate the TFD and the procedures for valid distribution of assets and property under the Corp. Code. The TFD provides that subscription to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. The doctrine is the underlying principle in the procedure for the distribution of capital assets, in the Corp. Code which allows the distribution of corporate capital only in three instances: (1) amendments of the Articles of Incorporation to reduce the authorized capital stock (requires Board Resolution and stockholders’s meeting) (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings and (3) dissolution and eventual liquidation of the corporation. In the instant case, the rescission of the pre-subscription agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation, thereby violation the TFD and the Corp. Code, since the rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed. (d) When Condition of Payment Provided in By-laws. De Silva v. Aboitiz & Co., 44 Phil. 755 (1923). 3. Consideration (Sec. 62).

Revised Bagtas Reviewer by Ve and Ocfe 2A

Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16) (a) Cash (b) Property (c) Service (d) Retained Earnings (d) Shares

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CASH AND PROMISSORY NOTES FOR SUBSCRIPTION – WHY THE PROHIBITION  Two factors – (1) The underlying difference in legal consequence between notes receivable or accounts receivable and subscription receivable on the other hand. If a not receivable is accepted as payment for subscription of shares of stock, the face value of the note would appear as an addition to the assets of the corporation’s balance sheet, without corresponding deduction on the capital stock of the equity portion. On the other hand, subscription receivables are correctly treated not as assets and are reflected properly in the balance sheet of the corporation as deductions from stockholder’s equity and the difference shows the net amount of the stockholder’s equity which is backed up by assets actually received by the corporation (such as cash or property) which have values that do not depend on the credit standing of another person. In short, the latter informs the creditors of the actual net amount of capital stock which is truly backed-up by realizable assets. (2) TFD – that the capital stock of the corporation, especially the paid-up portion thereof should be backed up by assets which have their own intrinsic value other than the promise of a person to pay in the future.

PROPERTY CONSIDERATION  The property to be accepted by the corporation must be necessary or proper for it to own in carrying on its business. (It cannot lawfully issue stock for property which its charter does not authorize it to acquire, or for property acquired for an unauthorized purpose.) The property must be of substantial nature, having pecuniary value capable of being ascertained, and must be something real and tangible as distinguished from something speculative. It must be delivered to the corporation. It must be capable of being applied to the payment of debts and of distribution among the stockholders. EXAMPLE: Real property may be accepted as payment on subscription to the capital stock only

when the same can be used in the business of the corporation, as in real estate development, subdivision, agro-industrial business, and the like, as well as for the establishment of offices. SEC has ruled that property as financial instruments and receivables may be legally accepted as capital contributions subject to the following conditions: (1) actually received by the corporation (2) necessary or convenient for the corporation’s use and lawful purpose; and (3) at a fair valuation equal to the par value of the stock to be approved by the SEC

DEBTS AND SERVICES AS CONSIDERATION   Labor performed or services actually rendered are also considered as considerations, provided that the transaction is in good faith and no fraud is perpetuated upon other stockholders. Previously-incurred debts’ valuation would have been established at arms-length prior to even negotiating on the subscription agreement, and they would more often represent the true value of services which the corporation received. Future services are not allowed as consideration for subscription because the value of such service to the corporation in exchange for shares of stock would again depend on the future performance of the subscriber of the services offered, and there would be tendency to shortchange the corporation.

SET-OFF OF CORPORATION’S INDEBTEDNESS  Previously-incurred debts’ valuation would have been established at arms-length prior to even negotiating on the subscription agreement, and they would more often represent the true value of services which the corporation received. Since these exists in its books, the corporation would have had to pay the same in cash to its creditor, and in turn the same cash is paid back by such creditor to the corporation for subscription of shares.

UNRESTRICTED RETAINED EARNINGS OR EXISTING CAPITAL AS CONSIDERATION  The amounts transferred from URE to stated capital covers the declaration of stock dividends, which has the net effect of capitalizing URE. Stock dividends are in the nature of shares of stock, where the consideration is the amount of URE converted into equity in the corporation’s books.

CONSEQUENCES OF UNLAWFUL CONSIDERATION Subscription contract is valid, but the consideration is void. It would not be in consonance with the TFD nor to the best interest of the corporation and the subscriber, to consider the contract as void. The reasonable interpretation is that the subscription contract would be valid and binding on both the corporation and the subscriber, but that the provision on such unlawful consideration is deemed void, such that the subscription agreement would be construed to be for cash and the unpaid amount be treated as part of subscription receivables. (QUESTION KO: So what do you for instance with accepted PNs reflected as assets of the corporation – amend the records that contain them? Won’t creditors be prejudiced because they were led to believe that the assets are up to this amount where they are not…)  Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporation’s books. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).1 4. Watered Stocks (Sec. 65) Section 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having
1The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in the latest audited financial statements of the corporation, and not the par value thereof. Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002).

Revised Bagtas Reviewer by Ve and Ocfe 2A

knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. NOTES:   Shares issued as fully paid when in truth the consideration received is known to be less than the par value or issued value of the shares are called WATERED STOCK. This is prohibited because of the injuries caused to: (1) CORPORATION which is deprived of the needed capital and the opportunity to market its securities to its own advantage, thus hurting its business prospects and financial responsibility; (2) EXISTING AND FUTURE SHAREHOLDERS who are also injured by the dilution of the proportionate interests in the corporation and who pay full value for their shares; (3) PRESENT AND FUTURE CREDITORS who are injured as the corporation is deprived of the assets or capital required by law to be contributed by all shareholders as substitute for individual liability for corporate debts; and (4) PERSONS WHO DEAL WITH IT OR PURCHASE ITS SECURITIES WHO ARE DECEIVED because stock watering is invariable accompanied with misleading corporate accounts and financial statements, particularly by an overstatement of the value of assets received for the shares to cover up a capital deficit resulting from overvaluation and underpayment of purported capital contributions. 5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 [1953]). Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. Section 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. NOTES:  The word call is capable of three meanings namely (1) resolution of the board of directors for the payment of unpaid subscriptions (2) notification of such resolution made on the stockholders (3) the time when the subscriptions become payable. A call is usually expressed in the form of a resolution adopted by the board of directors, specifying the proportion of the unpaid subscription which it desired to call in and the time or times when it is to be payable. The entire amount of the unpaid subscription may be called at once or it may be made payable by installments, at stated intervals or by successive calls. A call must be uniform with respect to all holders of the class of shares on which it is made, who have already paid an equal amount on their shares, and as a general rule it must not exceed the balance remaining unpaid on their shares. WHEN CALL NOT NECESSARY (1) When, under the terms of the subscription contract, subscription is payable, not upon call but immediately, or on a specified day, or when it is payable in installments at specified times; (2) If the corporation becomes insolvent which makes the liability

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on the unpaid subscription due and demandable regardless of any stipulation to the contrary in the subscription agreement.  Jurisprudence provides that notice of call for payment of unpaid subscribed stock must be published, except when the corporation is insolvent. A stockholder who is employed with the company, cannot sett-off his unpaid subscription against his awarded claims for wages, where there has been no call for the payment of such subscription. Apodaca v. NLRC, 172 SCRA 442 (1989). 6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; Philippine Trust Co. v. Rivera, 44 Phil. 469 [1923]; Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932])

Section 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. Section 69. When sale may be questioned. - No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. Section 71. Effect of delinquency. - No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. The prescriptive period to recover on unpaid subscription does not commence from the

Revised Bagtas Reviewer by Ve and Ocfe 2A time of subscription but from the time of demand by Board of Directors to pay the balance of subscription. Garcia v. Suarez, 67 Phil. 441 (1939). NOTES: 

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The SEC has ruled that the use of the word SHALL shows that a prior call or board resolution demanding payment is not necessary if a specific date of payment is specified in the subscription contract; and neither is there a need of a formal declaration of the board for an unpaid subscription to become delinquent in the event of failure to pay the unpaid subscription within the prescribed 30 day period from the date specified in the subscription contract.

WHO IS THE HIGHEST BIDDER  Such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interests, costs of advertisements and expenses of sale for the smallest number of shares or fraction of a share. If there is no bidder, the corporation may bid for the same, with such shares to be vested in the corporation as treasury shares. (DISCLAIMER: I am not sure if this is correct but this is how I understood the explanation.) For example stockholder X owes the corporation Php 3M (inclusive of costs, etc.) for 3000 shares. During the bid, what the bidders do lets say bidders A, B and C is to bid for a certain number of shares in exchange for a fixed price which will cover the balance on the subscription together with accrued interests, costs of advertisement and expenses of sale. Whoever bids for the smallest number of shares shall be considered as the highest bidder, and the remaining shares not covered by the bid is reverted to its delinquent owner. In this case, let us say for Php 3M, A expressed the intention to pay 3M for 1000 shares while B for 2000 shares and C for 3000 shares, the highest bidder is A. The 1000 shares shall be placed under the name of A, while the 2000 shares which were not covered shall be deemed as fully paid by delinquent stockholder X (who is no longer delinquent by this time). CLV tells us that during this biddings, bidders do not include the amount they wish to bid for the shares of stock, as what the corporation deems important is that the delinquent amount plus costs of the sale be paid, no more, no less. What they only include in their bid is the number of shares they wish to purchase. That is why the rule is the highest bidder shall be the one who purchases the least number of shares for a fixed price. CLV also tells us that the corporation generally does not desire to profit from this endeavor but only to discharge such delinquency. However, nothing precludes the corporation from earning profits in this case provided they structure the bid in such a way as to accommodate such endeavor. However CLV tells us that this is quite difficult.

 

OTHER REMEDIES AVAILABLE TO THE CORPORATION  The Board of Directors has absolute discretion to choose which remedy it deems proper in order to collect on the unpaid subscriptions. If it does not know which remedy it will make use of, it may put up the unpaid stock for sale as provided in Sections 38 to 48 of the Code, or by action in court.

EFFECTS OF DELINQUENCY  DELINQUENCY MAY BE ACHIEVED IN TWO WAYS: (1) failure to pay the subscription on the date mentioned in the call or (2) failure to pay the subscription on the date specified on the contract of subscription. THESE ARE ITS EFFECTS: (1) it disqualifies the stockholders to be voted for or be entitled to vote or to representation at any stockholder’s meeting; (2) it disqualifies the stockholder to exercise any rights of a stockholder except the right to dividends until and unless he pays the amount due on his subscription with accrued interest and the costs and expenses of

advertisement if any. They shall not be entitled to notice on meetings, and they are not included in the determination of the quorum. The only right remaining to them is the right to receive dividends but the cash dividends shall first be applied to the unpaid balance, while the stock dividend shall be withheld until payment of unpaid balance.

PRESCRIPTION ON DEMAND FOR PAYMENT OF SUBSCRIPTION  The period begins to run from the time the payment becomes demandable, which in the case of subscription of shares begins to run only from the time the board of director declares that balance are due and demandable. The period does not run from the date of subscription. (a) Who May Question a Delinquency Sale (Sec. 68 and 69). Section 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. Section 69. When sale may be questioned. - No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. 7. Certificate of Stock (Sec. 63) Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates

Revised Bagtas Reviewer by Ve and Ocfe 2A and the number of shares transferred.

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No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. NOTES:  Certificate shall only be issued upon full payment – the rationale for this is to prevent partial disposition of a subscription which is not fully paid, because if it is permitted and the subscriber subsequently becomes delinquent in the payment of his subscription, the corporation may not be able to sell as many of his subscribed shares as would be necessary to cover the total amount due from him. In the absence of the provision of the by-laws to the contrary, a corporation may apply payments made by subscribers on account of their subscriptions either as: (1) full payment for the corresponding number of shares, the par value of which is covered by such payment; or (2) payment pro rata to each and all the entire number of shares subscribed for. The SEC may by specific rule or regulation, allow corporations to provide in their articles of incorporation and by-laws for the use of uncertified security – security evidenced by electronic or similar records. (a) Nature of Certificate: aTan v. SEC, 206 SCRA 740 (1992); aDe los Santos v. Republic, 96 Phil. 577 (1955); aPonce v. Alsons Cement Corp., 393 SCRA 602 (2002); C.N. Hodges v. Lezama, 14 SCRA 1030 (1965).

TAN v. SEC FACTS: Respondent Visayan Corp. was registered on October 1, 1979. As incorporator, petitioner had four hundred (400) shares of the capital stock standing in his name at the par value of P100.00 per share, evidenced by Certificate of Stock No. 2. He was elected as President and subsequently reelected, holding the position as such until 1982 but remained in the Board of Directors until April 19, 1983 as director. On January 31, 1981, while petitioner was still the president of the respondent corporation, two other incorporators, namely, Antonia Y. Young and Teresita Y. Ong, assigned to the corporation their shares, represented by certificate of stock No. 4 and 5 after which, they were paid the corresponding 40% corporate stock-in-trade. Petitioner's certificate of stock No. 2 was cancelled by the corporate secretary and respondent Patricia Aguilar by virtue of Resolution No. 1981 (b), which was passed and approved while petitioner was still a member of the Board of Directors of the respondent corporation. Due to the withdrawal of the aforesaid incorporators and in order to complete the membership of the five (5) directors of the board, petitioner sold fifty (50) shares out of his 400 shares of capital stock to his brother Angel S. Tan. Another incorporator, Alfredo B. Uy, also sold fifty (50) of his 400 shares of capital stock to Teodora S. Tan and both new stockholders attended the special meeting, Angel Tan was elected director and on March 27, 1981, the minutes of said meeting was filed with the SEC. Accordingly, as a result of the sale by petitioner of his fifty (50) shares of stock to Angel S. Tan on April 16, 1981, Certificate of Stock No. 2 was cancelled and the corresponding Certificates Nos. 6 and 8 were issued, signed by the newly elected fifth member of the Board, Angel S. Tan as Vicepresident, upon instruction of Alfonso S. Tan who was then the president of the Corporation. Mr. Buzon, submitted an Affidavit alleging that he was personally requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make proper endorsement in the cancelled Certificate of Stock No. 2 and Certificate No. 8, but he did not endorse, instead he kept the cancelled (1981) Certificate of Stock No. 2 and returned only to me Certificate of Stock No. 8, which he delivered to Tan Su Ching. When petitioner was dislodged from his position as president, he withdrew from the corporation on February 27, 1983, on condition that he be paid with stocks-in-trade equivalent to 33.3% in lieu of the stock value of his shares in the amount of P35,000.00. After the withdrawal of the stocks, the

board of the respondent corporation held a meeting on April 19, 1983, effecting the cancellation of Stock Certificate Nos. 2 and 8 in the corporate stock and transfer book 1 and submitted the minutes thereof to the SEC on May 18, 1983. Five (5) years and nine (9) months after the transfer of 50 shares to Angel S. Tan and three (3) years and seven (7) months after effecting the transfer of Stock Certificate Nos. 2 and 8 from the original owner in the stock and transfer book of the corporation, the latter filed the case before the Cebu SEC Extension Office questioning for the first time, the cancellation of his aforesaid Stock Certificates Nos. 2 and 8. SEC Extension Office Hearing Officer ruled in favor of petitioner. Private respondent in the original complaint went to the SEC on appeal. The commission en banc unanimously overturned the Decision of the Hearing Officer. ISSUES: (1) W/N the meaning of shares of stock are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer (2) W/N Section 63 of the Corporation Code of the Philippines is "mandatory in nature", meaning that without the actual delivery and endorsement of the certificate in question, there can be no transfer, or that such transfer is null and void. HELD: (1) There is no doubt that there was delivery of Stock Certificate No. 2 made by the petitioner to the Corporation before its replacement with the Stock Certificate No. 6 for fifty (50) shares to Angel S. Tan and Stock Certificate No. 8 for 350 shares to the petitioner, on March 16, 1981. The problem arose when petitioner was given back Stock Certificate No. 2 for him to endorse and he deliberately witheld it for reasons of his own. That the Stock Certificate in question was returned to him for his purpose was attested to by Mr. Buzon in his Affidavit. The proof that Stock Certificate No. 2 was split into two (2) consisting of Stock Certificate No. 6 for fifty (50) shares and Stock Certificate No. 8 for 350 shares, is the fact that petitioner surrendered the latter stock (No. 8) in lieu of P2 million pesos worth of stocks, which the board passed in a resolution in its meeting on April 19, 1983. Thus, on February 27, 1983, petitioner indicated he was withdrawing from the corporation on condition that he be paid with stock-in-trade corresponding to 33.3%, which had only a par value of P35,000.00. In this same meeting, the transfer of Stock Certificate Nos. 2 and 8 from the original owner, Alfonso S. Tan was ordered to be recorded in the corporate stock and transfer book thereafter submitting the minutes of said meeting to the SEC on May 18, 1983. It is also doubtless that Stock Certificate No. 8 was exchanged by petitioner for stocks-in-trade since he was operating his own enterprise engaged in the same business, otherwise, why would a businessman be interested in acquiring P2,000,000.00 worth of goods which could possibly at that time, fill up warehouse? In fact, he even padlocked the warehouse of the respondent corporation, after withdrawing the thirty-three and one-third (33 1/3%) percent stocks. Accordingly, the Memorandum of Agreement prepared by the respondents' counsel, Atty. Ramirez evidencing the transaction, was also presented to petitioner for his signature, however, this document was never returned by him to the corporate officer for the signature of the other officers concerned. (2) No. To follow the argument put up by petitioner which was upheld by the Cebu SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the cancelled "mother" Certificate No. 2 whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the corporation law itself as the only law governing transfer of stocks. While Section 47(s) grants a stock corporations the authority to determine in the by-laws "the manner of issuing certificates" of shares of stock, however, the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of stockholders to transfer their shares. (Emphasis supplied) Moreover, it is safe to infer from the facts deduced in the instant case that, there was already delivery of the unendorsed Stock Certificate No. 2, which is essential to the issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to the problem was the return of the cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement and his deliberate non-endorsement.

Revised Bagtas Reviewer by Ve and Ocfe 2A

For all intents and purposes, however, since this was already cancelled which cancellation was also reported to the respondent Commission, there was no necessity for the same certificate to be endorsed by the petitioner. All the acts required for the transferee to exercise its rights over the acquired stocks were attendant and even the corporation was protected from other parties, considering that said transfer was earlier recorded or registered in the corporate stock and transfer book. Tuazon v. La Provisora Filipina: But delivery is not essential where it appears that the persons sought to be held as stockholders are officers of the corporation, and have the custody of the stock book A certificate of stock is not necessary to render one a stockholder in corporation. Nevertheless, a certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership. Under the instant case, the fact of the matter is, the new holder, Angel S. Tan has already exercised his rights and prerogatives as stockholder and was even elected as member of the board of directors in the respondent corporation with the full knowledge and acquiescence of petitioner. Due to the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and responsibilities in the board of the respondent corporation when he was elected as officer thereof. NOTE: Petitioner even attempted to mislead the Court by erroneously quoting the ruling of the Court in C. N. Hodges v. Lezama, which has some parallelism with the instant case was the parties involved therein were also close relatives as in this case. The quoted portion appearing on p. 11 of the petition, was cut short in such a way that relevant portions thereof were purposely left out in order to impress upon the Court that the unendorsed and uncancelled stock certificate No. 17, was unconditionally declared null and void, flagrantly omitting the justifying circumstances regarding its acquisition and the reason given by the Court why it was declared so. NOTE: This case held that the lack of endorsement of a certificate of a stock which had been previously delivered to the corporation by the registered stockholder for cancellation would not prevent the corporation from canceling in the books of the corporation, such certificate and issuance of a new certificate in favor of the new owner of the shares. The statement in Tan that the certificate of stock does not represent ownership of the shares covered therein should be understood in the light than Tan essentially involved issues between intra-corporate members, namely the corporation and the stockholders. NOTE: How can Tan stand together with Bitong? Bitong provided for rules with regard to certificate of stocks, but not all applicable rules for such were provided by Bitong. Tan provides for rules in relation to certificate of stocks treated as quasi-negotiable instruments. NOTE: Why is Tan correct in this case? Why was delivery not essential? Section 63 of the Corporation Code tells us that the delivery and indorsement of a certificate of stock is just one means of disposition, as the Code uses the permissive word “MAY”. Other ways of constructive delivery are execution of public instrument and enjoyment of the prerogatives of ownership with full knowledge and consent of the original owner. The latter was present in this case. DELOS SANTOS v REPUBLIC NOTE: This case held that a certificate of stock is not a negotiable instrument, but is regarded as quasi-negotiable in the sense that it may be transferred by endorsement coupled with delivery, but it is not negotiable because the holder thereof takes it without prejudice to such rights or defenses as the registered owners thereof may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. NOTE: A transferee under a forged assignment acquires no title which can be asserted against the true owner unless the true owner’s own negligence has been such as to create an estoppel against him. This would mean that a bona fide purchaser of shares under a forged or unauthorized transfer

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acquires no title as against the true owner does not apply where the circumstances are such as to estop the latter from asserting his title. PONCE v ALSONS CEMENT FACTS: On January 25, 1996, Vicente C. Ponce, filed a complaint with the SEC for mandamus and damages against Alsons Cement Corporation and its corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that: x x x 5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having subscribed to and fully paid 239,500 shares of said corporation. 6. On February 8, 1968, plaintiff and Fausto Gaid executed a “Deed of Undertaking” and “Endorsement” whereby the latter acknowledges that the former is the owner of said shares and he was therefore assigning/endorsing the same to the plaintiff. A copy of the said deed/endorsement is attached as Annex “A”. 7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity). 8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as shown by the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex “B”. 9. From the time of incorporation of VCC up to the present, no certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid and/or the plaintiff. 10. Despite repeated demands, the defendants refused and continue to refuse without any justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239,500 shares of Gaid, in violation of plaintiff’s right to secure the corresponding certificate of stock in his name. Attached to the complaint was the Deed of Undertaking and Endorsement upon which petitioner based his petition for mandamus. DEED OF UNDERTAKING KNOW ALL MEN BY THESE PRESENTS: I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory Cement Corporation in the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (P239,500.00) PESOS and that Fausto Gaid does not have any liability whatsoever on the subscription agreement in favor of Victory Cement Corporation x x x ENDORSEMENT I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE. x x x With these allegations, petitioner prayed that judgment be rendered ordering respondents (a) to issue in his name certificates of stocks covering the 239,500 shares of stocks and its legal increments and (b) to pay him damages. Instead of filing an answer, respondents moved to dismiss the complaint. They argued, inter alia, that there being no allegation that the alleged “ENDORSEMENT” was recorded in the books of the corporation, said endorsement by Gaid to the plaintiff of the shares of stock in question— assuming that the endorsement was in fact a transfer of stocks—was not valid against third persons such as ALSONS under Section 63 of the Corporation Code. There was, therefore, no specific legal duty on the part of the respondents to issue the corresponding certificates of stock, and mandamus will not lie.

Revised Bagtas Reviewer by Ve and Ocfe 2A

Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that: (1) mandamus is the proper remedy when a corporation and its corporate secretary wrongfully refuse to record a transfer of shares and issue the corresponding certificates of stocks; (2) he is the proper party in interest since he stands to be benefited or injured by a judgment in the case; (3) the statute of limitations did not begin to run until defendant refused to issue the certificates of stock in favor of the plaintiff on April 13, 1992. SEC granted the motion to dismiss saying that there is no record of any assignment or transfer in the books of the defendant corporation, and there is no instruction or authority from the transferor (Gaid) for such assignment or transfer. There is not even any endorsement of any stock certificate to speak of. What the plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc reversed the appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a transfer or assignment of stocks need not be registered first before it can take cognizance of the case to enforce the petitioner’s rights as a stockholder. A transfer or assignment of stocks need not be registered first before the Commission can take cognizance of the case to enforce his rights as a stockholder. Also, the problem encountered in securing the certificates of stock made by the buyer must be expeditiously taken up through the so-called administrative mandamus proceedings with the SEC than in the regular courts. It also found that the Hearing Officer erred in holding that petitioner is not the real party in interest. Their MR having been denied, respondents appealed the decision of the SEC En Banc and the resolution denying their MR to the CA. In its decision, the CA held that in the absence of any allegation that the transfer of the shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of ALSONS, Ponce failed to state a cause of action. Thus, said the CA, “the complaint for mandamus should be dismissed for failure to state a cause of action. Petitioner’s MR was likewise denied. Petitioner first contends that the act of recording the transfer of shares in the stock and transfer book and that of issuing a certificate of stock for the transferred shares involves only one continuous process. Thus, when a corporate secretary is presented with a document of transfer of fully paid shares, it is his duty to record the transfer in the stock and transfer book of the corporation, issue a new stock certificate in the name of the transferee, and cancel the old one. A transferee who requests for the issuance of a stock certificate need not spell out each and every act that needs to be done by the corporate secretary, as a request for issuance of stock certificates necessarily includes a request for the recording of the transfer. Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the issuance of stock certificates. Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of shares of stock to first issue express instructions or execute a power of attorney for the transfer of said shares before a certificate of stock is issued in the name of the transferee and the transfer registered in the books of the corporation. He contends that Hager vs. Bryan, 19 Phil. 138 (1911), and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by respondents, do not apply to this case. These cases contemplate a situation where a certificate of stock has been issued by the company whereas in this case at bar, no stock certificates have been issued even in the name of the original stockholder, Fausto Gaid. Finally, petitioner maintains that since he is under no compulsion to register the transfer or to secure stock certificates in his name, his cause of action is deemed not to have accrued until respondent ALSONS denied his request. Respondents, in their comment, maintain that the transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent insofar as the corporation is concerned and no certificate of stock can be issued in the name of the transferee. Until the recording is made, the

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transfer cannot be the basis of issuance of a certificate of stock. They add that petitioner is not the real party in interest, the real party in interest being Fausto Gaid since it is his name that appears in the records of the corporation. They conclude that petitioner’s cause of action is barred by prescription and laches since 24 years elapsed before he made any demand upon ALSONS.

ISSUES: (1) W/N CA erred in holding that petitioner has no cause of action for a writ of mandamus. (2) W/N the transfer of shares of stocks not recorded in the stock and transfer book of the corporation is nonexistent(3) W/N notice to a corporation of the sale of the shares and presentation of certificates for transfer is equivalent to registration HELD: No. The CA did not err in ruling that petitioner had no cause of action, and that his petition for mandamus was properly dismissed. In Rural Bank of Salinas, Inc., private respondent Melania Guerrero had a Special Power of Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It gave Guerrero full authority to sell or otherwise dispose of the 473 shares of stock registered in Clemente’s name and to execute the proper documents therefor. Pursuant to the authority so given, Melania assigned the 473 shares of stock owned by Guerrero and presented to the Rural Bank of Salinas the deeds of assignment covering the assigned shares. Melania Guerrero prayed for the transfer of the stocks in the stock and transfer book and the issuance of stock certificates in the name of the new owners thereof. Based on those circumstances, there was a clear duty on the part of the corporate secretary to register the 473 shares in favor of the new owners, since the person who sought the transfer of shares had express instructions from and specific authority given by the registered stockholder to cause the disposition of stocks registered in his name. That cannot be said of this case. The deed of undertaking with endorsement presented by petitioner does not establish, on its face, his right to demand for the registration of the transfer and the issuance of certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus fails to state a cause of action where it appears that the petitioner is not the registered stockholder and there is no allegation that he holds any power of attorney from the registered stockholder, from whom he obtained the stocks, to make the transfer. Without discussing or deciding the respective rights of the parties which might be properly asserted in an ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case such as that at bar, a mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do, upon the demand either of the person in whose name the stock is registered, or of some person holding a power of attorney for that purpose from the registered owner of the stock. There is no allegation in the petition that the petitioner or anyone else holds a power of attorney from the Bryan-Landon Company authorizing a demand for the transfer of the stock, or that the Bryan-Landon Company has ever itself made such demand upon the Visayan Electric Company, and in the absence of such allegation we are not able to say that there was such a clear indisputable duty, such a clear legal obligation upon the respondent, as to justify the issuance of the writ to compel him to perform it. Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No. 1459), the mere endorsement of stock certificates does not in itself give to the indorsee such a right to have a transfer of the shares of stock on the books of the company as will entitle him to the writ of mandamus to compel the company and its officers to make such transfer at his demand, because, under such circumstances the duty, the legal obligation, is not so clear and indisputable as to justify the issuance of the writ. As a general rule and

Revised Bagtas Reviewer by Ve and Ocfe 2A especially under the above-cited statute, as between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a stock certificate, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in the absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer.

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(2) A transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64 of the Corporation Code. This is the import of Section 63 which states that “No transfer, however, shall be valid, except between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.” The situation would be different if the petitioner was himself the registered owner of the stock which he sought to transfer to a third party, for then he would be entitled to the remedy of mandamus. x x x until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, in the absence of any allegation that the transfer of the shares between Gaid and the private respondent [herein petitioner] was registered in the stock and transfer book of the petitioner corporation, the private respondent has failed to state a cause of action. (3) Petitioner’s reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to registration is misplaced. In the case, there is no allegation in the complaint that petitioner ever gave notice to respondents of the alleged transfer in his favor. Moreover, that case arose between and among the principal stockholders of the corporation, Pocket Bell, due to the refusal of the corporate secretary to record the transfers in favor of Telectronics of the corporation’s controlling 56% shares of stock which were covered by duly endorsed stock certificates. As aforesaid, the request for the recording of a transfer is different from the request for the issuance of stock certificates in the transferee’s name. Finally, in Abejo, the Court did not say that transfer of shares need not be recorded in the books of the corporation before the transferee may ask for the issuance of stock certificates. The Court’s statement, that “there is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder among which is the stock purchaser’s right to secure the corresponding certificate in his name,” was addressed to the issue of jurisdiction, which is not pertinent to the issue at hand. NOTE: That petitioner was under no obligation to request for the registration of the transfer is not in issue. It has no pertinence in this controversy. One may own shares of corporate stock without possessing a stock certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is not necessary to render one a stockholder in a corporation. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. The certificate is the evidence of the holder’s interest and status in the corporation, his ownership of the share represented thereby. The certificate is in law, so to speak, an equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. In fact, it rests on the will of the stockholder whether he wants to be issued stock certificates, and a stockholder may opt not to be issued a certificate. In Won vs. Wack Wack Golf and Country Club,

Inc., 104 Phil. 466 (1958), we held that considering that the law does not prescribe a period within which the registration should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer. In the present case, petitioner’s complaint for mandamus must fail, not because of laches or estoppel, but because he had alleged no cause of action sufficient for the issuance of the writ. NOTE: Ponce teaches us that the very fact that a certificate is indorsed and delivered to a third person does not automatically entitle such person to register such certificate in his name, or compel the corporation to register the certificate in his name even. This case teaches us that an indorsed and delivered certificate does not create a clear right with respect to the possession of such certificate by the third person, as the same mode (indorsement and delivery) applies to sale, pledge and mortgage. This is where the registered owner must come in, he must inform the corporation whether the disposition was a pledge, or mortgage or sale, which would determine whether or not the third person is entitled registration. Since almost all dealings comprise of the same mode, the owner must apprise the corporation with the necessary information and instructions. A stock certificate is merely evidence of a share of stock and not the share itself. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998). A certificate of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and countersigned by the secretary or assistance secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998). (b) Quasi-negotiable Character of Certificate of Stock:aBachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937). BACHRACH MOTOR CO. v LACSON LEDESMA FACTS: Bachrach obtained judgment (in 1927) against Ledesma in two civil cases. The sheriff, in compliance with the writ of execution issued in favor of Bachrach, attached and sold the right of redemption of Ledesma over several properties, and attached as well all right, title to and interest that Ledesma had in “Any bonus, dividend, shares of stock, money, or other property which Ledesma was entitled to receive from Talisay-Silay Milling Co. Inc…. on account of being a stockholder in that corporation or which he is entitled to receive from that corporation for any other cause or pretext whatsoever.” The properties and the shares Ledesma owned in Talisay were mortgaged to PNB as securities to ensure his payment of P624,000. There was another mortgage over the real properties in favor of PNB to answer for the debts of Central Talisay-Silay Milling. Central resolved to grant a bonus or compensation to the owners of the properties mortgaged for the risk incurred from being subjected to said mortgage lien. Under the resolution, Ledesma was allotted P19,911.11. This was payable only in January, 1930. PNB brought an action against Ledesma and his wife for recovery of mortgage credit (1928). In 1929, they amended the complaint to include Bachrach, “because they claim to have some right to certain properties which are the subject matter of the complaint.” The court ruled in favor of PNB, and ordered the sale of properties mortgaged. PNB was also granted the authority to sell the stock certificates. During the pendency of the case of PNB v. Ledesma, Bachrach filed an action against Talisay to recover P13,850 which by virtue of the resolution was bestowed upon Ledesma by Central. PNB intervened, alleging a preferred right, as said bonus being a civil fruit of the mortgaged lands, the bank became entitled to it as the mortgage had become due. Judgment was rendered in favor of Bachrach. The SC held that the bonus had no immediate relation to the lands in question but merely a remote and accidental one. It was not a civil fruit, being a mere personal right of Ledesma. In January, 1930, Stock Cert. 772 was issued in favor of Ledesma by Talisay. Ledesma ordered this to be delivered to PNB. The 6,300 shares constituted the 2,100 original shares that was given as pledge to PNB under the deed of mortgage. On Feb. 1931, the sheriff sold the whole 6,300 shares covered by 772, and not only the 2,100 original shares. PNB informed Talisay of the sale, and Talisay issued Stock Cert. 1155 representing 8,968 shares (6,300 + 2,100). ISSUES: W/N Bachrach had a preferred right by virtue of the judgment and attachment made (1927) - NO W/N the pledge was ineffective as against Bachrach because evidence of its date was not made to appear in a public instrument – NO

Revised Bagtas Reviewer by Ve and Ocfe 2A W/N the pledge could not legally exist as the Cert. was not the shares themselves - NO HELD:

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Plaintiff said it had a preferred right over the 6,300 shares because the stocks were in custodia legis by virtue of the attachment/garnishment when Cert 772 was delivered to PNB, and when Talisay issued Cert 1155 in favor of PNB. This contention was unfounded as it appeared that the stocks were pledged to the bank prior to the garnishment. Cert 772 was delivered to PNB on Feb 27, 1930. The garnishment was notified to the parties and became effective on August 11, 1930, more than five months after delivery. On Feb, 1931, Talisay issued Cert 1155 in favor of PNB. According to Article 1865 of the Civil Code then, in order that a pledge may be effective as against third persons, evidence of its date must appear in a public instrument in addition to the delivery of the thing pledged to the creditor. However, Sec. 4 of the Chattel Mortgage Law implicitly modified 1865 – a contract of pledge and that of chattel mortgage need not appear in public instruments to be effective against third persons, provided that delivery was made. Therefore, the pledge of the 6,300 shares was valid against Bachrach. The contention that a certificate of stock or of stock dividends can not be the subject matter of contract of pledge or chattel mortgage was untenable. Certificates of stock or of stock dividends are quasi negotiable instruments. They may be given in pledge or mortgage to secure an obligation. They are transferable, when properly indorsed, by mere delivery, and by estoppel against the corporation or against prior holders, as good a title to the transferee as if they were negotiable. It is to the public interest that such use should be simplified and facilitated by placing them as nearly as possible on the plane of commercial paper. In order for a transfer of stock certificate to be effective, it must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. Endorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. aRazon v. IAC, 207 SCRA 234 (1992). RAZON v IAC FACTS: Vicente Chuidian, as administrator of the intestate estate of Juan Chuidian, prayed that defendants Enrique Razon, etc. be ordered to deliver certificates of stocks representing the shares of deceased Juan in the E. Razon Inc. The defendants alleged in turn that all the shares of stock in the name of stockholders of record of the corporation were fully paid for by defendant Razon; that said shares were subject to agreement between defendants and incorporators; that the shares were actually owned and remained in the possession of Razon; and that neither Vicente nor Juan paid any amount for the 1,500 shares of stock in question. Enrique organized E. Razon Inc in 1962 for the purpose of bidding for arrastre services in South Harbor, Manila. Some of the incorporators withdrew, so Enrique distributed the stocks in the names of the withdrawing incorporators to his friends. Among them was Juan who received 1,500 shares. The shares were registered in Juan’s name only as nominal stockholder, and with the agreement that the said shares were owned and held by Enrique. Juan was given the option to buy these though. Because of the agreement, Juan delivered the cert. of stocks to Razon, who from then on had possession of the cert. until he delivered it for deposit with the PBC under joint custody with Juan. ISSUE: W/N by virtue of the agreement, the shares were owned by Enrique - NO HELD: No. In the Corporation Code and in the case of Embassy Farms v. CA, for an effective transfer of shares of stock the mode and manner as prescribed by law must be followed. Shares of stock may be

transferred by delivery to the transferee of the cert properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed cert. No transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of corporation. In the case at hand, the stocks were in the name of Juan in the books of the corporation. Also, he was also elected member of the Board of Directors which clearly showed that he was a stockholder of the corporation. The petitioner failed to present any bylaws which could show the effective transfer to him of the stocks. In the absence of such bylaws, the provisions of the Corporation Code governs. Also, preponderance of evidence showed that the shares were given to Juan for value Juan was the legal counsel of the corporation. The shares were given as payment for the legal services. The cash and stock dividends and all the preemptive rights are all incidents of stock ownership. The rights of stockholders are the ff: (1) to have a certificate or other evidence of his status as stockholder issued to him (2) vote at meetings of the corporation (3) receive his proportionate share of the profits of the corporation (4) participate proportionately in the distribution of the corporate assets upon dissolution or winding up.

The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. But to be valid against third parties, the transfer must be recorded in the books of the corporation. aBitong v. Court of Appeals, 292 SCRA 503 (1998) BITONG v CA FACTS:

Nora Bitong filed in the SEC a derivative suit for the benefit of Mr. and Ms Publishing Co, Inc. to hold spouses Apostol liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest and mismanagement in directing the affairs of Mr. & Ms. to the damage of the Corp and its stockholders. Nora claimed that she had been the Treasurer and a Member of the Board of Directors of Mr & Ms, and was the registered owner of 1,000 shares of stock. Eugenia Apostol was President and Chair of the Board of Mr & Ms. It was alleged that except for the sale of the name Philippine Inquirer to Philippine Daily Inquirer, all other transactions and agreements entered into by Mr & Ms with PDI were not supported by any bond and/or stockholders’ resolution. Several cash advances were also made to PDI amounting to P3.276M. on some of these loans, PDI paid no interest. Though the advances were booked as advances to an affiliate, no resolution or document existed which could legally authorize the creation of and support to an affiliate. It was also claimed that respondent spouses were also stockholders, directors, and officers in both Mr & Ms and PDI. The stock subscriptions were paid for by Mr & Ms and initially treated as receivables from officers and employees. Mr & Ms was actually made when Ex Libris Publishing Co., whose original stockholders were Juan Ponce Enrile and his wife through JAKA Investments and the spouses Apostol, suffered financial difficulties. In 1989, it was agreed upon among the incorporators of Mr & Ms that it would be a partnership or a close corporation, and the spouses would manage its affairs. No shares would be sold to 3rd parties without first offering the shares to other stockholders. The spouses asserted that Eugenia informed her business partners of her actions as manager, and obtained their advice and consent. The spouses also said that Bitong, being merely a holder-in-trust of JAKA shares, only represented and continued to represent JAKA in the board. Bitong and her principals, and Eugenia’s relationship became strained due to political difference. In mid-1986 to 88, Bitong refused to speak with Eugenia, but the latter always made available to Bitong and her representatives all the books of the corporation. The spouses claimed that all the PDI shares they owned were acquired thru their own private funds. That the loan of P750,000 by PDI from Mr & Ms had been fully paid with interest. That Bitong was not the real parti in interest, that being JAKA which continued to be the true stockholder of Mr & Ms.

Revised Bagtas Reviewer by Ve and Ocfe 2A

Petitioner testified that she became the registered and beneficial owner of 997 shares of stock out of the 4,088 total outstanding shares after she acquired them from JAKA thru a deed of sale executed on July 25, 1983. She said this was recorded in the Stock and Transfer Book of Mr & Ms. Spouses said that Eugenia signed the Cert only on March 1989, not July 1983. Since the Stock and Transfer Book that was presented by Bitong was not registered with the SEC, the entries therein were fraudulent. Eugenia said that she had not seen the Book until it was presented to her by Bitong on March 1989. The SEC dismissed the suit. It found that there was no serious mismanagement which would warrant drastic corrective measures. It gave credence to the assertion that Mr was operated as a close corporation where important matters were discussed at breakfast conferences. The SEC En Banc reversed the decision. It ordered the spouses to account for, return and deliver to Mr any and all funds and assets they disbursed from the coffers of Mr. including shares of stock, profits, dividends and/or fruits received as a result of their investment in PDI; as well as cease and desist from managing Mr. The CA reversed the decision of the SEC En Banc, holding that Bitong was not the real party in interest. ISSUE: W/N Bitong was a real party in interest – NO

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HELD: The spouses repeatedly contested the standing of Bitong, starting with the SEC up to its appeal to the CA. The SEC also held that Bitong was not the real party, but allowed for the resolution of the complaint as to resolve the important issues as well. Petitioner invokes Sec 63 of the Corp Code, which provides that no transfer shall be valid as between the parties until the transfer is recorded in the books of the corporation, and upon its recording the corporation is bound by it and is estopped to deny the fact of transfer of said shares. She alleged that as a stockholder solely on the strength of the recording in the stock and transfer book can exercise all the rights of the stockholder, including the right to file a derivative suit in the name of the corporation. The SC held that this provision envisions a formal certificate of stock which can be issued only upon compliance with certain requisites. (1) The certificates must be signed by the Pres or VP, countersigned by the secretary or assistant-secretary, and sealed with the corporation’s seal. A mere typewritten statement cannot be considered a formal certificate of stock. (2) Delivery is an essential element of its issuance. (3) The par value or the full subscription as to no par values shares must be fully paid. (4) The original cert must be surrendered where the person requesting the issuance of a cert is a transferee from a stockholder. The cert of stock itself once issued is a continuing affirmation or representation that the stock described therein is valid and genuine and is at least prima facie evidence that it was legally issued in the absence of evidence to the contrary. However, this presumption may be rebutted. Books and records of a corporation which include even the stock and transfer book are generally admissible in evidence. They are ordinarily the best evidence of corporate acts and proceedings. However, they are only prima facie evidence. They may be rebutted. They can be destroyed by testimony of a more conclusive character than mere suspicion that there was an irregularity in the manner in which the books were kept. These are founded on the basic principle that stock issued without authority and in violation of law is void and confers no rights on the person to whom it is issued and subjects him to no liabilities. Where there is an inherent lack of power in the corporation to issue the stock, neither the corporation nor the person to whom the stock is issued is estopped to question its validity sine an estoppel cannot operate to create stock which under the law cannot have existence. Evidence showed that the certificate of stock was only signed by Eugenia in 1989, not in 1983 as purported by Bitong. The Book was also kept by Bitong, and was only presented to Eugenia in 1989 as well. The testimony given by Enrile himself contradicted that of Bitong’s. Enrile said that in 1983, he told Bitong to work out the documentation of the transfer of shares to Apostol as a nominal holder. Then he decided to transfer the shares to Bitong. But the transfer was done orally. Bitong held that the shares were transferred to her thru a deed of sale. Plus, records show that the shares were already transferred to Apostol, who would hold them in trust for the benefit of JAKA, as of May 1983. Bitong said that the deed of sale was executed in July 1983. Hence, no valid sale could have

been made. Nothing in the records showed that JAKA revoked the trust given to Apostol. Nor was there any request to Apostol to transfer or assign the shares. For a valid transfer of stocks, (a) there must be delivery of the stock cert (b) the cert must be endorsed by the owner or his atty-in-fact or other persons legally authorized to make the transfer (c) to be valid against 3rd parties, the transfer must be recorded in the books of the corporation. Compliance with at most the first two was not seen in this case. Well settled is the rule that where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution. The most important of these is the bona fide ownership by a stockholder of a stock in his own right at the time of the transaction complained of which invests him with standing to institute a derivative suit for the benefit of the corporation. NOTE: Requirements for a valid transfer of stocks (1) there must be a delivery of the stock certificate; (2) the certificate must be indorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (3) to be valid against third parties, the transfer must be recorded in the books of the corporation. NOTE: Endorsement and delivery are essential for (1) sale or assignment of shares (2) pursuant to a trust or nominee arrangement (3) by way of pledge or encumbrance of the shares. NOTE: Why cannot legal standing of stockholders be based or dependent on the payment they made? Because from the moment a person subscribes to stocks, the trust fund doctrine comes in removing all contractual stipulations that come with such purchase. Even when a formal Deed of Assignment covering the shares was duly executed, without the endorsement and delivery of the covering certificates of stocks, the covered shares cannot be deemed to transferred and registered in the names of the assignees. aRural Bank of Lipa City v. Court of Appeals, 366 SCRA 188 (2001); Rivera V. Florendo, 144 SCRA 643 (1986). RURAL BANK OF LIPA CITY v CA Villanueva, Sr. executed a deed of assignment in favor of stockholders of the bank. The former failed to comply with his obligation that shares were converted into Treasury shares and that he was no longer informed and included in the meetings. The Court held that this is improper as the deed does not effect a transfer that the law contemplates as the requirements are not complied with as (1) there must be a delivery of the stock certificate (2) it must be endorsed (3) must be recorded in the books of the corporation. (c) Right to Issuance (Sec. 64; Baltazar v. Lingayen Gulf Elect. Power Co., Inc., 14 SCRA 522 [1965]). Section 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.  The remedies available to a stockholder if a corporation wrongfully refuses to issue a certificate of stock is as follows: (1) to file a suit for specific performance of an express or implied contract; (2) to file for an alternative relief by way of damages where specific performance cannot be granted; (3) to file a petition for mandamus to compel the issuance of the certificate where the conditions, facts, and circumstances of the particular case bring it within the legal rules which govern the granting of the writ; (4) to rescind the contract of subscription if the corporation wrongfully refuses to deliver a certificate and sue to recover back what has been paid. (d) Lost or Destroyed Certificates (Sec. 63 and 73)  The SEC has held that requirements under 73 are not mandatory, however when the corporation does not follow these steps, they may not avail of the free and harmless clause provided in said section and opens itself to claims for damages.

Revised Bagtas Reviewer by Ve and Ocfe 2A

Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorneyin-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. Section 73. Lost or destroyed certificates. - The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. While Sec. 73 of Corporation Code appears to be mandatory, the same admits exceptions, such that a corporation may voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost without complying with the requirements under said section. It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock for purposes of liquidation. It is well-settled that unless proven otherwise, the “stock and transfer book” is the best evidence to establish stock ownership. (SEC Opinion, dated 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos). (e) Forged and Unauthorized Transfers. aJ. Santamaria v. HongKong and Shanghai Banking Corp., 89 Phil. 780 (1951); aNeugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295 (1999).

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SANTAMARIA v HSBC FACTS: Josefa Santamaria bought 10,000 shares of Batangas Minerals, inc through the stock brokerage firm Woo, Uy-Tioco & Naftaly in which she received stock certificate # 517 issued in the name of the stock brokerage firm and indorsed in blank by this firm. Afterwards, Santamaria place an order for purchase of 10,000 shares of Crown mines, inc. with another brokerage firm, RJ Campos & Co., and delivered the stock Certificate #517 as security with the understanding that the certificate will be returned to her upon payment of the 10,000 Crown Mines shares. The name of Santamaria was written in pencil on the right margin of the certificate for the purpose of identification but the certificate remained to be in the name of the Woo et al. firm indorsed in blank. When Santamaria went to RJ Campos to pay for the 10,000 shares, she was informed that the firm was no longer transacting business and that the certificate was with HSBC. It appears that RJ et al. had an opened an overdraft account with the bank and pledged to the bank the certificate among others. Santamaria then went to HSBC to claim the certificate but was told that the bank did not know about the transaction between her and RJ Campos. Thereafter, Santamaria filed an estafa case against RJ Campos et al. wherein the court ruled in favor of Santamaria. However, judgment could not be enforced because the president became insolvent so Santamaria then instituted the present case action against HSBC. ISSUE: Did the trial court erroneously find that HSBC was not chargeable with negligence in the transaction which gave rise to this case? Did the trial court err on holding that it was the obligation of the HSBC to have inquired into the ownership of the certificate when it received it from RJ Campos et al. and in concluding that the bank was negligent for no having done so? HELD: Santamaria was negligent and thus liable for the consequences. She did not take any precaution to protect herself against the possible misuse of the shares. She could have asked for the cancellation of the certificate and that another be issued in her name to apprise the holder that she was the holder. Her failure to do this amounted to clothing RJ Campos et al. with apparent title and apparent authority to negotiate it since the certificate is what is known as a street certificate. Since a street certificate is transferable by mere delivery, HSBC, who had no knowledge of the circumstances, had every right to assume that RJ Campos et al. was lawfully in possession of the same. HSBC was not obliged to look beyond the certificate to ascertain the ownership of the stock. A stock certificate indorsed in blank is deemed quasi-negotiable and as such, the transferee thereof is justified in believing that it belongs to the holder and transferor. Even assuming that Santamaria had really approached the bank, this would merely show that she has an adverse claim to the ownership of the certificate but this would not necessarily place the bank in a position to inquire as to the real basis of her claim. A mere claim of ownership does not establish the fact of ownership NOTE: This case held that a bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with knowledge of the limitations placed on said certificates by the real owner, or by any secret agreement relating to the use which might be made of the stock by the holder. It further held that when a stock certificate is indorsed in blank it constitutes a street certificate so that upon its face, the holder is entitled to demand its transfer into his name from the issuing corporation. In this case, Mrs. Santamaria’s negligence is the immediate cause of the damage. NEUGENE MARKETING INC. v CA FACTS: Charles Sy, Arsenio Yang Jr. and Lok Chun Suen, holders of shares representing at least 2/3 of the outstanding certificates of stock, sent notice to the board of directors and the shareholders for a special meeting to consider the dissolution of Neugene. In that meeting, the dissolution was approved. Thus, the SEC issued a Certificate of Dissolution.

Revised Bagtas Reviewer by Ve and Ocfe 2A

Leoncio Tan, Nicanor Martin, Sonny Moreno, and Johnson Lee brought an action to annul the SEC certificate of dissolution and stated that they are the majority shareholders of Neugene owning 80% of the outstanding certificate of stocks at the time of the adoption and approval of the resolution for dissolution. They contend that, prior to the meeting, Sy et al. endorsed their stock certificates in blank and delivered the same to the UY family, and that the Uy family agreed to award the Neugene stock certificates to Johnny Uy to settle family squabbles; that Johnny then authorized Johnson Lee to dispose of the same and Johnson Lee sold the said shares of stock to Tan and Martin. This series of transaction is reflected in the Stock and Transfer Book of Neugene. They also contend that Sy assigned 2,100 of his 2,800 shares to Tan, and Yang assigned 350 of his 1,050 to Tan as well. Furthermore, Lok Chun Suen ceased to be a Shareholder before the meeting. Therefore, Sy, Yang and Lok could not have validly vote for the dissolution of Neugene, and that the meeting did not there fore represent a quorum and thus was null and void. Sy, Yang and Lok, on the other hand, allege that the aforesaid assignments were simulated and fraudulently effected and that the stocks were stolen by Johnny Uy. ISSUE: Whether or not Sy, Yang and Lok lacked the requisite number of shares of stocks or had they divested themselves of their stockholdings when they voted for the resolution dissolving Neugene HELD: The Supreme court held in favor of Sy, Yang and Lok. The certificates were indeed stolen and therefore not validly transferred to Tan et al. The entries in the Stock and Transfer Book were also fraudulently recorded. The records reveal that the relationship between the stockholders of Neugene and the Uy family; they had an understanding that the beneficial ownership would remain with the Uy Family, such that subject of shares of stocks were immediately upon issuance, endorsed in blank by the stockholders and entrusted to the Uy family through Ban Ha Chua, for Safekeeping. As nominees of the Uy’s, the approval of Sy, Yang and Lok was necessary for the validity and effectivity of the transfers of stock certificates registered under their names. In this case, not only did the transfers of the stock certificates lack the requisite approval, Sy, Yang and Lok categorically declared under oath that the said certificates were stolen from the confidential vault of the UY’s and illegally transferred to the names of Tan et al. in the Stock and Transfer book of Neugene NOTE: The SC said that when the certificates of stock have been indorsed in blank for purposes of showing the nominee relations, the eventual delivery and registration of the shares in violation of the trust relationship and after their having been stolen, would be void, even when such transfers have been registered in the stock and transfer book NOTE: No negligence was found to have actuated the acts of the registered owners. The proper corporate officers were aware of the blank endorsement of the certificates and therefore were adjudged to have acted in bad faith in assigning the certificates to other parties and in recording the transfers in the stock and transfer book. Since the certificates were endorsed in blank and delivered for safekeeping and not in the process if negotiation, it was essential that the beneficial owners must give their approval for the transfer of the certificates for such transfers to be valid and effective. 8. STOCK AND TRANSFER BOOK (Secs. 63, 72 and 74; aFua Cun v. Summers, 44 Phil. 704 [1923]; aMonserrat v. Ceran, 58 Phil. 469 [1933]; aChua Guan v. Samahang Magsasaka, Inc., 62 Phil. 472 [1935]; aUson v. Diosomito, 61 Phil. 535 [1935]; aEscaño v. Filipinas Mining Corporation, 74 Phil. 71 [1944]; aBachrach Motors v. Lacson-Ledesma, 64 Phil. 681 [1937]; aNava v. Peers Marketing Corp., 74 SCRA 65 [1976]). Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in

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accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. FUA CUN v SUMMERS

Revised Bagtas Reviewer by Ve and Ocfe 2A FACTS:

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Chua Soco subscribed 500 shares of capital stock of the China Banking Corp at par value of P100/ share, paying the sum of P25k, or half of the subscription price and was issued a receipt. Later Chua Soco issued a PN in favor of Fua Cun for P25k and secured it with a chattel maortgage on the shares of stock he former subscribed. Chua Soco indorsed the receipt and delivered it with the mortgage. Subsequently, Fua Cun brought the receipt to the manager of CBC and informed the latter of the transaction but Fua Cun was told to wait for the action of the board. In the meantime, Chua Soco incurred a debt of P37k with CBC. CBC brought an action against Chua Soco resulting to the seizure of his interest in the 500 shares and attachment of the receipt. Fua Cun brought an action praying that his lien on the 250 shares, paid for and thereby owned by Chua Soco be declared to hold priority over the claim of CBC. ISSUE: Who has the better right? HELD: The Sc held in favor of Fua Cun. There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to persons to whom notice is brought. The assignment made by Chua Soco in favor of Fua Cun was valid; even though it was made was made for the purpose of securing a debt. The endorsement of the receipt to Fua Cun was accompanied by delivery and further strengthened by the execution of the chattel mortgage; which, at least, operated as a conditional equitable assignment. As against the rights of Fua Cun, CBC had no lien unless by virtue of the attachment. But the attachment was levied after the bank had received notice of the assignment of Chua Soco’s interests to Fua Cun and was therefore subject to the rights of the latter. It follows that as against these right, CBC holds no lien whatsoever. NOTE: Fua Cun is not actually covered by Sec 63 since it involved pledge of shares without certificates. NOTE: Half paid shares do not mean that they are half-issued, once it is paid or even subscribed to, it shall be deemed issued to the stockholder. While it is half-paid or not even half-paid, the same is already considered as fully owned by the stockholder and as a corollary for such, the stockholder has full-dominion over the shares of stock and not the corporation. It is just that the certificate of stock shall be issued upon full payment of the stockholder of the value of the shares he subscribed to. But insofar as ownership is concerned, the shares of stock shall be deemed owned by the shareholder upon issuance. MONSERRAT v CERAN

FACTS: Enrique Monserrat was the president and manager of the Manila Yellow Taxicab Co., Inc. and the owner of 1,200 shares of stock. In consideration for the financial aid extended to him by Carlos G. Ceron, Monserrat assigned to the former the usufruct of ½ of his shares. Said assignment only gave the transferee the right to enjoy, during his lifetime the profits, and in no way can he dispose of the said shares. Thus, Stock certificate no. 7 was issued in the name of Ceron. Thereafter, the transfer was recorded on the Stock and Transfer book of the corp wherein the annotation was later added. Ceron thereafter mortgaged some shares of stocks to Eduardo Matute, president of Erma corp., including the 600 shares of stocks earlier mentioned. Ceron endorsed to Matute the certificate of stock, when Ceron mortgaged the stocks, he did not inform Matute of the annotation. ISSUE: Whether or not it is necessary to enter upon the books of the corporation a mortgage

constituted on common shares of stock in order that such mortgage may be valid and may have force and effect as against third persons. HELD: The SC held that Sec. 35 of the Corp Law does not require any entry except of transfers of shares of stock in order that such transfers may be valid as against third persons. The transfer contemplated in the Corp Law does not include a mortgage since what the word transfer means in Sec. 35 is an absolute conveyance of the ownership of the title to a share.

CHUA GUAN V. SAMAHANG MAGSASAKA, INC.

FACTS:

Gonzalo Co Toco was the owner of 5,894 shares of the capial stock of Samahang Magsasaka, Inc. He mortgaged said shares to Chua Chiu. Said certificate of stocks were delivered with the mortgage to the mortgagee, Chua Chiu. The said mortgage was duly registered in the register of Deeds, Mla. And in the office of said corporation. When Co Toco defaulted, Chua Chiu surrendered the certificate of stocks to the sheriff for public auction wherein Chua gave the highest bid. After payment, plaintiff went to the office of the corp. to have the certificates issued in his name. Defendants refused. Such refusal prompted plaintiff to file a case for mandamus. Defendant corp. refuses to transfer ownership because according to their books said stock certificates had nine attachments noted and that plaintiff objected to the annotation of said attachments to the new stock certificates they would issue plaintiff. It must be noted that the first 8 attachments were served to the corporation before notice was served to the corporation regarding Chua’s mortgage agreement with Co Toco. ISSUE: Whether said mortgage takes priority over the said writs of attachments. HELD: In order to answer this question, we must first answer the question whether the registration of the mortgage in the register of deeds would amount to constructive notice with regards to the mortgage? Apparently, the answer is NO. The SC held that the said attaching creditors have priority over the defectively registered mortgage. It is to be noted that Sec. 35 of the Corp. Law enacts that shares of stock may be transferred by delivery of the certificate endorsed by the owner. The use of the verb may does not exclude the possibility that a transfer may be made in a different manner, thus leaving the creditor in an insecure position eenthough he has the certificate in possession. Moreover, the shares still standing in the name of the debtor on the books of the corporation will be liable to seizure by attachment or levy on execution at the instance of other creditors. Loans and stock securities must be facilitated in order to foster economic development. The transfer by endorsement and delivery of certificate with intention to pledge the shares covered thereby should be sufficient to give legal effect to that intention and to consummate the juristic act without necessity for registration.

USON V. DIOSOMITO Toribia Uson attached the shares of stocks owned by Vicente Diosomito, which was given by the latter as security for a loan obtained from Uson. However, it was later on found out that the same shares were sold to Jollye even before the attachment. But the problem is, the sale was not

Revised Bagtas Reviewer by Ve and Ocfe 2A

registered in the stock and transfer book of the corporation. The same was only brought to the attention of the corporation after nine months when the attachment was levied. The Court ruled that the attachment is to take precedence over the sale, and the same shall be respected. NOTE: Why are we studying Uson? Prior to the ruling in Uson, registration merely meant notice to the corporation. The same has nothing to do with the validity or invalidity of the transaction. As such actual knowledge > registration. However, Uson teaches us that registration accords validity or invalidity to the transfer. If the same is not registered, the transaction is void as to the fact of those who have no notice and it is also void as to the transaction itself. Does Uson then overturn Fua Cun when it says that actual knowledge cannot defeat registration? No, what Uson says is that when the corporation is party to the transaction and it accepts the notice duly given to it, then it binds the corporation, even in the transfer of ownership; most especially if the corporation already recognized the transferee as the owner. With the latter situation, the corporation can no longer assert nonregistration. However, when the corporation is not a party to the transaction, then the corporation cannot be bound by the notice. (I think the notice pertained to here is the sale of the shares of stock to Jollye and not the attachment of Uson.)

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ESCAÑO V. FILIPINAS MINING CORPORATION

FACTS: Antonio Escaño obtained judgment in the CFI of Manila against Silverio Salvosa whereby the Salvosa was ordered to transfer and deliver to the former 116 active shares and an undetermined number of shares in escrow of the Filipinas Mining Corporation (FMC) and to pay damages, with the proviso that the escrow shares shall be transferred and delivered to the plaintiff only after they shall have been released by the company. A writ of garnishment was served by the sheriff of Manila upon the FMC to satisfy the said judgment. FMC then advised the sheriff of Manila that according to its books the judgment debtor Silverio Salvosa was the registered owner of 1,000 active shares and about 21,338 unissued shares held in escrow by the said corporation. The sheriff sold the 1,000 active shares at public auction, realizing therefrom only the sum of P10, which was applied in partial satisfaction of the judgment for damages. The present case, which was instituted by Antonio Escaño against the FMC and the Standard Investment of the Philippines (SIP), relates to the escrow shares involved in the garnishment preceeding. In the original case, Salvosa sold to Jose P. Bengson all his right, title, and interest in and 18.580 shares of stock of the FMC held in escrow which the said Salvosa was entitled to receive, and which Bengzon in turn subsequently sold and transferred to SIP. Neither Salvosa's sale to Bengzon nor Bengzon's sale to the SIP was notified to and recorded in the books of the FMC for more than three years after the escrow shares in question were attached by garnishment served on the FMC. FMC then issued in favor of the SIP certificate of stock for the 18,580 shares formerly held in escrow by Salvosa and which had been claimed adversely by Escaño on the one hand and the SIP. The TC ruled that since the transfer of the escrow shares in question from Salvosa to Bengzon and from Bengzon to the SIP, were not recorded in the books of the corporation as required by section 35 of the Corporation Law, these could not prevail over the garnishment previously made by Escaño of the said shares. SIP appealed to the SC. ISSUE: WON section 35 of the Corporation Law, which requires the registration of transfers of shares of stock upon the books of the corporation as a condition precedent to their validity against the corporation and third parties, is also applicable to unissued shares held by the corporation in escrow? (YES) HELD:

Yes, it is applicable. Details of the Appeal to the SC: o SIP said: section 35 of Act 1459 and the doctrine laid down in the case of Uson vs. Diosomito were not applicable to the case at bar. o SC said: It is admitted that under this legal provision and the decision of SC in Uson vs. Diosomito, the transfer of duly issued shares of stock is not valid as against third parties and the corporation until it is noted upon the books of the corporation. Since the sale, transfer, or assignment of unissued shares of stock held in escrow is not specifically provided for by law, the question has to be resolved by resorting to analogy. The SC held that the reason of the law for requiring the recording upon the books of the corporation of transfers of shares of stock as a condition precedent to their validity against the corporation and third parties is also applicable to unissued shares held in escrow. These are as follows: (1) to enable the corporation to know at all times who its actual stockholders are, because mutual rights and obligations exist between the corporation and its stockholders; (2) to afford to the corporation an opportunity to object or refuse its consent to the transfer in case it has any claim against the stock sought to be transferred, or for any other valid reason; and (3) to avoid fictitious or fraudulent transfers. In both cases the corporation is entitled to know who the actual owners of the shares are, and to object to the transfer upon any valid ground. Likewise, in both cases the possibility of fictitious or fraudulent transfers exists. o SIP said: the transfer of unissued shares should be exempted form recording because in case of unissued shares there is no certificate number to be recorded. o SC said: the lack of such detail does not make it impossible to record the transfer upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, and the number of shares transferred, which are the most essential data. NAVA V. PEERS MARKETING CORP

FACTS: Teofilo Po as an incorporator, subscribed to 80 shares of Peers Marketing Corporation (PMC). Po paid 25 % of the amount of his subscription. No certificate of stock was issued to him or, for that matter, to any incorporator, subscriber or stockholder. Po sold to Ricardo A. Nava 20 of his 80 shares. In the deed of sale Po represented that he was "the absolute and registered owner of twenty shares" of PMC. Nava requested the officers of the corporation to register the sale in the books of the corporation. The request was denied because Po has not paid fully the amount of his subscription. Nava was informed that Po was delinquent in the payment of the balance due on his subscription and that the corporation had a claim on his entire subscription of 80 shares, which included the 20 shares that had been sold to Nava. Nava filed this mandamus action in the CFI of Negros Occidental to compel the corporation and Renato R. Cusi and Amparo Cusi, its executive vice-president and secretary, respectively, to register the said 20 shares in Nava's name in the corporation's transfer book. The respondents in their answer pleaded the defense that no shares of stock against which the corporation holds an unpaid claim are transferable in the books of the corporation. After hearing, the TC dismissed the petition. Nava appealed on the ground that the trial court erred in applying the ruling in Fua Con vs. Summers and China Banking Corporation, to justify respondents' refusal in registering the 20 shares in Nava's name in the books of the corporation. The rule enunciated in the Fua Cun case is that payment of one-half of the subscription does not entitle the subscriber to a certificate of stock for one-half of the number of shares subscribed. ISSUE: WON the officers of PMC can be compelled by mandamus to enter in its stock and transfer book the sale made by Po to Nava of the 20 shares forming part of Po's subscription of 80 shares, it being admitted that the corporation has an unpaid claim of P6,000 as the balance due on Po's subscription and that the twenty shares are not covered by any stock certificate? (NO)

Revised Bagtas Reviewer by Ve and Ocfe 2A HELD:

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No. The SC affirmed the decision of the TC dismissing the petition for mandamus. The SC held that the transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" that is supposed to be recorded in the stock and transfer book, as contemplated in section 52 of the Corporation Law. As a rule, the shares which may be alienated are those which are covered by certificates of stock. As prescribed in section 35, share of stock may be transferred by delivery to the transferee of the certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate with a written assignment or endorsement thereof". There should be compliance with the mode of transfer prescribed by law. The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate may thereafter be transferred from one person to another. If the holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form by inserting his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation's books. The certificate is then surrendered and a new one issued to the transferee. That procedure cannot be followed in the instant case because the 20 shares in question are not covered by any certificate of stock in Po's name. Moreover, the corporation has a claim on the said shares for the unpaid balance of Po's subscription. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription, as he would be to pay any other debt. The right of the corporation to demand payment is no less incontestable. A corporation cannot release an original subscriber from paying for his shares without a valuable consideration or without the unanimous consent of the stockholders. Based on the facts of this case, there is no clear legal duty on the part of the officers of the corporation to register the 20 shares in Nava's name. Hence, there is no cause of action for mandamus. NOTE: Summary of rules that apply to the different type of dispositions: ULTIMATE RULE à He who is first in time and complies with the requirement for such disposition shall be first in right. (1) SALE – must be registered in the stock and transfer book of the corporation (2) MORTGAGE – double registration, register in the Register of Deeds of the place where the head office of the corporation is located and in the Register of Deeds of the place where the stockholder lives (3) ATTACHMENT – upon notice to the corporation. All of these must be done in good faith. (a) Validity of Transfers: Under Sec. 63 of Corporation Code, the sale of stocks shall not be recognized as valid unless registered in the books of the corporation insofar as third persons, including the corporation, are concerned—as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation. Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001). A transferee has no right to intervene as a stockholder in corporate issue on the strength of the transfer of shares allegedly executed by a registered stockholder. It is explicit under Sec. 63 that the transfer must be registered to affect the corporation and third persons. Magsaysay-Labrador v. CA, 180 SCRA 266 (1989). The purpose of registration is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders’ resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001). A bona fide transfer of shares, not registered in the corporate books, is not valid as

against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not. All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute. Garcia v. Jomouad, 323 SCRA 424 (2000). Pursuant to Sec. 63, a transfer of shares of stock not recorded in the stock and transfer book is non-existent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only into its books for the purpose of determining who its shareholders are. Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002). (b) Who May Make Entries: Entries made on the stock and transfer book by any person other than the corporate secretary, such as those made by the President and Chairman, cannot be given any valid effect. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997) (c) Attachments: Attachments of shares of stock are not included in the term “transfer” as provided in Sec. 63 of Corporation Code. Both the Revised Rules of Court and the Corporation Code do not require annotation in the corporation’s stock and transfer books for the attachment of shares to be valid and binding on the corporation and third parties. Chemphil Export & Import Corp. v. CA, 251 SCRA 257 (1995). (d) Meaning of “Unpaid Claims”: “Unpaid claims” under Sec. 63 refers to any unpaid subscription, and not to any indebtedness which a stockholder may owe the corporation arising from any other transactions, like unpaid monthly dues. China Banking Corp. v. CA, 270 SCRA 503 (1997) (e) Equitable Mortgage Assignment: It seems that the assignment of voting shares as security for a loan operates to give the assignee not only the right to vote on the shares, but would also treat the assignee as the owner of the shares (not just an equitable mortgage): “It is true that the assignment was predicated on the intention that it would serve as security vis-à-vis DBP’s financial accommodation extended to PJI, but it was a valid and duly executed assignment, subject to a resolutory condition, which was the settlement of PJI’s loan obligation with DBP.” APT v. Sandiganbayan, 341 SCRA 551, 560 (2000). 9. Situs of Shares of Stocks (Sec. 55) Section 55. Right to vote of pledgors, mortgagors, and administrators. - In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. NOTE: situs of shares is the domicile of the corporation while the situs of the certificate of stock is the domicile of the person. Situs of shares of stock is the domicile of the corporation to which they pertain to. Wells Fargo Bank and Union v. Collector, 70 Phil. 325 (1940); Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).

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XII. RIGHTS OF STOCKHOLDERS AND MEMBERS 1. What Does “Share” Represent? While shares of stock constitute personal property, they do not represent property of the corporation [i.e., they are properties of the stockholders who own them]. A share of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when distributed according to law and equity, but the holder is not the owner of any part of the capital [properties] of the corporation, nor is he entitled to the possession of any definite portion of its assets. The stockholder is not a co-owner of corporate property. Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962). The registration of shares in a stockholder’s name, the issuance of stock certificates, and the right to receive dividends which pertain to the shares are all rights that flow from ownership. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001). 2. Right to Certificate of Stock for Fully Paid Shares (Sec. 64; Tan v. SEC, 206 SCRA 740 [1992]) Section 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. 3. Preemptive Rights (Sec. 39; Datu Tagoranao Benito v. SEC, 123 SCRA 722 [1983]; Dee v. SEC, 199 SCRA 238 [1991]). Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. NOTE: Distinction between right of first refusal – The right of first refusal arises only by virtue of contractual stipulations, in which case the right is construed strictly against the right of persons to

dispose or deal with their property. Pre-emptive right on the other hand is a common law right and pertains to unissued stocks and to re-issuance of treasury shares, while the former to issued stocks. NOTE: Pre-emptive right refers to the common law right granted to the stockholder of a corporation to be granted the first option to subscribe the opening of the unissued capital stock or to any increase, so as to protect his proportionate interest in the corporation. 4. Right to Transfer of Shareholdings (Sec. 63) Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. a) Non-transferability of Membership (Secs. 90 and 91). Section 90. Non-transferability of membership. - Membership in a non-stock corporation and all rights arising therefrom are personal and non-transferable, unless the articles of incorporation or the bylaws otherwise provide. Section 91. Termination of membership. - Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws. (b) Restriction on Transfers: aLambert v. Fox, 26 Phil. 588 (1914). LAMBERT v FOX This is an action brought to recover a penalty prescribed in a contract as punishment for the breach thereof. Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery business, found itself in such condition financially that its creditors, including the plaintiff and the defendant, together with many others, agreed to take over the business, incorporate it and accept stock therein in payment of their respective credits. This was done, the plaintiff and the defendant becoming the two largest stockholders in the new corporation called John R. Edgar & Co., Incorporated. A few days after the incorporation was completed plaintiff and defendant entered into an agreement stating that: "Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any part of their present holdings of stock in said John R. Edgar & Co., Inc., till after one year from the date hereof.” Notwithstanding this contract the defendant Fox sold his stock in the said corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor of the said John,R. Edgar & Co., Inc. This sale was made by the defendant against the protest of the plaintiff and with the warning that he would be held liable under the contract hereinabove set forth and in accordance with its terms. The learned TC decided the case in favor of the defendant upon the ground that the intention of the parties as it appeared from the contract in question was to the effect that the agreement should be good and continue only until the corporation reached a sound financial basis, and that that event having occurred some time before the expiration of the year mentioned in the contract, the

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purpose for which the contract was made had been fulfilled and the defendant accordingly discharged of his obligation thereunder. The complaint was dismissed upon the merits. Lambert appealed urging that the TC erred in its construction of the contract. ISSUE: WON Fox can sell his stocks before the period stated in the agreement expires? (NO) HELD: No, Fox cannot sell his stocks. The intention of parties to a contract must be determined, in the first instance, from the words of the contract itself. It is to be presumed that persons mean what they say when they speak plain English. Interpretation and construction should be the instruments last resorted to by a court in determining what the parties agreed to. Where the language used by the parties is plain, then construction and interpretation are unnecessary and, if used, result in making a contract for the parties. In the case at bar the parties expressly stipulated that the contract should last one year. No reason is shown for saying that it shall last only nine months. Whatever the object was in specifying the year, it was their agreement that the contract should last a year and it was their judgment and conviction that their purposes would not be subserved in any less time. Note that Fox said, that the stipulation in the contract suspending the power to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore, offends public policy. However, the SC said that where the suspension of the right to sell stock in a corporation has a beneficial purpose and results in the protection of the corporation as well as of the individual parties to the contract and is reasonable as to time, the suspension is legal. The judgment is reversed. Right of Refusal: aPadgett v. Babcock & Templeton, Inc., 59 Phil. 232 (1933).

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PADGETT v BABCOCK & TEMPLETON, INC FACTS: Padget was an employee of Babcock and Templeton Inc. from 1923-1929. Padget bought 35 shares of the corp. at P100 at the suggestion of the President of the corp. Padget was also a recipient of 9 shares by bonus given during the Christmas season. Hence, he was the owner of a total of 44 shares, with the label “non-transferable” on each and every certificate. Before severing his ties with with the corp. he offered the corp. to buy back his shares at par value or sell it to another person. The President bargained for P85 then P80 but Padget did not agree with the price. ISSUE: Was the labeling of “non-transferable” on each certificate valid? NO HELD: The court held that the notation should be considered null and void because such is a limitation on the right of ownership and a restraint on trade. Hence, the SC ruled that the label “non-transferable” is void. Section 63 contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. aFleishcher v. Botica Nolasco, 47 Phil. 583 (1925). FLEISHCHER v BOTICA NOLASCO FACTS:

Fleischer bought from Gonzales 5 shares of stock in Botica Nolasco Inc. Gonzales indorsed the said transaction to the corp. but the corp. refused to register the shares of stock in the name of Fleischer. The corp. invoked its by-laws which stated that they had the preferential option to buy the shares of stock at P100. ISSUE: Was the by-law provision valid? NO HELD: The SC held that although a corporation is granted by law to formulate its own by-laws, the same shall remain valid and binding as long as it does not conflict the Corporation Code. Since, the Code provides that shares of stock may be transferred from one person to another by virtue of a valid transaction, there shall be no restriction to trade or unreasonable limitation on ownership. Moreover, a by-law provision may not bind an innocent third person. Therefore, the by-law provision is invalid because it is not in consonance with the law. The only limitation imposed by Sec. 63 is when the corporation holds any unpaid claim against the shares intended to be transferred. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because “Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe relation, not restriction; they are always subject to the charter of the corporation.” Rural Bank of Salinas v. CA, 210 SCRA 510 (1992). - Restraint of Trade: An agreement by which a person obliges himself not to engage in competitive trade for five years is valid and reasonable and not an undue or unreasonable restraint of trade and is obligatory on the parties who voluntarily enter into such agreement. xOllendorf v. Abrahamson, 38 Phil. 585 (1918). NOTES:  The underlying test on whether the restrictions are valid is whether the restriction is sufficiently reasonable as to justify the restriction overriding the general policy against restraint on alienation of personal property. It must also be limited to a certain time and a certain place. SEC GUIDELINES: (1) the restriction shall not be more onerous than granting the existing stockholders of the corporation the option to purchase the shares of the transferring stockholders with such reasonable terms, conditions or periods stated (2) not valid – if it absolutely prohibits the sale or transfer without the consent of the existing stockholders (3) reasonable option period may range from 30-60 days (4) after the option period has expires, the stockholder is free to sell his property to anyone. (c) Remedy If Registration Refused: aPonce v. Alsons Cement Corp., 393 SCRA 602. PONCE v ALSONS CEMENT CORP. FACTS: On January 25, 1996, Vicente C. Ponce, filed a complaint with the SEC for mandamus and damages against Alsons Cement Corporation and its corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that: x x x 5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having subscribed to and fully paid 239,500 shares of said corporation. 6. On February 8, 1968, plaintiff and Fausto Gaid executed a “Deed of Undertaking” and “Indorsement” whereby the latter acknowledges that the former is the owner of said shares and he was therefore assigning/endorsing the same to the plaintiff. A copy of the said deed/indorsement is attached as Annex “A”. 7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity). 8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as

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shown by the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex “B”. 9. From the time of incorporation of VCC up to the present, no certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid and/or the plaintiff. 10. Despite repeated demands, the defendants refused and continue to refuse without any justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239,500 shares of Gaid, in violation of plaintiff’s right to secure the corresponding certificate of stock in his name.

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Attached to the complaint was the Deed of Undertaking and Indorsement upon which petitioner based his petition for mandamus. DEED OF UNDERTAKING KNOW ALL MEN BY THESE PRESENTS: I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory Cement Corporation in the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (P239,500.00) PESOS and that Fausto Gaid does not have any liability whatsoever on the subscription agreement in favor of Victory Cement Corporation x x x INDORSEMENT I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE. x x x With these allegations, petitioner prayed that judgment be rendered ordering respondents (a) to issue in his name certificates of stocks covering the 239,500 shares of stocks and its legal increments and (b) to pay him damages. Instead of filing an answer, respondents moved to dismiss the complaint. They argued, inter alia, that there being no allegation that the alleged “INDORSEMENT” was recorded in the books of the corporation, said indorsement by Gaid to the plaintiff of the shares of stock in question— assuming that the indorsement was in fact a transfer of stocks—was not valid against third persons such as ALSONS under Section 63 of the Corporation Code. There was, therefore, no specific legal duty on the part of the respondents to issue the corresponding certificates of stock, and mandamus will not lie. Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that: (1) mandamus is the proper remedy when a corporation and its corporate secretary wrongfully refuse to record a transfer of shares and issue the corresponding certificates of stocks; (2) he is the proper party in interest since he stands to be benefited or injured by a judgment in the case; (3) the statute of limitations did not begin to run until defendant refused to issue the certificates of stock in favor of the plaintiff on April 13, 1992. SEC granted the motion to dismiss saying that there is no record of any assignment or transfer in the books of the defendant corporation, and there is no instruction or authority from the transferor (Gaid) for such assignment or transfer. There is not even any indorsement of any stock certificate to speak of. What the plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc reversed the appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a transfer or assignment of stocks need not be registered first before it can take cognizance of the case to enforce the petitioner’s rights as a stockholder. A transfer or assignment of stocks need not be registered first before the Commission can take cognizance of the case to enforce his rights

as a stockholder. Also, the problem encountered in securing the certificates of stock made by the buyer must be expeditiously taken up through the so-called administrative mandamus proceedings with the SEC than in the regular courts. It also found that the Hearing Officer erred in holding that petitioner is not the real party in interest. Their MR having been denied, respondents appealed the decision of the SEC En Banc and the resolution denying their MR to the CA. In its decision, the CA held that in the absence of any allegation that the transfer of the shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of ALSONS, Ponce failed to state a cause of action. Thus, said the CA, “the complaint for mandamus should be dismissed for failure to state a cause of action. Petitioner’s MR was likewise denied. Petitioner first contends that the act of recording the transfer of shares in the stock and transfer book and that of issuing a certificate of stock for the transferred shares involves only one continuous process. Thus, when a corporate secretary is presented with a document of transfer of fully paid shares, it is his duty to record the transfer in the stock and transfer book of the corporation, issue a new stock certificate in the name of the transferee, and cancel the old one. A transferee who requests for the issuance of a stock certificate need not spell out each and every act that needs to be done by the corporate secretary, as a request for issuance of stock certificates necessarily includes a request for the recording of the transfer. Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the issuance of stock certificates. Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of shares of stock to first issue express instructions or execute a power of attorney for the transfer of said shares before a certificate of stock is issued in the name of the transferee and the transfer registered in the books of the corporation. He contends that Hager vs. Bryan, 19 Phil. 138 (1911), and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by respondents, do not apply to this case. These cases contemplate a situation where a certificate of stock has been issued by the company whereas in this case at bar, no stock certificates have been issued even in the name of the original stockholder, Fausto Gaid. Finally, petitioner maintains that since he is under no compulsion to register the transfer or to secure stock certificates in his name, his cause of action is deemed not to have accrued until respondent ALSONS denied his request. Respondents, in their comment, maintain that the transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent insofar as the corporation is concerned and no certificate of stock can be issued in the name of the transferee. Until the recording is made, the transfer cannot be the basis of issuance of a certificate of stock. They add that petitioner is not the real party in interest, the real party in interest being Fausto Gaid since it is his name that appears in the records of the corporation. They conclude that petitioner’s cause of action is barred by prescription and laches since 24 years elapsed before he made any demand upon ALSONS.

Issue: (1) W/N CA erred in holding that petitioner has no cause of action for a writ of mandamus. (2) W/N the transfer of shares of stocks not recorded in the stock and transfer book of the corporation is non-existent(3) W/N notice to a corporation of the sale of the shares and presentation of certificates for transfer is equivalent to registration Held: No. The CA did not err in ruling that petitioner had no cause of action, and that his petition for mandamus was properly dismissed. In Rural Bank of Salinas, Inc., private respondent Melania Guerrero had a Special Power of Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It gave Guerrero full authority to sell or otherwise dispose of the 473 shares of stock registered in Clemente’s name and to execute the proper documents therefor. Pursuant to the authority so given, Melania assigned the 473 shares of stock owned by Guerrero and presented to the

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Rural Bank of Salinas the deeds of assignment covering the assigned shares. Melania Guerrero prayed for the transfer of the stocks in the stock and transfer book and the issuance of stock certificates in the name of the new owners thereof. Based on those circumstances, there was a clear duty on the part of the corporate secretary to register the 473 shares in favor of the new owners, since the person who sought the transfer of shares had express instructions from and specific authority given by the registered stockholder to cause the disposition of stocks registered in his name.

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That cannot be said of this case. The deed of undertaking with indorsement presented by petitioner does not establish, on its face, his right to demand for the registration of the transfer and the issuance of certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus fails to state a cause of action where it appears that the petitioner is not the registered stockholder and there is no allegation that he holds any power of attorney from the registered stockholder, from whom he obtained the stocks, to make the transfer. Without discussing or deciding the respective rights of the parties which might be properly asserted in an ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case such as that at bar, a mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do, upon the demand either of the person in whose name the stock is registered, or of some person holding a power of attorney for that purpose from the registered owner of the stock. There is no allegation in the petition that the petitioner or anyone else holds a power of attorney from the Bryan-Landon Company authorizing a demand for the transfer of the stock, or that the Bryan-Landon Company has ever itself made such demand upon the Visayan Electric Company, and in the absence of such allegation we are not able to say that there was such a clear indisputable duty, such a clear legal obligation upon the respondent, as to justify the issuance of the writ to compel him to perform it. Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No. 1459), the mere indorsement of stock certificates does not in itself give to the indorsee such a right to have a transfer of the shares of stock on the books of the company as will entitle him to the writ of mandamus to compel the company and its officers to make such transfer at his demand, because, under such circumstances the duty, the legal obligation, is not so clear and indisputable as to justify the issuance of the writ. As a general rule and especially under the above-cited statute, as between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a stock certificate, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in the absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer. (2) A transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64 of the Corporation Code. This is the import of Section 63 which states that “No transfer, however, shall be valid, except between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.” The situation would be

different if the petitioner was himself the registered owner of the stock which he sought to transfer to a third party, for then he would be entitled to the remedy of mandamus. x x x until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, in the absence of any allegation that the transfer of the shares between Gaid and the private respondent [herein petitioner] was registered in the stock and transfer book of the petitioner corporation, the private respondent has failed to state a cause of action. (3) Petitioner’s reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to registration is misplaced. In the case, there is no allegation in the complaint that petitioner ever gave notice to respondents of the alleged transfer in his favor. Moreover, that case arose between and among the principal stockholders of the corporation, Pocket Bell, due to the refusal of the corporate secretary to record the transfers in favor of Telectronics of the corporation’s controlling 56% shares of stock which were covered by duly endorsed stock certificates. As aforesaid, the request for the recording of a transfer is different from the request for the issuance of stock certificates in the transferee’s name. Finally, in Abejo, the Court did not say that transfer of shares need not be recorded in the books of the corporation before the transferee may ask for the issuance of stock certificates. The Court’s statement, that “there is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder among which is the stock purchaser’s right to secure the corresponding certificate in his name,” was addressed to the issue of jurisdiction, which is not pertinent to the issue at hand. NOTE: That petitioner was under no obligation to request for the registration of the transfer is not in issue. It has no pertinence in this controversy. One may own shares of corporate stock without possessing a stock certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is not necessary to render one a stockholder in a corporation. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. The certificate is the evidence of the holder’s interest and status in the corporation, his ownership of the share represented thereby. The certificate is in law, so to speak, an equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. In fact, it rests on the will of the stockholder whether he wants to be issued stock certificates, and a stockholder may opt not to be issued a certificate. In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466 (1958), we held that considering that the law does not prescribe a period within which the registration should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer. In the present case, petitioner’s complaint for mandamus must fail, not because of laches or estoppel, but because he had alleged no cause of action sufficient for the issuance of the writ. Mandamus will not lie to compel the corporate secretary to register the transfer of shares in the corporate books when the petitioner is not the registered stockholder nor does he hold a power of attorney from the latter. This is under the general rule that as between the corporation one the one hand and its shareholders on other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a certificate of stock, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer. Hager v. Bryan, 19 Phil. 138 (1911); Rivera v. Florendo, 144 SCRA 643, 657 (1986). The claim for damages of what the shares could have sold had the demand been complied with is deemed to be speculative damage and non-recoverable Batong Buhay Gold Mines v. CA, 147 SCRA 4 (1987) Period to Enforce: Considering that the law does not prescribe a period within which the registration of purchase of shares should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer.”

Revised Bagtas Reviewer by Ve and Ocfe 2A Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).

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A stipulation on the stock certificate that any assignment would not be binding on the corporation unless registered in the corporate books as required under the by-laws and without providing when registration should be made, would mean that the cause of action and the determination of prescription period would begin only when demand for registration is made and not at the time of the assignment of the certificate. Won v. Wack Wack Golf & Country Club, 104 Phil. 466 (1958). 5. Rights to Dividends (Sec. 43)

Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. Although stock certificates grant the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. Sec. 43 of Corporation Code prohibits the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock, which underscores the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks”, on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. Republic Planters Bank v. Agana, 269 SCRA 1 (1997). 6. Right to Vote and to Attend Meetings (Secs. 6 and 89)

(NOTE: right to manage ones property may also be sold.) Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and

conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. Section 89. Right to vote. - The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission. Until challenged successfully in proper proceedings, a registered stockholder has a right to participate in any meeting, and in the absence of fraud the action of the stockholders’ meeting cannot be collaterally attacked on account of such participation, even if it be shown later on that the shares had been previously sold (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933). The sequestration of shares does not entitle the government to exercise acts of ownership over the shares; even sequestered shares may be voted upon by the registered stockholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991). The right to vote sequestered shares of stock registered in the names of private

16 9 individuals or entities and alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the registered owner. The PCGG may, however, be granted such voting right provided it can (1) show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2) demonstrate imminent danger of dissipation of the assets, thus necessitating their continued sequestration and voting by the government until a decision, ruling with finality on their ownership, is promulgated by the proper court. Nevertheless, the foregoing "two-tiered" test does not apply when the funds that are prima facie public in character or, at least, are affected with public interest. Inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public in character, then the right to vote them shall be exercised by the PCGG. In sum, the "public character" test, not the "two-tiered" one, applies. Republic v. COCOFED, 372 SCRA 462 (2001). (a) Instances When Stockholders Entitled to Vote: - Election of directors and trustees (Sec. 24). - Amendment of articles of incorporation (Sec. 16). - Investment in another business or corporation (Secs. 36 and 42). - Merger and consolidation (Sec. 72). - Increase and Decrease of capital stock (Sec. 38). - Adoption, amendment and repeal of by-laws (Sec. 48). - Declaration of stock dividends (Sec. 43). - Management contracts (Sec. 44). - Fixing of consideration of no par value shares (Sec. 62). (b) Joint Ownership (Sec. 56) Section 56. Voting in case of joint ownership of stock. - In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor. (c) Treasury Share No Voting Rights (Sec. 57) Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as such shares remain in the Treasury. (d) Pledgor, Mortgagors and Administrators (Sec. 55) Section 55. Right to vote of pledgors, mortgagors, and administrators. - In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. (n) Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. When shares are pledged by means of endorsement in blank and delivery of the covering certificates to a loan, the pledgee does not become the owner thereof simply by the failure of the registered stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in his name. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998). Although the Rules of Court, while permitting an executor or administrator to represent or to bring suits on behalf of the deceased, do no prohibit the heirs from representing the deceased. When no administrator has been appointed, there is all the more reason to recognize the heirs as the proper representatives of the deceased. Gochan v. Young, 354 SCRA 207 (2001).

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(e) Conduct of Stockholders' or Members' Meetings: (i) Kinds and Requirements of Meetings (Secs. 49 and 50); Section 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members may be regular or special. (n) Section 50. Regular and special meetings of stockholders or members. - Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of their number as presiding officer. (ii) Place and Time of Meeting (Secs. 51 and 93); Section 51. Place and time of meetings of stockholders of members. - Stockholder's or member's meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. Section 93. Place of meetings. - The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. (iii) Quorum (Sec. 52) Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. 7. Rights to Inspect and Copy (Such right may in no way be taken away, violation may result to criminal prosecution. (a) Basis of Right (Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]). – based upon their ownership – founded on the beneficial interest through ownership for the purpose of protecting individual interests. (b) Limitations on Right

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The only express limitations on the right of inspection under Sec. 74 of Corporation Code are: (a) it should be exercised at reasonable hours on business days; (b) the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of records; and (c) the demand is made in good faith or for a legitimate purpose. Africa v. PCGG, 205 SCRA 39 (1992). ADDITION: (d) the existence of evil motive must be proven by the corporation, the burden of proof is upon the corporation. Summary of Rulings: The right to inspect corporate books and records: • Is exercisable through agents and representatives, otherwise it would often be useless to the stockholder who does not know corporate intricacies. W.G. Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919). Cannot be denied on the ground that the director is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Although it includes the right to make copies, does not authorize bringing the books or records outside of corporate premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Does not include the right of access to minutes until such minutes have been written up and approved by the directors. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Cannot be limited to a period of ten days shortly prior to the annual stockholders’ meeting, as such would be an unreasonable restriction and violates the legal provision granting the exercise of such right “at reasonable hours.” Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924).

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(c) Specified Records (Secs. 74, 75 and 141) Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. Section 75. Right to financial statements. - Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. Section 141. Annual report or corporations. - Every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations, together with a financial statement of its assets and liabilities, certified by any independent certified public accountant in appropriate cases, covering the preceding fiscal year and such other requirements as the Securities and Exchange Commission may require. Such report shall be submitted within such period as may be prescribed by the Securities and Exchange Commission. (d) Remedies If Denied: Mandamus aGonzales v. PNB, 122 SCRA 489 (1983). GONZALES v PNB FACTS: Gonzales instituted a suit against the PNB for alleged anomalies committed regarding the bank’s extension of credit to import construction machinery through the Dept. of Public Works. The petitioner’s standing was raised because he owned no share in PNB. Consequently, Gonzales bought 1 share of PNB stocks in order to gain standing as a stockholder. Gonzales thereafter sought to inquire and ordered PNB to produce its books and records which the Bank refused, invoking provisions from its charter created by Congress. The petitioner hence filed a court action to compel PNB the production of books and records. The RTC ruled in favor of PNB. ISSUE: May Gonzales compel PNB to produce its books and records? NO HELD: The New Corporation code provided a more restrictive tone on a right of a stockholder to inquire about a corporation’s books and records. Among other new provisions, an inquiry into a corporation’s books and records may only be done during office hours and must be reasonably related to a stockholder’s interest. Furthermore, the Code provided that an inquiry to the books and records must also be coupled with good faith and not

Revised Bagtas Reviewer by Ve and Ocfe 2A by speculation.

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Hence, since Gonzales only bought a share of stock in order to gain standing in the case that he earlier filed against the bank, the SC found that this was done to pry on certain Bank information. In addition, PNB’s charter also restricted access on its books and records, hence, books and records of PNB may no longer be inquired into by just any stockholder. NOTE: The new Code expressly provides that the party requesting must not be guilty of using improperly any information secured through a prior examination and that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand. The burden of proof to show that examination is for improper purpose is on the part of the corporation. Republic v. Sandiganbayan, 199 SCRA 39 (1999). (e) Confidential Nature of SEC Examinations (Sec. 142) Section 142. Confidential nature of examination results. - All interrogatories propounded by the Securities and Exchange Commission and the answers thereto, as well as the results of any examination made by the Commission or by any other official authorized by law to make an examination of the operations, books and records of any corporation, shall be kept strictly confidential, except insofar as the law may require the same to be made public or where such interrogatories, answers or results are necessary to be presented as evidence before any court.

NOTES:  Inspection has to be germane to the petitioner’s interest as a stockholder and member and has to be proper and lawful character not inimical to the interest of the corporation.  ALLOWABLE PURPOSES: (1) ascertain whether the corporation is being mismanaged (2) ascertain the financial condition (3) ascertain the value of the shares of stock for sale (4) mailing list of shareholders to solicit proxies or influence voting.  REMEDIES: (1) mandamus (2) damages (3) criminal suit  EXAMPLE: I own 20,000 shares in San Miguel and I demand that I may be given access to the accounting records for the last 6 months. My purpose for such request is to determine whether the company was complying with environmental laws. San Miguel refused to give me access to the records. I file for mandamus in Court, who will win? San Miguel will win. Such right must only be exercised akin to the proprietary interest of the stockholder, other than for this purpose, the exercise of such right will be denied.  NOTE: Records that are not yet approved or are confidential may not be inspected. 8. Appraisal Right (Secs. 81 to 86 and 105) NOTE: The exercise of this right shall only pertain to the EXCLUSIVE ENUMERATION provided by law and must be exercised in the same manner provided by law. In other instances that are not provided in the enumeration, the stockholder may always sell his shares to another person as he exercises the right of free transferability of interest. Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation. (n) Section 82. How right is exercised. - The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n) Section 83. Effect of demand and termination of right. - From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. (n) Section 84. When right to payment ceases. - No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him. Section 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. Section 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange

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Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. NOTES:  Appraisal right refers to a stockholder’s right to demand payment of the fair value of his shares after dissenting from a proposed corporate action involving a fundamental change in the corporate setting. The appraisal right is given when a radical change in the contractual relationship presumably agreed upon between the stockholders and the corporation, a changer which the dissenting stockholders could not have reasonably anticipated may happen at the time he invested into, or created his contractual relationship with, the corporation.  INSTANCES WHEN RIGHT IS EXERCISABLE: (1) amendment to the AI (2) extending or shortening term of corporate existence (3) sale, lease, transfer, mortgage or pledge or other disposition of all or substantially all of the corporate property and assets (4) invest its funds in another corporation outside its primary purpose (5) merger or consolidation.  NON-EXISTENCE OF URE – this is not one of the grounds enumerated by which the right ceases – the code provides that if the dissenting stockholder is not paid the value of his shares within 30 days, his voting and dividend rights shall be restored. 9. Derivative Suits (aInterim Rules for Intra-Corporate Controversies; aSan Miguel Corp. v. Kahn, 176 SCRA 447 [1989])  It is one instituted by a shareholder or a member of a corporation for and in behalf of the corporation for its protection from acts committed by directors, trustee, corporate officers and even third persons.

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SAN MIGUEL CORP. v KAHN REQUISITES: 1) the party bringing a suit should be shareholder as of the time of the act or transaction complained of, the number of his shares being immaterial (there must be privity with the corporation at the time of the filing of the suit and at the time of the transaction à privity must exist on both instances to avoid cases of forum shopping) 2) person has exhausted intra-corporate remedies (otherwise, no cause of action has yet accrued, however, if it is futile to exhaust such remedies, resort to the courts may be had) 3) cause of action actually devolves on the corporation, the wrongdoing or harm having been or being caused to the corporation and not to the particular stockholder bringing the suit. (The stockholders should bring the suit in the name of the corporation and not for the benefit of the stockholders as the same would constitute a violation of the trust fund doctrine. Creditors ultimately are to be protected and not the stockholders. Stockholders are not the only ones who sustain the injury but the creditors as well, and as they take precedence in right over the former, they shall be protected. When compensation for injury is rendered to the stockholders, it in effect would constitute a distribution of property which should be subordinate to the right of the creditors to receive such property or compensation.) REQUIREMENTS UNDER INTERIM RULES (SEC took out the cause of action requirement provided in Jurisprudence. If one could take notice, such requirements are harder as appraisal right has nothing to do with the exercise of the right to file a derivative suit. The former is a personal right while the latter is not. From the requirements, it may be seen that by the fact that one did not exercise his appraisal right upon the action of the Board, one is already estopped to file a derivative suit. While one who dissented and exercised his right is not estopped to exercise this right.) 1) Plaintiff was stockholder or member at the time the questioned act or transaction subject to the action occurred, as well as at the time the action was filed and remains as such during the pendency of the action. 2) Plaintiff exercised all reasonable efforts and alleges with particularity in the compliant, to exhaust all remedies available under the articles of incorporation, by-laws or rules governing the corporation to obtain the relief he desires. 3) No appraisal right are available for the acts complained of. (If the same was available, it

should have been exercised.) 4) The suit is not a nuisance or harassment suit (black mail suit is against the business judgment rule of the corporation. NOTE: The right of stockholders or some of the Board members to bring a derivative suit is a common law right, and is an exception to the general rule, which is the right to sue and be sued is within the business judgment rule of the Board of Directors. But when it appears that the BJ is no longer with the Board as when their decisions are tainted with (1) fraud, (2) disloyalty, (3) conflict of interest, (4) bad faith and (5) gross negligence. The next best guard of shareholders is the exercise of such right. From the requirements of SEC, it appears that as to the majority, the derivative suit is not available as they consented to the transaction however as with the minority, there is no appraisal right available for them to be able to exercise such right. Derivative suit has now become a class suit. A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority. aWestern Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997). WESTERN INSTITUTE OF TECHNOLOGY v SALAS Facts: The Salas family are the majority owners and controlling members of the Board of Trustees of Western Institute of Technology (WIT), a stock corporation in the business of education. A special board meeting was held and a resolution was passed granting retroactive monthly compensation to the Salas’ as corporate officers. A few years later, the minority stockholders, including Villasis who is also a member of the Board, filed 2 criminal complaints charging the petitioners of estafa and falsification of a public document claiming that the income statements of the company for 19951996 reflected the disbursement of corporate funds for the compensation, making it appear that the resolution was passed by the Board March 30, 1986 instead of June 1, 1986 (the company’s fiscal years ends on April 30 so in other words, the compensation expense should have been recorded in the 1996-1997 income statement instead of 1995-1996 IS). In addition, they claim that the Salas’ cannot receive compensation because the Corporation Code does not allow the giving of compensation to directors. The trial court acquitted the Salas’ and petitioners filed an MR of the civil aspect. Issue: W/N the resolution provided for compensation of the Board members Held: No it did not. Although the Salas’ were directors, the compensation was for their positions as Chairman, Vice-Chairman and Corporate secretary. There is no argument that directors or trustees, as the case may be, are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a presumption that directors/trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. Under the foregoing section, there are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders' meeting agree to give it to them. This however, is not a sweeping rule. The phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees. In the case at bench, Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western

Revised Bagtas Reviewer by Ve and Ocfe 2A Institute of Technology. Clearly therefore, the prohibition with respect to granting directors/trustees as such is not violated in this particular case. compensation to

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Where corporate directors have committed a breach of trust either by their fraud, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. It is asettled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporation’s behalf is only nominal party. The corporation should be included as a party in the suit. Hornilla v. Salunat, 405 SCRA 220 (2003). REQURIEMENT UNDER SEC RULES:  In addition to what was said in the San Miguel case – (1) no appraisal right is available (2) it is not a nuisance or harassment suit. (a) Who May Bring the Suit In the absence of a special authority from the Board of Directors to institute a derivative suit for and in behalf of the corporation, the president or managing director is disqualified by law to sue in her own name. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Board that exercises its corporate powers and not in the president or officer thereof. Bitong v. Court of Appeals, 292 SCRA 503 (1998). A minority stockholder and member of the board has no power or authority to sue on the corporation’s behalf. Nor can we uphold this as a derivative suit, since it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. There is now showing that petitioner has complied with the foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001). The relators must be stockholders both at time of occurrence of the events constituting the cause of action and at the time of the filing of the derivative suit. Gochan v. Young, 354 SCRA 207 (2001); Pascual v. Orozco, 19 Phil. 83 (1911). A minority stockholder can file a derivative suit against the president for diverting corporate income to his personal accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991). A lawyer engaged as counsel for a corporation cannot represent members of the same corporation’s board of directors in a derivative suit brought against them. To do so would be tantamount to representing conflicting interests, which is prohibited by the Code of Professional Responsibility.” Hornilla v. Salunat, 405 SCRA 220 (2003). (b) Exhaustion of Intra-Corporate Remedies: Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v. Santos, 64 Phil. 697 (1937). A derivative suit to question the validity of the foreclosure of the mortgage on corporate assets can be filed without prior demand upon the Board of Directors where the legality of the constitution of the Board lies at the center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993). NOTE: The general rules is that a derivative suit can only be filed when there has been a showing of exhaustion of administrative remedies. An exception is when it would be futile or useless because the board itself would not bring the suit for reason that they are also guilty of the fraud committed against the corporation. (c) Nature of Relief: Evangelista v. Santos, 86 Phil. 387 [1950]; Republic Bank v. Cuaderno, 19 SCRA 671 (1967); Reyes v. Tan, 3 SCRA 198 (1961). The allegations of injury to the relators can co-exist with those pertaining to the

corporation, and does not disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. Gochan v. Young, 354 SCRA 207 (2001). In a derivative action, the real party in interest is the corporation itself, not the shareholders who actually instituted it. A suit to enforce preemptive rights in a corporation is not a derivative suit, and therefore a temporary restraining order enjoining a person from representing the corporation will not bar such action, because it is instituted on behalf and for the benefit of the shareholder, not the corporation. Lim v. Lim-Yu, 352 SCRA 216 (2001). Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966) 10. Right to Proportionate Share of Remaining Assets Upon Dissolution (a) Different Rules for Non-stock Corporations and Foundations (Secs. 94 and 95; Section 34(H)(2)(c), 1997 NIRC). Section 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n) Section 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting. Section 34(H)(2)(c), 1997 NIRC Donations to the following are deductible in full – Donations to Accredited Nongovernmental Organizations – The term “nongovernmental organization” means a nonprofit domestic corporation: 1) Organized and operated exclusively for scientific, research, educational, characterbuilding and youth and sports development, health, social welfare, cultural or

Revised Bagtas Reviewer by Ve and Ocfe 2A charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual;

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2) Which not later than 15th of the 3rd month after the close of the accredited nongovernmental organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; 3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed 30% of the total expenses; and 4) The assets of which, in the even of dissolution would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. Subject to the terms and conditions as may be prescribed by the Secretary of Finance, the term “utilization” means: (i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. (ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed 5 years and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds.

11. Contracts and Agreement Affecting Shareholdings (a) Proxy (Sec. 58) Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time.   A proxy is a special form of agency and governed by the law of agency. It is generally revocable, an exception however is when it is coupled with interest. REQUISITES: (1) shall be in writing (2) signed by the stockholder or member (3) filed before the scheduled meeting with the corporate secretary. (b) Voting Trust Agreements (Sec. 59; aLee v. CA, 205 SCRA 752 [1992]).

Section 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a

period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. LEE v CA FACTS: A complaint for a sum of money was filed by the International Corporate Bank, Inc. against private respondents Sacoba Manufacturing Corp., Pablo Gonzales, Jr., and Thomas Gonzales. PRs then filed a 3rd party complaint against ALFA and petitioners Lee and Lacdao. The TC issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of the petitioners’ letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA had been transferred to the DBP. DBP claimed that it was not authorized to receive summons of behalf of ALFA since it had not taken over the company. PR’s filed a Manifestation and Motion for the Declaration of Proper Service of Summons which the TC granted. Petitioner Lee and Lacdao filed a motion for recon since they were no longer officers of ALFA and PRs should have availed of another mode of service, i.e., publication. PR’s argued that the voting trust agreement previously executed did not divest the petitioners of their positions as president and executive vice-president of ALFA so that service of summons upon ALFA through the petitioners as corporate officers was proper. TC upheld the validity of the service of summons on ALFA through petitioners, thus denying latter’s motion for recon. A second motion for recon was filed by pets, upon which was attached a copy of the voting trust agreement between all the stockholders of ALFA and DBP, whereby the management and control of ALFA became vested upon DBP. TC then reversed itself. CA reversed TC. Petition brought to the SC on certiorari imputing GAD. ISSUE: W/N pets Lee and Lacdao, by virtue of the voting trust agreement between ALFA and DBP, have assigned and transferred all their shares in ALFA to DBP? HELD: Every director must own at least one share of the capital stock of the corporation of which he is a director which share shall stand in his name on the books of the corporation. Any director who

Revised Bagtas Reviewer by Ve and Ocfe 2A ceases to be the owner of at least one share of the capital stock of the corporation shall thereby cease to be a director.

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The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981 disposed of ALL THEIR SHARES THROUGH ASSIGNMENT AND DELIVERY IN FAVOR OF DBP, AS TRUSTEE. Consequently, the petitioners ceased to own at least one share standing in their names on the books of ALFA as required under Sec. 23 of the Corp. Code. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors. Hence, the transfer of the pets’ shares to the DBP created vacancies in their respective positions as directors of ALFA. The transfer of shares from the stockholders of ALFA to the DBP is the essence of the subject voting trust agreement. At the time of service of summons on ALFA, the voting trust agreement in question was not yet terminated, so that the title to the stocks of ALFA then still belonged to the DBP. Service of summons on ALFA through pets was therefore improper. Petition granted. The trustor has a right to terminate the VTA for breach thereof. Everett v. Asia Banking Corporation, 49 Phil. 512 (1926). Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988). NOTE: In a trust agreement (1) voting rights are separated from other attributes of ownership (2) voting rights are intended to be irrevocable for a definite period of time (3) principal purpose of the grant is to acquire voting control of the corporation. NOTE: REQUISITES: (1) in writing and notarized and shall specify the terms and conditions thereof (2) certified copy of such agreement shall be filed with the corporation and with the SEC. DISTINCTIONS BETWEEN PROXY, VOTING TRUST AGREEMENT and POOLING ARRANGEMENT PROXY – agency VOTING TRUST AGREEMENT – trust an agency (1) contractual relationship (2) fiduciary – not revocable – proprietary fiduciary (3) not limited to any particular meeting (4) will receive dividends but with the obligation to dispose them for the benefit of the beneficial owner (5) entitled to such right (6) trustee as the naked owner will exercise the appraisal right. (7) lasts also for five years (8) in writing, notarized, filed corporation and SEC signed, with POOLING ARRANGEMENT – contract: I do that you may do (1) (2) contractual/nonfiduciary (Title on Close Corporations)

(1) essentially relationship

(2) fiduciary -- generally revocable -- representative fiduciary (3) can only act at specified stockholders’ meeting (4) no right dividends to receive

(5) does not have the right to inspect (6) does not have appraisal right (7) lasts for only five years (8) in writing, signed and filed prior to the meeting

NOTE: When the VTA is unenforceable as when it is not filed with the corporation and with the SEC, it is at the very least a proxy agreement, however, all the other rights in relation to the VTA may not be exercised as the same is unenforceable. The VTA if not registered with the SEC or not registered with the corporation shall be valid as between the parties if the trustor validates such agreement, however the validation of the trustor does not bind the corporation. This is the case because the corporation only recognizes transfers which are actually registered with them, in the stock and transfer book. (c) Pooling Agreements or Shareholders’ Agreements (Sec. 100) Section 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. 2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. 4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

Revised Bagtas Reviewer by Ve and Ocfe 2A

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XIII. CAPITAL STRUCTURE: SHARES OF STOCK 1. Concept of “Capital Stock” (Central Textile Mills v. National Wage and Productivity Commission, 260 SCRA 368 [1996]).

EQUITY INVESTMENT (1) One who makes this in a corporation expects that his return shall be tied-up with the success or loss of the operations of the corporation. Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. He is given a voice or say in management in the sense that he would be entitled to participate in the election of the board of directors, and also to cast votes on certain corporate structural matters. (2) An equity investment in a corporate enterprise is generally nonwithdrawable for so long as the corporation has not been dissolved. This assures the corporate enterprise and its managers that they will have such resources at their disposal so long as the corporate enterprise remains a going concern. In the case of an equity investor, since he has placed his stake in the results of the operations, he generally participates in all income earned by the venture. (3) Since the equity investor clearly undertook to place their investment to the risk of the venture, they can only receive a return of their investment only from the remaining assets of the venture, if any, after the payment of all liabilities to creditors.

DEBT CONTRACT (1) One who makes this expects that his return shall be given back to him regardless of the success or loss of the operations of the corporation. Creditors are not considered risk takers.

(2) A person who extends a loan or a debt to the corporation only looks at the financial condition and operations of the corporation as a means of gauging the ability of the corporation to pay-back the loan at the specified period. But a creditor puts no stake on the operations of the corporation, and therefore, the contractual obligations of the corporate enterprise to pay the stipulated return remains even when the corporations are incurring losses. Since the investor places no stake in the results of the operations, he can only demand the stipulated fixed return of his investment even if by the use of the borrowed funds, the enterprise is able to reap huge profits. (3) Since a debt investor places no stake in the corporate operations and his rights are based on contract, then the corporate venture must in case of insolvency, devote and prefer all corporate assets towards the payment of its creditors.

By express provision of Sec. 13 of Corporation Code, paid-up capital is that portion of the authorized capital stock which has been both subscribed and paid. . . Not all funds or assets received by the corporation can be considered paid-up capital, for this term has a technical signification in Corporation Law. Such must form part of the authorized capital stock of the corporation, subscribed and then actually paid up. MSCI-NACUSIP Local Chapter v. National Wages and Productivity Commission, 269 SCRA 173 (1997). The term “capital” and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premium if any, in consideration of the original issuance of the shares. NTC v. Court of Appeals, 311 SCRA 508 (1999).

Revised Bagtas Reviewer by Ve and Ocfe 2A

NOTE: Subscription contract is a species of a sale contract, but while it is a species of sale, it is still the Corporation Code that applies to it. With sale, rescission as a remedy may be resorted to when substantial breach occurs. But as with subscription agreements, such may not be resorted to.

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2. Classification of Shares (Sec. 6) The definition of capital stock clearly shows that it is composed of two items, namely: (a) the portion which have been paid by the stockholders, represented by the account “Paid-up Capital”; and (b) the portion which is to be paid on the subscriptions, represented by the account “Subscription Receivables.” POLICIES ON CLASSIFICATION OF SHARES: (1) It expressly recognizes the freedom and power of a corporation to classify shares (2) The Code expressly adopts the presumption of equality of rights and features of shares when nothing is expressed to the contrary (3) The Code also provides for voting rights for all types of shares on matters it considers as fundamental measures. NOTE: In the absence of stipulation, all shares are equal. Restrictions and preferences in relation to this must be stated in the articles of incorporation. ( In close corporations, such must the in the AI, BL and certificate itself, in order that it may bind the public. Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (a) Common Shares Common stock do not have any special contract rights or preferences. Frequently it is the only class of outstanding. It generally represents the greatest portion of the corporation’s capital structure and bears the greatest risk of loss in the event of failure of the enterprise. Bearing the risk of loss, along with the participation in corporation assets after all claims are paid, management of the corporation, and participation in profits are the foremost elements of common shares. “A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits.” Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). (b) Preferred Shares (aRepublic Planters Bank v. Agana, 269 SCRA 1 [1997]). A preferred share of stock is one “which entitles the holder thereof to certain preferences over the holder of common stock...designed to induce persons to subscribe for shares of a corporation. PREFERRED SHARES AS TO ASSETS gives the holder thereof preference in the distribution of assets of the corporation in case of liquidation. PREFERRED SHARES AS TO DIVIDENDS give the holder the right to receive dividends on said shares to the extent agreed upon before any dividends at all are paid to the holders of the common stock. REPUBLIC PLANTERS BANK v AGANA  The SC has held that although the certificates of stock granted the stockholder the right to receive quarterly dividends of 1% cumulative and participating, the stockholders did not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. Both Sec. 16 and 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than 2/3 of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, interest bearing stock on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. In spite of specific preferences granted to preferred shares, there is no guaranty, that the share will receive any dividends, or that the preferred shareholders will have preference to corporate assets greater than corporate creditors, thus, similarly the present Corporation Code provides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings. The Code in Sec. 43, adopting the change made in accounting terminology,

Revised Bagtas Reviewer by Ve and Ocfe 2A

substituted the phrase “unrestricted retained earnings” which may be a more precise term in place of “surplus arising from its business” in the former law. Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividend thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. Shareholders both common and preferred are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. • Participating and Non-participating – PARTICIPATING entitle the shareholders to participate with the holders of common shares in the retained earnings after the amount of stipulated divided has been paid to the preferred shares. NON-PARTICIPATING are those that entitle holders of preferred shares only to the stipulated preferred dividends and no more. Cumulative and Non-cumulative – CUMULATIVE entitle the holders thereof to the payment not only of current dividends but also of back dividends not previously paid, when and if the dividends are declared to the extent agreed upon before holders of common shares are paid. Its fundamental characteristic is that if the preferred dividend is not paid in full in any year, whether or not earned, the deficiency must be made up before any dividend may be paid on the common stock. NONCUMULATIVE entitle the holders merely to the payment of current dividends that are paid to the extent agreed upon before the holders of common shares are paid. Par Value and No Par Value – PAR VALUE shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditor in respect thereto. NO PAR VALUE may not be issued for consideration less than the value of P5.00 per share and that the entire consideration received by the corporation for its nopar value shares be treated as capital and shall not be available for distribution of dividends. A NO PAR VALUE share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not hidden beneath a false appearance of a given sum of money, as in the case of par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money but instead is expressed to be divided into a stated number of shares, such as 1,000 shares. This indicates that a shareholder of 100 shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of 100/1000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the financial condition of a corporation is focused upon the value of the assets and the amount of its debts.

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NOTE: In the absence of stipulation as to stocks which are non-cumulative or cumulative, or nonparticipating or participating, the presumption is in favor of the one which provides for lower rights i.e. non-cumulative and non-participating. “Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution.” Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).

EXAMPLES: 1.) 1000 common voting and 500 preferred non-voting do the 500 shares have preference as to distributions of dividends? NO, the type of preference must be stated expressly in the articles of incorporation, as such it is only preferred as to its name. The only thing stated is the restriction on its voting rights. 2.) 1000 common non-voting shares VOID, the only shares that may be restricted as to voting are preferred and redeemable shares. 3.) 12% preferred non-voting This is a gray area in corporation law. The general school of thought with regard to this, is that it enjoys preference as to dividends because the provision of the figure seemingly guarantees a certain amount of return. (b) Redeemable Shares (Sec. 8;aRepublic Planters Bank v. Agana, 269 SCRA 1) Section 8. Redeemable shares. Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. REDEEMABLE SHARES are shares of stock issued by a corporation which the corporation can purchase or take up from their holders as expressly provided for in the articles of incorporation and certificates of stock representing said shares. NOTE: Redeemable shares are an exception GR: The corporation is not allowed to buy back shares. ER: (1) delinquency sale (2) redeemable shares (3) Section 41 of the Corporation Code – realm outside redeemable shares. Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. REPUBLIC PLANTERS BANK V. AGANA  It has been held that when the certificate of stock recognizes redemption but the option to do so is clearly vested in the corporation, the redemption is clearly known as “optional” and rest entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock.  Redeemable shares are shares usually preferred which by their terms are redeemable at a fixed date, or at the option of either the issuing corporation, or the stockholder or both at a certain redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debt as they mature. “Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or

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held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). ON TAXABILITY OF REDEMPTION OF STOCK DIVIDENDS – When the corporation redeems shares coming from those issued upon establishment of the corporation or from initial capital investment, the redemption to their concurrent value of acquisition would not be subject to tax because that would constitute merely a return of investment. On the other hand, if the redemption from previously declared stock dividends, the proceeds of the redemption constitute additional wealth, for it is no longer merely a return of capital but a gain thereon, and subject to tax. (c) Founder Shares (Sec. 7) Section 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. NOTE: It must be understood that founders’ share are considered as such not because of the nomenclature given to them. It must be presumed that what makes shares as founders’ shares would be that they are given the exclusive rights not given to other stockholders, and especially the right to vote and be voted for in the election of directors. The existence of founders’ shares must necessarily include the fact that there are other shares that not enjoy such rights, and would necessarily include the existence of common shares, which ordinarily would have the right to vote and be voted into the board of directors. It would then be reasonable to conclude that a class of shares, even when not given the nomenclature of founders’ share would necessarily fall within the provision of Sec. 7 whenever such class of shares are given the exclusive right to vote and be voted for in the election of the directors, and necessarily such exclusive right shall have a limited period of five years. EFFECT WHEN EXCLUSIVITY PERIOD EXPIRES – The SEC has opined that upon the expiration of the period within which the founders’ shares can exercise their exclusive right to vote and be voted for in the election of directors, such exclusive right would only be transferred to common shareholders who are supposes to exercise such right had there been no founders’ share. Other classes of shares such as preferred shares are not affected. (d) Treasury Shares (Sec. 9; Commissioner v. Manning, 66 SCRA 14 [1975]). Section 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. TREASURY SHARES are shares that a corporation acquires after it has issued them. The SEC has opined that treasury shares have no effect on the stated capital of the corporation unless and until there are cancelled or retired in which event the stated capital is reduced by the amount then representing the shares. Treasury shares must be distinguished from the authorized but unissued shares: the acquisition of treasury shares does not reduce the number of issued shares or the amount of stated capital and their sale does not increase the number of issued shares or the amount of the stated capital. A corporation may sell treasury shares for any amount the board of directors determines, even if the shares have a par value that is more than the sale price. Treasury shares do not have voting rights nor pre-emptive rights. In addition, no dividends are paid on treasury shares. VARIOUS FEATURES OF TREASURY SHARES: (1) Although authorities differ on the exact legal and accounting statutes of so-called treasury shares, they are more or less in agreement that treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means; (b) Treasury shares are therefore issued shares, but being in the

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treasury, they do not have the status of outstanding shares; (c) Consequently, although a treasury share, not having been retired by the corporation, reacquiring it, may be reissued or sold again, such share, as long as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paidfor-interest in the property of the corporation. Treasury shares do not revert to the unissued shares of the corporation but are regarded as property acquired by the corporation which may be reissued or sold by the corporation at a price to be fixed by the Board of Directors. The amount of unrestricted retained earnings equivalent to the cost of treasury shares being held shall be restricted from being declared and issued as dividends. The dividend restriction on retained earnings on account of the treasury shares shall be lifted only after the treasury shares causing the restriction are re-issued or retired. The retirement of treasury shares shall be effected by decreasing the capital stock of the corporation in accordance with Section 38 of the Code, for the purpose of eliminating treasury shares. Treasury shares shall have no voting rights as long as such shares remain in the treasury. Treasury shares may be declared as property dividend to be issued out of the retained earnings previously used to support their acquisition, provided that the amount of the said retained earnings has not been subsequently impaired by losses. Any declaration and issuance of treasury shares as property dividend shall be disclosed and properly designated as property dividend in the books of eh corporation and in its financial statement. NOTE: These are sold via the Board at the price which is considered to be the most feasible sale value to the Board as part of its business judgment rule. It does not appear as assets in the balance sheet. It is not entitled to vote, to be counted as part of the quorum, and is not entitled to dividends. It becomes a treasury share when it is purchased as such, when purchased in a delinquency sale, and when donated. (e) Stock Warrants  Stock warrant is a type of security which entitles the holder the right to subscribe to, the unissued capital stock of the corporation or to purchase issued shares in the future, evidenced by a Warrant Certificate, whether detachable or not which may be sold or offered for sale to the public but does not apply to a right granted under an Option Plan duly approved by the SEC for the benefit of the employees, officers, and/or directors of the issuing corporation. ISSUANCE OF WARRANTS: (1) a duly registered domestic corporation which issues or proposes to issue subscription warrants (2) A person or group of persons who issues or proposes to issue covered warrants. TYPES OF WARRANTS: (1) Subscription warrants – entitles the holders thereof the right to subscribe to a pre-determined number of shares out of the unissued capital stock of the Issuer (2) Covered warrant – entitles the hlder thereof the right to purchase from the Issuer a predetermined number of existing shares. TYPES OF WARRANT CERTIFICATES (1) Detachable warrant – sold, transferred or assigned to any person by the warrant holder separate from, and independent of, the corresponding Beneficiary Securities (2) Non-detachable warrant – cannot be sold, transferred or assigned to any person by the warrant holder separate from, or independent of the Beneficiary Securities. Warrant holders may exercise their right granted under a warrant within the period approved by the SEC which shall not be less than 1 year nor more than 5 years from the date of the Issue of the warrants. An Issuer of warrants must provide for a Warrants Registry Book maintained by the warrants registrar independent of the Issuer. (f) Stock Options  Stock option is a privilege granted to a party to subscribe to a certain portion of the unissued

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capital stock of a corporation within a specified period and under the terms and conditions of the grant, exercised by the grantee at any time within the period granted. The Rules provide that no corporation shall grant any stock option unless approval by the SEC is first obtained. Aside from a formal board resolution authorizing the grant of the option, the Rules require that the application with the SEC should contain a detailed statement as to the plan or scheme by which the option shall be exercised. No exercise of the right of the option shall be valid unless accompanied by the payment of not less than 40% of the total price of the shares so purchased, which payment shall be properly receipted for by the corporate treasurer, except where the grantee is an employee or officer who is not a director of the corporation in which case only 25% of the total price shall be required or allow a planned payroll deduction scheme. If the option shall be for compensation or payment of service already rendered, then the initial payment shall not be required.  The Rules provide for the following guidelines: (1) Stock options may be granted on the basis of proportionate interests of stockholders in the capital stock; (2) Stock options granted to employees or officers who are not members of the board may also be allowed after a review of the scheme since it would be in consonance with the policy of the government to widen corporate base and to distribute corporate profits wider and more equitable; (3) Stock options granted to non-stockholders may be granted only upon showing that the board has been duly authorized to grant the same by its charter or by a resolution of the stockholders owning at least 2/3 of the outstanding capital stock of the corporation, both voting and non-voting; (4) Options granted to directors, managing groups and corporate officers must be approved in a stockholders’ meeting by stockholders owning at least 2/3 of all the outstanding capital stock, voting or non-voting; (5) The options must be exercise within a period of three years from the approval thereof by the SEC or upon extension thereof duly approved by the SEC; and (6) No transfer of the right to an option shall be made without the approval of the SEC. The Rules provide that when a person has been allowed to subscribe to 5% of the total subscribed capital stock of the corporation at a price below the current market price, even when the subscription is above par, such subscription shall be considered and treated as stock option and the subscriber must be required to tender payment thereof to the corporation of at least 75% of the total price of the subscription. Such subscriptions shall not also be transferable until full payment. If they are to be sold, the price should not be lower than par or less than 80% of the market price at the time of the exercise, or its there is no transaction at the time of the exercise. Then the last asked price whichever is higher; provided that if the shares are not listed, the 80% referred to shall be based on the book value. (g) Re-Classification of Shares “Reclassification of shares does not always bring any substantial alteration in the subscriber’s proportional interest. But the exchange is different—there would be a shifting of the balance of stock features like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se yields income for tax purposes. . . In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modification of the subscriber’s rights and privileges—which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interests and not when there is still maintenance of proprietary interest.” Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). 3. Hybrid Securities (aGovernment v. Phil. Sugar Estates, 38 Phil. 15 [1918]; John Keley Co. v. Comm. of Internal Revenue, 326 U.S. 521, 66 S. Ct. 299, 90 L. Ed., 278 [1945]). NOTE: Sale of equity securities represent an ownership interest in the corporation and include both common and preferred stock. In addition, corporations finance much of their continued operations through debt securities. Debt securities or bonds do not represent an ownership interest in the corporation but rather create a debtor-creditor relationship between the corporation and the bondholder. GOVERNMENT v. PHIL SUGAR ESTATES

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In this case, the SC in determining whether the arrangement between two corporations was a contract of partnership or a loan arrangement between two corporations was a contract of partnership or loan arrangement noted the following features in the contract in ruling that it is an equity arrangement: (1) there was no period fixed in the contract for the repayment of the money except that the first return from sale of the land was to be devoted to the payment of the capital and there was no date fixed for such payment; (2) the entire amount of the credit as not be turned over at once but was to be used by the borrowing company as it was needed; (3) the return on the capital was not by a fixed rate of interest but 25% of the profits earned by the borrowing company in todos los negocios; (4) the lending company agreed to pay 25% of all general expenditures true and necessary that the borrowing company must make for the development of its business; (5) the consent of the lending company was necessary when the borrowing company desired to sell the land below an agreed market price, but was not required if the selling price was over the benchmark figure; and (6) the lending company acted as treasurer of the entire enterprise. The Court held that it is difficult to understand how this contract can be considered a loan. There was no date fixed for the return of the money and there was no fixed return to be made for the use of the money. The return was dependent solely upon the profits of the business. It is possible for the defendant to receive a return from the business even after the capital has been returned. The capital was to be returned as soon as the land was sold and apparently there were to be no profits until this capital was returned. The defendant was not to receive anything for the use of said sum until after the capital has been fully repaid, which is not consistent with the idea of loan. It is not impossible to provide that capital be repaid first but the usual method is to pay the interest first. 4. Quasi-Reorganization a) Reduction of Capital Stock (Sec. 38) Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of nopar stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.

Revised Bagtas Reviewer by Ve and Ocfe 2A Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission.

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One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. Reduction of capital stock cannot be employed to avoid the corporation’s obligations under the Labor Code. xMadrigal & Co. v. Zamora, 151 SCRA 355 (1987). (b) Stock Splits – each of the issued and outstanding shares is simply broken up into a greater number of shares, each representing a proportionately smaller interest in the corporation. The usual purpose of a stock split us to lower the price per share to a more marketable price and thus increase the number of the potential shareholders. They encourage investment. (c) Stock Consolidations – new shares are issued in a replacement of old shares with a higher par or issued value, without affecting the total value of the issued shares. Stock consolidations are resorted to make each share have a higher par or issued value and thereby make them more expensive in acquiring and to bring the stock within higher end of the market. XIV. ACQUISITIONS, MERGERS AND CONSOLIDATIONS NOTE: In mergers, there is no break in the subject matter that is why in a merger you end up with a super entity, and as such the magic of successorship (as CLV would put it) applies.
I.ACQUISITIONS AND

TRANSFERS

IN A NUTSHELL: NATURE The purchaser is only interested in the raw assets and properties of the business, perhaps to be used to establish his own business enterprise or to be used for his on-going business enterprise. In LIABILITIES The transferee is not liable for the debts and liabilities of the transferor EXCEPT where he impliedly or expressly agrees to assume such debts or when there was fraud. EMPLOYEES The transferee is not bound to retain the employees of the transferor, since the former does not really step into the shoes of the latter. The transferee is not liable even if the sale of the assets should result in the shutting down of the transferor’s operations and the laying-off of employees. (contract of employment is

ASSETS-ONLY LEVEL

BUSINESS ENTERPRISE LEVEL

such an acquisition, the purchaser is not interested in the entity of the corporate owner of the assets nor of the goodwill and other factors relating to the business itself. The purchaser’s interest goes beyond the assets or properties of the business enterprise. His primary interest is essentially to obtain the earning capability of the venture. However, he is not interested in obtaining the juridical entity that owns the business enterprise and therefore purchases directly the business from the corporate entity.

in personam) EXECPTION: (1) when expressly assumed (2) when contracts are entered into in bad faith

The transferee is liable for the debts and liabilities of the transferor.

The transferee should be bound to retain the services of the employees of the business that it has acquired, although it is not liable for the violations that the transferor had committed in the past and for which the transferor remains solely liable. (Initially the court held that the sale of a business does not ipso facto terminate the EER insofar as the successor employer is concerned, the change of management is not one of the just causes provided by law. However, the termination and payment of benefits prior to the sale is recognized as a proper means to avoid such a situation. BUT REFER TO CENTRAL AZUCARERA FOR A VERY IMPORTANT PRONOUNCEMENT!) a. EMPLOYEES HAVE NO EQUITY CLAIMS ON BUSINESS ENTERPRISE – when it comes to labor claims, the transferee is not obligated to absorb the employment of the existing employees nor the outstanding claims against the transferor. b. PIERCING APPLICABLE – The case of YU v NLRC clarifies that in a BE transfer, to make the transferee liable, there must be a showing of continuity of the same business by the same owners using the corporate fiction as a shield, and that

Revised Bagtas Reviewer by Ve and Ocfe 2A the transferor has ceased to exist and operate on its own. c. NEED FOR A CLEAR BREAK IN OPERATIONS – for a new enterprise to take over the business concerns of the other as not to make the new owners liable, there must be a formal and substantial termination and break from the operations of the predecessor entity. (Burden of proof is on the transferee.) Since the only result of the transaction is the change in ownership or control, the employees remain with the corporate employer in exactly the same manner as before the equity transfer, and therefore the purchaser does not assume any personal liability to the employees.

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EQUITY LEVEL

This constitutes looking at the entirety of the business enterprise as it is owned and operated by the corporation. The purchaser takes control and ownership of the business by purchasing the shareholdings of the corporate owner. The control therefore is indirect, since the corporate owner remains the direct owner of the business, and what the purchaser has actually purchased is the ability to elect the members of the board of the corporation who run the business.

The transferee is not liable for the debts and liabilities of the transferor except where the transferee expressly or impliedly aggress to assume such debts.

NOTES ON ASSETS-ONLY:  In such transfer, it is logical that the transferee would not be liable for the debts and liabilities of his transferor since there is no privity of contract over the debt obligations between the transferee and transferor’s creditors. (DOCTRINE OF RELATIVITY – contracts are binding only as between the parties)  COVERAGE OF BULK SALES LAW – if constituting bulk sale would affect the transferee in the sense that if the sale has not complied with the requirements of the Law, the sale could be classified as fraudulent and void, and therefore the title of the transferee over the assets would be void, even if he were a purchaser in good faith.  SPECIAL RULE ON CORPORATE DISSOLUTION – when another corporation takes over the assets of

another corporation which is dissolved, the succeeding corporation is liable for the claims against the dissolved corporation to the extent of the fair value of the assets assumed. See relevant portion of VILLANUEVA, Restatement of the Doctrine of Piercing The Veil of Corporate Fiction, 37 ATENEO L.J. 19 (No. 2, June 1993) 1. Concept of “Enterprise” or “Economic unit” or “Going concern” 2. Types of Acquisitions\Transfers (aEdward J. Nell Co. v. Pacific, 15 SCRA 415; PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 [2002]): EDWARD NELL v. PACIFIC FACTS: Appellant Edward J. Nell Co., appellant secured against Insular Farms, a judgment representing the unpaid balance of the price of a pump sold by appellant EJ Nell Co. to Insular Farms. A writ of execution issued. Thereafter, EJ Nell Co. filed the present action against Pacific Farms Inc., appellee, upon the theory that appellee is the alter ego of Insular Farms. Municipal court dismissed appellant’s complaint. EJ Nell appealed. CFI dismissed, CA dismissed. Appeal by certiorari to SC. ISSUE: W/N Pacific Farms is the alter ego of Insular Farms because the former had purchased all or substantially all the shares of stock, as well as real and personal properties of the latter, including the pumping equipment sold by EJ Nell to Insular Farms. HELD: Record shows that Pacific purchased 1,000 shares of stock of Insular Farms and that appellee sold shares of stock to certain individuals who reorganized said corporation; and that the BOD caused its assets, including its leasehold rights over a public land in Pangasinan to be sold to appellee for P10,000. We agree with CA that these facts do not prove that the appellee is an alter ego of Insular Farms or is liable for its debts. In the case at bar, there is neither proof nor allegation that appellee had expressly or impliedly agreed to assume the debt of Insular Farms in favor of appellant, or that the appellee is a continuation of Insular Farms, or that the sale of either the shares of stock or the assets of Insular Farms has been entered into fraudulently, in order to escape liability. Appellee purchased the shares of stock of Insular as the highest bidder at an auction sale at the instance of a bank to which said shares had been pledged as security for an obligation of Insular Farms in favor of said bank. Where one corporation sells its assets to another corporation, latter not liable for debts of transferor, except when: 1. purchaser impliedly or expressly agrees 2. transaction is a consolidation or merger 3. mere continuation of selling corporation 4. transaction is entered into fraudulently Since none of the exceptions apply, Pacific is not deemed liable. Judgment affirmed. 3. Business Enterprise Transfers: aA.D. Santos v. Vasquez, 22 SCRA 1156 (1968); aLaguna Transportation Co., Inc. v. SSS, 107 Phil. 833 (1960). NOTES:  A business enterprise comprises more than just the properties of the business, but includes a “concern” that covers the employees, the goodwill, list of clientele and suppliers, etc. which give it value separate and distinct from its owners or the juridical entity under which it operates. (The

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 

BE is considered and accounted for as a separate accounting unit apart from the other assets and businesses of the proprietor.) A business enterprise by itself is a “concern” that has a separate economic unit or selling value from its owners’ other assets; and that the businessmen evaluating whether to purchase such business enterprise do not only look at the properties of the business, but many other intangibles that really have no definite monetary value, except when expressed as goodwill and assigned a value under principles of Accounting, such as the moral and technical competence of the employees and middle-management, the list of its valued clientele, location of the business, etc. The buyer is “willing” to pay much more if he can get the goodwill of the business, meaning the good will of the customers, that they may continue to tread the old footpath to his door and maintain with him the business relations enjoyed by the seller. RATIONALE BEHIND THE ABSORPTION OF LIABILITIES IN SUCH TYPE OF ACQUISITION – The purpose is to protect the creditors of the business by allowing them a remedy against the new controller or owner of the business enterprise. Other wise, creditors would be left holding the bag since they may not be able to recover from the transferor who has disappeared with the loot nor against the transferee who can claim that he is a purchaser in good faith and for value. Although no formal mortgage contract is executed, creditors and suppliers extend credit to the business enterprise because they see that the business’ earning capacity and assets as a security to the undertaking that they will eventually be paid back. The doctrine therefore puts the burden on the shoulder of the person who is in the best position to protect himself, namely the transferee, by obtaining certain guarantees and protection from the transferor. FREE AND HARMLESS CLAUSE may be provided, by such is binding only as to the transferor and transferee. It is not binding on the creditors. The transferee is made liable for the business enterprise, even its losses, as compared to a third party mortgagor whose liability does not exceed the liabilities of the assets that he acquired, because the business enterprise grows while a mortgage does not. As the transferee is to receive profits, he must also suffer the losses that come with it.

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AD SANTOS v. VASQUEZ

FACTS: Ventura Vasquez was petitioner AD Santos Inc.’s taxi driver. While driving petitioner’s taxi cab, he vomited blood. He was sent to the company’s physician, Dr. Roman, who treated him and sent him to Sto. Tomas Hospital where he was confined. He was then admitted at the Quezon Institute where he was diagnosed with pulmonary tuberculosis. He has not resumed work. Vasquez then filed a claim with the Workmen’s Compensation Commission. Commission ordered petitioner to pay compensation and reimburse Vasquez the sum he had spent for his treatment. Case is now before SC on review. ISSUE: W/n Vasquez has a cause of action against petitioner. HELD: Petitioner’s averment that respondent driver had no cause of action against petitioner is without merit. Vasquez’s claim for compensation is directed against petitioner AD Santos Inc. Petitioner, in answer to the claim, categorically admitted that claimant was its taxi driver. Add to this the fact that the claimant contracted pulmonary TB by reason of his employment. Thus respondent’s cause of action against petitioner is complete. But petitioner cites the fact that respondent driver, in the course of his testimony, mentioned that he worked for the City Cab operated by Amador Santos. This will not detract from the validity of respondent’s right to compensation. For, the truth is that really at one time Amador Santos was the sole owner and operator of the City Cab. It was subsequently transferred to petitioner AD Santos Inc., in which Amador Santos was an officer. The mention by respondent of Amador Santos as his employer in the course of his testimony, should not be allowed to confuse the facts relating to employer-employee relationship for when the veil of corporate fiction is made as a shield to

perpetrate a fraud and/or confuse legitimate issues (here, the relation of employer-employee) the same should be pierced. Decision of the WCC in favor of Vasquez affirmed.

LAGUNA TRANSPORTATION CO. INC. v. SSS FACTS: Petitioner Laguna is a domestic corporation with principal place of business in Biñan, Laguna. Respondent SSS has served notice upon petitioner requiring it to register as member of the System and to remit the premiums due from all the employees of the petitioner and contribution of the latter to the System beginning month of September 1957. In 1949, the Biñan Transportation Co., sold part of the lines and equipment to G. Mercado, A. Mercado, Mata, and Vera Cruz. After the sale, the vendees formed an unregistered partnership under the name of Laguna Transportation Co. which continued to operate the lines and equipment bought from the Biñan Transpo Co. The original partners forming the Laguna Transpo Co., with the addition of two new members, organized a corporation known as the Laguna Transportation Company Inc., which was registered with the SEC on June 20, 1956. The corporation continued the same transportation business of the unregistered partnership. Prior to November 11, 1957, plaintiff requested for exemption from coverage by the System on the ground that it started operation only on June 20, 1956, when it was registered with the SEC but on Nov. 11, 1957, SEC informed plaintiff that it was covered. On the basis of the stipulation of facts abovementioned, the court rendered a decision which regarded petitioner as being in operation for at least two years prior to enactment of RA 1161 as amended by RA 1792 (creating SSS) and therefore subject to compulsory coverage under the law. Petitioner appealed to SC. ISSUE: w/n Laguna is covered by the SSS. HELD: It is undisputed that Laguna Transportation Company, an unregistered partnership, commenced operation as a common carrier on April 1, 1949. The four original partners later converted the partnership into a corporate entity by registering its articles of incorporation with the SEC. Firm name “Laguna Transportation Co.” was not altered, except with the addition of the word “Inc.” There was in effect, only a change in the form of the organization of the entity engaged in the business of transportation of passengers. Hence, said entity as an employer engaged in business, was already in operation for at least 3 years prior to the enactment of the SS Act on June 18, 1954. If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. To adopt petitioner’s argument would defeat, rather than promote, the ends for which the Social Security Act was enacted. An employer could easily circumvent the statute by simply changing his form of organization every other year, and then claim exemption from contribution to the System as required, on the theory that, as a new entity, it has not been in operation for a period of at least 2 years. The door to fraudulent circumvention of the statute would then be opened. Judgment affirmed. NOTE: While it is true that a corporation once formed is conferred a juridical personality separate and distinct from the persons composing it, it is but a legal fiction introduced for the purpose of convenience and to subserve the ends of justice. The concept cannot be extended to a point beyond

Revised Bagtas Reviewer by Ve and Ocfe 2A its reasons and policy, and when invoked in support of an end in subversive of this policy, will be disregarded by the courts.

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NOTE: The doctrine therefore is that where a corporation is formed by, and consisted of members of a partnership whose business and property was conveyed and transferred to the corporation for the purpose of continuing its business, in payment for which corporate capital stock was issued, such corporation is presumed to have assumed partnership debts, and is prima facie liable therefore. Although the business enterprise was operated under a partnership scheme and later transferred to a corporation, the business enterprise is deemed to have been in operation for the required two-year period as to come under the coverage of the SSS Law (San Teodoro Dev. v. SSS, 8 SCRA 96 [1963]); and since the corporation assumed all the assets and liabilities of the partnership, then the corporation cannot be regarded, for purposes of the SSS Law, as having come into being only on the date of its incorporation but from the date the partnership started the business. (Oromeca Lumber Co. v. SSS, 4 SCRA 1188 [1962]). Where a corporation is closed for alleged losses and its equipment are transferred to another company which engaged in the same operations, the separate juridical personality of the latter can be pierced to make it liable for the labor claims of the employees of the closed company. National Federation of Labor Union v. Ople, 143 SCRA 124 (1986). Although a corporation may have ceased business operations and an entirely new company has been organized to take over the same type of operations, it does not necessarily follow that no one may now be held liable for illegal acts committed by the earlier firm. aPepsi-Cola Bottling Co., v. NLRC, 210 SCRA 277 (1992). PEPSI v. NLRC FACTS: Private respondent Oscar Encabo was employed as a maintenance manager in Pepsi Cola Distributors (PCD). His employment was terminated because of his negligence in repairing the beverage plant’s CEM-72 soaker machine which needed rehabilitation. According to PCD, his delays in repairing the machine caused the company to incur significant losses. Encabo filed a complaint for illegal dismissal and unfair labor practice claiming that he was denied due process. The NLRC found in favor of Encabo and issued a writ of execution addressed to Pepsi Cola Bottling Corp (PBC) ordering PCD to reinstate him. The writ was delivered to Pepsi-Cola Products Philippines (PCPPI). PCCPI alleged that reinstatement is no longer possible since PCD had closed down its business on the ground of serious business losses and the new franchise holder, PCPPI, is a new entity. ISSUE: W/N PCPPI is liable despite the fact that it’s a new entity HELD: Yes, it’s liable. Company is ordered to may 3 years worth of backwages in lieu of reinstatement. PCD may have ceased business operations and PCPPI may be a new company but it does necessarily follow that one may now be held liable for illegal acts committed by the earlier firm. The complaint was filed when PCD was still in existence. Pepsi-Cola never stopped doing business in the Philippines. The same softdrink products sold in 1988 when the complaint was initiated continue to be sold now. The sale of products did not stop at the time PCD bowed out and PCPPI came into being. There is no evidence presented showing that PCCPI, as the new entity or purchasing company is free from any liabilities incurred by the former company. In fact, in the surety bond put up by petitioners, both PCD and PCPPI bound themselves to answer for mentary awards which clearly implies that the PCPPI as a result of the transfer of the franchise bound

itself to answer for the liability of PCD to its employees. NOTE: What may have convinced the Court to rule as it did, was the Court’s finding that in the surety bond put to cover the appeal, both PCD and PCPPI bound themselves to answer the monetary awards of the private respondent in case of an adverse decision of the appeal, which clearly implied that PCPPI as a result of the transfer of the franchise bound itself to answer for the liability of PCD to its employees. “It should be rather clear that, as between the estate and the corporation, the intention of incorporation was to make the corporation liable for past and pending obligations of the estate as the transportation business itself was being transferred to and placed in the name of the corporation. That liability on the part of the corporation, vis-àvis the estate, should continue to remain with it even after the percentage of the estate’s shares of stock in the corporation should be diluted.” aBuan v. Alcantara, 127 SCRA 845 (1984). BUAN v. ALCANTARA NOTE: The Court held that the new corporation taking over all the mortgaged assets of an old corporation in exchange for all the old corporation’s capital stock and continuing to operate the business formerly operated by the old corporation is an alter ego of the old corporation so as to be liable to pay the obligations of the old corporation, notwithstanding that the old corporation retained title to the mortgaged assets. Similarly, where the administrator of the estate of a decedent incorporated the assets of the estate into a corporation and continued the business of the latter, the administrator and the corporation so formed are alter egos, each in respect to the other, so that the administrator would be liable for the obligations of the corporation just as the corporation would be liable for the debts of the administrator. 4. Equity Transfers (aPhividec v. Court of Appeals, 181 SCRA 669 [1990]). NOTES:  The logic of the doctrine on liability under this heading finds support in the main doctrine of separate juridical personality, that by purchasing the shares in a corporation that owns a business, the stockholder does not by that reason alone become the owner directly of the business assets and does not become personally liable for the debts and liabilities of the business. In addition, the buyer of the controlling shares of stock in a corporation may take advantage of the limited liability feature that is part of the corporate set-up.

PHIVIDEC v. CA FACTS: Borres was injured in an accident that was later held to be due to the negligence of Phividec Railways Inc (PRI). The accident occurred on March 29, 1979. On May 25, 1979, Philippine Veterans Investment Dev’t. Corp (PHIVIDEC) sold all of its right and interest in PRI to PHILSUCOM. 2 days later, PHILSUCOM caused the creation of a wholly owned subsidiary, Panay Railways to operate the assets acquired from PHIVIDEC. A complaint was filed by Borres against PRI and Panay. Panay disclaimed liability on the ground that in there is a stipulation in the agreement concluded between PHIVIDEC and PHILSUCOM which frees PHILSUCOM from “any action or liability that may arise out of or result from acts or omissions, contracts or transactions prior to the turnover.” ISSUE: W/N PHILSUCOM is liable to liability incurred prior to the transfer. HELD: No it is not liable. Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a

Revised Bagtas Reviewer by Ve and Ocfe 2A

consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts. Besides, PHIVIDEC'S act of selling PRI to PHILSUCOM shows that PHVIDEC had complete control of PRI's business. This circumstance renders applicable the rule cited by third-party plaintiff-appellee (Costan v. Manila Electric, 24 F 2nd 383) that if a parent- holding company (PHIVIDEC in the present case) assumes complete control of the operations of its subsidiary's business, the separate corporate existence of the subsidiary must be disregarded, such that the holding company will be responsible for the negligence of the employees of the subsidiary as if it were the holding company's own employees. It is clear from the evidence of record that by virtue of the agreement between PHIVIDEC and PHILSUCOM, particularly the stipulation exempting the latter from any "claim or liability arising out of any act or transaction" prior to the turn-over, PHIVIDEC had expressly assumed liability for any claim against PRI. Since the accident happened before that agreement and PRI ceased to exist after the turn-over, it should follow that PHIVIDEC cannot evade its liability for the injuries sustained by the private respondent. NOTE: The general rule therefore is that in an equity transfer, the transferee does not become personally liable for the obligations of the corporate enterprise under the main doctrine of separate juridical personality, unless either the transferee by contract assumes such obligations, or there is basis for piercing the veil of corporate fiction. 5. Aspects as to Employees (aComplex Electronics Employees Assn. v. NLRC, 310 SCRA 403 [1999]). COMPLEX ELECTRONICS EMPLOYEES ASSOCIATION v. NLRC

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B. MERGER

AND

CONSOLIDATION

NOTE: The power to merge and consolidate is an expressed power of the corporation. (NOT INHERENT) MERGER (1) Union whereby one or more existing corporations are absorbed by another corporation which survives and continues the combined business. CONSOLIDATION (1) Union of two or more existing corporations to form a new corporation called the consolidated corporation. It is a combination by agreement between two or more corporations by which their rights, franchise, privileges and properties are united and become those of a single, new corporation, composed generally, although not necessarily, of the SHs of the original corporations. (2) All constituent corporations are dissolved and absorbed by the new consolidated enterprise. (3) No liquidation occurs and the surviving corporation assumes ipso jure the liabilities of the dissolved corporation, regardless of whether the creditors have consented or not.

(2) All constituent corporations except the surviving one is dissolved. (3) No liquidation occurs and the surviving corporation assumes ipso jure the liabilities of the dissolved corporation, regardless of whether the creditors have consented or not.

1. Concepts A consolidation is the union of two or more existing entities to form a new entity called

the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). 2. Procedure: (a) Plan of Merger or Consolidation (Sec. 76) Section 76. Plan or merger of consolidation. - Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; 2. The terms of the merger or consolidation and the mode of carrying the same into effect; 3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (b) Stockholders' or Members' Approval (Sec. 77) Section 77. Stockholder's or member's approval. - Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. (c) Articles of Merger or Consolidation (Sec. 78) Section 78. Articles of merger or consolidation. - After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth: 1. The plan of the merger or the plan of consolidation;

Revised Bagtas Reviewer by Ve and Ocfe 2A 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and

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3. As to each corporation, the number of shares or members voting for and against such plan, respectively. (d) Approval by SEC (Sec. 79) Section 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation, signed and certified as herein above required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective. If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. Submission of Financial Statements Requirements: For applications of merger, the audited financial statements of the constituent corporations (surviving and absorbed) as of the date not earlier than 120 days prior to the date of filing of the application and the long-form audit report for absorbed corporation(s) are always required. Long form audit report for the surviving corporation is required if it is insolvent. (SEC Opinion 14, s. of 2002, 15 November 2002). 3. Effects of Merger or Consolidation (Sec. 80; Associated Bank v. Court of Appeals, 291 SCRA 511 [1998]) Section 80. Effects of merger or consolidation. - The merger or consolidation shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The

rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. When the procedure for merger/consolidation prescribed under the Corporation Code are not followed, there can be no merger or consolidation, and corporate separateness between the constituent corporations remains, and the liabilities of one entity cannot be enforced against another entity. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. The surviving corporation therefore has a right to institute a collection suit on accounts of one of one of the constituent corporations. Babst v. Court of Appeals, 350 SCRA 341 (2001).  ADVANTAGES: (1) continuous flow of juridical personalities and business enterprise (2) allows corporate planners certain ends not available to other forms of transfer (3) advantages in the field of taxation. DE FACTO MERGER – can be pursued by one corporation acquiring all or substantially all of the properties of another corporation in exchange of shares of stock of the acquiring corporation. The acquiring corporation would end up with the business enterprise of the target corporation; whereas the target corporation would end up basically its only remaining assets being the shares of stock of the acquiring corporation. C. EFFECTS
ON

EMPLOYEES

OF

CORPORATION

1. Assets Only Transfers (Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 [1989]) “There is no law requiring that the purchaser of MDII’s assets should absorb its employees . . . the most that the NLRC could do, for reasons of public policy and social justice, was to direct [the buyer] to give preference to the qualified separated employees of MDII in the filling up of vacancies in the facilities. MDII Supervisors & Confidential Employees Asso. v. Pres. Assistance on Legal Affairs, 79 SCRA 40. 2. Business-Enterprise Transfers (aCentral Azucarera del Danao v. CA, 137 SCRA 295 [1985]; Yu v. NLRC, 245 SCRA 134 [1995]; Sunio v. NLRC, 127 SCRA 390 [1984]; San Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991).

CENTRAL AZUCARERA DEL DAVAO v. CA FACTS: Private respondents in this case were regular employees of Central Azucarera del Danao (Central). Central sold its sugar mill and other properties to Danao Devt. Corporation (DADECO) by virtue of a Deed of Sale. The deed made no express mention of the continued employment status of the old employees but DADECO hired the old employees anyway but in accordance with its own hiring and selection policies. Nonelon Bana-ay and others were terminated and subsequently filed complaints for recovery of termination pay against DADECO and Central as common defendants. They alleged that DADECO fraudulently dismissed them without justifiable cause or any advance notice. DADECO denied liability for termination pay asserting lack of cause of action since the latter was not their employer for the period in question. Central claimed that DADECO assumed liability to pay termination pay corresponding to the alleged years of employment. CFI ordered Central to pay the complainants. The complaints were dismissed as against DADECO. CA affirmed the ruling of the lower court. Central further argued that employees were not terminated as would entitle them to termination pays when it sold its assets to Dadeco. Instead, they were absorbed and continued working in the sugar mill upon Dadeco’s takeover. ISSUE:

Revised Bagtas Reviewer by Ve and Ocfe 2A

w/n a change of the ownership or mgt of a corp by virtue of a sale of all or substantially all of it assets operates to insulate the selling corp from its obligation to its employees under the Termination Pay Law HELD: It is a well-recognized principle that it is within the employer’s legitimate sphere of mgt control of business to adopt economic policies or to make some changes or adjustment or organization or operations that would insure profit or protect the investments of its stockholders. As in the exercise of such mgt prerogative, it may sell or dispose all or substantially all of its assets and properties that may bring about termination or dismissal of its employees in the process. Such dismissal should not however be interpreted is such a manner that would allow the employer to escape payment of termination pay. The sale must be motivated by good faith as an element of exemption from liability. Indeed, an innocent transferees has no liability to the employees of the transferor to continue employing them. The most that the purchasing company can do for reasons of public policy and social justice is to give old employees preference. The Deed of Sale made no express stipulation of the continued employment of Central’s employees. Clearly, there was in fact an interruption of the employment. The employees were rehired hired anew by Dadeco, their new employer. However, in as much as there was no notice of termination whatsoever given to the employees of Central coupled with the fact the Central made no effort in apprising its employees of the consequences of the sale (sale was done behind the back of the employees; employees were surprised) justice and equity dictate that the employees be entitled to their termination or separation pay corresponding to the years of service with central. By way of reminder, employers should exercise caution and care in dealing with its employees to prevent suspicion that the adoption of certain corporate combinations such as merger or consolidation or outright sale of assets is but a scheme to evade termination pay of the employees. NOTE: Why are employees not considered as creditors who likewise have claim with the business enterprise? Normal creditors have lien on the business enterprise while the employees do not. Creditors extend loans to the company in consideration for the profit-making ability of the business enterprise while employees extend their services to the corporation whether or not the same is profitable or not. That is why the rule on assets-only transfer are applied to claims of employees. 3. Equity Transfers (aPepsi Cola Distributors v. NLRC, 247 SCRA 386 (1995); aManlimos v. NLRC, 242 SCRA 145 [1995]; Robledo v. NLRC, 238 SCRA 52 [1994]; Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992); DBP v. NLRC, 186 SCRA 841 [1990]; Coral v. NLRC, 258 SCRA 704 [1996]; Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 [1995]). PEPSI COLA DISTRIBUTORS v. NLRC FACTS: Private respondent Tertuliano Yute started working with Pepsi-Cola Bottling Company of the Philippines (PCBCP) as contractual maintenance electrician in 1979 and when Pepsi Cola Distributors (PCD) took over the company’s manufacturing operations in 1981, he was absorbed as a regular employee. In December 15, 1988, PCD terminated Yute for alleged abandonment of work and/or absence without leave. He file a complaint for illegal; dismissal before the NLRC wherein the labor arbiter declared the dismissal illegal and ordered PCD to reinstate him. In July 25, 1989, (33 days after his reinstatement) , PCD stopped payment of Yute’s salary on the ground that it allegedly sold its business interest with Pesi Cola Products Philippines, Inc. (PCPPI) effective July 24 of the same year. NLRC issued a writ of execution ordering PCD to pat their salaries from July 25 to September 30. PCPPI filed in the case a manifestation/motion praying that the change of ownership of the company be taken cognizance of by the NLRC saying that PCPPI has a separate personality from PCD and therefore, not a party to the cases filed. Not being a party, they can not be subjected to the issue writ of execution. The NLRC in resolving the motion for recon that was filed by PCD modified its decision by ordering both PCD and PCPPI to reinstate Yute. PCD is further ordered to pay Yute’s separation pay.

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Hence, this petition for grave abuse of discretion on the part of NLRC. ISSUE: w/n there was GAD on the part of NLRC in ordering both PCD and PCPPI to reinstate Yute and the former to pay Yute his separation pay. (note that there were two dismissals referred to in this case- December 15, 1988 and the stop payment in July 25, 1989) HELD: As to the first dismissal, the court held that the penalty of dismissal as disproportionate for an infraction which under the attendant circumstances appears to be excusable. He experienced stomachache and his supervisor gave him a vacation leave the following day so that he can go to the company’s physician for check-up. Yute was not able to formally inform the management that he will be absent for 25 days (for rest) as prescribed by the company’s physician. The court however did not sustain the second dismissal by PCD by removing him from the payroll on the ground that it allegedly sold its business interest to PCPPI. The contention that the second dismissal is a separate and distinct from the issue of the first dismissal is nothing but an attempt of PCD to evade its liability for illegally dismissing Yute and to shield the purchasing corp, PCPPI, from the said liability. The court noted that the issue of w/n PCPPI can be liable for the illegal acts of its predecessor, PCD, as in the instant case has already been settled in Pepsi Cola Bottling vs. NLRC where the court held that: PCD may have ceased its operations and that PCPPI is a new company but it does not necessarily follow that no one may now be liable for the illegal acts committed by the earlier firm. The complaint was filed when PCD was still in existence. Pepsi Cola never stopped doing business. There is no showing that PCPPI as the new entity is free from any liability incurred by the former corp. Hence, the court affirmed the ruling of NLRC in ordering both PCD and PCPPI to reinstate Yute with full backwages from July 25, 1989 upto actual reinstatement.

MANLIMOS v. NLRC FACTS: Petitioners were among the regular employees of Super Mahogany Plywood Corporation. A new owner/mgt group headed by Alfredo Roxas acquired complete ownership of the corp. Petitioners were advised of such change of ownership. They continued to work for the new owner until Dec 1991. Each of them executed on Dec 1991 a Release and Waiver which was acknowledged before DOLE’s hearing officer. The new owner caused the publication of a notice for the hiring of new workers. The petitioners then applied and were subsequently hired on probationary basis for 6mos as patchers or tapers, bur were compensated on piece-rate or task basis. Two employees were considered to have abandoned their work while the rest were dismissed because they allegedly committed acts prejudicial to the interests of the new mgt which consisted of their “ including unrepaired veneers in their reported productions on output as well as untaped corestock or whole sheets in their supposed taped veneers/corestock.” They, thus, file a complaint for illegal dismissal before the sub-Regional Arbitration Branch of the NLRC Petitioners were arguing that they remained regular employees regardless of the change of mgt and the execution of the Release and Waiver. They argued that being a corp, the juridical personality was unaffected even if the ownership of its shares of stock changed hands and that their signing of the Release was on no moment not only because the consideration was inadequate but also because the employees who receive their separation pay are not barred from contesting the legality of their dismissal and quitclaims executed by laborers are frowned upon. Labor Arbiter ruled in favor of the petitioners and ordered reinstatement and payment of backwages. However, the NLRC reversed the decision. HELD: decision of NLRC affirmed. The change of ownership was done bona fide and the petitioners did not for any moment before the filing of the complaints raise any doubt as to the motive of change. On the contrary, upon

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being informed thereof and their eventual termination, they freely accepted their separation pay and other benefits and individually executed the Release and Waiver. A change of ownership is not proscribed by law, In Central Azucarera del Danao vs. CA the court held that it is within the employer’s legitimate sphere of mgt control of business to make some changes or adjustment or organization or operations that would insure profit. It may sell or dispose all or substantially all of its assets that may bring about termination or dismissal of its employees. Such dismissal should not however be interpreted is such a manner that would allow the employer to escape payment of termination pay. The sale must be motivated by good faith as an element of exemption from liability. Where such transfer of ownership is done in good faith, the transferee is under no legal duty to absorb the transferor’s employees. The most that the transferee may do, for reasons of public policy and social justice, is to give preference. The court affirmed the ruling of the NLRC but for the employees who allegedly abandoned their work, the court ordered payment of backwages since there was no clear and deliberate intent on the part the said employees to discontinue employment NOTE: The reasoning is flawed, since with the change of majority ownership of a corporation, the relationship of employer-employee in the business does not change, and the corporation-employer which has a separate juridical personality, remains the same employer to the employees of the business. 4. Mergers and Consolidations (aFilipinas Port Services v. NLRC, 177 SCRA 203 [1989]; Filipinas Port Services v. NLRC, 200 SCRA 773 [1991]; National Union Bank Employees v. Lazaro, 156 SCRA 123 [1988]); First Gen. Marketing Corp. v. NLRC, 223 SCRA 337 (1993). NOTE: It would be logical to expect that the contractual rights of employees and the existing CBA would have to be absorbed by the surviving or consolidated corporation. FILIPINAS PORT SERVICES v. NLRC FACTS: Stevedoring and arrastre services for coastwise or domestic cargoes loaded at the Sta. Ana Pier and Sasa Wharf of the Port of Davao were handled by several cargo handling operators, wherein one is DAMASTICOR. During the existence of DAMASTICOR, private respondent Josefino Silva was employed by said company. Subsequently, the government adopted a policy that there should be only one cargo handling operator in every port. Accordingly all the existing arrastre and stevedoring firms which were then operating individually in the Port of Davao were integrated into a single and unified service which resulted in the formation of a new corporation known as the Davao Dockhandlers, Inc. The name was later changed to Filipinas Port Services, Inc. (FILPORT). By mandate, however, of the PPA's Administrative Order, petitioner drew its necessary labor force, together with its personnel complement, from the merging operators. Of the employees absorbed, private respondent was among them. He continued to work until his retirement. Private respondent was paid his retirement pay corresponding only to the period that he actually worked with petitioner. His length of service with DAMASTICOR was not included. Private respondent lodged a complain against petitioner and/or DAMASTICOR with the DOLE demanding payment of separation pay covering the period of his employ with DAMASTICOR. Petitioner denied owing any monetary liability to private respondent, claiming that it could not be held liable for the payment of private respondent's separation pay corresponding to the period of the latter's employment with DAMASTICOR since it is not the successor-employer of the latter. Labor Arbiter rendered a Decision ordering respondent FILPORT as the survivor- employer to pay retirement pay to complainant computed from 1960 until his retirement on June 29, 1987. Complaint against DAMASTICOR is ordered Dismissed inasmuch as said corporation no longer exists. NLRC promulgated its Decision affirming the labor arbiter's Decision.

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Petitioner now claims the NLRC committed a grave abuse of discretion. ISSUE: Whether or not the successor-in-interest of an employer is liable for the differential retirement pay of an employee earned by him when he was still under the employment of the predecessor-ininterest. HELD: A close scrutiny of the record of this case inevitably and clearly shows that petitioner came into existence as a juridical person only as a direct result of the merger among different cargo handling operators. In Fernando vs. Angat Labor Union, 5 this Court held that, unless expressly assumed, labor contracts are not enforceable against a transferee of an enterprise, labor contracts being in personam. On the other hand, a transferor in bad faith may be held responsible to employees discharged in violation of the Industrial Peace Act. 6 Petitioner cannot be held liable for the payment of the retirement pay of private respondent while in the employ of DAMASTICOR. It is the latter who is responsible for the same as the labor contract of private respondent with DAMASTICOR is in personam and cannot be passed on to the petitioner. The adverted memorandum of the PPA Assistant General Manager to this effect is well taken. 5. Spin-Offs (aSMC Employees Union-PTGWO v. Confessor, 262 SCRA 81 [1996]).  A spin off has the opposite effect of a merger or consolidation whereby a department, division or portions of the corporate business enterprise is sold-off or assigned into a new corporation that will arise by the process which may constitute into a new subsidiary of the original corporation. American literature describes such to exist when a parent corporation organizes a subsidiary to which is transferred part of parent’s assets in exchange of all capital stock of subsidiary and stock of subsidiary is transferred to parent’s shareholders without surrender of their stock in parent. It is also described as one where part of assets of corporation is transferred to a new corporation and stock of transferee is distributed to shareholders or transferor without surrender by them of stock in the transferor. Spin-offs are not regulated by the Code, the closest provision that would govern it would be Section 40.

Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization

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by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. SMC v. CONFESSOR NOTE: The SC held that spin-offs were done for valid business cause and in good faith, and therefore valid. The Court denied the Union’s petition to include the employees in the spun-off divisions to be within the SMC bargaining unit, and held that the employees in the new corporations constitute new bargaining units.

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XV. xREHABILITATION AND INSOLVENCY See VILLANUEVA, Revisiting the Philippine “Laws” on Corporate Rehabilitation, XLIII ATENEO L.J., No. 2 (May, 1999). 1. Corporate Bankruptcy Laws in General (a) Governing Laws (Insolvency Act, PD 902-A, Securities Regulation Code [RA 8799]) (b) Types of Bankruptcy Proceedings in the Philippines (c) Resolution on Jurisdiction Issues in Bankruptcy Proceedings: Ching v. Land Bank of the Philippines, 201 SCRA 190 (1991). 2. Suspension of Payments (a) Insolvency Law (Secs. 2 to 13) - Situation of the corporate debtor - Nature of petition - Required vote of creditors - Consequences of approval/non-approval (b) P.D. 902-A (Sec. 5[d]), Sec. 5.10 of Securities Regulation Code (c) Interim Rules on Corporation Rehabilitation (supplanted SEC Rules on Petition, SEC Memo, dated 7 October 1997) 3. Corporate Rehabilitation (a) Nature of “Rehabilitation” (Ruby Industrial Corp. v. CA, 284 SCRA 445 (1998). (b) Basis of RTC Power to Undertake Corporate Rehabilitation (Secs. 5[d] and 6, PD 902-A, Sec. 5.10, Securities Regulation Code) On 15 December 2000, the Supreme Court, in A.M. No. 00-8-10-SC, adopted the Interim Rules of Procedure on Corporate Rehabilitation and directed to be transferred from the SEC to Regional Trial Courts, all petitions for rehabilitation filed by corporations, partnerships, and association under P.D. 902-A in accordance with the amendatory provisions of Republic Act No. 8799. The rules require trial courts to issue, among other things, a stay order in the “enforcement of all claims, whether for money or otherwise, and whether such enforcement is by court action or otherwise,” against the corporation under rehabilitation, its guarantors and sureties not solidarily liable with it. Philippine Airlines v. Kurangking, 389 SCRA 588 (2002). (c) SC Interim Rules on Corporate Rehabilitation

Requirements of Petition: The contents of the petition for corporate rehabilitation are provided under Rule 4, Section 2(k) of the Interim Rules on Corporate Rehabilitation, which among other things, prescribe that the petition needs for a certification. Chas Realty and Dev. Corp. v. Talavera, 397 SCRA 84 (2004). If extraordinary corporate action mentioned in Rule 4, Section 2(k), of the Interim Rules are to be done under the proposed rehabilitation plan, the petitioner would be bound to make it known that it has received the approval of a majority of the directors and the affirmative votes of stockholders representing at least two-thirds (2/3) of the outstanding capital stock. Where no such extraordinary corporate acts, or one that under the law would call for a two-thirds (2/3) vote are contemplated to be done in carrying out the proposed rehabilitation plan, then the approval of stockholders would only be by a majority, not necessarily a two-thirds (2/3), vote, as long as, of course, there is a quorum. Chas Realty and Dev. Corp. v. Talavera, 397 SCRA 84 (2004). (e) Appointment of Management Committee or a Rehabilitation Receiver In exercising the discretion to appoint a management committee, the officer or tribunal before whom the application was made must take into account all the circumstances and facts of the case, the presence of conditions and grounds justifying the relief, the ends of justice, the rights of all the parties interests in the controversy and the adequacy and effectiveness of other available remedies. The discretion must be exercised with great caution and circumspection and only for a reason strongly appearing to the tribunal or officer exercising jurisdiction. Once the discretion has been exercised, the presumption to be considered is that the officer or tribunal has fairly weighed and appraised the evidence submitted by the parties. Jacinto v. First Women’s Credit Corp., 410 SCRA 140 (2003). (f) Automatic Stay - When It Becomes Effective: The appointment of a management committee or rehabilitation receiver may only take place after the filing with the SEC of an appropriate petition for suspension of payments. The conclusion is inevitable that pursuant to Section 6(c), taken together with Sections 5(d) and (d), a court action is ipso jure suspended only upon the appointment of a management committee or a rehabilitation receiver. Barotac Sugar Mills, Inc. v. CA, 275 SCRA 497 (1997); Union Bank v. CA, 290 SCRA 198 (1998). - Duration: B.F. Homes, Inc. v. Court of Appeals, 190 SCRA 262 (1990). The stay order is effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings. PAL v. Kurangking, 389 SCRA 588 (2002). - Parties Covered/Benefitted: Union Bank of the Philippines v. CA, 290 SCRA 198 (1998); Modern Paper Products, Inc. v. CA, 286 SCRA 749 (1998); Traders Royal Bank v. CA, 177 SCRA 788 (1989); Chung Ka Bio v. IAC, 163 SCRA 534 (1988). - Claims Covered: PCIB v. CA, 172 SCRA 436 (1989); Alemar’s Sibal & Sons, Inc. v. Elbinias, 186 SCRA 94 (1990); RCBC v. IAC, 213 SCRA 830 (1992); BPI v. CA, 229 SCRA 223 [1994]). Interim Rules must be read and applied along with Section 6(c) of P.D. 902-A, directing that upon the appointment of a management committee, rehabilitation receiver, board or body pursuant to the decree, “all actions” for claims against the distressed corporation “pending before any court, tribunal, board or body shall be suspended accordingly.” PAL v. Kurangking, 389 SCRA 588 (2002). - Types of “Claims” Covered (Finasia Investments v. CA, 237 SCRA 446 [1994]) A “claim” is said to be “a right to payment, whether or not it is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, and secured or unsecured.” Verily, the claim against an airline company is a money claim for the missing luggages, a financial

Revised Bagtas Reviewer by Ve and Ocfe 2A demand, that the law requires to be suspended pending the rehabilitation proceedings. PAL v. Kurangking, 389 SCRA 588 (2002).

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The justification for the automatic stay of all pending actions for claims is to enable the management committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the “rescue” of the debtor company. To allow labor claims to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted defending claims against the corporation instead of being directed toward its restructuring and rehabilitation. Rubberworld [Phils.], Inc. v. NLRC, 305 SCRA 721 (1999); 336 SCRA 433 (2000). (g) Powers of Management Committee or the Rehabilitation Receiver (Sec. 6, PD 902-A; Interim Rules on Corporate Rehabilitation) (h) SEC Power to Liquidate Corporation (i) Basic Differences Between Suspension of Payments Proceedings under the Insolvency Law and Under PD 902-A 4. Insolvency Proceedings Liquidation proceeding is one in rem so that all other interested persons whether known to the parties or not may be bound by such proceedings. Chua v. NLRC, 190 SCRA 558 (1990). (a) Governing Law and Jurisdiction (b) General Effect of Corporate Insolvency Proceedings (c) Voluntary Insolvency (d) Filing of Petition (Sec. 14, Insolvency Law) (e) Effect of Order of Insolvency (Sec. 18, Insolvency Law; De Amuzategui v. Macleod, 33 Phil. 80 [1915]). Section 18 on the automatic stay is no self-executory; applications for suspension of proceedings must be made in the various courts where actions in pending. Unson v. Abeto, 47 Phil. 42 (1924). (f) Involuntary Insolvency (Sec. 20 to 33) (g) Qualifications of Petitioning Creditors A foreign corporation which shows that it is a resident of the Philippines has legal standing to petition for involuntary insolvency of a corporate debtor. State Investment House, Inc. v. Citibank, N.A., 203 SCRA 9 (1991). (h) Order to Show Cause (Sec. 21); Hearing of petition (Sec. 24) (i) Acts of Insolvency and Order of Adjudication (Sec. 20) (j) Meeting of Creditors to Elect Assignee (Secs. 29 and 30) (k) Effects of Order of Insolvency and Appointment of Receiver (Secs. 32, 34 and 35; RadiolaToshiba Phil. v. IAC, 199 SCRA 373 [1991]) (l) Liquidation of Assets and Payment of Debts (Sec. 33) (m) Remedies of Secured Creditors (Sec. 29, 43 and 59) (n) Composition (Sec. 63) (o) Discharge (Secs. 52, 64, and 66) (p) Appeal in certain cases (Sec. 82)

XVI. DISSOLUTION INTRODUCTORY LECTURE: Note that the treatments of contractual expectations in these three different levels differ. PRE-INCORPORATION Set aside the issue of consent (the corporation cannot yet consent since it is not yet in existence) in order to uphold the intention of the INCORPORATION One party presumes that he enters into a contract with a juridical entity, and even in the absence of the latter, the contract must be fulfilled as DISSOLUTION

Revised Bagtas Reviewer by Ve and Ocfe 2A parties to corporation. promote the expected by the parties. EXAMPLE: ABC enters into a contract with Juan Dela Cruz, the latter believing that ABC had JP – ABC cannot raise its lack of JP to avoid the performance of its obligation to Juan. PUBLIC POLICY that the public should be protected in its dealings with the corporation will uphold such contract. EXAMPLE: JDC entered into a contract with ABC on March 11, 2005 where ABC’s term ended on October 31. 2004. JDC refused to deliver, the Board demanded delivery and sued for specific performance. Who will win? JDC will win. The corporation is only entitled to enter into contracts within 3 years after the expiration of its term, provided that these contracts are related to the liquidation and dissolution of the corporation. In this case, the contract entered into is unrelated to the dissolution and liquidation of the corporation. Hence, the contract is VOID. WHY IS THE TREATMENT DIFFERENT with the incorporation example and the dissolution example? In dissolution, a higher public policy must be upheld – Creditors must be protected – protection of the trust fund doctrine.

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NOTES:  Termination of the life of a juridical entity does not by itself imply the diminution or extinction of rights demandable against a juridical entity. When the entity is taken over by another, the successor entity must be held liable for the obligations of the dissolved entity pertaining to the assets so assumed, “to the extent of the fair value of assets actually taken over.  Dissolution of a corporation signifies the extinguishment of its franchise and the termination of the corporate existence for business purpose. The mere fact that the corporation ceased to do business does not necessarily constitute dissolution, if it is still solvent and has not gone into liquidation.  DE JURE DISSOLUTION – one adjudged and determined by administrative or judicial sentence or brought about by an act of the sovereign power or which results from the expiration of the charter period of corporate life.  DE FACTO DISSOLUTION – one which takes place in substance and in fact when the corporation by reason of insolvency, cessation of business, or suspension of all its operations, as the case may be goes into liquidation, still retaining its primary franchise to be a corporation; dissolution only of the business enterprise. The business enterprise collapses, but the juridical personality remains. (This implies that one can form a corporation without the business enterprise and that one can have a business enterprise without a juridical person – corporation by estoppel.)  DISSOLUTION concerns itself with the JURIDICAL PERSONALITY of the corporation, while LIQUIDATION concerns itself with the BUSINESS ENTERPRISE. Can dissolution be had without liquidation? No, the business enterprise is always affected, it is only in this stage where the trust fund doctrine kicks in. Is liquidation possible without dissolution? Yes, in de facto dissolution. 1. No Vested Rights to Corporate Fiction. aGonzales v. Sugar Regulatory Administration, 174 SCRA 377 (1989).

GONZALES v. SUGAR REGULATORY ADMINISTRATION FACTS: Spouses Gonzales, filed a complaint seeking cancellation of a mortgage and recovery of a sum of money against the Republic Planters Bank ("RPBank"), Philippine Sugar Commission ("Philsucom") and the SRA. The complaint alleged that petitioners obtained a loan secured by a real estate mortgage. The complaint also stated that petitioners received a statement of account from the RPBank setting forth that petitioners had an outstanding loan balance due to the bank. On the basis of the promissory notes and the list of re-payments made, it seemed that the petitioners had already more than fully repaid their loan. The complaint further averred that Philsucom had deducted from the export sugar proceeds of petitioners the amount of P 421,517.32 without the authority and consent of petitioners with the result that petitioners had overpaid the RPBank. Petitioners prayed that the real estate mortgage be cancelled, and that Philsucom and SRA be required jointly and severally to reimburse the petitioners the amount of P 289,260.88. SRA moved to dismiss the complaint upon the ground of lack of cause of action. SRA also noted that while the deductions complained of were made by the Philsucom during the period from 1980 to 1984, the SRA itself had been created by Executive Order No. 18 only on 18 May 1986 and that it was not a party to the real estate mortgage between petitioners and the RPBank. Petitioners urged that the abolition of the Philsucom by Executive Order No. 18 in effect destroyed the petitioners' right to recover from Philsucom. Petitioners hence assert that they had been deprived of property without due process of law and that the abolition of Philsucom and the transfer of assets from Philsucom to respondent SRA are unconstitutional and ineffective. The implicit theory of petitioners is that they have a right to follow Philsucom's assets in the hands of the SRA. HELD: .One who asserts a claim against a juridical entity has no constitutional right to the perpetual existence of such entity. Juridical persons, whether incorporated or not, whether owned by the government or the private sector, may come to an end at one time or another for a variety of reasons Thus, the Corporation Code provides for termination of corporate life, the dissolution of the corporation, the winding up of its operations, the liquidation of its assets, the payment of its obligations and distribution of any residual assets to its stockholders. The termination of the life of a juridical entity does not by itself imply the diminution or extinction of rights demandable against such juridical entity. We note that Executive Order No. 18 did not provide for universal succession, as it were, of SRA to Philsucom, or more specifically to the assets and liabilities of Philsucom. The succession of the SRA to the assets and records of the Philsucom is thus limited in nature; the extent of such succession is left to the discretionary determination of the SRA itself. More importantly, Executive Order No. 18 is silent as to the liabilities of Philsucom; it does not speak of assumption of such liabilities by the SRA. Section 13 of Executive Order No. 18 is not to be interpreted as authorizing respondent SRA to disable Philsucom from paying Philsucom's demandable obligations by simply taking over Philsucom's assets and immunizing them from legitimate claims against Philsucom. The right of those who have previously contracted with, or otherwise acquired lawful claims against, Philsucom, to have the assets of Philsucom applied to the satisfaction of those claims, is a substantive right and not merely a procedural remedy. Section 13 cannot be read as permitting the SRA to destroy that substantive right. To avoid such a result, we believe and so hold that should the assets of Philsucom remaining in Philsucom at the time of its abolition not be adequate to pay for all lawful claims against Philsucom, respondent SRA must be held liable for such claims against Philsucom to the extent of the fair value of assets actually taken over by the SRA from Philsucom, if any. To this extent, claimants

Revised Bagtas Reviewer by Ve and Ocfe 2A against Philsucom do have a right to follow Philsucom's assets in the hands of SRA or any other agency for that matter.

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Petitioners have a cause of action against SRA to the extent that they are able to prove lawful claims against Philsucom, which claims Philsucom is or may be unable to satisfy, and to the extent respondent SRA did, or does, in fact take over all or some of the assets of Philsucom. 2. Voluntary Dissolution (Sec. 117) Section 117. Methods of dissolution. - A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or involuntarily. (a) No Creditors Affected (Sec. 118) Section 118. Voluntary dissolution where no creditors are affected. - If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of a meeting to be held upon call of the directors or trustees after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution. (b) There Are Creditors Affected (Secs. 119 and 122). Section 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. Section 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was

established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. When a corporation is contemplating dissolution, it ust submit tax return on the income earned by it from the beginning of the year up to the date of its dissolution and pay the corresponding tax due. BPI v. Court of Appeals, 363 SCRA 840 (2001). NOTE:   OTHER TYPES: (1) shortening of corporate term by the amendment of the articles of incorporation (2) allowing the expiration of the corporate term as provided for in the articles of incorporation. Minority stockholders do not have a common law right, much less a statutory right to demand for dissolution of the corporation. 3. Involuntary Dissolution (Sec. 121; Sec. 6(l), P.D. 902-A; Sec. 2, Rule 66, Rules of Court) Section 121. Involuntary dissolution. - A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations. Sec. 2 Rule 66 When Solicitor General or public prosecutor must commence action. — The Solicitor General or a public prosecutor, when directed by the President of the Philippines, or when upon complaint or otherwise he has good reason to believe that any case specified in the preceding section can be established by proof, must commence such action. (a) Quo Warranto (Republic v. Bisaya Land Transportation Co., 81 SCRA 9 [1978]; Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 [1967]; Government v. El Hogar Filipino, 50 Phil. 399 [1927]). (b) Expiration of Term (c) Shortening of Corporate Term (Sec. 120) Section 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation. (d) Non-user of Charter and Continuous Inoperation (Sec. 22) Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (19a) This provision shall not apply if the failure to organize, commence the transaction of its businesses or

Revised Bagtas Reviewer by Ve and Ocfe 2A the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission.

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NOTE: The essence of the corporation’s juridical personality is the existence of the business enterprise (however it is quite ironic that the this is the case when the juridical person may be separated from the business enterprise.) Q: Why is it that after the lapse of two years with the non-organization of the corporation, it lapses into nothingness, while after the five years and after organization, it cannot lapse into nothingness? A: Because in the latter the business enterprise is already in existence. Note that the business enterprise is not only comprised of assets but also of the goodwill of the corporation. Its existence creates certain common law rights, and by the collapse of the corporation, it must be made sure that these rights are not prejudiced. “Organize” involves the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which the corporation was created. “Organization” relates merely to the systematization and orderly arrangement of the internal and managerial affairs and organs of the corporation. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711. The failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution. Chung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534 (1988). (f) Demand of Minority Stockholders for Dissolution. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953). Corporate dissolution due to mismanagement of majority stockholder is too drastic a remedy, especially when the situation can be remedied such as giving minority stockholders a veto power to any decision. Chase v. Buencamino, 136 SCRA 365 (1985). 4. Legal Effects of Dissolution The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liability of such entity, since it is allowed to continue as a juridical entity for 3 years for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property, and to distribute its assets. Republic v. Tancinco, 394 SCRA 386 (2002). A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity. For dissolution to be effective “[t]he requirements mandated by the Corporation Code should have been strictly complied with.” Vesagas v. Court of Appeals, 371 SCRA 509, 516 (2002). A corporation cannot extend its life by amendment of its articles of incorporation effected during the three-year statutory period for liquidation when its original term of existence had already expired, as the same would constitute new business. Alhambra Cigar & Cigarette Manufacturing Company, Inc. v. SEC, 24 SCRA 269 (1968). When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized. PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992). 5. Methods of Liquidation (Sec. 122; aBoard of Liquidators v. Kalaw, 20 SCRA 987 [1967]; Sumera v. Valencia, 67 Phil. 721 [1939]; Buenaflor v. Camarines Industry, 108 Phil. 472 [1960]). Section 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits

by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

LIQUIDATION – settlement of the affairs of a corporation which consists of adjusting the debts and claims, that is, of collecting all that is due to the corporation, the settlement and adjustment of claims against it and the payment of its just debts. It is the process by which all assets of the corporation are converted into liquid assets in order to pay for all claims of corporate creditors and the remaining balance if any is to be distributed to the stockholders or members of the corporation. It is a proceeding in rem.

BOARD OF LIQUIDATORS v. KALAW The Court held that the placing of the affairs and assets of the NACOCO in the hands of a Board of Liquidators upon dissolution, did not terminate the power of the Board to continue with the liquidation process of NACOCO even after the lapse of the three year period because the Board of Liquidators became the trustees; the Board took the place of the corporation after the expiration of its affairs. Since no time limit has been tacked to the existence of the Board and its functions of closing the affairs of the corporation, it was held that the Board can still …cases pending even after the three year period. Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. PVB Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001). There can be no doubt that under Secs. 77 and 78 of Corporation Law, the Legislature intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. The normal method of procedure is for the directors and executive officers to have charge of the winding up operations, though there is the alternative method of assigning the property of the corporation to the trustees for the benefit of its creditors and shareholders. “While the appointment of a receiver rests within the sound judicial discretion of the court, such discretion must, however, always be exercised with caution and governed by legal and equitable principles, the violation of which will amount to its abuse, and in making such appointment the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate business.” China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261 (1933) There is nothing in Sec. 122 which bars an action for the recovery of the debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. “It immaterial that the present action was filed after the expiration of the three years . . . for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely

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established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation.” Republic v. Marsman Dev. Co., 44 SCRA 418 (1972). 6. Who Are Liable After Dissolution and Winding-Up? (aNational Abaca Corp. v. Pore, 2 SCRA 989 [1961]; aTan Tiong Bio v. Commissioner, 100 Phil. 86 [1956]; aGelano v. Court of Appeals, 103 SCRA 90 [1981]). NATIONAL ABACA CORP. v. PORE

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FACTS: On November 14, 1953, plaintiff filed a complaint, against defendant Apolonia Pore, for the recovery of P1,213.34, allegedly advanced to her for the purchase of hemp for the account of the former and for which she had allegedly failed to account. Defendant alleged that she had accounted for all cash advances. The court found that the defendant had not accounted for cash advances in the sum of P272.49. National Abaca filed a motion for reconsideration of this decision as well as a motion for new trial. Pore moved to dismiss the complaint upon the ground that plaintiff has no legal capacity to sue, it having been abolished by Executive Order No. 372 of the President of the Philippines, dated November 24,1950. National Abaca objected upon the ground that pursuant to said executive order, plaintiff "shall nevertheless be continued as a body corporate for a period of three (3) years from the effective date" of said executive order, which was November 30, 1950, "for the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators" — thereby created — "gradually to settle and close its affairs", . . . and that this case was begun on November 14, 1953, or before the expiration of the period aforementioned. The then issued an order dated August 1, 1956, directing plaintiff to amend the complaint, within ten (10) days from notice, by including the Board of Liquidators as co-party plaintiff, with the admonition that otherwise the case would be dismissed. Although a copy of the amended complaint was received by the counsel of Pore, no such complaint was received by the court. As such, on September 1, 1956, said court issued another order dismissing the case. On September 13, 1956, plaintiff's counsel received copy of the order of September 1, 1956. He then inquired from plaintiff's mailing clerk whether or not his instructions, concerning the mailing of copies of said amended complaint, had been complied with. He found out that, although said copies of the amended complaint were entered in the record book of plaintiff's outgoing correspondence on August 24, 1956, only the copy addressed to defendant's counsel had actually been mailed. The original copy of the amended complaint, addressed to the clerk of court, could not be located, despite diligent efforts made to find the same. Plaintiff prayed, therefore, that the dismissal order of September 1, 1956 be reconsidered and set aside and that its aforementioned amended complaint be admitted. ISSUES: 1.) Whether an action, commenced within three (3) years after the abolition of plaintiff, as a corporation, may be continued by the same after the expiration of said period. 2.) Whether, under the facts set forth above, the lower court should have granted plaintiff's motion for reconsideration of its order of September 1, 1956. HELD: 1.) No, in the absence of statutory provision to the contrary, pending actions by or against a

corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs. It is generally held, that where a statute continues the existence of a corporation for a certain period after its dissolution for the purpose of prosecuting and defending suits, etc., the corporation becomes defunct upon the expiration of such period, at least in the absence of a provision to the contrary, so that no action can afterwards be brought by or against it, and must be dismissed. Actions pending by or against the corporation when the period allowed by the statute expires, ordinarily abate. Our Corporation Law contains no provision authorizing a corporation, after three (3) years from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of three (3) years. in fact, section 77 of said law provides that the corporation shall "be continued as a body corporate for three (3) years after the time when it would have been . . . dissolved, for the purposed of prosecuting and defending suits by or against it . . .", so that, thereafter, it shall no longer enjoy corporate existence for such purpose. For this reason, section 78 of the same law authorizes the corporation, "at any time during said three years . . . to convey all of its property to trustees for the benefit of members, stockholders, creditors and other interested", evidently for the purpose, among others, of enabling said trustees to prosecute and defend suits by or against the corporation begun before the expiration of said period. It is to be noted that the time during which the corporation, through its own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences; but that there is no time limited within the trustees must complete a liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78) that the conveyance to the trustees must be made within the three-year period. It may be found impossible to complete the work of liquidation within the three-year period or to reduce disputed claims to judgment. The authorities are to the effect that suits by or against a corporation abate when it ceased to be an entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but trustees to whom the corporate assets have been conveyed pursuant to the authority of section 78 may sue and be sued as such in all matters connected with the liquidation. By the terms of the statute the effect of the conveyance is to make the trustees the legal owners of the property conveyed, subject to the beneficial interest therein of creditors and stockholders. 2.) The record satisfactorily shows that plaintiff had prepared an amended complaint, as directed in the order of August 1, 1956, upon receipt thereof; that copy of said amended complaint had actually been sent by registered mail to defendant's counsel; that plaintiff's counsel had given to its mailing clerk the proper instructions for the filing of the original of said amended complaint with the office of the Court of First Instance of Leyte; that said mailing clerk had endeavored to comply with the aforementioned instructions, as evidenced by the corresponding entry in the record book of plaintiff's outgoing correspondence; and that the failure to file in court said original of the amended complaint must have been due, therefore, either to accident or to excusable negligence on the part of said mailing clerk. Therefore, the court should have granted the motion for reconsideration. Plaintiff's amended complaint is hereby admitted, and the record remanded to the lower court for further proceedings, with the costs of this instance against defendant-appellee, Apolonio Pore. NOTE: In the absence of a statutory provision to the contrary, pending actions by or against a corporation are abated upon the expiration of the 3 year period allowed by law for the liquidation of its affairs.

TAN TIONG BIO v. COMMISSIONER

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NOTE: Even after the three year period of liquidation, corporate creditors can still pursue their claims against corporate assets against the officers or stockholders who have taken over the properties of the corporation. Forget people concentrate on the assets. Creditors may claim against those who are in possession of the property even if they are not the dominical owners of such.

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GELANO v. COURT OF APPEALS FACTS: Private respondent Insular Sawmill, Inc. is a corporation organized on September 17, 1945 with a corporate life of fifty (50) years, or up to September 17, 1995, with the primary purpose of carrying on a general lumber and sawmill business. It was leasing a property from the spouses Gelano in order to conduct its business. Between November 19, 1947 to December 26, 1950 petitioner Carlos Gelano obtained from Insular Sawmill cash advances of P25,950.00. The said sum was taken and received by petitioner Carlos Gelano on the agreement that private respondent could deduct the same from the monthly rentals of the leased premises until said cash advances are fully paid. Only P5,950.00 was paid. The Gelanos refused to pay the rest of the amount despite repeated demands. Guillermina M. Gelano refused to pay on the ground that said amount was for the personal account of her husband asked for by, and given to him, without her knowledge and consent and did not benefit the family. There were other occasions when the spoused purchased materials on credit from insular. they also made insular an accomodation party for a loan from China Bank. in the said instances, the Gelanos were not able to pay, inspite of repeated demands from insular. On May 29, 1959 the corporation filed a complaint for collection against herein petitioners before the Court of First Instance of Manila. In the meantime, private respondent amended its Articles of Incorporation to shorten its term of existence up to December 31, 1960 only. The amended Articles of Incorporation was filed with, and approved by the Securities and Exchange Commission, but the trial court was not notified of the amendment shortening the corporate existence and no substitution of party was ever made. On November 20, 1964 and almost four (4) years after the dissolution of the corporation, the trial court rendered a decision in favor of private respondent the dispositive portion of which reads as follows: WHEREFORE, judgment is rendered, ordering: 1. Defendant Carlos Gelano to pay plaintiff the sum of: (a) P19,650.00 with interest thereon at the legal rate from the date of the filing of the complaint on May 29, 1959, until said sum is fully paid; (b) P4,106.00, with interest thereon at the legal rate from the date of the filing of the complaint until said sum is fully paid; 2. Defendants Carlos Gelano and Guillermina Mendoza to pay jointly and severally the sum of: (a) P946.46, with interest thereon, at the agreed rate of 12% per annum from October 6, 1946, until said sum is fully paid; (b) P550.00, with interest thereon at the legal rate from the date of the filing of the complaint until the said sum is fully paid; (c) Costs of the suit; and 3. Defendant Carlos Gelano to pay the plaintiff the sum of P2,000.00 attorney's fees. The Countered of defendants are dismissed. SO ORDERED.

Both parties appealed to the Court of Appeals, private respondent also appealing because it insisted that both Carlos Gelano and Guillermina Gelano should be held liable for the substantial portion of the claim. On August 23, 1973, the Court of Appeals rendered a decision modifying the judgment of the trial court by holding petitioner spouses jointly and severally liable on private respondent's claim and increasing the award of P4,106.00. After petitioners received a copy of the decision on August 24, 1973, they came to know that the Insular Sawmill Inc. was dissolved way back on December 31, 1960. The Gelanos filed a motion to dismiss the case and/or reconsideration of the decision of the Court of Appeals on grounds that the case was prosecuted even after dissolution of private respondent as a corporation. After receipt of petitioners' motion to dismiss and/or reconsideration or on October 28, 1973, private respondent thru its former directors filed a Petition for Receivership before the Court of First Instance of Manila, docketed as Special Proceedings No. 92303. ISSUE: Whether a corporation, whose corporate life had ceased by the expiration of its term of existence, could still continue prosecuting and defending suits after its dissolution and beyond the period of three years provided for under Act No. 1459, otherwise known as the Corporation law, to wind up its affairs, without having undertaken any step to transfer its assets to a trustee or assignee. HELD: Yes, it can. It is well settled that, unless the statutes otherwise provide, all pending suits and actions by and against a corporation are abated by a dissolution of the corporation. 5 Section 77 of the Corporation Law provides that the corporation shall "be continued as a body corporate for three (3) years after the time when it would have been ... dissolved, for the purpose of prosecuting and defending suits By or against it ...," so that, thereafter, it shall no longer enjoy corporate existence for such purpose. For this reason, Section 78 of the same law authorizes the corporation, "at any time during said three years ... to convey all of its property to trustees for the benefit of members, Stockholders, creditors and other interested," evidently for the purpose, among others, of enabling said trustees to prosecute and defend suits by or against the corporation begun before the expiration of said period. 6 Commenting on said sections, Justice Fisher said: It is to be noted that the time during which the corporation, through its own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences; but that there is no time limited within which the trustees must complete a liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78) that the conveyance to the trustees must be made within the three-year period. It may be found impossible to complete the work of liquidation within the three-year period or to reduce disputed claims to judgment. The authorities are to the effect that suits by or against a corporation abate when it ceased to be an entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but trustees to whom the corporate assets have been conveyed pursuant to the authority of Section 78 may sue and be sued as such in all matters connected with the liquidation. By the terms of the statute the effect of the conveyance is to make the trustees the legal owners of the property conveyed, subject to the beneficial interest therein of creditors and stockholders. 7 When Insular Sawmill, Inc. was dissolved on December 31, 1960, under Section 77 of the Corporation Law, it still has the right until December 31, 1963 to prosecute in its name the present case. After the expiration of said period, the corporation ceased to exist for all purposes and it can no longer sue or be sued. However, a corporation that has a pending action and which cannot be terminated within the three-year period after its dissolution is authorized under Section 78 to convey all its property to trustees to enable it to prosecute and defend suits by or against the corporation beyond the Threeyear period although private respondent (did not appoint any trustee, yet the counsel who prosecuted and defended the interest of the corporation in the instant case and who in fact appeared

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in behalf of the corporation may be considered a trustee of the corporation at least with respect to the matter in litigation only. Said counsel had been handling the case when the same was pending before the trial court until it was appealed before the Court of Appeals and finally to this Court. We therefore hold that there was a substantial compliance with Section 78 of the Corporation Law and as such, private respondent Insular Sawmill, Inc. could still continue prosecuting the present case even beyond the period of three (3) years from the time of its dissolution. The trustee may commence a suit which can proceed to final judgment even beyond the three-year period. No reason can be conceived why a suit already commenced By the corporation itself during its existence, not by a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation should not be accorded similar treatment allowed — to proceed to final judgment and execution thereof. The supreme court upheld the view of the court of appeals that "any litigation filed by or against the corporation instituted within the period, but which could not be terminated, must necessarily prolong that period until the final termination of said litigation as otherwise corporations in liquidation would lose what should justly belong to them or would be exempt from the payment of just obligations through a mere technicality, something that courts should prevent"

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NOTE: “Trustee” must be understood in its general concept which would include the counsel to whom was entrusted in a pending case, the prosecution of the suit filed by the corporation.

Although a corporate officer is not liable for corporate obligations, such as claims for wages, however, when such corporate officer ceases corporate property to apply to his own claims against the corporation, he shall be liable to the extent thereof to corporate liabilities, since knowing fully well that certain creditors had similarly valid claims, he took advantage of his position as general manager and applied the corporation's assets in payment exclusively to his own claims. De Guzman v. NLRC, 211 SCRA 723 (1992). If the 3-year extended life has expired without a trustee or receiver having been designated, the Board of Directors itself, following the rationale of the decision in Gelano, may be permitted to so continue as “trustees” to complete liquidation; and in the absence of a Board, those having pecuniary interest in the assets, including the shareholders and the creditors of the corporation, acting for and in its behalf, might make proper representations with the appropriate body for working out a final settlement of the corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717 (1995). In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later case of Clemente v. Court of Appeals, the Board of Directors was permitted to complete the corporate liquidation by continuing as “trustees”. Under Sec. 145 “No right of remedy in favor or against any corporation . . . shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.” This provision safeguards the rights of a corporation which is dissolved pending litigation. Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002). METHODS OF LIQUIDATION:  THROUGH BOARD OF DIRECTORS OR TRUSTEES  THROUGH TRUSTEE  THROUGH RECEIVER  Distinction – A receiver in liquidation stands on a different legal basis from a trustee in a liquidation. It is basically a contractual relationship and generally centered upon property such that the trustee assumes naked title to the property placed in trust. He is not appointed by the court, but he is actually a transferee who holds legal title to the corporate assets and he is accountable under the terms of the trust agreement. A receivership on the other hand, is created by means of a judicial or quasi-judicial appointment of the receiver. He is actually an officer of the

court and must therefore be accountable to the Court. SUMMARY OF PRINCIPLES:  The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditors.  The corporation continues to be a body corporate for 3 years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets.  It may during the term appoint a trustee or a receiver who may act beyond that period.  If the 3 year extended life has expired without such appointment, the Board may continue as trustees by legal implication to complete the corporate liquidation.  Still in the absence of the Board, those having any pecuniary interest, might make proper representations with the SEC. 7. Reincorporation: aChung Ka Bio v. IAC, 163 SCRA 534 (1988). NOTE: One cannot overcome the rights of creditors, if they are not prejudiced, the stockholders rights may not be prejudiced. Q: Is the business enterprise viable at this point? A: No. CHUNG KA BIO v. IAC FACTS: Philippine Blooming Mills (PBM) was incorporated in 1952 with a term of 25 years which expired in January of 1977. In May of 1977, the members of its board of directors executed a deed of assignment of all of its receivables and properties in favor of Chung Siong Pek, in his capacity as treasurer of the new PBM, which was then in the process of incorporation. In June of 1977, the new PBM was issued a certificate of incorporation by the SEC. In May of 1981, Chung Ka Bio and other stockholders of the old PBM filed a petition for liquidation of both the old and the new PBM. The allegation was that the former had become legally non-existent for failure to extend its corporate life and that the latter had likewise been ipso facto dissolved for non-use of the charter and continuous failure to operate within 2 years from incorporation. ISSUES: 1.) Does the BOD of an already dissolved corp. have the inherent power without the express consent of the stockholders to convey all of its assets to a new corp? 2.) Has the new corporation complied with the 2 year requirement in the new corporation code on non-user because its stockholders failed to adopt a set of by-laws, and therefore become dissolved? HELD: 1.) The first contention is based on the averment that no stockholders meeting was held and there was no 2/3 vote to approve the disposition of all the property. Even so, there is a presumption of regularity which must operate in favor of the private respondents who insist that the proper authorization as required by the corp law was duly obtained at a meeting called for the purpose. That authorization was embodied in a unanimous resolution dated March 19, 1977, which was reproduced verbatim in the deed of assignment. Otherwise, the new PBM would not have been issued a certificate of incorporation, which should also be presumed to have been done regularly. While the board of directors is not ordinarily permitted to undertake an activity other than the usual liquidation of the business of the dissolved corporation, there is nothing to prevent the stockholders from conveying their respective shareholdings toward the creation of a new corporation to continue the business of the old. Winding up is the sole activity of a dissolved corporation that does not intend to incorporate anew. If it does, however, it is not unlawful for the old BOD to negotiate and transfer the assets of the dissolved corporation to the new corporation intended to be created as long as the

Revised Bagtas Reviewer by Ve and Ocfe 2A stockholders have given their consent.

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What is intruiging in this case is that the deed of assignment was issued in 1977, it was only in 1981 that it occured to the petitioners to question its validity. Four years had elapsed before the action for liquidation was filed. By this time the new PBM was in full operation, openly and quite visibly conducting the same business undertaken by the old and dissolved PBM. The new corporation employs the same personnel as the old PBM. the petitioners and the respondents are not strangers but relatives and close business associates, so it was quite likely that they were aware of the happenings in the new PBM from the beginning. these circumstances operate to bar the petitioners from questioning the deed of assignment. Latches has operated against them. 2.) Non-filing of the by-laws does not operate as an automatic dissolution of the corp. Under sec. 6 of P.D. 902-A, the SEC is empowered to suspend or revoke, after proper notice and hearing, the franchise or the certificate of registration of a corporation on the ground of failure to file by-laws within the required period. It is clear from this provision that there must first be a hearing to determine the existence of the ground, and secondly, assuming such finding, the penalty is not necessarily revocation, but may only be suspension of the charter. In fact under the rules of the SEC, there is a possibility that it may only be penalized with an administrative fine. In any case, the deficiency complained of was corrected in 1981, when the new PBM adopted and filed its by-laws. thus rendering this issue moot and academic. NOTE: Distinction between extension of charter and the grant of new one – to renew a charter is to revive a charter which has expired or in other words, to give a new existence to one which has been forfeited or which has lost its vitality by lapse of time. To increase a charter is to increase the time for the existence of one which would otherwise reach its limit at an earlier period. On the other hand, the renewal of a corporate charter by extending the term of corporate life has been considered, in legal effect as amounting to the grant of a new charter so as to subject the corporation to the laws in effect at the time of renewal. XVII. CLOSE CORPORATION See VILLANUEVA, The Philippine Close Corporation, 32 ATENEO L.J. (No. 2, March, 1988) 1. Definition (Sec. 96; aManuel R. Dulay Enterprises v. Court of Appeals, 225 SCRA 678 [1993]; aSan Juan Structural v. Court of Appeals, 296 SCRA 631 [1998]). Section 96 Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. MANUEL DULAY v CA FACTS: The corporation was described to have its controlling stockholders, members of the Dulay family, to compose the board of directors and officers, with nominal shares listed in the names of two other nominees, and which corporation was the registered owner of the Dulay Apartments. The corporation

obtained various loans for the construction of its hotel project, Dulay Continental Hotel, and borrowed money from one of its directors, Virgilio Dulay to continue the project. As a result, Virgilio Dulay occupied one of the apartment units since 1973 while at the same time managed the Dulay Apartments. In 1976, the corporation through its President, sold the Dulay Apartments under a sale with option to purchase within 2 years, to one Veloso who mortgaged the property in favor of one Torres, who eventually foreclosed on the property and become the highest bidder at the auction sale. When the redemption period expired, Torres sought to consolidate title and filed an action to recover possession of the property. The corporation filed an action against Torres and Veloso for the cancellation of the sale at foreclosure on the ground tat the sale of the property to Veloso was done by the President without actual board approval. HELD: By virtue of Section 101 of the Corporation Code, the court said that the petitioner corporation is classified as a close corporation and consequently, a board resolution to authorize the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, a corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which in this case, Dulay failed to do so. Q: But why was it important to place the corporation under the classification of a close corporation where the same may have been achieved if it were considered a publicly held corporation? A: In the realm of ordinary corporations or publicly-held corporations, only the Board of Directors may be estopped with regard to the authority its President exercises but stockholders are not so estopped. However, in the realm of close corporations, since the Board and the stockholders are closely intertwined, the latter may not set up the defense that the doctrine of estoppel does not apply to them. In short, invocation of the presence of a close corporation is important as to attach liability to stockholders by virtue of the doctrine of estoppel. NOTE: In this case, the sale of real property was contracted by the president of a close corporation with the knowledge and acquiescence of its Board of Directors. SAN JUAN STRUCTURAL v CA The Court held that just because the corporate treasurer and her husband together owned 99.866% of the outstanding capital stock of the corporation does not justify a conclusion that it is a close corporation which can be bound by the acts of its principal stockholder who needs no specific authority. The determination of when a corporation is a close corporation is determined by the requisites provided in Sec. 96 of the Corporation Code. In this case the articles of incorporation do not contain any provision stating that (1) the number of stockholders shall not exceed 20 or (2) a preemption of shares is restricted in favor of any stockholder of the corporation, or (3) listing its stock in any stock exchange or making a public offering of such stocks is prohibited. The corporation does not become a close corporation by the mere fact that the spouses owned 99.866% of the capital stock. The mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personalities. So too, a narrow distribution of ownership, does not, by itself, make a close corporation. The concept of a close corporation organized for the purpose of running a family business or managing family property has formed the backbone of Philippine commerce and industry. Through this device, Filipino families have been able to turn their humble, hard-earned life savings into going concerns capable of providing them and their families with a modicum of material comfort and financial security as a reward for years of hard work. A family corporation should serve as a reward for years of hard work. A family corporation should serve as a rallying point for family unity and prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of mutual aid and security that

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are the original driving forces behind the formation of family corporations and use these tenets in order to facilitate more civil, if not more amicable, settlements of family corporate disputes. aGala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). GALA v. ELLICE AGRO-INDUSTRIAL CORP. 2. Articles of Incorporation Requirements (Sec. 97) Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. (a) Pre-Emptive Rights (Sec. 102) Section 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. (b) Amendment (Sec. 103) Section 103. Amendment of articles of incorporation. - Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least twothirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. 3. Restriction on Transfer of Shares (Secs. 98 and 99) Section 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails

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to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. 2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. 5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. 6. The term "transfer", as used in this section, is not limited to a transfer for value. 7. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied. 4. Agreements by Stockholder (Sec. 100) Section 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. 2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves.

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4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. 5. No Necessity of Board (Sec. 101; aSergio F. Naguiat v. NLRC, 269 SCRA 564 [1997]). Section 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. SERGIO NAGUIAT v. NLRC FACTS: Petitioner Clark Field Taxi, Inc. (CFTI) held a concessionaire’s contract with the Army Air Force Exchange Service (AAFES) for the operation of taxi services within Clark Air Base. Sergio F. Naguiat was President of CFTI and Antolin T. Naguiat (Sergio’s son) was vice-president. Both CFTI and Sergio F. Naguiat Enterprises, Inc. (a trading firm) are family-owned corporations. Respondents were taxi drivers of CFTI. Their services were terminated when AAFES was dissolved due to the phasing out of US military bases in the Philippines in 1991. The AAFES Taxi Drivers Association negotiated with CFTI as to separation benefits. They agreed on P500/yr of service but respondents refused to accept so they disaffiliated themselves from said Union and joined the National Organization of Workingmen (NOWM), through which they filed a complaint against Sergio F. Naguiat doing business under the name and style Sergio F. Naguiat Enterprises, Inc., AAFES and AAFES Taxi Drivers Association for payment of separation pay due to termination/phase-out. They amended the complaint to include other taxi drivers as complainants and, as respondents, CFTI with Antolin Naguiat as VP and general manager. Private respondents alleged that they were regular employees of Naguiat Enterprises, although their individual applications for employment were approved by CFTI. They claimed to have been assigned to Naguiat Enterprises after having been hired by CFTI, and that Naguiat Enterprises thus managed, controlled and supervised their employment. Petitioners submitted a position paper to the labor arbiter, claiming that CFTI’s cessation of business was due to “great financial losses and lost business opportunity” resulting from the phaseout of Clark Air Base brought about by the Mt. Pinatubo eruption and expiration of the RP-US military bases agreement. They admitted that CFTI had agreed with the drivers’ union to pay P500/yr of

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service. Labor Arbiter ordered CFTI to pay complainants P1,200/yr of service “for humanitarian consideration” and not as separation pay. Separation pay wasn’t granted on the ground that it would be inhuman to exempt CFTI, but it would also be unfair and unjust to impose a monetary obligation on an employer whose business was shot down by force majeure. Respondents appealed to NLRC, which modified by granting separation pay and holding Naguiat Enterprises, Sergio & Antolin solidarily liable. NLRC denied petitioners’ MR. The SC issued a TRO enjoining execution of the assailed Resolutions after petitioners posted a surety bond. ISSUES: 1. W/N NLRC committed grave abuse of discretion in unilaterally increasing the amount of severance pay granted by the labor arbiter – NO MERIT 2. W/N NOWM cannot make legal representations in behalf of individual respondents who should, instead, be bound by the decision of the AAFES Taxi Drivers Assn. of which they were members – NO MERIT 3. W/N Naguiat Enterprises is a separate and distinct juridical entity which cannot be held jointly & severally liable for the obligations of CFTI – HAS MERIT; W/N Sergio & Antolin were merely officers and stockholders of CFTI and, thus, could not be held personally accountable for corporate debts – NO MERIT 4. W/N Sergio & Antolin may be held solidarily liable by the NLRC despite not having been impleaded as parties to the complaint (denial of due process) – NO MERIT HELD: Petition is partly meritorious. I. Amount of Separation Pay – Evidence insufficient to prove grave abuse of discretion. Petitioners are in estoppel for not having questioned the private respondents’ claim that their separation pay should be based on $240, allegedly their monthly earnings. The factual findings of the NLRC are binding. Petitioners fail to prove with clear and satisfactory evidence that they are exempted from payment of separation pay on the ground of business losses or financial reverses to sustain retrenchment of personnel or closure of business. The labor arbiter correctly found that the taxi business was earning profitably at the time of its closure. II. NOWM’s Personality to Represent Individual Respondents-Employees – Petitioners estopped for not having seasonably raised this issue before the labor arbiter or NLRC. III. Liability of Petitioner-Corporations and Their Respective Officers The NLRC did not discuss or give any explanation for holding Naguiat Enterprises and its officers jointly and severally liable in discharging CFTI’s liability for payment of separation pay. Naguiat Enterprises Not Liable The labor arbiter correctly found that respondents were regular employees of CFTI who received wages on a boundary or commission basis. There is no substantial basis to hold that Naguiat Enterprises is an indirect employer much less a labor only contractor. Respondents failed to show that they were managed, supervised and controlled by Naguiat Enterprises. Apparently, they were confused as to the personalities of Sergio F. Naguiat as an individual who was the president of CFTI, and Sergio F. Naguiat Enterprises, inc., as a separate corporate entity with a separate business. They presumed that Naguiat, who was also a stockholder & director of Naguiat Enterprises, was managing and controlling the taxi business on behalf of the latter. In reality, in supervising the taxi drivers and determining their employment terms, Naguiat was carrying out his responsibilities as president of CFTI. Hence, Naguiat Enterprises as a separate corporation does not appear to be involved at all in the taxi business. CFTI President solidarily liable Case cited—A.C. Ransom Union v. NLRC—A.C. Ransom Corp, which was a family corporation, filed an application for clearance to close or cease operations. The Ministry of Labor & Employment granted the application without prejudice to employees’ rights to seek redress. Backwages of 22 employees, who held a strike before closure, were computed, and for almost 3 years, the union filed about 10 motions for execution against the corporation, but none could be implemented for failure to find

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leviable assets. In the last of said motions, the union asked that officers and agents of the company be held personally liable and it was granted. An issue raised by the Corp on appeal was W/N the judgment against a corporation to reinstate its dismissed employees with backwages is enforceable against its officers and agents in their individual, private and personal capacities, who were not parties in the case where the judgment is rendered. NLRC said no, on the ground that officers are liable personally for official acts only when they have exceeded the scope of their authority. SC reversed the NLRC, imposing solidary liability on the President. Reason: The Labor Code definition of ‘employer’ is any person acting in the interest of an employer, directly or indirectly. Since Ransom is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of Ransom. The corporation, only in the technical sense, is the employer. In the absence of definite proof with regard to the responsible officer/s, it should be presumed that the responsible officer is the President of the corporation who can be deemed the chief operation officer thereof. Thus, in RA 602 (minimum wage law), criminal responsibility is with the ‘Manager or in his default, the person acting as such.’ In Ransom, the President appears to be the Manager. Case at bar—Sergio Naguiat is the president of CFTI who actively managed the business and thus falls within the meaning of an ‘employer’ who may be held jointly & severally liable for the obligations of the corp to its dismissed employees. Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises were “close family corporations” owned by the Naguiat Family. Sec. 100(5) of the Corp Code states: To the extent that the stockholders are actively engage(d) in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. It has not been shown that CFTI obtained such insurance, so the question is whether there was “corporate tort.” Jurisprudence has not given the definite scope of this term, but essentially, a “tort” is the violation of a right given or the omission of a duty imposed by law; a breach of a legal duty. Art. 283, Labor Code, mandates the employer to grant separation pay to employees in case of closure or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, which is the condition obtaining at bar. CFTI failed to comply with this lawimposed duty or obligation. Thus, its stockholder who was actively engaged in the management or operation of the business should be held personally liable. It was also hold in MAM Realty Dev’t v. NLRC that a director or officer may still be held solidarily liable with a corporation by specific provision of law, which in this case is Sec. 100(5), Corporation Code. In fact, in posting the surety bond, only Naguiat in his personal capacity, principally bound himself to comply with the oblgation. The SC cannot apply the rule that a corporate officer cannot be held solidarily liable with a corporation in the absence of evidence that he acted in bad faith or with malice. Antolin Naguiat not personally liable Antolin was the VP and “general manager” of CFTI, but it was not shown that he acted in the latter capacity. The extent of his participation in the management or operation of the business was also not made known. Thus, he cannot be held solidarily liable. IV. No Denial of Due Process There was no denial of due process for failure to implead the individual Naguiats as parties to the complaint. In AC Ransom, the officers of the corp were not parties to the case when the judgment in favor of the employees was rendered, but the Court nonetheless held the President solidarily liable. Moreover, the Naguiats voluntarily submitted themselves to the jurisdiction of the labor arbiter when they, in their individual capacities, filed a position paper together with CFTI, before the arbiter. They were given the opportunity to present their positions. Petitioner CFTI & Sergio Naguiat, president and co-owner thereof, are ordered to pay, jointly and severally $120/yr of service or its peso equivalent. Naguiat Enterprises and Antolin Naguiat are

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absolved. NOTE: In this case, the Supreme Court held personally and solidarily liable the President and VicePresident of two corporations under the findings that both officers admitted that the two corporations were “close family corporations” owned by the Naguiat family. The two officers are liable solidarily with the Clark Field Taxis, Inc. for the employees of Clark Field Taxis. Section 100 par. 5 of the Corporation Code provides that to the extent that the stockholders are actively engaged in the management or operation of the business and affairs of the close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves; said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. NOTE: The Dulay and Sergio rulings demonstrate a tendency that may be followed in the future: (a) the coverage of close corporations may expand beyond the definition provided for in the Corporation Code; or (b) principles pertaining peculiarly to close corporations under Title XII of the Corporation Code would be expanded to apply even to non-close corporations i.e. de facto close corporations or even publicly-held corporations. NOTE: In normal corporations, stockholders enjoy the right of limited liability, but in close corporations, such is not the case. Since in the latter, stockholders run the company that is why they may be held liable as though they were Board of Directors. They may be held personally liable in instances of tort, when they exceed their authority or when they perform acts in bad faith. In this case, even in the absence of bad faith, they were held liable because of subsidiary liability, because what was performed was a collective act; thus, one is liable as to his co-actors. 6. Deadlocks (Sec. 104) Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: (1) cancelling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2) cancelling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. 7. Withdrawal and Dissolution (Sec. 105) Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any

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stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. Even prior to the passage of Corporation Code which recognized close corporations, the Supreme Court had on limited instances recognized the common law rights of minority stockholders to seek dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).

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XVIII. NON-STOCK CORPORATIONS AND FOUNDATIONS See VILLANUEVA, Distinguishing Foundations from Other Non-Stock Corporations. (Unpublished) 1. Theory on Non-Stock Corporation (Secs. 14(2), 43, 87, 88 and 94(5); aCollector of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 [1962]; aCollector of Internal Revenue v. University of Visayas, 1 SCRA 669 [1961]).

Section 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: (2) The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. Section 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part

of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. Section 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: (5) In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n) COLLECTOR OF INTERNAL REVENUE v CLUB FILIPINO DE CEBU FACTS: Club Filipino, Inc. de Cebu (Club) is a civic domestic corporation. Its articles and by-laws do not provide for dividends and their distribution, although it is provided that upon its dissolution, the Club’s remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu. The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the gov’t), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and guests. The bar-restaurant was a necessary incident to the operation of the club and its golf-course. The club is operated mainly with funds from membership fees and dues. Whatever profits it had were used to defray its overhead expenses and improve its golf-course. In 1951, as a result of a capital surplus from the re-valuation of its real properties, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club had never paid percentage tax on the gross receipts of its bar and restaurant. The CIR assessed against and demanded P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, from Club Filipino, Inc. de Cebu, allegedly due from it as a keeper of bar and restaurant. The CTA reversed. Hence, this petition. ISSUE: W/N Club Filipino is engaged in business as a barkeeper-restaurateur and is thus liable for taxes– NO. HELD: CTA affirmed. Club Filipino is not liable because it is not engaged in the business of an operator of a bar and restaurant. Liability for fixed and percentage taxes does not attach ipso facto by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator must be engaged in such ‘business,’ the plain and ordinary meaning of which is: activities or affairs for profit or livelihood. The ff. facts prove that the Club is not engaged in the business of an operator of a bar and restaurant: the Club was organized to develop and cultivate sports; its remaining assets shall be donated to a charitable Phil. Institution in Cebu; it is operated mainly with funds derived from membership fees and dues; the Club’s bar and restaurant catered only to its members and their guests; there was in fact no cash dividend distribution to its stockholders and whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course.

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It is conceded that the Club derived profit from the operation of its bar and restaurant, but this does not necessarily convert it into a profit-making enterprise since these were necessary adjuncts of the Club to foster its purposes, and the profits derived from it are necessarily incidental to the primary object. A club should always strive, whenever possible, to have surplus. Likewise, the fact that the capital stock of the Club is divided into shares is not essential because what is determinative of its being engaged in such business is its object or purpose as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. Also, for a stock corporation to exist, two requisites must be complied with: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held. In the case at bar, the Club’s articles of incorporation and by-laws do not provide an authority for the distribution of its dividends or surplus profits. Therefore, it cannot be considered a stock corporation within the contemplation of the corporation law. NOTE: The Club Filipino Inc. de Cebu was organized to develop and cultivate sports of all class and denomimation, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assets after paying debts shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club’s bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf course. It stands to reason that the Club is not engaged in the business of an operator of bar and restaurant.

COLLECTOR OF INTERNAL REVENUE v UNIVERSITY OF VISAYAS FACTS: In 1919, Vicente Gullas established a school in Cebu City known as the Visayan Institute and for a few years remained its sole owner. Two years later, Vicente Gullas, Pantaleon E. del Rosario, et al. formed a non-stock corporation with an authorized capital of P20K for the purpose of establishing and maintaining a school to be named as the “Visayan Institute.” The plan was to finance the school by selling bonds with a par value of P100 each payable out of the funds of the corporation to the public, with the interest to be fixed by the by-laws. However, the financing plan was abandoned and instead of selling bonds to the public, Vicente Gullas and his wife put in their own money. Nine years later, its articles of incorporation were amended by converting it into a stock corporation with an authorized capital of P50K. In 1949 the Visayan Institute was raised to the category of a university and renamed “University of the Visayas.” The respondent did not file with the BIR returns of net income for 1949-1950. After investigation, the examiner filed returns for said years based upon profit & loss statements shown and submitted to him by respondent’s accountant. Petitioner assessed the respondent for income during 1946-1950 and the tax due thereon, surcharges and penalties. On Dec. 1 & 2, 1951 the respondent sent telegrams to petitioner requesting that it be allowed to pay by installment at P1K/month. Petitioner replied that respondent could pay in 12 monthly installments at P5808.02 per month, provided that it would file a surety bond to insure payment. Respondent paid P1,000. and wrote a letter to petitioner requesting that 25% surcharge imposed for non-payment of income tax be eliminated because its failure to file income tax returns and to pay income tax for 1946-1950 was due to the honest belief that private schools were exempted from taxation. Petitioner granted respondent’s request and reduced the monthly installment to P4,603.77, provided that the 1st installment would be due on or before Feb. 29 and that the surety bond would be filed on or before the same. On Feb. 29, April 3 and May 5, the respondent paid monthly installments.

On 1 March 1954 respondent wrote to petitioner requesting a refund of P14,811.31 on the ground that being a corporation organized and operated exclusively for educational purpose, it was exempt from the payment of income tax. On the same day, respondent brought an action against the petitioner for recovery of said sum with the CFI, but the case was later certified to the CTA due to the enactment of RA 1125. The CTA ruled that the University of the Visayas is exempt from payment of income tax and that the assessments made by the petitioner CIR for 1946-1951 (P46,592.03) are null and void, and ordered the CIR to refund P13,811.31 for income tax erroneously paid. Hence, this appeal. Petitioner claims that the respondent is a corporation organized for profit which inures to the benefit of Vicente Gullas, its president. Respondent denies this claim. ISSUE: W/N CTA was correct in ruling that the University is exempt from payment of income tax – YES. HELD: CTA affirmed. A corporation or association claiming exemption from the payment of income tax as provided for in Sec. 27(e) of the NIRC, must show that it is organized and operated exclusively for religious, charitable, scientific, athletic, cultural or educational purposes, or for the rehabilitation of veterans and that no part of its income inures to the benefit of any private stockholder or individual. Respondent has satisfactorily established its claim that it is organized and operated exclusively for educational purposes and that no part of its income has inured to the benefit of any stockholder or individual. The purposes of the respondent stated in the original and amended articles of incorporation show that it is engaged in an educational endeavor and in no other. Its profit and loss statements show that its income was solely derived from fees paid by students for admission, tuition, diploma, graduation, ROTC, and laboratory. The fact that the original articles of incorporation was amended to convert the corporation from a non-stock to a stock corporation is not a conclusive proof that the respondent is engaged in a profit-making business, part of which inures to the benefit of a single stockholder or individual. As held by the CTA, Sec. 27 of the NIRC does not make any distinction between stock and non-stock corporations, and it is not for this Court to make the distinction. The fact that when it was converted into a stock corporation, its assets had increased from P6K cash and P3K worth of books into assets worth P50K which were distributed in the form of shares of stock to the members of the non-stock corporation, predecessor of the stock corporation and that at the meeting of the Board of Trustees of the respondent, there was a move to double the stock dividend of the corporation, which was not actually carried out, is not enough for an inference that the respondent has been turned into a corporation for business and profit. The fact is that since its incorporation, the respondent has not declared any cash dividend and no part of its profits has inured tot the benefit of any stockholder or individual. The mere realization of profits out of its operation does not automatically result in the loss of its privilege of exemption from the payment of income tax as long as no part of its profits inures to the benefit of any stockholder or individual. Petitioner’s claim that respondent has invested in other schools established in other places is denied by President Gullas, who testified that the respondent is merely supervising these schools and does not receive any fee for such. Neither the fact that there was an offer to purchase the assets of the University for P4K, nor the fact that the respondent’s profits are being kept for future distribution to stockholders would deprive the respondent of the privilege of exemption. As long as it continues to engage solely in the operation and maintenance of the school and no dividend inures to the benefit of any stockholder or individual, the respondent would enjoy the exemption. The action for refund, as far as the sum of P1K paid by respondent is already barred. The respondent does not insist on asking for a refund of this sum. As for the P4,603.77 the CTA correctly ruled that it is not barred. NOTES:

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The fact that an educational institution charges tuition fees and other fees for the different services it renders to the students, does not in itself make the school a profit-making enterprise that would place it beyond the purview of the law exempting it from income. While the acquisition of additional facilities may redound to the benefit of the institution itself, it cannot be positively asserted that the same will redound to the benefit of its stockholders, for no one can predict the financial condition of the institution upon its dissolution. The fact that the original articles of incorporation of an educational institution was amended to convert it from a non-stock to a stock corporation is not conclusive proof that it is engaged in a profit-making business, part of which inures to the benefit of a single stockholder or individual. The mere realization of profits out of its operation does not automatically result in the loss of an educational institution’s exemption from income tax as long as no part of its profits inures to the benefit of any stockholder or individual. A non-stock corporation may only be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in undertakings such as the investment business where profit is the main or underlying purpose. Although the non-stock corporation may obtain profits as an incident to its operation such profits are not to be distributed among its members but must be used for the furtherance of its purposes. People v. Menil, G.R. 115054-66, 12 September 1999 [unrep.]) The incurring of profit or losses does not determine whether an activity is for profit or nonprofit, and the courts will consider whether dividends have been declared or its members or that is property, effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise. Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963). 2. Non-Applicability of the Nationalization Laws A foreigner may a member or an officer of a non-stock corporation. Save for the position of the Secretary, who must be a Filipino citizen and a resident of the Philippines, the prohibition of foreign citizens becoming officers in corporations engaged in business does not apply to the activities of a non-stock corporation which do not fall within the coverage of a nationalized industry or area of business reserved by law exclusively to Filipino citizens. (SEC Opinion No. 12, series of 2002, 21 November 2002). 3. Conversion of Non-Stock Corporation to Stock Corporation The conversion of a non-stock educational institution into a stock corporation is not legally feasible, as it violates Sec. 87 of Corporation Code that no part of the income of a non-stock corporation may be distributable as dividends to its members, trustees or officers. “Thus, the Commission has previously ruled that a non-stock corporation cannot be converted into a stock corporation by a mere amendment of the Articles of Incorporation. For purposes of transformation, it is fundamental that the non-stock corporation be dissolved first under any of the methods specified Title XIV of the Corporation Code. Thereafter, the members may organize as a stock corporation directed to bring profits or pecuniary gains to themselves. (SEC Opinion dated 24 February 2003; SEC Opinion dated 10 December 1992). In the event of dissolution of a non-stock corporation, its assets shall be distributed in accordance with the rules as provided for under Secs. 94 and 95 of Corporation Code. Unless, it is so provided in the Articles of Incorporation or By-Laws, the members are not entitled to any beneficial or vested interest over the assets of the non-stock corporation. In other words, non-stock, non-profit corporations hold their funds in trust for the carrying out of the objectives and purposes expressed in its charter. (SEC Opinion dated 24 February 2003; SEC Opinion dated 13 May 1992). 4. What Is a Foundation? (Secs. 30 and 34(H), NIRC of 1997; Sec. 24, Revenue Regulations No. 2; BIR-NEDA Regulations No. 1-81, as amended)

Sec. 30 Exemptions from Tax on Corporations – The following organizations shall not be taxed under this Title in respect to income received by them as such: A) Labor, agricultural or horticultural organization not organized principally for profit; B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident or other benefits exclusively to the members of such society, order or association, or nonstick corporation or their dependents D) Cemetery company owned and operated exclusively for the benefit of its members; E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; F) Business league, chamber of commerce, or board of trade not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; H) A nonstock nonprofit educational institution; I) J) Government educational institution; Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

K) Farmers’, fruit growers’, or like associations organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity produce finished by them; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal or from any of their activities conducted for profit regardless of the disposition made for such income, shall be subject to tax imposed under this Code. Section 34(H) Such may be deducted on the gross income – Charitable and Other Contributions – 1) In General – Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth, and sports development, cultural, educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-governmental organizations, in accordance with the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, no par of the net income of which inures to the benefit of any private stockholder or individual in an amount in excess of 10% in the case of an individual, and 5% in the case of a corporation, of the taxpayer’s taxable income derived from trade, business or

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2) Contributions Deductible in Full – Notwithstanding the provisions of the preceding subparagraph, donations to the following institution or entities shall be deductible in full: (a) Donations to the Government – Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to the National Priority Plan determined by the National Economic and Development Authority (NEDA), in consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions: Provided, that any donation which is made to the government or any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection; (b) Donations to Certain Foreign Institutions or International Organizations – Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; (c)Donations to Accredited Nongovernmental Organizations – The term “nongovernmental organization” means a nonprofit domestic corporation: 5) Organized and operated exclusively for scientific, research, educational, characterbuilding and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual; 6) Which not later than 15th of the 3rd month after the close of the accredited nongovernmental organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; 7) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed 30% of the total expenses; and 8) The assets of which, in the even of dissolution would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. Subject to the terms and conditions as may be prescribed by the Secretary of Finance, the term “utilization” means: (i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. (ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if

at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed 5 years and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds.

Formal requirements of Rev. Reg. No. 2 are not mandatory and an entity may, in the absence of compliance with such requirements, still show that it falls under the provisions of Sec. of NIRC. Collector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956). 5. Dissolution (Secs. 94 and 95) Section 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n) Section 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting. NOTE: It is important to determine whether a corporation is stock or non-stock as to determine whether it is tax exempt or not, whether straight or cumulative voting shall apply, whether distributions of dividends may be had (such is an inherent power of stock corporations but is a prohibited action of a non-stock corporation.) NOTE: The key requirements in determining the existence of a non-stock corporation are the existence of its eleemosynary purpose and the non-distribution of its profits. (A stock corporation may have an eleemosynary purpose.) The latter is the element that animates a non-stock

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corporation. Usually, such provision is found in its articles of incorporation or by-laws, in its absence, or in the silence of these documents as to such matters, one must look at the actual practice of the corporation.

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XIX. FOREIGN CORPORATION See VILLANUEVA, Philippine Doctrine of "Doing Business," THE LAWYERS REVIEW, - Part I Vol. VII, No. 4, (April, 1993); Part II - Vol. VII, No. 6 (June, 1993). 1. Definition (Sec. 123)

Section 123. Definition and rights of foreign corporations. - For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. A foreign corporation is one which owes its existence to the laws of another state, and generally, has no legal existence within the state in which it is foreign. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997) A fundamental rule of international jurisdiction is that no state can by its laws, and no court which is only a creature of the state, can by its judgments and decrees, directly bind or affect property or persons beyond the limits of that state. Times, Inc. v. Reyes, 39 SCRA 303 (1971). 2. Statutory Concept of “Doing Business” (Art. 44, Executive Order No. 226, Omnibus Investment Code; Sec. 3(d), R.A. No. 7042, Foreign Investment Act of 1991). (a) Application for License (Secs. 124 and 125; Art. 48, Omnibus Investment Code) Section 124. Application to existing foreign corporations. - Every foreign corporation which on the date of the effectivity of this Code is authorized to do business in the Philippines under a license therefore issued to it, shall continue to have such authority under the terms and condition of its license, subject to the provisions of this Code and other special laws. Section 125. Application for a license. - A foreign corporation applying for a license to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: 1. The date and term of incorporation; 2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation; 3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation; 4. The place in the Philippines where the corporation intends to operate; 5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency; 6. The names and addresses of the present directors and officers of the corporation; 7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any; 8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any; 9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a

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Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate government agency, whenever required by law. A foreign corporation without a license is not ipso facto incapacitated from bringing an action in Philippine courts. A license is necessary only if a foreign corporation is “transacting” or “doing business” in the country. Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Tech., G.R No. 154618, 14 April (2004). (b) Rationale for Requiring License to Do Business The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, it to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts. Otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997). The same danger does not exist among foreign corporations that are indubitably not doing business in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject to the State’s regulation. As we observed, in so far as the State is concerned, such foreign corporation has no legal existence. Therefore, to subject such foreign corporation to the courts’ jurisdiction would violate the essence of sovereignty. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997). (c) Issuance of License (Sec. 126; Art. 49, Omnibus Investment Code) Section 126. Issuance of a license. - If the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special laws. Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except foreign banking or insurance corporation, shall deposit with the Securities and Exchange Commission for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the Securities and Exchange Commission, consisting of bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, shares of stock in

"registered enterprises" as this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of securities, with an actual market value of at least one hundred thousand (P100,000.) pesos; Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by which the licensee's gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities and Exchange Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has decreased by at least ten (10%) percent of their actual market value at the time they were deposited. The Securities and Exchange Commission may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than ten (10%) percent of the actual market value of the securities at the time they were deposited. The Securities and Exchange Commission may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities deposited. In the event the licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be returned, upon the licensee's application therefor and upon proof to the satisfaction of the Securities and Exchange Commission that the licensee has no liability to Philippine residents, including the Government of the Republic of the Philippines. A foreign corporation licensed to do business should be subjected to no harsher rules that is required of domestic corporation and should not generally be subject to attachment on the pretense that such foreign corporation is not residing in the Philippines. Claude Neon Lights v. Phil. Advertising Corp., 57 Phil. 607 (1932). (d) Amendment of License (Sec. 131) Section 131. Amended license. - A foreign corporation authorized to transact business in the Philippines shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the Philippines other or additional purposes, by submitting an application therefor to the Securities and Exchange Commission, favorably endorsed by the appropriate government agency in the proper cases. 3. Jurisprudential Concepts of “Doing Business” (a) “Doing Business” implies a continuity of commercial dealings the performance of acts or works or the exercise of some of incident to the purpose or object of its organization. Mentholatum 525 (1941); aAgilent Technolgies Singapore v. Integrated Silicon G.R No. 154618, 14 April 2004. MENTHOLATUM v. MANGALIMAN FACTS Mentholatum Co, Inc. is a Kansas corp which manufactures Mentholatum and medicament salve for the treatment of colds, nasal irritations, chapped skin and other external ailments of the body. It is registered with the Bureau of Commerce and Industry the word “Mentholatum” as trademark for its products. Hoever, the Mangaliman brothers prepared a mediacament and salve named Mentholiman which they sold to the public packed in a container of the same size, color and shape as Mentholatum (tsk tsk, sneaky, sneaky! Gollum issss a ssssneak…). As a consequence Mentholatum suffered damages from the diminution of sales and the loss of goodwill and reputation of their products. So they instituted action against the Mangaliman brothers and the director of Bureau of Commerce for the infringement of trademark and unfair competition. HELD Mentholatum cannot prosecute this action since it was doing business in the Philippines without a license. In the present case no dispute exists as to the fact that Mentholatum is a foreign corp and it is not licensed to do business in the Phils. So what does “doing business” mean? and arrangements and the functions normally v. Mangaliman, 72 Phil. Technology Phil. Corp.,

24 5 No general rule or governing principle can be laid down as what constitutes “doing business.” It must be judged in the light of peculiar circumstances. The test, however, seems to be that “Doing Business” implies a continuity of the commercial dealings and arrangements and the performance of acts or works or the exercise of some of the functions normally incident to the purpose or object of its organization. AGILENT TECHNOLGIES SINGAPORE V. INTEGRATED SILICON TECHNOLOGY PHIL. CORP. FACTS: Agilent Technologies Singapore is a foreign corporation not licensed to do business in the Philippines. Integrated Silicon Technology is a private domestic corporation, 100% foreign owned, which is engaged in the manufacturing and assembling electronics components. Hewlett-Packard Singapore (HP Singapore) & Singapore Components Operation entered into a 5-year Value Added Assembly Services Agreement (VAASA) with Integrated Silicon. Under the terms of the VAASA, Integrated Silicon was to locally manufacture and assemble fiber optics for export to HP Singapore. HP Singapore, for its part, was to consign raw materials to Integrated Silicon; transport machinery to the plant of Integrated Silicon; and pay Integrated Silicon the purchase price of the finished products. Subsequently, HP Singapore assigned all its rights & obligations in the VAASA to Agilent. Integrated Silicon filed a complaint for specific performance & damages against Agilent and its officers. It alleged that Agilent breached the parties' oral agreement to extend the VAASA. Integrated Silicon prayed that the defendant be ordered to execute a written extension of the VAASA for a period of five years as earlier promised. Agilent filed a separate complaint against Integrated Silicon for specific performance, recovery of possession & sum of money with replevin, preliminary injunction & damages before the Regional Trial Court of Calamba, Laguna. Agilent prayed that a writ of replevin be issued to order Integrated Silicon to immediately return and deliver to Agilent its equipment, machineries and the materials to be sued for fiber-optic components which were left in the plant of the defendant. Integrated Silicon filed a Motion to Dismiss said case on the grounds of lack of Agilent's legal capacity to sue, litis pendentia, forum shopping and failure to state a cause of action. The RTC DENIED the Motion. The Court of Appeals GRANTED Integrated Silicon's petition for certiorari and ordered the dismissal of the case initiated by Agilent. ISSUE: W/N Agilent Technologies has the legal capacity to sue. HELD: YES. Integrated Silicon argues that since Agilent is an unlicensed foreign corporation doing business in the Philippines, it lacks the legal capacity to file suit. The assailed acts of Agilent, purportedly in the nature of “doing business” in the Philippines are the following: (1) mere entering into the VAASA, which is in the nature of a “service contract”; (2) appointment of a full-time representative in Integrated Silicon, to “oversee and supervise the production” of Agilent products, among others. A foreign corporation without a license is not ipso facto incapacitated from bringing an action in Philippine courts. A license is necessary only if a foreign corporation is “transacting” or “doing business” in the country (Sec. 133 of the Corporation Code). The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements: (a) if a foreign corporation does business in the Philippines without a license it cannot sue before the Philippine courts; (b) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely dependent of any business transaction; (c) if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation's corporate personality in a suit brought before Philippine courts; and (d) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts in any transaction. The term “doing”, “engaging in,” or “transacting” business in the Philippines implies a continuity of commercial dealings and arrangements, and contemplates the performance of acts or

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works or the exercise of some of the functions normally incident to or in progressive prosecution of the purpose and subject of its organization. There are two general tests to determine whether or not a foreign corporation can be considered as “doing business” in the Philippines. The first of these is the substance test: The true test [for doing business], however, seems to be whether the foreign corporation is continuing the body of the business or enterprise for which it was organized or whether it has substantially retired from it and turned over to another. The second test is the continuity test: The term [doing business] implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in the progressive prosecution of, the purpose and object of the organization. Although each case must be judged in light of its attendant circumstances, jurisprudence has evolved several guiding principles for the application of these tests. For instance, considering that it transacted with its Philippine counterpart for seven years, engaging in futures contracts, it was concluded that the foreign corporation in Merrill Lynch Futures, Inc. v. Court of Appeals and Spouses Lara, was doing business in the Philippines. In Commissioner of Internal Revenue v. Japan Airlines (“JAL”), the Court held that JAL was doing business in the Philippines, i.e., its commercial dealings in the country were continuous – despite the fact that no JAL aircraft landed in the country – as it sold tickets in the Philippines through a general sales agent, and opened a promotions office here as well. In General Corp. of the Phils. v. Union Insurance Society of Canton and Fireman’s Fund Insurance, a foreign insurance corporation was held to be doing business in the Philippines, as it appointed a settling agent here, and issued 12 marine insurance policies. It was held that these transactions were not isolated or casual, but manifested the continuity of the foreign corporation’s conduct and its intent to establish a continuous business in the country. In Eriks PTE Ltd. v. Court of Appeals and Enriquez, the foreign corporation sold its products to a Filipino buyer who ordered the goods 16 times within an eight-month period. Accordingly, it was ruled that the corporation was doing business in the Philippines, as there was a clear intention on its part to continue the body of its business here, despite the relatively short span of time involved. Communication Materials and Design, Inc., et al. v. Court of Appeals, ITEC, et al. and Top-Weld Manufacturing v. ECED, IRTI, et al. both involved the License and Technical Agreement and Distributor Agreement of foreign corporations with their respective local counterparts that were the primary bases for the Court’s ruling that the foreign corporations were doing business in the Philippines. In particular, the Court cited the highly restrictive nature of certain provisions in the agreements involved, such that, as stated in Communication Materials, the Philippine entity is reduced to a mere extension or instrument of the foreign corporation. For example, in Communication Materials, the Court deemed the “No Competing Product” provision of the Representative Agreement therein restrictive. The case law definition has evolved into a statutory definition, having been adopted with some qualifications in various pieces of legislation. The Foreign Investments Act of 1991 (the “FIA”; Republic Act No. 7042, as amended), defines “doing business” as follows: Sec. 3, par. (d). The phrase “doing business” shall include soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in the progressive prosecution of, commercial gain or of the purpose and object of the business organization. An analysis of the relevant case law, in conjunction with Section 1 of the Implementing Rules and Regulations of the FIA (as amended by Republic Act No. 8179), would demonstrate that the acts

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enumerated in the VAASA do not constitute “doing business” in the Philippines. Section 1 of the Implementing Rules and Regulations of the FIA provides that the following shall not be deemed “doing business”: (1) Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; (2) Having a nominee director or officer to represent its interest in such corporation; (3) Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative’s or distributor’s own name and account; (4) The publication of a general advertisement through any print or broadcast media; (5) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; (6) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; (7) Collecting information in the Philippines; and (8) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services. By and large, to constitute “doing business”, the activity to be undertaken in the Philippines is one that is for profit-making. By the clear terms of the VAASA, Agilent’s activities in the Philippines were confined to (1) maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by Integrated Silicon; and (2) consignment of equipment with Integrated Silicon to be used in the processing of products for export. As such Agilent cannot be deemed to be “doing business” in the Philippines. Respondents’ contention that Agilent lacks the legal capacity to file suit is unmeritorious. As a foreign corporation not doing business in the Philippines, it needed no license before it can sue before our courts. The Decision of the Court of Appeals dismissing the Civil Case is REVERSED & SET ASIDE. The order of the RTC of Calamba is REINSTATED. Agilent’s application for a Writ of Replevin is GRANTED. Single Transaction: Where a single act or transaction, however, is not merely incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act or transaction constitutes doing business. Far East Int'l. v. Nankai Kogyo, 6 SCRA 725 (1962). It is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged in business in the Philippines, since other circumstances must be considered. Where a single act or transaction of a foreign corporation is not merely incidental or casual but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state, such act will be considered as constituting business. Litton Mills, Inc. v. Court of Appeals, 256 SCRA 696 (1996). Acts of Soliciations: Solicitation of business contracts constitutes doing business in the Philippines. Marubeni Nederland B.V. v. Tensuan, 190 SCRA 105. On Insurance Business: A foreign corporation with a settling agent in the Philippines which issues twelve marine policies covering different shipments to the Philippines is doing business in the Philippines. General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950). A foreign corporation which had been collecting premiums on outstanding policies is doing business in the Philippines. Manufacturing Life Ins. v. Meer, 89 Phil. 351 (1951). Summary of Doing Business: The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements: (1) if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts; (2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; (3) if a foreign

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corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation’s corporate personality in a suit brought before the Philippine courts; and (4) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction. aMR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002); Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., G.R No. 154618, 14 April (2004). MR. HOLDINGS, LTD. V. BAJAR FACTS: Asian Development Bank (ADB), a multilateral development finance institution, agreed to extend to Marcopper Mining Corporation (Marcopper) a loan in the aggregate amount of US$40,000,000.00 to finance the latter’s mining project at Sta. Cruz, Marinduque. The principal loan of US$ 15,000,000 was sourced from ADB’s ordinary capital resources, while the complementary loan of US$ 25,000,000 was funded by the Bank of Nova Scotia, a participating finance institution. ADB & Placer Dome, Inc., a foreign corporation which owns 40% of Marcopper, executed a “Support and Standby Credit Agreement” whereby the latter agreed to provide Marcopper with cash flow support for the payment of its obligations to ADB. To secure the loan, Marcopper executed in favor of ADB a “Deed of Real Estate and Chattel Mortgage” covering substantially all of Marcopper’s properties and assets in Marinduque. When Marcopper defaulted in the payment of its loan obligation, Placer Dome, in fulfillment of its undertaking under the “Support and Standby Credit Agreement,” agreed to have its subsidiary corporation, MR Holding, Ltd., assumed Marcopper’s obligation to ADB in the amount of US$ 18,453,450.02. In an “Assignment Agreement”, ADB assigned to petitioner all its rights, interests and obligations under the principal and complementary loan agreements, (“Deed of Real Estate and Chattel Mortgage,” and “Support and Standby Credit Agreement”). Marcopper likewise executed a “Deed of Assignment” in favor of petitioner. Under its provisions, Marcopper assigns, transfers, cedes and conveys to petitioner, its assigns and/or successors-in-interest all of its (Marcopper’s) properties, mining equipment and facilities Meanwhile, Solidbank Corporation (Solidbank) obtained a Partial Judgment against Marcopper from the RTC of Manila. The RTC ordered Marcopper to pay Solidbank the sum of P52,970,756.89. Upon Solidbank’s motion, the RTC of Manila issued a writ of execution pending appeal to require Marcopper to pay the sums of money to satisfy the Partial Judgment. Thereafter, two notices of levy were issued on Marcopper’s personal and real properties, and over all its stocks of scrap iron & unserviceable mining equipment. Two notices setting the public auction sale of the levied properties were made. Having learned of the scheduled sale, petitioner commenced with the RTC of Boac, Marinduque, a complaint for reivindication of properties, etc., with prayer for preliminary injunction and temporary restraining order against respondents Solidbank and the sheriffs. The RTC denied petitioner’s application on the ground that: (1) petitioner has no legal capacity to sue, it being a foreign corporation doing business in the Philippines without license; & (2) the validity of the “Assignment Agreement” and the “Deed of Assignment” has been “put into serious question by the timing of their execution and registration.” The Court of Appeals did not find grave abuse of discretion. ISSUES: (1) W/N petitioner has legal capacity to sue & seek redress from Philippine courts. (2) W/N the Deed of Assignment between Marcopper & petitioner was executed in fraud of creditors. (3) W/N petitioner MR Holdings, Ltd., Placer Dome, and Marcopper are one and the same entity. HELD: (1) YES. Solidbank avers that: a) petitioner is “doing business” in the Philippines evidenced by the “huge investment” it poured into the assignment contracts; b) granting that petitioner is not doing business in the Philippines, the transaction reveals an “intention to do business” or “to begin a series of transaction” in the country; and c) petitioner, Marcopper and Placer Dome are the same entity, petitioner being then a wholly-owned subsidiary of Placer Dome, which, in turn, owns 40% of

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Marcopper. Whether or not a foreign corporation is doing business is dependent principally upon the facts & circumstances of each particular case, considered in the light of the purposes and language of the pertinent statutes involved and of the general principles governing the jurisdictional authority of the state over such corporations. The Corporation Code is silent as to what constitutes “doing” or “transacting” business in the Philippines. Jurisprudence has supplied the deficiency and has held that the term “implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object for which the corporation was organized.” In Mentholatum Co. Inc., vs. Mangaliman, the Court laid down the test to determine whether a foreign company is “doing business:” “The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another.” Republic Act No. 7042, known as the “Foreign Investment Act of 1991,” defines “doing business” as follows: “d) The phrase ‘doing business’ shall include soliciting orders, service contracts, opening offices, whether called ‘liaison’ offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eight(y) (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works; or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization; Provided, however, That the phrase ‘doing business’ shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business x x x .” Section 1 of Republic Act No. 5455 provides that: “SECTION. 1. Definition and scope of this Act. - (1) x x x the phrase ‘doing business’ shall include soliciting orders, purchases, service contracts, opening offices x x x ; participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization.” In this case the Court of Appeals categorized as “doing business” petitioner’s participation under the “Assignment Agreement” and the “Deed of Assignment.” This is incorrect. The expression “doing business” should not be given such a strict and literal construction as to make it apply to any corporate dealing. At this early stage and with petitioner’s acts limited to the assignment contracts, it cannot be said that it had performed acts intended to continue the business for which it was organized. The purpose for which petitioner was organized is not discernible in the records. No effort was exerted by the Court of Appeals to establish the nexus between petitioner’s business and the acts supposed to constitute “doing business.” Thus, whether the assignment contracts were incidental to petitioner’s business or were continuation thereof is beyond determination. The case cited by the CA is inapplicable. Far East Int’l Import and Export Corp. vs. Nankai Kogyo Co., Ltd., held that a single act may still constitute “doing business” if “it is not merely incidental or casual, but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state.” In the said case, there was an express admission from an official of the foreign corporation that he was sent to the Philippines to look into the operation of mines, thereby revealing the foreign corporation’s desire to continue engaging in business here. But in this case, there is no evidence of

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similar intent. Unarguably, petitioner may decide to operate Marcopper’s mining business but that is a mere speculation. Or it may decide to sell the credit secured by the mining properties to an offshore investor, in which case the acts will still be isolated transactions. The Court of Appeals’ holding that petitioner was determined to be “doing business” in the Philippines is based mainly on speculation. In concluding that the “unmistakable intention” of petitioner is to continue Marcopper’s business, the CA hangs on the wobbly premise that “there is no other way for petitioner to recover its huge financial investments which it poured into Marcopper’s rehabilitation without it (petitioner) continuing Marcopper’s business in the country.” This is a mere presumption. There is absence of any overt acts from which the petitioner's intention to continue Marcopper's business is directly inferred. A view subscribed upon by many authorities is that the mere ownership by a foreign corporation of a property in a certain state, unaccompanied by its active use in furtherance of the business for which it was formed, is insufficient in itself to constitute doing business. In Chittim vs. Belle Fourche Bentonite Products Co., it was held that even if a foreign corporation purchased and took conveyances of a mining claim, did some assessment work thereon, and endeavored to sell it, its acts will not constitute the doing of business so as to subject the corporation to the statutory requirements for the transacting of business. In the same vein, petitioner, a foreign corporation, which becomes the assignee of mining properties, facilities and equipment cannot be automatically considered as doing business, nor presumed to have the intention of engaging in mining business. Long before petitioner assumed Marcopper’s debt to ADB and became their assignee under the two assignment contracts, there already existed a “Support and Standby Credit Agreement” between ADB and Placer Dome whereby the latter bound itself to provide cash flow support for Marcopper’s payment of its obligations to ADB. Petitioner’s payment of $18,453,450.12 to ADB was more of a fulfillment of an obligation under the “Support and Standby Credit Agreement” rather than an investment. That petitioner had to step into the shoes of ADB as Marcopper’s creditor was just a necessary legal consequence of the transactions that transpired. Also, the “Support and Standby Credit Agreement” was executed four years prior to Marcopper’s insovency. Thus, the alleged “intention of petitioner to continue Marcopper’s business” could have no basis for at that time. Petitioner was engaged only in isolated acts or transactions. Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of business. Typical examples of these are the making of a single contract, sale, sale with the taking of a note and mortgage in the state to secure payment therefor, purchase, or note, or the mere commission of a tort. In these instances, there is no purpose to do any other business within the country. (2) NO. Solidbank contends that from the timing of events, it is evident that there existed a preset pattern of response on Marcopper to defeat whatever court ruling that may be rendered in favor of Solidbank. While it may appear that the assignment contracts are in the nature of fraudulent conveyances, a closer look at the events that transpired prior to the execution of those contracts gives rise to a conclusion that the CA left out some events. Article 1387 of the Civil Code provides: “All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation.” Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking rescission. This presumption of fraud is not conclusive and may be rebutted by satisfactory and convincing evidence. All that is necessary is to establish affirmatively that the conveyance is made in good faith and for a sufficient and valuable consideration. The “Assignment Agreement” & the “Deed of Assignment” were executed for valuable considerations. Patent from the “Assignment Agreement” is the fact that petitioner assumed the payment of $18,453,450.12 to ADB in satisfaction of Marcopper’s remaining debt. Facts show that the assignment contracts were executed in good faith. The execution of the

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“Assignment Agreement” and the “Deed of Assignment” is not the alpha of this case. While the execution of these coincided with the Partial Judgment by the RTC, there was, however, no intention on the part of petitioner to defeat Solidbank’s claim. It is inconceivable that ADB, a reputable financial organization, will connive with Marcopper to feign or simulate a contract just to defraud Solidbank for its claim four years. And it is incredible for petitioner to be paying the huge sum of $18,453,450.12 to ADB only for the purpose of defrauding Solidbank of the sum of P52,970.756.89. (3) NO. The record is lacking in circumstances that would suggest that petitioner corporation, Placer Dome and Marcopper are one and the same entity. While admittedly, petitioner is a whollyowned subsidiary of Placer Dome, which in turn was then a minority stockholder of Marcopper, however, the mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. Philippine National Bank vs. Ritratto Group Inc. outlines the circumstances which are useful in the determination of whether a subsidiary is but a mere instrumentality of the parent-corporation: “(a) The parent corporation owns all or most of the capital stock of the subsidiary. (b) The parent and subsidiary corporations have common directors or officers. (c) The parent corporation finances the subsidiary. (d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation. (e) The subsidiary has grossly inadequate capital. (f) The parent corporation pays the salaries and other expenses or losses of the subsidiary. (g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. (h) In the papers of the parent corporation or x x x, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own. x x x.” There are no other factors indicative that petitioner is a mere instrumentality of Marcopper or Placer Dome. The fact that Placer Dome agreed, under the terms of the “Support and Standby Credit Agreement” to provide Marcopper with cash flow support in paying its obligations, does not mean that its personality has merged with Marcopper. This singular undertaking, performed by Placer Dome with its own stockholders in Canada and elsewhere, is not a sufficient ground to merge its corporate personality with Marcopper which has its own set of shareholders, dominated mostly by Filipino citizens. The same applies to petitioner’s payment of Marcopper’s remaining debt to ADB. With the absence of fraud in the transaction of the three foreign corporations, it is improper to pierce the veil of corporate fiction – that equitable doctrine developed to address situations where the corporate personality of a corporation is abused or used for wrongful purposes. The Decision of the Court of Appeals is SET ASIDE. The sheriffs are restrained from further implementing the writ of execution issued by the Regional Trial Court. (b) Unrelated or Isolated Transactions. aEastboard Navigation, Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1 (1957);aAntam Consolidated v. CA, 143 SCRA 288 (1986). EASTBOARD NAVIGATION, LTD. V. JUAN YSMAEL AND CO., INC. FACTS: Atkins, Kroll & Co., Inc., Manila (Atkins) wrote Juan Ysmael & Co., Inc. (Ysmael) informing the latter that Eastboard Navigation, Ltd. of Toronto, Canada agreed to the terms of payment for the charter of the S/S Eastwater. Eastboard owned the vessel. This letter is also referred to as the charter party agreement. The sea vessel was to be used in loading cargo of scrap iron in the Philippines for Buenos Aires. Atkins acted as an agent for and in behalf of Eastboard by cable authority.

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Ysmael signed the charter party agreement signifying its confirmation. The letter contained the clause: “x x x it is mutually agreed that should any dispute arise between Owners and Charterers, the matter in dispute shall be referred to three persons at New York for arbitration, one to be appointed by each of the parties hereto, and the third by the two so chosen x x x” Atkins, following the instructions of its principal, subsequently wrote Ysmael requesting the defendant company to immediately nominate its arbitrator. A controversy existed between the parties concerning the liability of Ysmael for demurrage, discharging expenses, wharfage, extra meals, agency fees, crew overtime and other miscellaneous expenses. Ysmael and Eastboard executed an arbitration agreement where both agreed to observe an award made by the arbitrators. It also read: “And it is hereby further mutually agreed that a judgment of the United States District Court x x x for New York shall be rendered upon the award made pursuant to this submission.” The three arbitrators rendered their decision and such was presented by Eastboard to the New York District Court for confirmation. The said court confirmed the arbitration decision which allowed Eastboard to recover from Ysmael $53,566.13 with interest until the full amount is paid. Eastboard filed an action with the Court of First Instance of Manila (CFI) to enforce the said order. Ysmael set up the defense that said judgment cannot be enforced because the New York District Court had no jurisdiction over the person of the defendant and that the proceeding where judgment was rendered was summary. During the hearing in the CFI, the following facts were agreed upon: (a) Eastboard was not licensed to transact business in the Philippines; and (b) the charter party agreement with Ysmael was not its first business transaction made locally. Eastboard's vessel was previously chartered by the National Rice & Corn Corporation to carry rice cargo to the Philippines. The CFI affirmed the decree of the New York District Court and ordered its enforcement. Ysmael appealed the decision. Eastboard likewise appealed but only on the score that the court did not declare defendant liable for the amount of the foreign exchange tax due on the judgment and for fees it agreed to pay its counsel. One of issues raised by Ysmael on appeal is the capacity of Eastboard, being a foreign corporation, to sue within Philippine jurisdiction. ISSUE: W/N Eastboard Navigation has the capacity to sue. HELD: YES. While Eastboard Navigation is a foreign corporation without license to transact business in the Philippines, it does not follow that it has to no capacity to sue. Such license is not necessary because it is not engaged in business in the Philippines. The transaction involved in this case is the first business undertaken by Eastboard in the Philippines, although on a previous occasion Eastboard's vessel was chartered by the National Rice and Corn Corporation to carry rice cargo from abroad to the Philippines. These two isolated transactions do not constitute engaging in business in the Philippines within the purview of Sections 68 and 69 of the Corporation Law so as to bar plaintiff from seeking redress in Philippine courts. The decision of the Court of First Instance is AFFIRMED. Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of business. Typical examples of these are the making of a single contract, sale, sale with the taking of a note and mortgage in the state to secure payment thereof, purchase, or note, or the mere commission of a tort. In these instances, there is no purpose to do any other business within the country. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). Case-Law Examples: • Collision of two vessels at the Manila Harbor. Dampfschieffs Rhederei Union v. La Campañia Transatlantica, 8 Phil. 766 (1907). Loss of goods bound for Hongkong but erroneously discharged in Manila. The Swedish East Asia Co., Ltd. v. Manila Port Service, 25 SCRA 633 (1968).

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Infringement of trade name. General Garments Corp. v. Director of Patens, 41 SCRA 50 (1971); Universal Rubber Products, Inc. v. Court of Appeals, 130 SCRA 104 (1988). Recovery of damages sustained by cargo shipped to the Philippines. Bulakhidas v. Navarro, 142 SCRA 1 (1986). Sale construction equipment to the Government with no intent of continuity of transaction. Gonzales v. Raquiza, 180 SCRA 254 (1989). Recovery on a Hongkong judgment against a Manila resident. Hang Lung Bak v. Saulog, 201 SCRA 137 (1991). Appointment of local lawyer by foreign movie companies who have registered intellectual property rights over their movies in the Philippines, to protect such rights for piracy: “We fail to see how exercising one's legal and property rights and taking steps for the vigilant protection of said rights, particularly the appointment of an attorney-in-fact, can be deemed by and of themselves to be doing business here.” Columbia Pictures Inc. v. Court of Appeals, 261 SCRA 144 (1996).

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Need to Allege: The fact that a foreign corporation is not doing business in the Philippines must be alleged if a foreign corporation desires to sue in Philippines courts under the “isolated transactions rule.” aAtlantic Mutual Inc. Co. v. Cebu Stevedoring Co., 17 SCRA 1037 (1966); Commissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990).2 (c) “Contract Test” of Doing Business: aPacific Vegetable Oil Corp. v. Singson, Advanced Decision Supreme Court, April 1955 Vol., p. 100-A; aAetna Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977); Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 (1990). PACIFIC VEGETABLE OIL CORP. V. SINGSON Singzon, acting through its own broker in San Francisco, Ca., sold to Pacific Vegetable Oil 500 long tons of copra at $142 per short ton CIF Pacific Coast. The agreed price was to be covered by an irrevocable letter of credit for 100% of the K price. Pursuant to the K, the Bank of California, on behalf of Pacific, opened an irrevocable credit with China Bank in the Phils. However, Singzon failed to ship the copra. An agreement however was reached where Singzon promised to deliver 300 long tons during the months of Jan and Feb with penalty clause wherein stated that Singzon will be liable for $10,00 as damages and will still be bound to deliver the original 500 long tons in case he still fails to deliver pursuant to the “2nd” agreement. Singzon still failed to deliver so Pacific filed for damages. Sinzon filed MtD on ground that Pacific had no personality to file the action as it had no license to do business in the Phils. HELD Pacific had personality to sue. Pacific did not transact business in the Phils. It clearly appears that the copra was actually sold by Singzon in the US-it was entered into the US by Singzon’s broker who was in California. Not only was the K entered into the US, it was agreed to be consummated there. Therefore, Pacific Oil has not transacted business in the Phils, as such, it is not required to obtain a license before it could have personality to bring a court action. (d) Transactions with Agents and Brokers: aGranger Associates v. Microwave Systems, Inc., 189 SCRA 631 (1990); La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 (1984); Schmid & Oberly v. RJL, 166 SCRA 493 [1988]; Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1974). 2This overturned the previous doctrine in Marshall-Wells (as well as in In re Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938), that the lack of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a matter of affirmative defense.

GRANGER ASSOCIATES V. MICROWAVE SYSTEMS, INC. FACTS Granger is a US corp without a license to do business in the Phils. It entered into a seies of agreements with Microwave Sytems (MSI), a domestic corp: Granger licensed MSI to manufacture and sell its products in the Phils and extended to the latter certain loans, equipment, and parts; Granger was to sell Multiplex Eqpt to MSI; a supplemental and mandatory agreement in 1979. MSI did not pay so Granger filed suit. HELD Granger was doing business. Without a license, it cannot sue. Doing business includes: a) soliciting orders, purchase, service contracts, opening offices, whether called ‘liaison’ offices or branches; b) appointing reps or distributors domiciled in the Phils who stays more than 180 days at least; c) participation in the mgt, supervision or control of any domestic business firm, entity or corp in the Phils; and d) any other act implying continuity of commercial dealings. The different agreements entered into were considered a series of agreements showing that Granger was doing business. Even if the subject matter of the different agreements were all the same, that alone would not necessarily signify that all such agreements ere merely auxiliary to the first. As long as it could be shown that the parties entered into a series of agreements, as in successive sales of the company’s regular products, that company shall be deemed as doing business. The stipulations show that Granger had extended its personality in the Phils, and would receive orders for it products and discharge its warranty obligations through MSI as agent. It would even appear that Granger intended to transact business through MSI not only for the sale and warranty of its products but also to act as representative in the development of possible markets for Granger products. Also, Granger saw to it that it was assured at least one seat in the BoD of MSI. Although Granger cites the regulations of the Board of Investments that mere investment in a local company by a foreign corp should not be construed as doing business in the Phils., it cannot be denied that the investment was quite substantial (30%), enabling it to participate in the actual mgt and control. 4. Different Rules on Trademark and Tradenames (aWestern Equipment & Supply Co. v. Reyes, 51 Phil. 115 [1927]; Leviton Industries v. Salvador, 114 SCRA 420 [1982]; Converse Rubber v. Universal Rubber, 147 SCRA 154 [1987]; Converse Rubber Corp. v. Jacinto Rubber & Plastic Co., 97 SCRA 158 [1980]; Universal Rubber Products, Inc. v. CA, 130 SCRA 104 [1984]; Puma Sportschunhfabriken Rudolf Dassler, K.G. v. IAC, 158 SCRA 233 [1988]; Philips Export B.V. v. CA, 206 SCRA 457 [1992]). 5. Effects of Failure to Obtain License: (a) On the Contract Entered Into: aHome Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983). HOME INSURANCE CO. V. EASTERN SHIPPING LINES FACTS This is a consolidation of 2 cases. 1st case: S. Kajita & Co., on behalf of Atlas Consolidated Corp shipped on board the SS Eastern Jupiter coils of black hot rolled copper wire rod (shipment was insured). The said vessel is owned and operated by Eastern Shipping Lines. Some of the coils discharged from the vessel were in bad order and had to be considered as scrap. So Home Insurance Co. paid under it’s insurance policy the amt of P3, 60.44. Home Insurance made demands for payment against Eatern and Angel Jose Transpo for reimbursemnt of the amt but each refused to pay the same. 2nd case: Hansa Transport Kontor shipped from Bremen, Germany, 30 packages of Service Parts

25 5 of Farm Eqpmt and Implements on oard the vessel SS NEDER RIJN owned by the defendant N.V. Nedlloyd Lijnen and represented in the Phils by its local agent, Columbian Phils, Inc. Shipment was also insured. Again, some packages were in bad order. So Home Insurance paid the amt of P2, 426.98. Demands were made on Lijnen for reimbursement but did nopt get anywhere. In both cases, petitioner-appellant avers that it is a foreign insurance company duly authorized to do business in the Phils through its agent Victor Bello. HELD When the complaints in these 2 cases were filed, Home Insurance already secured the necessary license to conduct its business and could therefore already file suit. The SC has already ruled that the object of Secs 68 and 69 of the Corp Law was to subject the foreign corp doing business in the Phils to the jurisdiction of our courts. The object of the statute was not to prevent the foreign corp from performing single acts, but to prevent it from acquiring a domicile for the purpose of business without taking the necessary steps to render it amenable to suit in the local courts. The implication therefore is that it was never the purpose of the legislature to exclude a foreign corp which happens to obtain an isolated order for business from the Phils from seeking redress in Phil courts and thus, in effect, to permit persons to avoid their contracts made with such foreign corps. Sec. 69 of old Corporation Law was intended to subject the foreign corporation doing business in the Philippines to the jurisdiction of our courts and not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring domicile for the purpose of business without taking the necessary steps to render it amenable to suit in the local courts. Marshall-Wells Co., v. Elser, 46 Phil. 70 (1924). (b) Standing to Sue (Sec. 133; Marshall-Wells v. Elser, 46 Phil. 71 [1924]) Section 133. Doing business without a license. - No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. (c) Criminal Liability under Sec. 144 aHome Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983). Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code. (d) Pari Delicto Doctrine: The local party to a contract with a foreign corporation that does business in the Philippines without license cannot maintain suit against the foreign corporation just as the foreign corporation cannot maintain suit, under the principle of pari delicto. aTop-Weld Mfg. v. ECED, 119 SCRA 118 (1985). But See:aCommunication Materials v. Court of Appeals, 260 SCRA 673 (1996). (e) Estoppel Doctrine: A foreign corporation doing business in the Philippines may sue in Philippine courts although it is without license to do business here against a Philippine citizen who had contracted with and been benefited by said corporation and knew it to be without the necessary license to do business, under the principle of estoppel. aMerrill

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Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992); Georg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994); Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., G.R No. 154618, 14 April (2004). MERRILL LYNCH FUTURES, INC. V. CA FACTS Merrill Lynch Futures Inc is a foreign corp organized under the laws of Delaware. It entered into a Customer Agreement with the Lara spouses where the cor agreed to act as the spouses’ broker for the purchase of the sale of Futures contracts in the US. (Futures contract – contractual commitment to buy and sell standardized quantity of a particular item at a specified future settlement date and at a price agreed upon, with the purchase of sale being executed on a regulated Futures exchange). Transactions between the parties were to be made through the agent of MLF in the Phils— Merrill Lynch Phils Inc (MLPI), a Phil corp. So transactions were made but in 3 particular transactions, the spouses incurred a loss. After MLF set off the amount of this loss with a debt it owed to the Lara spouses, the spouses became indebted to MLF for the balance but the latter refused to pay the same alleging that MLF had not been doing business in the Phils although not licensed to do so. Therefore, MLF is prohibited by law to maintain an action in Phil courts and that they were never informed that MLPI was not authorized to operate as a futures trading advisor. HELD Case is remanded for further proceedings. If it be true that during all the time that they were transacting with MLF, the Laras were fully aware of its lack of license to do business in the Philippines, and in relation to those transactions had made payments to, and received money from it for several years, the question is whether or not the Lara spouses are estopped to impugn MLF capacity to sue them in the courts of the forum. The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. And the “doctrine of estoppel to deny corporate existence applies to foreign as well as to domestic corporations;” “ one who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity.” Although there is authority that said doctrine “does not, by analogy, require that such person be held estopped to deny that the corporation has compiled with the local statutes imposing conditions, restrictions and regulations on foreign corporations and that it has acquired thereby the right to do business in the state”] The principle “ will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract where such person has acted as agent for the corporation and has violated his fiduciary obligations as such, and where the statute does not provide that the contract shall be void, but merely fixed a special penalty for violation of the statute.” The doctrine was adopted by this Court as early as 1924 in Asia Banking Corporation v. Standard Products Co., in which the following pronouncement was made” “The general rule that in the absence of fraud a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for causes which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as domestic corporations.” The Merill Lynch estoppel doctrine will effectively remove the sanction provided for by law on the failure of the foreign corp to obtain a license before it engages in business in the Phils, and therefore there would be less motive on the part of such foreign corp to obtain the license since it can always sue in Phils courts. (f) Proper Doctrine: aEricks Ltd. v. Court of Appeals, 267 SCRA 567 (1997). ERICKS LTD. V. COURT OF APPEALS FACTS Eriks Pte. Ltd. Is a non-resident foreign corp organized under the laws of Singapore. It states in its complaint that it is engaged in the manufacture and sale of elements used in sealing pumps, valve, etc. and other industrial equipment. It is not license to do business in the Phils.

25 7 Over a span of 5 months (Jan-Aug 1989), Delfin Enriquez, under Delrene EB Controls Center ordered and received various elements from Eriks. The transfers were perfected in Singapore and Delrene was given a 90-day credit term to pay. Delrene failed to pay so Eriks files suit in RTC Makati. Delrene filed MtD for lack of Erik’s capacity to sue. RTC dismissed the action. CA affirmed. HELD Decision affirmed. Eriks has no capacity to sue. It was never the intent of the legislature to bar court access to a foreign corporation or entity which happens to obtain an isolated order for business in the Philippines. Neither, did I intend to shield debtors from their legitimate liabilities or obligations. But it cannot allow foreign corporations or entities which conduct regular business (Eriks as found to be “doing business” in the Phils) any acess to courts without the fulfillment by such corporations of the necessary requisites to be subjected to our government’s regulation and authority. By securing a license, the foreign entity would be giving assurance that it will abide by the decisions of our courts, even if adverse to it. Other Remedy Still Available: By thi judgement, we are not forewclosing petitioner’s right to collect payment. Res judicata does not set in a case dismissed for lack of capacity to sue, because there has been no determination on the merits. 16 Morever, this Court has ruled that subsequent acquisition of the license will cure the lack of capacity at the time of the execution of the contract. The requirement of license is not meant to put foreign corporations at a disadvantage. Rather, the doctrine of lack of capacity to sue is based on considerations of sound public policy. Thus, it has been ruled in Home Insurance that: “…The primary purpose of our statute is to compel a foreign corporation desiring to do business within the state to submit itself to the jurisdiction of the courts of this state. The statute was not intended to exclude foreign corporations from the state…The better reason, the wiser and fairer policy, and the greater weight lie with those decisions which hold that where, as here, there is a prohibition with a penalty, with no express or implied declarations respecting the validity of enforceability of contracts made by qualified foreign corporations, the contracts…are enforceable…upon compliance with the law. While we agree with the petitioner that the country needs to develop trade relations and foster friendly commercial relations with other states, we also need to enforce our law that regulate the conduct of foreigners who desire to do business here. Such strangers must follow our laws and must subject themselves to reasonable regulation by our government. 6. Suits Against Foreign Corporations: (a) Jurisdiction Over Foreign Corporations (Sec. 14, Rule 14, Rules of Court; General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 [1950]; Johnlo Trading Co., v Flores, 88 Phil. 741 [1951]; Johnlo Trading Co. v. Zulueta, 88 Phil. 750 [1951]; Pacific Micronisian Line, Inc. v. Del rosario, 96 Phil. 23 [1954]; Far East Int’l Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 [1962]). For purpose serving summons a foreign corporation in accordance with Rule 14, Section 14, it is sufficient that it be alleged in the complaint that it is doing business in the Philippines. Hahn v. Court of Appeals, 266 SCRA 537 (1997). When it is shown that a foreign corporation is doing business in the Philippines, summons may be served on (a) its resident agent designated in accordance with law; (b) if there is no resident agent, the government official designated by law to that effect; or (c) any of its officers or agent within the Philippines. The mere allegation in the complaint that a local company is the agent of the foreign corporation is not sufficient to allow proper service to such alleged agent; it is necessary that there must be specific allegations that establishes the connection between the principal foreign corporation and its alleged agent with respect to the transaction in question. French Oil Mills Machinery Co.v. CA, 295 SCRA 462 (1998). (b) Objection to Jurisdiction: Appearance of a foreign corporation to a suit precisely to question the tribunal’s jurisdiction over its person is not equivalent to service of summons, nor does it constitute an acquiescence to the court’s jurisdiction. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312, 327 (1997).

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(c) Odd Doctrine: aFacilities Management Corp. v. De la Osa, 89 SCRA 131 (1979); FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Int’l v. NLRC, 178 SCRA 569 (1989); Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1987). FACILITIES MANAGEMENT CORP. V. DE LA OSA FACTS Pet. Facilities Mgt Corp, a non-resident foreign corp recruited Filipino workers to work in Wake Island. Respondent, who was recruited by pet. through the latter’s agent in the Phils, sought to recover from pet. his overtime compensation, as well as his swing shift and graveyard shift premiums. On the basis of the findings of the Hearing Examiner, the Court of Industrial Relations rendered judgment in favor of respondent. In its petition for review, pet. claims that the CIR cannot affirm a judgment against persons domiciled outside and not doing business in the Phils. HELD Petition denied. Indeed, if a foreign corp not engaged in doing business in the Phils, is not barred from seeking redress from courts in the Phls, a fortiori, that same corp cannot claim exemption from being sued in Phil courts for acts done against a person/s in the Phils. Contra: The sine qua non requirement for service of summons and other legal processes or any such agent or representative is that the foreign corporation is doing business in the Philippines. Hyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1988); aSignetics Corp. v. CA, 225 SCRA 737 (1993). But Now See: Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997). (d) Stipulation on Venue: When the contract sued upon has a venue clause within the Philippines, it is deemed a confirmation by the foreign corporation, even though not doing business in the Philippines, to be sued in local courts. Linger & Fisher GMBH v. IAC, 125 SCRA 522 (1983). 7. Resident Agent (Sec. 127 and 128)

Section 127. Who may be a resident agent. - A resident agent may be either an individual residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in the case of an individual, he must be of good moral character and of sound financial standing. Section 128. Resident agent; service of process. - The Securities and Exchange Commission shall require as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the Securities and Exchange Commission a written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such foreign corporation shall likewise execute and file with the Securities and Exchange Commission an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as follows: "The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the Securities and Exchange Commission and that such service shall have the same force and effect as if made upon the duly-authorized officers of the corporation at its home office." Whenever such service of summons or other process shall be made upon the Securities and

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Exchange Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the Commission shall be necessary part of and shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made. In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the Securities and Exchange Commission of the new address. (a) Concept of “residence”: State Investment House v. Citibank, 203 SCRA 9 (1991). (b) A complaint filed by a foreign corporation is fatally defective for failing to allege its duly authorized representative or resident agent in Philippine jurisdiction. New York Marine Managers, Inv. c. Court of Appeals, 249 SCRA 416 (1995). (c) When a corporation has designated a person to receive service of summon pursuant to the Corporation Code, the designation is exclusive and service of summons on any other person is inefficacious. H.B. Zachry Company Int’l v. CA, 232 SCRA 329 (1994) 8. Applicable Laws to Foreign Corporations (Sec. 129; Grey v. Insular Lumber Co., 67 Phil. 139 [1938]) Section 129. Law applicable. - Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, except such only as provide for the creation, formation, organization or dissolution of corporations or those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation. 9. Amendment of Articles of Incorporation (Sec. 130) Section 130. Amendments to articles of incorporation or by-laws of foreign corporations. - Whenever the articles of incorporation or by-laws of a foreign corporation authorized to transact business in the Philippines are amended, such foreign corporation shall, within sixty (60) days after the amendment becomes effective, file with the Securities and Exchange Commission, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles of incorporation or bylaws, as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the authorized official or officials of the country or state of incorporation. The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines. 10. Merger and Consolidation (Sec. 132; Art. 51, Omnibus Code) Section 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. - One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its incorporation: Provided, That the requirements on merger or consolidation as provided in this Code are followed. Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, within sixty (60) days after such merger or consolidation becomes effective, file with the Securities and Exchange Commission, and in proper cases with the appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which merger or consolidation was effected: Provided, however, That if the absorbed corporation is the foreign corporation doing business in the Philippines, the latter shall at the same time file a petition for withdrawal of its license in accordance with this Title. 11. Revocation of License (Secs. 134 and 135; Art. 50, Omnibus Investment Code) Section 134. Revocation of license. - Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exchange Commission upon any of the following grounds:

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1. Failure to file its annual report or pay any fees as required by this Code; 2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title; 3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title; 4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title; 5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title; 6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions; 7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; 8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or 9. Any other ground as would render it unfit to transact business in the Philippines. Section 135. Issuance of certificate of revocation. - Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation. 12. Withdrawal of Foreign Corporation (Sec. 136) Section 136. Withdrawal of foreign corporations. - Subject to existing laws and regulations, a foreign corporation licensed to transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the following requirements are met; 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and 3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines.

Revised Bagtas Reviewer by Ve and Ocfe 2A XX. PENALTY PROVISIONS OF THE CODE

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See VILLANUEVA, The Penal Provision Under Sec. 144 of the Corporation Code, THE LAWYERS REVIEW, Vol. X, No. 2 (29 February 1996). 1. Penalty Clause for Violations of the Provisions of the Code (Sec. 144) Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code. 2. Cross-reference (Sec. 27). Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. 3. Specific application (Sec. 74). Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at

reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. 4. Strict Principles in Criminal Law; the issue of malice. 5. Historical Background of Sec. 144 (Sec. 190 1/7 of the Corporation Law) Sec. 190 was not intended to make every casual violation of one of the Corporation Law provisions ground for involuntary dissolution of the corporation and that the court was entitled to exercise discretion in such matters. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927). The penalties imposed in Sec. 190(A) of Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in representation of the Government. Harden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933). 6. Violation of Sec. 133 by Foreign Corporations Section 133. Doing business without a license. - No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. Sec. 133 of Corporation Code, which unlike its counterpart Sec. 69 of Corporation Law provided specifically for penal sanctions for foreign corporations engaging in business in the Philippines without obtaining the requisite license, should be deemed to have a penal sanction by virtue of Section 144 of the Corporation Code. Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983).

Revised Bagtas Reviewer by Ve and Ocfe 2A

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XXI. MISCELLANEOUS 1. SEC Power and Supervision (Secs. 108 and 143; PD 902-A). Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. Section 143. Rule-making power of the Securities and Exchange Commission. - The Securities and Exchange Commission shall have the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers. 2. Special Corporations (Sec. 4) Section 4. Corporations created by special laws or charters. - Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or

applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. 3. New Requirements on Existing Corporations (Sec. 148). Section 148. Applicability to existing corporations. - All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That if any such corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same. 4. Applicability of Other Provision of old Corporation Law (Sec. 145 and 146). Section 145. Amendment or repeal. - No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. Section 146. Repealing clause. - Except as expressly provided by this Code, all laws or parts thereof inconsistent with any provision of this Code shall be deemed repealed.

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