agricultural and like

chambers, or any
combination thereof.
(88)

CORPORATION LAW
INTRODUCTION
Definition and attributes of a corporation

Distribution of
Profits

Profit is
distributed to
shareholders

Whatever incidental
profit made is not
distributed among its
members but is used
for furtherance of its
purpose. AOI or bylaws may provide for
the distribution of its
assets among its
members upon its
dissolution. Before
then, no profit may
be made by
members.

Composition

Stockholders

Members

Scope of right
to vote

Each stockholder
votes according
to the proportion
of his shares in
the
corporation. No
shares may be
deprived of
voting rights
except those
classified and
issued as
"preferred" or
"redeemable"
shares, and as
otherwise
provided by the
Code. (Sec. 6)

Each member,
regardless of class,
is entitled to one (1)
vote UNLESS such
right to vote has
been limited,
broadened, or
denied in the AOI or
by-laws. (Sec. 89)

Voting
proxy

May be denied
by the AOI or the
by-laws. (Sec.
89)

Cannot be
denied. (Sec. 58)

Voting by mail

May be
authorized by the
by-laws, with the
approval of and
under the
conditions
prescribed by the
SEC. (Sec. 89)

Not possible.

Who exercises
Corporate
Powers 23

Board of
Directors or
Trustees

Members of the
corporation

Governing
Board

Board of
Directors or
Trustees,
consisting of 515 directors /
trustees.

Board of Trustees,
which may consist of
more than 15
trustees unless
otherwise provided
by the AOI or bylaws. (Sec, 92)

A corporation is an artificial being created by operation

of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its
existence.
A corporation, being a creature of law, "owes its life to
the state, its birth being purely dependent on its will," it is "a
creature without any existence until it has received the
imprimatur of the state acting according to law." A corporation
will have no rights and privileges of a higher priority than that of
its creator and cannot legitimately refuse to yield obedience to
acts of its state organs. (Tanyag v. Benguet Corporation)
A corporation has four (4) attributes:
(1) It is an artificial being;
(2) Created by operation of law;
(3) With right of succession;
(4) Has the powers, attributes, and properties as
expressly authorized by law or incident to its
existence.

CLASSIFICATION OF PRIVATE
CORPORATIONS

Stock v. Non-Stock Corporations

Stock
Definition

Purpose

Corporations
which have
capital stock
divided into
shares and
are authorized to
distribute to the
holders of shares
dividends or
allotments of the
surplus profits on
the basis of the
shares (3)

Primarily to
make profits for
its shareholders

Non-Stock
All other private
corporations (3)
One where no part
of its income is
distributable as
dividends to its
members, trustees
or officers. (87)

May be formed or
organized for
charitable, religious,
educational,
professional,
cultural, fraternal,
literary, scientific,
social, civic service,
or similar purposes
like trade, industry,

by

Term
directors
trustees

Election
officers

Place
meetings

of
or

of

of

Transferability
of interest or
membership

Distribution of
assets in case
of dissolution

Directors /
trustees shall
hold office for 1
year and until
their successors
are elected and
qualified (Sec.
23).

Board classified in
such a way that the
term of office of 1/3
of their number shall
expire every year.
Subsequent
elections of trustees
comprising 1/3 of the
board shall be held
annually, and
trustees so elected
shall have a term of
3 years. (Sec. 92)

Officers are
elected by the
Board of
Directors (Sec.
25), except in
close
corporations
where the
stockholders
themselves may
elect the
officers. (Sec.
97)

Officers may directly

elected by the
members UNLESS
the AOI or by-laws
provide
otherwise. (Sec. 92)

Any place within

the Philippines, if
provided for by
the by-laws (Sec.
93)

Generally, the
meetings must be
held at the principal
office of the
corporation, if
practicable. If not,
then anyplace in the
city or municipality
where the principal
office of the
corporation is
located. (Sec. 51)

Transferable.

HELD: The Club was organized to develop and cultivate

sports of all class and denomination for the healthful
recreation and entertainment of its stockholders and
members. There was in fact, no cash dividend
distribution to its stockholders and whatever was derived
on retail from its bar and restaurants used were to defray
its overhead expenses and to improve its golf course.
For a stock corporation to exist, 2 requisites must be
complied with:
(1) a capital stock divided into shares
(2) an authority to distribute to the holders of such
shares, dividends or allotments
of the surplus profits on the basis of
shares held.
In the case at bar, nowhere in the AOI or by-laws of Club
Filipino could be found an authority for the distribution
of its dividends or surplus profits.

Generally nontransferable since

membership and all
rights arising
therefrom are
personal. However,
the AOI or by-laws
can provide
otherwise. (Sec. 90)
See Sec. 94.

CIR VS. CLUB FILIPINO (5 SCRA 321; 1962)

FACTS: Club Filipino owns and operates a club house, a
sports complex, and a bar restaurant, which is incident to
the operation of the club and its gold course. The club is
operated mainly with funds derived from membership
fees and dues. The BIR seeks to tax the said restaurant as
a business.

FORMATION AND ORGANIZATION OF

CORPORATION
Requirements in the formation of a
corporation

Who may form a corporation (See SEC. 10)

INCORPORATO
RS

REQUIREMEN
TS

Definition

stockholders or
members
mentioned
in
the
articles of
incorporati
on
as
originally
forming
and
composing
the
corporatio
n and who
are
signatories
thereof
stockholde
rs
or
members
mentioned
in
the
articles of
incorporati
on
as
originally

COMMENTS

compare
with
Corporators
which include all
stockholders or
members,
whether
incorporators or
joining
the
corporation after
its incorporation.

forming
and
composing
the
corporatio
n and who
are
signatories
thereof
Characteristic

Number

Age

Residence

natural
persons

not
less
than 5; not
more than
15

of
age

5- distribution/disposition of
capital/resource (embodied in
constitutive documents)

STEPS

excludes

a. Promotional Stage
(See SEC.
2. Definitions)

COMMENTS
Promoter

corporat
ions and
partnerships

may be more than

15 for non-stock
corp.
except
educational corp.

does not prevent

the
one-man
(person)
corporation whe
rein the other
incorporators
may have only
nominal
ownership of only
one share of
stock;
not
necessarily illegal

brings together
persons who
become interested
in the enterprise
aids in procuring
subscriptions
and sets in motion
the machinery
which leads to the
formation of the
corporation itself
formulates the
necessary initial
business and
financial plans and,
if necessary, buys
the rights and
property which the
business may need,
with the
understanding that
the corporation
when formed, shall
take over the same.

legal

majority
should be
residents
of
the
Philippines

b. Drafting articles

residence
a
requirement;
citizenship
requirement only
in certain areas
such as public
utilities,
retail
trade
banks,
investment
houses, savings
and
loan
associations,
schools

(see chart below)

of incorporation
(See SEC. 14)

c. Filing of articles;
payment of fees.

Steps in the formation of a corporation

Mutual Agreement to perform certain acts
required for organizing a corporation

1- Organize and establish a corporation

2- Comply with requirements of corporation
code

3- Contribute capital/resources
4- Mode of use of capital/resource and
control/management of capital/resource

d. Examination of
articles; approval or
rejection by SEC.

AOI & the treasurers

affidavit duly signed &
acknowledged
must be filed w/ the SEC &
the corresponding fees paid
failure to file the AOI will
prevent due incorporation of
the proposed corporation &
will not give rise to its
juridical personality. It will
not even be a de facto corp.
Under present SEC rules,
the AOI once filed , will be
published in the SEC Weekly
Bulletin at the expense of the
corp. (SEC Circular # 4,
1982).

Process:
a) SEC shall examine
them in order to determine
whether they are in conformity w/
law.
b) If not, the SEC must
give the incorporators a
reasonable time w/in w/c to

correct or modify the

objectionable portions.
Grounds for rejection or
disapproval of AOI:
a) AOI /amendment not
substantially in accordance w/
the form prescribed

b. Drafting articles of incorporation (See

SEC. 14)
CONTENTS OF
AOI
Corporate Name

b) purpose/s are patently

unconstitutional, illegal, immoral,
or contrary to government rules &
regulations;

COMMENTS

Essential to its existence since it is

through it that the corporation can
sue and be sued and perform all
legal acts

A corporate name shall be

disallowed by the SEC if the
proposed name is either:

c) Treasurers Affidavit is
false;
d) required percentage of
ownership has not been complied
with (Sec. 17)
e) corp.s establishment,
organization or operation will not
be consistent w/ the declared
national economic policies (to be
determined by the SEC, after
consultation w/ BOI, NEDA or
any appropriate government
agency -- PD 902-A as amended
by PD 1758, Sec. 6 (k))

e. Issuance of
certificate of
incorporation.

patently
deceptive,
confusing or contrary to
existing laws. (Sec. 18)

1.

a) SEC is satisfied that all

legal requirements have been
complied with; and

2.

b) there are no reasons

for rejecting or disapproving the
AOI.

3.

Should it be subsequently
found that the incorporators
were guilty of fraud in
procuring the certificate of
incorporation, the same may
be revoked by the SEC, after
proper notice & hearing.

(2)

PHILS.

VS.

The policy underlying the prohibition

against the registration of a corporate
name which is identical or deceptively
or confusingly similar to that of any
existing corporation or which is
patently
deceptive
or
patently
confusing or contrary to existing laws
is:

Certificate of Incorporation will

be issued if:

identical or deceptively
or confusingly similar to
that of any existing
corporation or to any
other name already
protected by law; or

LYCEUM OF THE
CA (219 SCRA 610)

Decisions of the SEC

disapproving or
rejecting AOI may be
appealed to the CA by
petition for review in
accordance w/ the ROC.

It is only upon such issuance

that the corporation acquires
juridical personality.
(See Sec. 19. Commencement of
corporate existence)

(1)

Purpose Clause

the avoidance of fraud

upon the public which
would have occasion to
deal with the entity
concerned;
the prevention of evasion
of legal obligations and
duties, and
the
reduction
of
difficulties
of
administration
and
supervision
over
corporations.

A corporation can only have one

(1) primary purpose. However, it
can have several secondary
purposes.

A corporation has only such

powers as are expressly granted
to it by law & by its articles of
incorporation, those which may be
incidental to such conferred
powers , those reasonably
necessary to accomplish its

purposes & those which may be

incident to its existence.

Principal Office

Term of
Existence

Corporation may not be formed for

the purpose of practicing a
profession like law, medicine or
accountancy

must be within the Philippines

specify city or province
street/number not necessary
important in determining venue in
an action by or against the corp.,
or on determining the province
where a chattel mortgage of
shares should be registered

cannot specify term which is

longer than 50 years at a time
may be renewed for another 50
years, but not earlier than 5 years
prior to the original or subsequent
expiry date UNLESS there are
justifiable reasons for an earlier
extension.

Incorporators
and Directors

Capital Stock

Other matters

names, nationalities & residences

of the incorporators;
names, nationalities & residences
of the directors or trustees who
will act as such until the first
regular directors or trustees are
elected;
treasurer who has been chosen by
the
pre-incorporation
subscribers/members to receive
on behalf of the corporation, all
subscriptions /contributions paid
by them.
amount of its authorized capital
stock in lawful money of the
Philippines
number of shares into which it is
divided
in case the shares are par value
shares, the par value of each,
names,
nationalities
and
residences
of
the
original
subscribers, and the amount
subscribed and paid by each on
his subscription, and if some or all
of the shares are without par
value, such fact must be stated
for a non-stock corporation, the
amount of its capital, the names,
nationalities and residences of the
contributors and the amount
contributed by each
25% of 25% rule to be certified by
Treasurer
paid up capital should not be less
than P5,000

Classes of shares into w/c the

shares of stock have
been
divided; preferences of &
restrictions on any such class;
and any denial or restriction of the
pre-emptive right of
stockholders should also be
expressly stated in said articles.

If the corporation is engaged in a

wholly or partially
nationalized business or activity,
the AOI must contain a
prohibition against a transfer of
stock which would reduce
the Filipino ownership of its stock
to less than the required
minimum.

Any corporation may be incorporated as a

close corporation, except:
a) mining or oil companies;
b) stock exchanges;
c) banks;
d) insurance companies;
e) public utilities;
f) educational institutions; &
g) corporations declared to be
vested w/ public interest

De Facto Corporations: Requisites

User of Corporate Powers
What is a de facto corporation?
A de facto corporation is a defectively
organized corporation, which has all the
powers and liabilities of a de jure corporation
and, except as to the State, has a juridical
personality distinct and separate from its
shareholders, provided that the following
requisites are concurrently present:
(1) That there is an apparently valid
statute under which the corporation
with its purposes may be formed;
(2) That there has been colorable
compliance
with
the
legal
requirements in good faith; and,
(3) That there has been use of
corporate
powers,
i.e.,
the
transaction of business in some
way as if it were a corporation.

Can a corporation transact business as a

de facto corporation while application is
still pending with SEC?

The constitutive documents were filed with the

clerk of the Court of Appeals but not with the clerk of
court in the judicial district where the business was
located. Arkansas law requires filing in both offices.

No. In the case of Hall v. Piccio (86

Phil. 603; 1950), where the supposed
corporation transacted business as a
corporation pending action by the SEC on its
articles of incorporation, the Court held that
there was no de facto corporation on the
ground that the corporation cannot claim to be
in good faith to be a corporation when it has
not yet obtained its certificate of incorporation.

Was there colorable compliance enough to give

the supposed corporation at least the status of a de facto
corporation?

Formation under apparently valid statute.

MUNICIPALITY OF MALABANG V. BENITO (29
SCRA 533; 1969)
WON a corporation organized under a statute
subsequently declared void acquires status as de facto
corporation.
No. A corporation organized under a statute
subsequently declared invalid cannot acquire the status of
a de facto corporation unless there is some other statute
under which the supposed corporation may be validly
organized. Hence, in the case at bar, the mere fact that the
municipality was organized before the statute had been
invalidated cannot conceivably make it a de facto
corporation since there is no other valid statute to give
color of authority to its creation.

Colorable compliance with

requirements in good faith.

the

HALL v. PICCIO (29 SCRA 533; 1969)

In the case of Hall v. Piccio, where the supposed
corporation transacted business as a corporation pending
action by the SEC on its articles of incorporation, the
Court held that there was no de facto corporation on the
ground that the corporation cannot claim to be in good
faith to be a corporation when it has not yet obtained its
certificate of incorporation.

legal

BERGERON V. HOBBS (71 N.W. 1056, 65 Am. St. Rep.

85)
The constitutive documents of the proposed
corporation were deposited with the Register of Deeds but
not on file in said office. One of the requirements for valid
incorporation is the filing of constitutive documents in the
Register of Deeds.
Was there colorable compliance enough to give
the supposed corporation at least the status of a de facto
corporation?
No. The filing of the constitutive documents in
the Register of Deeds is a condition precedent to the right
to act as a corporate body. As long as an act, required as
a condition precedent, remains undone, no immunity from
individual liability is secured.

HARRIL V. DAVIS (168 F. 187; 1909)

No. Neither the hope, the belief, nor the statement

by parties that they are incorporated, nor the signing of
the articles of incorporation which are not filed, where
filing is requisite to create the corporation, nor the use of
the pretended franchise of the nonexistent corporation,
will constitute such a corporation de facto as will exempt
those who actively and knowingly use s name to incur
legal obligations from their individual liability to pay
them. There could be no incorporation or color of it under
the law until the articles were filed (requisites for valid
incorporation).

NOTE: The
validity
of
incorporation cannot be
inquired
into
collaterally in any private suit
to which such corporation may be a
party. Such inquiry must be through
a quo warranto proceeding made by
the Solicitor General. (Sec. 20)

CORPORATION BY ESTOPPEL (Sec. 21)

Distinguish a de facto corporation from a
corporation by estoppel.
The de facto doctrine differs from
the estoppel doctrine in that where all the
requisites of a de facto corporation are
present, then the defectively organized
corporation will have the status of a de jure
corporation in all cases brought by and
against it, except only as to the State in a
direct proceeding. On the other hand, if any of
the requisites are absent, then the estoppel
doctrine can apply only if under the
circumstances of the particular case then
before the court, either the defendant
association is estopped from defending on the
ground of lack of capacity to be sued, or the

defendant third party had dealt with the

plaintiff as a corporation and is deemed to
have admitted its existence.

(De facto has status of de jure corpo, except separate

personality against State, provided all requisites are present)

What are the effects of a Corporation by

Estoppel in suits brought:
(1) against the Corporation?
Considered a
corporation in suits brought against it if
it held itself out as
such and denies capacity
to be sued;
(2) against third party?
Third party cannot
deny existence of corporation if it
dealt with it as
such.

EMPIRE vs. STUART (46 Mich. 482, 9 N.W. 527;

1881)
Company was sued on a promissory note. Its
defense was that at the time of its issuance, it was
defectively organized and therefore could not be sued as
such.
The Corporation cannot repudiate the transaction
or evade responsibility when sued thereon by setting up
its own mistake affecting the original organization.

The defendant is estopped from denying its own

corporate existence. It is also estopped from denying the
others corporate existence. The general rule is that in the
absence of fraud, a person who has contracted or
otherwise dealt with an association is such a way as to
recognize and in effect admit its legal existence as a
corporate body is thereby estopped from denying its
corporate existence.
CRANSON VS IBM (234 MD. 477, 200 A. 2D 33 ;
1964)
IBM sued Cranson in his personal capacity
regarding a typewriter bought by him as President of a
defectively organized company whose Articles were not
yet filed when the obligation was contracted.
IBM, having dealt with the defectively organized
company as if it were properly organized and having
relied on its credit instead of Cransons, is estopped from
asserting that it was not incorporated. It cannot sue
Cranson personally.
SALVATIERRA VS GARLITOS (103 Phil. 757;
1958)
Salvatierra leased his land to the corporation. He
filed a suit for accounting, rescission and damages against
the corporation and its president for his share of the
produce. Judgment against both was obtained. President
complains for being held personally liable.

LOWELL-WOODWARD vs. WOODS (104 Kan. 729;

1919)

He is liable. An agent who acts for a non-existent

principal is himself the principal. In acting on behalf of a
corporation which he knew to be unregistered, he
assumed the risk arising from the transaction.

Corporation sued a partnership on a promissory

note. The latter as defense alleged that the plaintiff was
not a corporation.

ALBERT VS UNIVERSITY PUBLISHING CO.,

INC. (Jan. 30, 1965)

One who enters into a contract with a party

described therein as a corporation is precluded, in an
action brought thereon by such party under the same
designation, from denying its corporate existence.

ASIA BANKING VS STANDARD PRODUCTS (46

Phil. 145; 1924)
The corporation sued another corporation a
promissory note. The defense was that the plaintiff was
not able to prove the corporate existence of both parties.

Mariano Albert entered into a contract with

University Publishing Co., Inc. through Jose M. Aruego,
its President, whereby University would pay plaintiff for
the exclusive right to publish his revised Commentaries
on the Revised Penal Code. The contract stipulated that
failure to pay one installment would render the rest of the
payments due. When University failed to pay the second
installment, Albert sued for collection and
won. However, upon execution, it was found that
University was not registered with the SEC. Albert
petitioned for a writ of execution against Jose M. Aruego
as the real defendant. University opposed, on the ground
that Aruego was not a party to the case.
The Supreme Court found that Aruego represented
a non-existent entity and induced not only Albert but the

court to believe in such representation. Aruego, acting as

representative of such non-existent principal, was the real
party to the contract sued upon, and thus assumed such
privileges and obligations and became personally liable
for the contract entered into or for other acts performed as
such agent.
The Supreme Court likewise held that the doctrine
of corporation by estoppel cannot be set up against Albert
since it was Aruego who had induced him to act upon his
(Aruego's) willful representation that University had been
duly organized and was existing under the law.

Contents of By-laws - Subject to the provisions of the

Constitution, this Code, other
special laws, and the
articles of incorporation, a
private corporation may
provide in its by-laws for:
1)

the time, place and manner of calling and

conducting regular or special meetings of the
directors or trustees;

2)

the time and manner of calling and

conducting regular and special meetings of
the stockholders or members;

3)

the required quorum in meetings of

stockholders or members and the manner of
voting herein;

4)

the form for proxies of stockholders and

members and the manner of voting them;

5)

the qualifications, duties and compensation of

directors or trustees, officers and employees;

6)

the time for holding the annual election of

directors or trustees and the mode or manner
of giving notice thereof;

7)

the manner of election or appointment and

the term of office of all officers other than
directors or trustees;

8)

the penalties for violation of the by-laws;

9)

in the case of stock corporations, the manner

of issuing certificates; and

BY-LAWS (Sec. 46 & 47)

When adopted:
(a) No later than one (1) month after
receipt
from
SEC
of
official
notice of
issuance of Cert. of incorporation.
Requirement:
stockholders representing at least

Affirmative vote of
majority
of
outstanding
capital
stock
(Stock Corp.) or
members (NonStock)

Must be signed by
stockholders or members voting for them

(b) Prior to incorporation

Requirement:
Approval
incorporators; must be signed by all of them

Where kept:
corporation ; and

of

all

(1) In the principal office of the

(2) Securities and Exchange

Commission
When effective:
Only upon the SECs issuance
of a certification that the by-laws
are not inconsistent with
the Corporation Code.
Special corporations: By-laws and/or amendments
thereto must be accompanied by
a certificate of the appropriate
government agency to the
effect that such by-laws /
amendments are in accordance with
law.

banks or banking institutions

building and loan associations
trust companies
insurance companies
public utilities

educational institutions
other special corporations governed by
special laws

10) such other matters as may be necessary for

the proper or convenient transaction of its
corporate business and affairs.

FLEISCHER V. BOTICA NOLASCO CO. (47 Phil.

583; 1925)
As a general rule, the by-laws of a corporation are
valid if they are reasonable and calculated to carry into
effect the objective of the corporation and are not
contradictory to the general policy of the laws of the land.
Under a statute authorizing by-laws for the transfer of
stock, a corp. can do no more than prescribe a general
mode of transfer on the corp. books and cannot justify
an restriction upon the right of sale.
GOVT. OF P.I. V. EL HOGAR
Is a provision in the by-laws allowing the BOD, by vote
of absolute majority, to cancel shares valid?

No. It is a patent nullity, being in direct conflict

with Sec. 187 of the Corp. Law which prohibits forced
surrender of unmatured stocks except in case of
dissolution.
Is a provision in the by-laws fixing the salary of directors
valid?
Yes. Since the Corporation Law does not
prescribe the rate of compensation, the power to fix
compensation lies with the corporation.
Is a provision requiring persons elected to the Board of
Directors to own at least P 5,000 shares valid?
Yes. The Corporation Law gives the corporation
the power to provide qualifications of its directors.
CITIBANK, N.A. v. CHUA (220 SCRA 75)

Where the SEC grants a license to a foreign

corporation, it is deemed to have
approved its
foreign-enacted by-laws. Sec. 46 of the
Corporation Code which states that by-laws are
not valid without SEC approval applies only to
domestic corporations.
A board resolution appointing an attorney-in-fact
to represent the corporation during pre-trial is not
necessary where the by-laws authorize an officer
of the corporation to make such appointment.

LOYOLA GRAND VILLAS v. CA (276 SCRA 681)

ISSUE: Whether the failure of a corporation to file its
by-laws within one (1) month from the date
of its incorporation, as mandated by Art. 46 of the
Corporation Code, results in the corporation's
automatic dissolution.
RULING:
No. Failure to file by-laws does not result
in the automatic dissolution of the corporation. It
only constitutes a ground for such
dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA
534) Incorporators must be given the chance to
explain their neglect or omission and remedy the
same.

THE CORPORATE ENTITY

The Theory of Corporate Entity

When does the corporations existence as a

legal entity commence?
Upon issuance by the SEC of the certificate of
incorporation (Sec. 19)

What rights does the corporation acquire?

The right to:
1)
2)
3)
&
4)

sue and be sued;

hold property in its own name;
enter into contracts with third persons;
perform all other legal acts.

Since corporate property is owned by the

corporation as a juridical person, the
stockholders have no claim on it as owners,
but have merely an expectancy or inchoate
right to the same should any of it remain upon
the dissolution of the corporation after all
corporate
creditors
have
been
paid. Conversely, a corporation has no
interest in the individual property of its
stockholders, unless transferred to the
corporation. Remember that the liability of
the stockholders is limited to the amount of
shares.

SAN
JUAN
STRUCTURAL
&
FABRICATORS v. CA (296 SCRA 631)

STEEL

A corporation is a juridical person separate and

distinct from its stockholders or members. Accordingly,
the property of the corporation is not the property of its
stockholders or members and may not be sold by the
stockholders or members without express authorization
from the corporation's Board of Directors.
In this case, the sale of a piece of land belonging
to Motorich Corporation by the corporation treasurer
(Gruenberg) was held to be invalid in the absence of
evidence that said corporate treasurer was authorized to
enter into the contract of sale, or that the said contract was
ratified by Motorich. Even though Gruenberg and her
husband owned 99.866% of Motorich, her act could not
bind the corporation since she was not the sole controlling
stockholder.
STOCKHOLDERS OF F. GUANZON V. REGISTER
OF DEEDS (6 SCRA 373)
Properties registered in the name of the
corporation are owned by it as an entity separate and
distinct from its members. While shares of stock
constitute personal property, they do not represent
property of the corporation. A 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 its holder is not the owner
of any part of the capital of the corporation. Nor is he

entitled to the possession of any definite portion of its

property or assets.
The act of liquidation made by the stockholders
of the corp of the latters assets is not and cannot be
considered a partition of community property, but rather
a transfer or conveyance of the title of its assets to the
individual stockholders. Since the purpose of the
liquidation, as well as the distribution of the assets, is to
transfer their title from the corporation to the stockholders
in proportion to their shareholdings, that transfer cannot
be effected without the corresponding deed of
conveyance from the corporation to the stockholders. It
is, therefore, fair and logical to consider the certificate of
liquidation as one in the nature of a transfer or
conveyance.
CARAM V. CA (151 SCRA 373; 1987)
The case of the unpaid compensation for the preparation
of the project study.
The petitioners were not involved in the initial
stages of the organization of the airline. They were
merely among the financiers whose interest was to be
invited and who were in fact persuaded, on the strength of
the project study, to invest in the proposed airline.
There was no showing that the Airline was a
fictitious corp and did not have a separate juridical
personality to justify making the petitioners, as principal
stockholders thereof, responsible for its obligations. As a
bona fide corp, the Airline should alone be liable for its
corporate acts as duly authorized by its officers and
directors. Granting that the petitioners benefited from the
services rendered, such is no justification to hold them
personally liable therefor. Otherwise, all the other
stockholders of the corporation, including those who
came in late, and regardless of the amount of their
shareholdings, would be equally and personally liable
also with the petitioner for the claims of the private
respondent.
PALAY V. CLAVE (124 SCRA 640; 1983)
The case of the reliance on a default provision of the
contract granting automatic extra-judicial rescission.
The court found no badges of fraud on the part of
the president of the corporation. The BOD had literally
and mistakenly relied on the default provision of the
contract. As president and controlling stockholder of the
corp, no sufficient proof exists on record that he used the
corp to defraud private respondent. He cannot, therefore,
be made personally liable because he appears to be the
controlling stockholder. Mere ownership by a single

stockholder or by another corporation of all or nearly all

of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate
personality.
MAGSAYSAY V. LABRADOR (180 SCRA 266)
The case of the assignment by Senator Magsaysay of a
certain portion of his shareholdings in SUBIC granting his
sisters the right to intervene in a case filed by the widow
against SUBIC.
The words "an interest in the subject," to allow
petitioners to intervene, mean a direct interest in the cause
of action as pleaded, and which would put the intervenor
in a legal position to litigate a fact alleged in the
complaint, without the establishment of which plaintiff
could not recover.
Here, the interest, of petitioners, if it exists at all,
is indirect, contingent, remote, conjectural, consequential
and collateral. At the very least, their interest is purely
inchoate, or in sheer expectancy of a right in the
management of the corporation and to share in the profits
thereof and in the properties and assets thereof on
dissolution, after payment of the corporate debts and
obligations.
While a share of stock represents a proportionate
or aliquot interest in the property of the corp, it does not
vest the owner thereof with any legal right or title to any
of the property, his interest in the corporate property being
equitable and beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is
owned by the corp as a distinct legal person.

PIERCING THE CORPORATE VEIL

Q: What is the theory of corporate entity?
A: That a corporation has a personality
distinct from its stockholders, and is not
affected by the personal rights, obligations
and transactions of the latter.

Q: When Can the Veil of Corporate Entity be

Pierced?
A:
The veil of corporate fiction may be
pierced when it is used as a shield to further
an end subversive of justice, or for purposes
that could not have been intended by law that
created it or to defeat public convenience,
justify wrong, protect fraud or defend crime or
to perpetuate fraud or confuse legitimate
issues or to circumvent the law or perpetuate
deception or as an alter ego, adjunct or

business conduit for the sole benefit of the

stockholders.

Q: What are the effects of disregarding the

corporate veil?
(1) Stockholders would be personally liable
for the acts and contracts of the corporation
whose existence at least for the purpose of
the particular situation involved is ignored.

TAN BOON BEE CO. V. JARENCIO (163 SCRA 205;

1988)

(2) Court is not denying corporate existence

for all purposes but merely refuses to allow
the corporation to use the corporate privilege
for the particular purpose involved.

Tan BBC (T) supplies paper to Graphics

Publishing Inc (G) but the latter fails to pay. G's printing
machine levied upon to satisfy claim but PADCO, another
corpo intercedes, saying it is the owner of the machine,
having leased such to G.

Contrary to law / public policy; evasion of

liability to government
STATE V. STANDARD OIL (49 Ohio, St., 137, N.E.
279, 15; 1892)
Where all or a majority of stockholders
comprising a corporation do an act which is designed to
affect the property and business of the company, as if it
had been a formal resolution of its Board of Directors and
the acts done is ultra vires, the act should be regarded as
the act of the corporation, and may be challenged by the
state in a quo warrranto proceeding.

LAGUNA TRANS V. SSS (107 Phil. 833; 1960)

Where the corporation was formed by and
consisted of the members of a partnership whose business
and property was conveyed to the corporation for the
purpose of continuing its business, such corporation is
presumed to have assumed partnership debts.

MARVEL BLDG. CORP. V. DAVID (94 Phil. 376;

1954)
The fact that:

Evasion of liability to creditors

certificates in possession of Castro were endorsed

in blank;
Castro had enormous profits and had motive to
hide them;
other subscribers had no incomes of sufficient
magnitude; and
directors never met;

shows that other shareholders may be considered

dummies of Castro. Hence, corporate veil may be pierced.

Printing machine was allowed by the Court to

satisfy G's liability. Both G and PADCO's corporate
entities pierced because they have: the same board of
directors, PADCO owns 50% of G, PADCO never
engaged in the business of printing. Obviously, the board
is using PADCO to shield G from fulfilling liability to T.
NAMARCO v. AFCorp (19 SCRA 962; 1967)
Associated Financing Corp. (AFC), through its
pres. F. Sycip (who together with wife, own 76% of AFC)
contracts with NAMARCO for an exchange of sugar (raw
v. refined). N delivers, AFC doesn't since it did not have
sugar to supply in the first place. N sues to recover sum
of money plus damages.
Sycip held jointly and severally liable with
AFC. AFC's corporate veil was pierced because it was
used as Sycip's alter ego, corpo used merely as an
instrumentality, agency or conduit of another to evade
liability.
JACINTO V. CA (198 SCRA 211)
Jacinto, president/GM and owner of 52% of
corpo, owes MetroBank sum of money, signs trust
receipts therefor. Jacinto absconds. Jacinto ordered to
jointly and severally pay MetroBank. Corpo veil pierced
because it was used as a shield to perpetuate fraud and/or
confuse legitimate issues. There was no clear cut
delimitation between the personality of Jacinto and the
corporation.

Evasion of liability / obligation to employees

CLAPAROLS V. CIR (65 SCRA 613; 1975)
Both predecessor and successor were owned and
controlled by petitioner and there was no break in the
succession and continuity of the same business. All the
assets of the dissolved Plant were turned over to the

emerging corporation. The veil of corporate fiction must

be pierced as it was deliberately and maliciously designed
to evade its financial obligation to its employees.

INDOPHIL TEXTILE MILL WORKERS UNION V.

CALICA (205 SCRA 698)
Rule: The doctrine of piercing the veil of
corporate entity applies when corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or
defend crime, or when it is made as a shield to confuse the
legitimate issues or where a corporation is the mere alter
ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
Case at bar: Union sought to pierce corporate veil alleging
that the creation of Acrylic is a devise to evade the
application of the CBA Indophil had with them (or it
sought to include the other union in its bargaining
leverage).
SC: Legal corporate entity is disregarded only if it is
sought to hold the officers and stockholders directly liable
for a corporate debt or obligation. Union does not seek to
impose such claim against Acrylic. Mere fact that
businesses were related, that some of the employees of
Indophil are the same persons manning and providing for
auxiliary services to the other company, and that physical
plants, officers and facilities are situated in the same
compound - not sufficient to apply doctrine.

NAFLU V. OPLE (143 SCRA 125; 1986)

Libra/Dolphin Garments was but an alter ego of
Lawman Industrial, therefore, the former must bear the
consequences of the latter's unfair acts. It cannot deny
reinstatement of petitioners simply because of cessation
of Lawman's operations, since it was in fact an illegal
lock-out, the company having maintained a run-away
shop and transferred its machines and assets there.
Here, the veil of corporate fiction was pierced in
order to safeguard the right to self-organization and
certain vested rights which had accrued in favor of the
union. Second corporation sought the protective shield of
corporate fiction to achieve an illegal purpose.

ASIONICS PHILS. v. NLRC (290 SCRA 164)

A corporation is invested by law with a
personality separate and distinct from those of the persons

composing it as well as from that of any other legal entity

to which it may be related. Mere ownership by a single
stockholder or by another corporation of all or nearly all
of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate
personality.
Where there is nothing on record to indicate the
President and majority stockholder of a corporation had
acted in bad faith or with malice in carrying out the
retrenchment program of the company, hecannot be held
solidarily and personally liable with the corporation.

Evasion of liability on contract

VILLA-REY TRANSIT V. FERRER (25 SCRA 849;
1968)
Jose M. Villarama, operator of a bus company,
Villa Rey Transit, which was authorized to operate 32
units from Pangasinan to Manila and vice-versa, sold 2
CPCs to Pantranco. One of the conditions included in the
contract of sale was that the seller (Villarama) "shall not,
for a period of 10 years from the date of the sale, apply
for any TPU service identical or competing with the buyer
(Pantranco)."
Barely 3 months after the sale, a corporation called
Villa Rey Transit, Inc. was organized, with the wife of
Jose M. Villarama as one of the incorporators and who
was subsequently elected as treasurer of the
Corporation. Barely a month after its registration with the
SEC, the corporation bought 5 CPCs and 49 buses from
one Valentin Fernando, and applied with the Public
Service Commission (PSC) for approval of the sale.
Before the PSC could take final action on the said
application, however, 2 of the 5 CPCs were levied upon
pursuant to a writ of execution issued by the CFI in favor
of Eusebio Ferrer, judgment creditor, against Valentin
Fernando, judgment debtor. During the public sale
conducted, Ferrer was the highest bidder, and a certificate
of sale was issued in his name. Shortly thereafter, he sold
the said CPCs to Pantranco, and they jointly submitted
their contract of sale to the PSC for approval.
The PSC issued an order that pending resolution
of the applications, Pantranco shall have the authority to
provisionally operate the service under the 2 CPCS that
were the subject of the contract between Ferrer and
Pantranco. Villa Rey Transit took issue with this, and
filed a complaint for annulment of the sheriff's sale of the
CPCs and prayed that all the orders of the PSC relative to
the dispute over the CPCs in question be
annulled. Pantranco filed a third-party complaint against
Jose M. Villarama, alleging that Villarama and Villa Rey

Transit are one and the same, and that Villarama and/or
the Corporation is qualified from operating the CPCs by
virtue of the agreement entered into between Villarama
and Pantranco.
Given the evidence, the Court found that the
finances of Villa-Rey, Inc. were managed as if they were
the private funds of Villarama and in such a way and
extent that Villarama appeared to be the actual owner of
the business without regard to the rights of the
stockholders. Villarama even admitted that he mingled
the corporate funds with his own money. These
circumstances negate Villarama's claim that he was only
a part-time General Manager, and show beyond doubt that
the corporation is his alter ego. Thus, the restrictive
clause with Pantranco applies. A seller may not make
use of a corporate entity as a means of evading the
obligation of his covenant. Where the Corporation is
substantially the alter ego of one of the parties to the
covenant or the restrictive agreement, it can be
enjoined from competing with the covenantee.

Parent-Subsidiary Relationship
Q: What is the general rule governing parentsubsidiary relationship?
A: The mere fact that a corporation owns all
or substantially all of the stocks of another
corporation is not alone sufficient to justify
their being treated as one entity.

Q:
When may it be disregarded by the
courts?
(1) if the subsidiary was formed for the
payment of evading the payment of
higher taxes
(2) where it was controlled by the parent
that its separate identity was hardly
discernible
(3) parent corporations may be held
responsible for the contracts as well
as the torts of the subsidiary

Close Corporations
CEASE V. CA (93 SCRA 483; 1979)
The Cease plantation was solely composed of the
assets and properties of the defunct Tiaong plantation
whose license to operate already expired. The legal fiction
of separate corporate personality was attempted to be used
to delay and deprive the respondents of their succession
rights to the estate of their deceased father.
While originally, there were other incorporators
of Tiaong, it has developed into a closed family
corporation (Cease). The head of the corporation, Cease,
used the Tiaong plantation as his instrumentality. It was
his business conduit and an extension of his personality.
There is not even a showing that his children were
subscribers or purchasers of the stocks they own.

DELPHER TRADES V. CA (157 SCRA 349; 1988)

The Delpher Trades Corp. is a business conduit
of the Pachecos. What they really did was to invest their
properties and change the nature of their ownership from
unincorporated to incorporated form by organizing
Delpher and placing the control of their properties under
the corporation. This saved them inheritance taxes.
This is the reverse of Cease; however, it does not
modify the other cases. It stands on its own because of the
facts.

Q: What are the criteria by which the

subsidiary can be considered a mere
instrumentality of the parent company?
1.

the parent corp. owns all or most of

the capital stock of the subsidiary.
2. the parent and subsidiary have
common directors and officers
3. the parent finances the subsidiary
4. the parent subscribes to all the
capital stock of the subsidiary or
otherwise causes its incorporation
5. the
subsidiary
has
grossly
inadequate capital
6. the parent pays the salaries and
other expenses or losses of the
subsidiary
7. the subsidiary has substantially no
business except with the parent
corp. or no assets except those
conveyed to or by the parent corp.
8. in the papers of the parent corp. or
in the statements of its officers, the
subsidiary is described as a
department or division of the parent
corp. or its business or financial
responsibility is referred as the
parents own
9. the parent uses the property of the
subsidiary as its own
10. the directors or the executives of the
subsidiary do not act independently
in the interest of the subsidiary but
take their orders from the parent
corp. in the latters interest
11. the formal legal requirements of the
subsidiary are not observed

(Garrett vs. Southern Railway)

(Note: Sir Jack said that we must not stop

after weve gone through the 11 points in
order to determine whether or not there is a
subsidiary or instrumentality. We must go
further and consider other circumstances
which may help determine clearly the true
nature of the relationship. --- Em)

GARRETT VS. SOUTHERN RAILWAY (173 F.

Supp. 915, E.D. Tenn. 1959)
This case involved a Workers Compensation
claim by a wheel moulder employed by Lenoir Car
Works. The plaintiff sought to claim from Southern
Railway Company, which acquired the entire capital
stock of Lenoir Car Works. Plaintiff contended that
Southern so completely dominated Lenoir that the latter
was a mere adjunct or instrumentality of Southern.
The general rule is that stock ownership alone by
one corporation of the stock of another does not thereby
render the dominant corporation liable for the torts of the
subsidiary, unless the separate corporate existence of the
subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or
adjunct of the dominant corporation.
In the case, it was found that there were two
distinct operations. There was no evidence that Southern
dictated the management of Lenoir. In fact, evidence
shows that Marius, the manager of the subsidiary, was in
full control of the operation. He established prices,
handled negotiations in CBAs, etc. Lenoir paid local
taxes, had local counsel and maintain a Workmens
Compensation Fund. There was also no evidence that
Lenoir was run solely for the benefit of Southern. In fact,
a substantial part of its requirements in the field of
operation of Lenoir was bought elsewhere. Lenoir sold
substantial quantities to other companies. Policy
decisions remained in the hands of Marius. Hence, the
complaint against Southern Railway was dismissed.

KOPPEL VS. YATCO (77 Phil. 496; 1946)

This case involved a complaint for the recovery of
merchant sales tax paid by Koppel (Philippines), Inc.
under protest to the Collector of Internal
Revenue. Although the Court of First Instance did not
deny legal personality to Koppel (Philippines), Inc. for
any and all purposes, it dismissed the complaint saying
that in the transactions involved in the case, the public
interest and convenience would be defeated and would
amount to a perpetration of tax evasion unless resort was
had to the doctrine of "disregard of the corporate fiction."

The facts show that 99.5% of the shares of stocks

of K-Phil were owned by K-USA. K-Phil. acted as a
representative of K-USA and not as an agent. K-Phil. also
bore alone its own incidental expenses (e.g. Cable
expenses) and also those of its principal. Moreover, KPhils share in the profits was left in the hands of KUSA. Clearly, K-Phil was a mere branch or dummy of KUSA, and was therefore liable for merchant sales tax. To
allow otherwise would be to sanction a circumvention of
our tax laws and permit a tax evasion of no mean
proportion and the consequent commission of a grave
injustice to the Government. Moreover, it would allow
the taxpayer to do by indirection what the tax laws
prohibit to be done directly.
LIDDELL & CO. VS. CIR (2 SCRA 632; 1961)
Liddel Motors Inc. was an alter ego of Liddel &
Co. At the time of its incorporation, 98% of the Liddel
Inc.s stock belonged to Frank Liddel. As to Liddel
Motors, Frank supplied the original capital funds. The
bulk of the business of Liddel Inc. was channeled through
Liddel Motors. Also, Liddel Motors pursued no other
activities except to secure cars, trucks and spare parts
from Liddel Inc. and then sell them to the general public.
To allow the taxpayer to deny tax liability on the
ground that the sales were made through another and
distinct corporation when it is proved that the latter is
virtually owned by the former or that they were practically
one and the same is to sanction the circumvention of tax
laws.
YUTIVO VS. CTA (1 SCRA 160; 1961)
Southern Motors was actually owned and
controlled by Yutivo as to make it a mere subsidiary or
branch of the latter created for the purpose of selling
vehicles at retail. Yutivo financed principally, if not
wholly, the business of Southern Motors and actually
exceeded the credit of the latter . At all times, Yutivo,
through the officers and directors common to it and the
Southern Motors exercised full control over the cash
funds, policies, expenditures and obligations of the
latter. Hence, Southern Motors, being a mere
instrumentality or adjunct of Yutivo, the CTA correctly
disregarded the technical defense of separate corporate
identity in order to arrive at the true tax liability of Yutivo.
LA CAMPANA VS. KAISAHAN (93 Phil. 160; 1953)
The La Campana Gaugau Packing and La
Campana Coffee Factory were operating under one single
business although with 2 trade names. It is a settled
doctrine that the fiction of law of having the corporate
identity separate and distinct from the identity of the

persons running it cannot be invoked to further the

end subversive of the purpose for which it was
created. In the case at bar, the attempt to make the two
businesses appear as one is but a device to defeat the ends
of the law governing capital and labor relations and
should not be permitted to prevail.

PROMOTERS CONTRACTS PRIOR TO

INCORPORATION
Liability of Corporation for Promoters
Contracts

While a corporation could

not have been a party to a
promoter's contract since it did yet
exist at the time the contract was
entered into and thus could not
possibly have had an agent who
could legally bind it, the corporation
may make the contracts its own and
become bound thereon if, after
incorporation, it:
(1)

Adopts or ratifies the

contract; or
(2) Accepts its benefits
with knowledge of the
terms thereof.
It must be noted, however, that the
contract must be adopted in its
entirety; the corporation cannot
adopt only the part that is beneficial
to it and discard that which is
burdensome.
Moreover,
the
contract must be one which is within
the powers of the corporation to
enter, and one which the usual
agents of the company have express
or implied authority to enter.

McARTHUR V. TIMES PRINTING CO. (48 Minn.

319, 51 N.W. 216; 1892)
It is not a requisite that a corporation's adoption
or acceptance of a promoter's contract be expressed, but it
may be inferred from acts or acquiescence on the part of
the corporation, or its authorized agents, as any similar
original contract might be shown.
The right of agents to adopt an agreement
originally made by promoters depends upon the purposes
of the corporation and the nature of the agreement. The
agreement must be one which the corporation itself could
make and one which the usual agents of the company
have express or implied authority to enter into.

CLIFTON v. TOMB (21 F. 2d 893; 1921)

Whatever may be the proper legal theory by
which a corporation may be bound by the contract
(ratification, adoption, novation, a continuing offer to be
accepted or rejected by the corporation), it is necessary in
all cases that the corporation should have full knowledge
of the facts, or at least should be put upon such notice as
would lead, upon reasonable inquiry, to the knowledge of
the facts.
CAGAYAN FISHING DEV. CO. v. SANDIKO (65
Phil. 223; 1937)
A promoter could not have acted as agent for a
corporation that had no legal existence. A corporation,
until organized, has no life therefore no faculties. The
corporation had no juridical personality to enter into a
contract.
Also see Caram v. CA

Corporate Rights under Promoters

Contracts

Should the other contracting

party fail to perform its part of the
bargain, the corporation which has
adopted or ratified the contract may
either sue for:
(1)

Specific performance;
or
(2) Damages
resulting
from
breach
of
contract.

The fact of bringing an action on the

contract has been held to constitute
sufficient adoption or ratification to
give the corporation a cause of
action.

BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17

S.W. 2d 715; 1929)
When the corporation was formed, the
incorporators took upon themselves the whole thing, and
ratified all that had been done on its behalf. Though there
was no formal assignment of the contract to the
corporation, the acts of the incorporators were an adoption
of the contract. Therefore the corporation has the right to
sue for damages for the breach of contract.

RIZAL LIGHT V. PSC (25 SCRA 285; 1968)

The incorporation of (Morong) and its acceptance
of the franchise as shown by this action in prosecuting the
application filed with the Commission for approval of
said franchise, not only perfected a contract between the
municipality and Morong but also cured the deficiency
pointed out by the petition. The fact that Morong did not
have a corporate existence on the day the franchise was
granted does not render the franchise invalid, as Morong
later obtained its certificate of incorporation and accepted
the franchise.

Personal Liability of Promoter on PreIncorporation Contracts

GENERAL RULE:
Promoters are personally
liable on their contracts made on behalf
of a corporation to be
formed.
EXCEPTION:

If there is an express or
implied agreement to the
contrary. It must be noted
that the fact that the
corporation when formed
has adopted or ratified the
contract does not release
the
promoter
from
responsibility unless a
novation was intended.

WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E.
873; 1915)
Individual promoters cannot escape liability
where they buy machinery, receive them in their
possession and authorize one member to issue a note, in
contemplation of organizing a corporation which was not
formed. (see Campos' notes p. 258-259). The agent is
personally liable for contracts if there is no principal. The
making of partial payments by the corporation, when
later formed, does not release the promoters here from
liability because the corporation acted as a mere stranger
paying the debt of another, the acceptance of which by
the creditor does not release the debtors from liability over
the balance. Hence, there is no adoption or ratification.

HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp.

936; 1963)
The rule is that if the contract is partly to be
performed before incorporation, the promoters solely are

liable. Even if the promoter signed "on behalf of

corporation to be formed, who will be obligor," there was
here an intention of the parties to have a present obligor,
because three-fourths of the payment are to be made at the
time the drawings or plans in the architectural contract are
completed, with or without incorporation. A purported
adoption by the corporation of the contract must be
expressed in a novation or agreement to that effect. The
promoter is liable unless the contract is to be construed to
mean: 1) that the creditor agreed to look solely to the new
corporation for payment; or 2) that the promoter did not
have any duty toward the creditor to form the corporation
and give the corporation the opportunity to assume and
pay the liability.

QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d

1056; 1961)
The promoters here are not liable because the
contract imposed no obligation on them to form a
corporation and they were not named there as
obligors/promissors. The creditor-plaintiff was aware of
the inexistence of the corporation but insisted on naming
it as obligor because the planting season was fast
approaching and he needed to dispose of the seedlings.
There was no intent here by plaintiff-creditor to look to
the promoters for the performance of the obligation. This
is an exception to the general rule that promoters are
personally liable on their contracts, though made on
behalf of a corporation to be formed.

Fiduciary relationship between corporation

and promoter

OLD DOMINION VS. BIGELOW (203 Mass. 159, 89

N.E. 193; 1909)
A promoter, notwithstanding his fiduciary duties
to the corporation, may still sell properties to it, but he
must pursue one of four courses to make the contract
binding. These are: 1) provide an independent board of
officers in no respect directly or indirectly under his
control, and make full disclosure to the corporation
through them; 2) make full disclosure of all material facts
to each original subscriber of shares in the corporation; 3)
procure a ratification of the contract after disclosing its
circumstances by vote of the stockholders of the
completely established corporation; or 4) be himself the
real subscriber of all the shares of the capital stock
contemplated as a part of the promotion scheme. The
promoter is liable, even if owning all the stock of the
corporation at the time of the transaction, if further

original subscription to capital stock contemplated as an

essential part of the scheme of promotion came in after
such transaction.

To adopt any plan of merger or

consolidation as provided in this Code;

To make reasonable donations, including

those for the public welfare of for
hospital, charitable, cultural, scientific,
civic, or similar purposes:

CORPORATE POWERS

General Powers of Corporation (Sec. 36)

To sue and be sued in its corporate

name;

Of succession by its corporate name for

the period of time stated in the articles of
incorporation and the certificate of
incorporation;

To adopt and use a corporate seal;

To amend its articles of incorporation in

accordance with the provisions of this
Code;

To adopt by-laws not contrary to law,

morals, or public policy, and to amend or
repeal the same in accordance with this
Code;

Provided that:
no corporation,
domestic or foreign, shall give donations in
aid of any political
party or candidate
or for purposes of
partisan political
activity;

To establish pension, retirement and

other plans for the benefit of its directors,
trustees, officers and employees; and

To exercise such other powers as may be

essential or necessary to carry out its
purpose or purposes as stated in its
articles of incorporation.

Specific Powers of Corporation

In case of stock corporations, to issue of

sell stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of this Code; and to admit
members to the corporation if it be a nonstock corporation;
To purchase, receive, take, grant, hold,
convey, sell, lease, pledge, mortgage
and otherwise deal with such real and
personal property, including securities
and bonds of other corporations, as the
transaction of the lawful business of the
corporation
may
reasonably
and
necessarily require, subject to the
limitations prescribed by law and the
Constitution;

Extension or shortening of the

corporate term (Sec. 37)

Increase or decrease of the capital

stock (Sec. 38)

Incur, create or increase bonded

indebtedness (Sec. 38)

Denial of the pre-emptive right (Sec.

39)

Sale or other disposition of

substantially all its assets. (Sec. 40)

(NOTE: There are two (2) general

restrictions on the power of the corp.
to acquire and hold properties:

(1) that the property must

be reasonable and
necessarily
required by
the
transaction of its lawful business,
and

subject
to
the
limitations prescribed
by other special laws
and the Constitution.)

Acquisition of its own shares. (Sec.

41)

Investment in another corporation or

business. (Sec. 42)
Declaration of dividends. (Sec. 43)

(2) that the power shall be

Implied Powers

A
sale
is
deemed
to
substantially cover all the
corporate property and assets if
such
sale
renders
the
corporation
incapable
of
continuing the business or
accomplishing the purpose for
which it was incorporated.

Entering
into
contracts. (Sec. 44)

management

Under Sec. 36, a corporation is given such powers as

are essential or necessary to carry out its purpose or purposes
as stated in the articles of incorporation. This phrase gives rise
to such a wide range of implied powers, that it would not be at
all difficult to defend a corporate act versus an allegation that it
is ultra vires.
A corporation is presumed to act within its powers and
when a contract is not its face necessarily beyond its authority;
it will, in the absence of proof to the contrary, be presumed valid.

The Ultra Vires Doctrine

Blacks Law Dictionary Definition:
Ultra vires acts are those acts beyond the scope of the
powers of the corporation, as defined by its charter or laws of
state of incorporation. The term has a broad application and
includes not only acts prohibited by the charter, but acts which
are in excess of powers granted and not prohibited, and
generally applied either when a corporation has no power
whatever to do an act, or when the corporation has the power
but exercises it irregularly.

Q: What are the consequences of ultra

vires acts?

The corporation may be dissolved under

a quo warrranto proceeding.

The Certificate of Registration may be

suspended or revoked by the SEC.

Parties to the ultra vires contract will be

left as they are, if the contract has been
fully executed on both sides. Neither
party can ask for specific performance, if
the contract is executory on both
sides. The contract, provided that it is
not illegal, will be enforced, where one
party has performed his part, and the
other has not with the latter having
benefited from the formers performance.

Any stockholder may bring an individual

or derivative suit to enjoin a threatened
ultra vires act or contract. If the act or
contract has already been performed, a
derivative suit for damages against the
directors maybe filed, but their liability will
depend on whether they acted in good
faith and with reasonable diligence in
entering into the contracts. When the
suit against the injured party who had no
knowledge that the corporation was
engaging in an act not included expressly
or impliedly in its purposes clause.
Ultra vires acts may become binding by
the ratification of all the stockholders,
unless third parties are prejudiced
thereby, or unless the acts are illegal.

REPUBLIC OF THE PHILS. v. ACOJE MINING (7

SCRA 361; 1963)
Resolution adopted by the company to open a
post office branch at the mining camp and to assume sole
and direct responsibility for any dishonest, careless or
negligent act of its appointed postmaster is NOT ULTRA
VIRES because the act covers a subject which concerns
the benefit, convenience, and welfare of the companys
employees and their families.
While as a rule an ultra vires act is one committed
outside the object for which a corporation is created as
defined by the law of its organization and therefore
beyond the powers conferred upon it by law, there are
however certain corporate acts that may be performed
outside of the scope of the powers expressly conferred if
they are necessary to promote the interest or welfare of
the corporation.
CARLOS v. MINDORO SUGAR CO. (57 SCRA 343,
1932)
The BOD of the Phil Trust Co. adopted a
resolution which authorized its president to purchase at
par and in the name of the corp. bonds of MSC. These
bonds were later resold and guaranteed by PTC to third
persons. PTC paid plaintiff the corresponding interest
payments until July 1, 1928 when it alleged that it is not
bound to pay such interest or to redeem the obligation
because the guarantee given for the bonds was illegal and
void.
Held: The act of guaranty by PTC was well within its
corporate powers. Furthermore, having received money
or property by virtue of the contract which is not illegal,
it is estopped from denying liability. Even if the then
prevailing law (Corp. Law) prohibited PTC from
guaranteeing bonds with a total value in excess of its
capital, with all the MSC properties transferred to PTC
based on the deed of trust, sufficient assets were made
available to secure the payment of the corresponding
liabilities brought about by the bonds.
GOVT v. EL HOGAR (50 Phil 399; 1932)
(This case is an example of how the implied powers
concept may be used to justify certain acts of a
corporation.)
A quo warranto proceeding instituted by the Gov't against
El Hogar, a building and loan ass'n to deprive it of its corp.
franchise.

1. El Hogar held title to real property for a period in excess

of 5 years in good faith, hence this cause will not prosper.
2. El Hogar owned a lot and bldg. at a business district in
Manila allegedly in excess of its reasonable requirements,
held valid bec, it was found to be necessary and legally
acquired and developed.

Two railroad corporations contend that they

transcended their own powers and violated their own
organic laws. Hence, they should not be held liable for
the injury of the plaintiff who was a passenger in one of
their trains.

3. El Hogar leased some office space in its bldg.; it

administered and managed properties belonging to
delinquent SHs; and managed properties of its SHs even
if such were not mortgaged to them.

Held: The contract between the two corporations was an

ultra vires act. However, it is not one tainted with
illegality, therefore, the accompanying rights and
obligations based on the contract of carriage between
them and the plaintiff cannot be avoided by raising such
a defense.

Held: first two valid, but the third is ultra vires bec.
the administration of property in that manner is more
befitting of the business of a real estate agent or trust
company and not of a building and loan ass'n.

PIROVANO v. DELA RAMA STEAMSHIP (96 Phil

335 , 1954)

4. Compensation to the promoter and organizer

allegedly excessive and unconscionable.
Held: Court cannot dwell on the issue since the
promoter is not a party in the proceeding and it is the
corp. or its SHs who may bring a complaint on such.

This case involved the issue of whether or not the

defendant corporation performed an ultra vires act by
donating the life insurance proceeds to the minor children
of Pirovano, the deceased president of the defendant
company under whose management the company grew
and progressed to become a multi-million peso
corporation.

5. Issuance of special shares did not affect El Hogar's

character as a building and loan ass'n nor make its loans
usurious.

Held: NO.
The AOI of the corporation provided two relevant
items:

6. Corporate policy of using a depreciation rate of 10 %

per annum is not excessive, bec. accdg. to the SC, the bylaws expressly authorizes the BOD to determine each year
the amount to be written down upon the expenses of
installation and the property of the corp.

(1) to invest and deal with moneys of the

company not immediately required, in
such manner as from time to time may be
determined; and

7. The Corp. Law does not expressly grant the power of

maintaining reserve funds but such power is implied. All
business enterprises encounter periods of gains and
losses, and its officers would usually provide for the
creation of a reserve to act as a buffer for such
circumstances.

(2) to aid in any other manner any person,

association or corporation of which any
obligation or in which any interest is held
by this corporation or in the affairs of
prosperity of which this corporation has
a lawful interest.

8. That loans issued to member borrowers are being used

for purposes other than the bldg. of homes not invalid bec.
there is no statute which expressly declares that loans may
be made by these ass'ns solely for the purpose of bldg.
homes.

From this, it is obvious that the corporation

properly exercised within its chartered powers the act of
availing of insurance proceeds to the heirs of the insured
and deceased officer.

9. Sec. 173 of the Corp. Law provides that "any person"

may become a SH on a bldg. and loan ass'n. The word
"person" is used on a broad sense including not only
natural persons but also artificial persons.

BISSEL v. MICHIGAN SOUTHERN ( 22 NY 258;

1860)

HARDEN v. BENGUET CONSOLIDATED (58 Phil

141)
A contract between Benguet and Balatoc
provided that Benguet will bring in capital, eqpt. and
technical expertise in exchange for capital shares in
Balatoc. Harden was a SH of Balatoc and he contends
that this contract violated the Corp.Law which restricts
the acquisition of interest by a

N+1

mining corp. in another mining corp.

X = being the number of shares needed to elect a given

number of directors
Y = being the total number of shares present or
represented at the meeting
N1 = being the number of directors desired to be
elected
N = being the total number of directors to be elected

Held: Harden has no standing bec. if any violation has

been committed, the same can be enforced only in a
criminal prosecution by an action of quo warranto which
may be maintained only by the Attorney-General.

CONTROL AND MANAGEMENT

(d) How removed (Sec. 28)

By a vote of the SHs holding or representing at least
2/3 of the outstanding capital stock, or by a vote of at
least 2/3 of the members entitled to vote, provided that
such removal takes place at either a regular meeting of
the corporation or at a special meeting called for the
purpose. In both cases, there must be previous notice
to the SHs / members of the intention to propose such
removal at the meeting.

Allocation of Power and Control

Q: What are the three levels of corporate
control/power?
Board of directors or trustees- responsible for
corporate
policies
and
the
general
management of the business and affairs of
the corporation.

Removal may be with or without cause. However,

removal without cause may not be used to deprive
minority SHs or members of the right of representation
to which they may be entitled under Sec. 24 of the
Code.

Officers- execute the policies laid down by the

board.
Stockholders or members- have residual
power over fundamental corporate changes
like amendments of articles of incorporation.

(e) How vacancy filled (Sec. 29)

If vacancy due to removal
Must be filled
by the SHs in a regular or special meeting
or expiration of term:
called for that
purpose.

Who Exercises Corporate Powers

Board of directors or trustees
Q: What are the powers of the BOD?
The BOD is responsible for corporate policies
and the general management of the business
affairs of the corporation. (See Citibank v
Chua)
(a) Authority (Sec. 24)

If "vacancy" due to increase Only by means of an

election at a regular or special SHs
in number of directors
meeting duly
called for the purpose, or in the same
or
trustees:
meeting authorizing
the increase of directors or trustees
if so stated in
the notice of the meeting.

All other vacancies:

the vote of at least a majority of the

remaining
directors or trustees, if still constituting a
quorum.

(b) Requirements
(i)

Qualifying share (Sec. 24)

(ii)

Residence (Sec. 24)

(iii)

Nationality

(iv)

Disqualifications (Sec. 27)

conviction by final judgment of
offense punishable > 6 yrs.
prison
violation of Corporation code
within 5 years prior to date of
election or appointment

Note: Directors or trustees so elected to fill vacancies

shall be elected only for the unexpired
term of their predecessors in office.
(f)

(c)

How elected (Sec. 24)

The formula for determining the number of shares needed
to elect a given number of directors is as follows:
X = Y x N1

May be filled by

+1

How compensated (Sec. 30)

If provided in by-laws:
stated in the by-laws.

That compensation

If not provided in by-laws:

Directors shall not
receive any compensation other than reasonable per
diems, as directors. However, compensation other
than per diems may be granted to directors by a
majority vote of the SHs at a regular or special
stockholders' meeting.
Note: In no case shall the total yearly compensation
of directors, as such directors, exceed 10%

of the net income before income tax of the

corporation during the preceding year.
(g)

Matters requiring Board of Directors' action

(h) Liability (See subsequent discussion under Duties of

Directors and Controlling Stockholders.)
(i) In general (Sec. 31)
(ii) Business judgment rule
(iii) Dealings with the corporation (Sec. 32)
(iv) Contracts between corporations with interlocking
directors (Sec. 33)

(i)

(v)

Disloyalty (Sec. 34)

(vi)

Watered stocks (Sec. 65)

Executive Committee (Sec. 35)

See subsequent discussion under Board
Committees.

RAMIREZ VS. ORIENTALIST

FERNANDEZ (38 Phil. 634; 1918)

CO

AND

In this case, the board of directors, before the

financial inability of the corporation to proceed with the
project was revealed, had already recognized the contracts
as being in existence and had proceed with the necessary
steps to utilize the films. The subsequent action by the
stockholders in not ratifying the contract must be ignored.
The functions of the stockholders are limited of nature.
The theory of a corporation is that the stockholders may
have all the profits but shall return over the complete
management of the enterprise to their representatives and
agents, called directors. Accordingly, there is little for the
stockholders to do beyond electing directors, making bylaws, and exercising certain other special powers defined
by law. In conformity with this idea, it is settled that
contracts between a corporation and a third person must
be made by directors and not stockholders.
LOPEZ VS. ERICTA (45 SCRA 539; 1972)
In this case, the Board of Regents of the
University of the Philippines terminated the ad interim
appointment of Dr. Blanco as Dean of the College of
Education by not acting on the matter. In the transcript of
the meeting which was latter agreed to be deleted, it was
found out that the BOR, consisting of 12 members, voted
5 in favor of Dr. Blanco's appointment 3 voted against,
and 4 abstained.
The core of the issue is WON the 4 abstentions
will be counted in favor of Dr. Blanco's appointment or
against it. The SC held that such abstentions be counted

as negative vote considering that those who abstained, 3

of which members of the Screening Committee, intended
to reject Dr. Blanco's appointment.
ZACHARY VS. MILLIN (294 Mic. 622; 1940)
The issue in this case is regarding the validity of
the director's meeting at the company's laboratory on
December 8, 1937 wherein Zachary was removed as
president of the company. Zachary that he was not
notified of the meeting thus, the action was void. On the
other hand, the defendants contend that the notice
requirement was waived by Zachary's presence at the
meeting.
The SC held that the validity of the meeting was
not affected by the failure to give notice as required by the
by-laws, provided that the parties were personally
present. Since all the parties were present at the meeting
of December 8, and understood that the meeting was to be
a directors' meeting, then the action taken is final and may
not be voided by any informality in connection with its
being called.
PNB VS. CA (83 SCRA 238; 1978)
The action was brought by the mortgagor
(Tapnio) against PNB for damages in connection with the
failure of the latter's board of directors to act
expeditiously on the proposed lease of the former's sugar
quota to one Tuazon.
The Supreme Court held that while the PNB has
the ultimate authority to approve or disapprove the
proposed lease since the quota was mortgaged to PNB, the
latter certainly cannot escape liability for observing, for
the protection of the interest of the private respondents,
that degree of care, precaution and vigilance which the
circumstances justly demand in approving or
disapproving the lease of the said sugar quota.

Corporate officers and agents

(a) Minimum
set
of
officers
qualifications (Sec. 25)

and

their

The minimum set of officers are:

(1) president (who shall be a
director);
(2) secretary (who shall be a
resident and Filipino citizen);
and
(3) treasurer (who may or may not
be a director)
The by-laws, however, may provide for other
officers.

Any 2 or more positions may be held

concurrently by the same person, except that no
one shall act as (a) president and secretary, or (b)
president and treasurer at the same time.
(b) Disqualifications (Sec. 27)
- Conviction by final judgment of an offense
punishable by imprisonment > 6 yrs.
- Violation of Corporation Code committed
within 6 yrs. prior to the date of election or
appointment
(c)

Liability in general (Sec. 31)

See discussion under Duties of Directors and
Controlling Stockholders. .

(d) Dealings with the corporation (Sec. 32)

- Generally voidable (See discussion under
Duties of Directors and Controlling
Stockhol
ders)

What is the doctrine of apparent authority?

The doctrine of apparent
authority provides that a corporation
will be liable to innocent third
persons for the acts of its agent
where the representation was made
by the agent in the course of
business and acting within his/her
general scope of authority even
though, in the particular case, the
agent is secretly abusing his
authority
and
attempting
to
perpetrate a fraud upon his/her
principal or some other person for
his/her own ultimate benefit.

FIRST PHILIPPINE INTERNATIONAL BANK &

RIVERA v. CA (January 24, 1996)
The authority of a corporate officer in dealing
with third persons may be actual or apparent. The
doctrine of "apparent authority," with special reference to
banks, was laid out in Prudential Bank v. CA (223 SCRA
350) where it was held that:
A bank is liable for the
wrongful acts of its
officers done in the
interest of the bank or in
the course of dealings of
the officers in their
representative capacity
but not for acts outside
the scope of their
authority.
A
bank

holding out its officers

and agents as worthy of
confidence will not be
permitted to profit by the
frauds they may thus be
enabled to perpetrate in
the apparent scope of
their employment; nor
will it be permitted to
shrink
from
its
responsibility for such
frauds, even though no
benefit may accrue to
the bank therefrom.
Accordingly, a bank is liable to innocent third
persons where the representation is made in the course of
its business by its agent acting within the general scope of
his authority even though, in the particular case, the agent
is secretly abusing his authority and attempting to
perpetrate a fraud upon his principal or some other person
for his own ultimate benefit. Application of these
principles is especially necessary because banks have a
fiduciary relationship with the public and their stability
depends on the confidence of the people in their honesty
and efficiency. Such faith will be eroded where banks do
not exercise strict care in the selection and supervision of
its employees, resulting in prejudice to their depositors.

YU CHUCK V. KONG LI PO (46 Phil. 608; 1924)

The power to bind a corporation by contract lies
with its board of directors or trustees. Such power may be
expressly or impliedly be delegated to other officers and
agents of the corporation. It is also well settled that
except where the authority of employing servants or
agents is expressly vested in the board, officers or agents
who have general control and management of the
corporation's business, or at least a specific part thereof,
may bind the corporation by the employment of such
agents and employees as are usual and necessary in the
conduct of such business. Those contracts of
employment should be reasonable. Case at bar: contract
of employment in the printing business was too long and
onerous to the business (3-year employment; shall receive
salary even if corp. is insolvent).

THE BOARD OF LIQUIDATORS V. HEIRS OF

MAXIMO KALAW (20 SCRA 987; 1967)
Kalaw was a corporate officer entrusted with
general management and control of NACOCO. He had
implied authority to make any contract or do any act
which is necessary for the conduct of the business. He

may, without authority from the board, perform acts of

ordinary nature for as long as these redound to the interest
of the corporation. Particularly, he contracted forward
sales with business entities. Long before some of these
contracts were disputed, he contracted by himself alone,
without board approval. All of the members of the board
knew about this practice and have entrusted fully such
decisions with Kalaw. He was never questioned nor
reprimanded nor prevented from this practice. In fact, the
board itself, through its acts and by acquiescence, have
laid aside the by-law requirement of prior board
approval. Thus, it cannot now declare that these contracts
(failures) are not binding on NACOCO.
ZAMBOANGA
TRANSPO
MOTORS (52 Phil. 244; 1928)

V.

Board Committees
The By-laws of the corporation may
create an executive committee, composed of
not less than 3 members of the Board, to be
appointed by the Board. The executive
committee may act, by majority vote of all its
members, on such specific matters within the
competence of the board, as may be
delegated to it in either (1) the By-laws, or (2)
on a majority vote of the board.
However, the following acts may never be delegated to
an executive committee:

BACHRACH

A chattel mortgage, although not approved by the

board of directors as stipulated in the by-laws, shall still
be valid and binding when the corporation, through the
board, tacitly approved and ratified it. The following acts
of the board constitute implied ratification:
1. Erquiaga is one of the largest stockholder, and was the
all-in-one officer (he was the President, GM,
Attorney, Auditor, etc.)
2. Two other directors approved his actions and
expressed satisfaction with the advantages obtained
by him in securing the chattel mortgage.
3. The corporation took advantage of the benefits of the
chattel mortgage. There were even partial payments
made with the knowledge of the three directors.
ACUNA V. BATAC PRODUCERS COOPERATIVE
MARKETING ASSOCIATION (20 SCRA 526; 1967)
Acuna entered into an agreement with Verano,
manager of PROCOMA, in which the former would be
constituted as the latter's agent in Manila. Acuna
diligently went about his business and even used personal
funds for the benefit of the corporation. During the faceto-face meeting with the board, Acuna was assured that
there need not be any board approval for his constitution
as agent for it would only be a mere formality. Later on,
the board disapproved the agency and did not pay
him. The SC ruled that the agreement was valid due to
the ratification of the corp. proven by these acts:
1. He was assured by the board that no board
approval was necessary.
2. He delivered P 20,000, performed his work
with the knowledge of the board.
3. Due to acquiescence, the board cannot
disown or disapprove the contract.

(1) approval of any action for which

shareholders' approval is also required;
(2) the filling of vacancies in the board (refer
to Sec. 29);
(3) the amendment or repeal of by-laws or
the adoption of new by-laws;
(4) the amendment or repeal of any
resolution of the board which by its
express terms is not so amendable or
repealable; and
(5) a distribution of cash dividends to the
shareholders.

HAYES V. CANADA, ATLANTIC AND PLANT S.S

CO., LTD. (181 F. 289; 1910)
In this case, the Executive Committee:
a) removed the Treasurer and appointed a new one
b) fixed the annual salary of the members of the
Executive Committee
c) amended the by-laws by giving the President the
sole authority to call a stockholder's meeting and
a board of directors meeting
d) amended the composition of the ExeCom by
limiting it to just 2 persons.
Was these actions valid?
No, because the Executive Commmittee usurped
the powers vested in the board and the stockholders. If
their actions was valid, it would put the corp. in a situation
wherein only two men, acting in their own pecuniary
interests, would have absorbed the powers of the entire
corporation. "Full powers" should be interpreted only in
the ordinary conduct of business and not total abdication
of board and stockholders' powers to the
ExeCom. "FULL POWERS" does not mean unlimited or
absolute power.

Stockholders or Members

In the following basic changes in the corporation,

although action is usually initiated by the board of directors or
trustees, their decision is not final, and approval of the
stockholders or members would be necessary:
(1) Amendment of articles of incorporation;
(2) Increase and decrease of capital stock;
(3) Incurring, creating or increasing bonded
indebtedness;
(4) Sale, lease, mortgage or other
disposition of substantially all corporate
assets;
(5) Investment of funds in another business
or corporation or for a purpose other than
the primary purpose for which the
corporation was organized;
(6) Adoption, amendment and repeal of bylaws;
(7) Merger and consolidation;
(8) Dissolution of corporation
In all of these cases, even non-voting stocks, or nonvoting members, as the case may be, will be entitled to
vote. (Sec. 6)

BOARD OF DIRECTORS AND ELECTION

COMMITTEE OF SMB VS. TAN (105 Phil. 426;
1959)
Meeting was invalid for lack of notice. By-laws
provide for a 5-day notice before meeting. March 26
posting not enough for March 28 election.

JOHNSTON VS. JOHNSTON (61 O.G. No. 39, 6160;

1965)
As a general rule, a quorum at a stockholders'
meeting, once reached, cannot be nullified by a
subsequent walkout.
However, the proceedings can be nullified if the
walkout was for a reasonable and justifiable cause. In this
case, F. Logan Johnston, who owned and/or represented
more than 50% of the corporation's outstanding shares,
was prohibited from voting the shares of the Silos family
(which he had validly purchased) and of the minor
children of Albert S. Johnston (of whom he was guardian)
on the ground that such shares must first be registered in
the names of the wards, thereby prompting the
walkout. The Court of Appeals held that the walkout was
neither unreasonable nor unjustifiable. It noted however
that there was no formal declaration of a quorum before
the withdrawal from the meeting by F. Logan Johnston.
PONCE VS. ENCARNACION (94 Phil. 81; 1953)

Upon good cause, such as a Chairman of the

Board failing to call a meeting, either by his absence or
neglect, the Court may grant a stockholder the authority
to call such a meeting.
DETECTIVE AND PROTECTIVE BUREAU VS.
CLORIBEL (26 SCRA 225; 1968)
The Corporation Law says that every director
must own at least one (1) share of the capital stock of the
corporation.
GOKONGWEI VS. SEC (89 SCRA 336; 1979)

Section 21 of the Corporation Law provides that

a corporation may prescribe in its by-laws the
qualifications, duties, and compensation of its
directors.

A stockholder has no vested right to be elected

director for he impliedly contracts that the will of
the majority shall govern.

Amended by-laws are valid for the corporation

has its inherent right to protect itself.

ROXAS V. DELA ROSA (49 Phil. 609; 1926)

Under the Law, directors can only be removed
from office by a vote of the stockholders representing 2/3
of subscribed capital stock, while vacancies can be filled
by a mere majority.
A director cannot be removed by a mere majority
by disguising it as filling a vacancy.
ANGELES V. SANTOS (64 Phil. 697; 1937)
Court may appoint a receiver when corporate
remedy is unavailable when board of directors perform
acts harmful to the corporation.
Generally, stockholders cannot sue on behalf of
the corporation. The exception is when the defendants are
in complete control of the corporation.
CAMPBELL V. LEOWS INC. (134 A. 2d 852; 1957)
The stockholders have an implied power to
remove a director for cause. Even when there is
cumulative voting, stockholders can still remove directors
for cause.
DELA RAMA V. MA-AO SUGAR CENTRAL CO,
INC. (27 SCRA 247; 1969)

A corporation may use its funds to invest in

another corporation without the approval of the
stockholders if done in pursuance of a corporate
purpose. However, if it is purely for investment, the vote
of the stockholders is necessary.

VOTING
Pledgors, mortgagors, executors,
receivers, and administrators (Sec. 55)
- Pledgors or mortgagors have the right to
attend and vote at stockholders' meetings.
Exception: If 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 that in Sec. 89, non-stock

corporations are permitted to waive the
right to use proxies via their AOI or bylaws.

Voting trust (Sec. 59)

- Voting trusts must be in writing,
notarized, specifying the terms and
conditions thereof, certified copy filed with
SEC. Failure to comply with this
requirement renders the agreement
ineffective and unenforceable.
- As a general rule, voting trusts are valid
for a period not exceeding 5 years at any
one time, and automatically expire at the
end of the agreed period unless expressly
renewed.
However, in the case of a voting trust
specifically required as a condition in
a loan agreement, said voting trust
may exceed 5 years but shall
automatically expire upon payment
of the loan.
- Voting trusts may be voted by proxy
unless
the
agreement
provides
otherwise. (Sec. 59)

Pooling agreement
- Pooling

Joint owners of stock (Sec. 56)

- Generally, consent of all co-owners shall
be necessary.

Treasury shares (Sec. 57)

- Treasury shares have no voting right for
as long as such shares remain in
the Treasury.

Proxies (Sec. 58)

- Proxies must be in writing, signed by
the stockholder/member, 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.
- Voting trusts may be voted by proxy
unless
the
agreement
provides
otherwise. (Sec. 59)
- It must be noted however that directors
or trustees cannot vote by proxy at board
meetings. (Sec. 25)

agreements
refer
to
agreements between 2 or more SHs to
vote their shares the same way. They
are
different
from
voting
trust
agreements in that they do not involve a
transfer of stocks but are merely private
agreements between 2 or more SHs to
vote in the same way.
- Sec. 100, par. 2 of the Corporation
Code provides for pooling and voting
agreements
in
close
corporations. Although there is no
equivalent provision for widely-held
corporations, Justice and Prof. Campos
are of the opinion that SHs of widely-held
corporations should not be precluded
from entering into voting agreements if
these are otherwise valid and are not
intended to commit any wrong or fraud
on the other SHs that are not parties to
the agreement.

Non-voting shares (Sec. 6)

- Preferred or redeemable shares.
ITF shares
And/or shares (Sec. 56)
- Any one of the joint owners can vote said
shares or appoint a proxy thereof.

A: In the case of Rosenfeld v. Fairchild Engine

and Airplane Corp. (128 N.E. 2d 291; 1955), it
was held that in a contest over policy (as
opposed to a purely personal power contest),
corporate directors have the right to make
reasonable and proper expenditures, subject
to the scrutiny of the courts when duly
challenged, from the corporate treasury for
the purpose of persuading the SHs of the
correctness of their position and soliciting
their support for policies which the directors
believe, in all good faith, are in the best
interests of the corporation. The SHs,
moreover, have the right to reimburse
successful contestants for the reasonable
and bona fide expenses incurred by them in
any such policy contest, subject to like court
scrutiny.
However, where it is established that such
monies have been spent for personal power,
individual gain or private advantage, and not
in the belief that such expenditures are in the
best interest of the stockholders and the
corporation, or where the fairness and
reasonableness of the amounts allegedly
expended are duly and successfully
challenged, the courts will not hesitate to
disallow them.

Devices Affecting Control

Proxy Device
Sec 58. Proxies. Stockholders and members may vote
in person or by proxy in all meetings of stockholders or
members. Proxies shall be 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.
Character: agency relationship; revocable at will (by
express revocation, by attending the meeting) and by
death, except when coupled with interest or is a security.

IN RE GIANT PORTLAND CEMENT CO. (21 A.2d

697; 1941)
Even if stocks are sold, the stockholder of record
remains the owner of the stocks and has the voting right
until the by-law requiring recording of transfer in the
transfer book is complied with. Thus, a proxy given by
the stockholder of record even if he has already sold the
share/s of stock remains effective.
STATE EX REL EVERETT TRUST V PACIFIC
WAXED PAPER, (159 A.L.R. 297; 1945)
The general rule is that a proxy is revocable even
though by its express terms it is irrevocable. The
exceptions are: (a) when authority is coupled with
interest; (b) where authority is given as part of a security
and is necessary to effectuate such a security. It is coupled
with interest when there is interest in the share themselves
(such as a right of first refusal in case of sale) and the
rights inherent in the shares (such as voting rights;
capacity to obtain majority).
DUFFY V LOFT (17 Del. Ch. 376, 152 A. 849; 1930)
Where a stockholders meeting was validly
convened, the proxies must be deemed present even if the
proxies were not presented, provided: (a) their existence
is established; (b) the agents were so designated to attend
and act in SHs behalf; (c) the agents were present in the
meeting.
Q: Is it valid for the corporation to pay the
expenses for proxy solicitation?

ROSENFELD V. FAIRCHILD (128 N.E. 2d 291;

1955)
In a contest over policy, as compared to a purely
personal power contest, corporate directors have the right
to make reasonable and proper expenditures. Reason: in
these days of giant corporations with vast numbers of
SHs, if directors are not allowed to authorize reasonable
expenses in soliciting proxies, corporate business may be
hampered by difficulty in procuring quorum; or
corporations may be at the mercy of persons seeking to
wrest control for their purposes if the directors may not
freely answer their challenge. But corp expense may be
disallowed by courts where money was shown to have
been spent for personal power, individual gain or private
advantage, or where fairness and reasonableness of
amount spent has been successfully challenged.

Voting Trust
A Voting Trust Agreement (VTA) is an agreement
whereby the real ownership of the shares is separated from the
voting rights, the usual aim being to insure the retention of
incumbent directors and remove from the stockholders the
power to change the management for the duration of the trust.

Advantages

Accumulates power. Small shareholders are given the

chance to have a representation in the BOD or at least
a spokesperson during stockholders meetings.
Continuity of management.
More effective than proxies because it is irrevocable.

Ensures that the required number of stockholders is

met thereby facilitating smooth corporate operations.

Disadvantages

Stockholders give up rights (voting and naked title)

Susceptible to abuse
Not used in widely held corporations

Rights given up by the shareholder in a VTA in

exchange for the fiduciary obligation of the trustee:

Voting rights
Proprietary rights/naked title/legal ownership
Incidental rights such as to attend meetings, to be
elected, to receive dividends)

Rights retained by the shareholder

Beneficial or equitable ownership

Right to revoke VTA in case of breach by trustee
Regain full ownership after the lapse of the period
Right to an accounting by the trustee after the period of
the VTA

How is a voting trust created?

MACKIN, ET AL. V. NICOLLET HOTEL (25 F. 2d

783; 1928)
Invalidating circumstances of a VTA are:

Want of consideration
Voting power not coupled with interest
Fraud
Illegal or improper purpose

NIDC V. AQUINO (163 SCRA 153; 1988)

A VTA transfers only voting or other rights
pertaining to the shares subject of the agreement, or
control over the stock. Stockholders of a corp. that lost
all its assets through foreclosures cannot go after those
properties. PNB-NIDC acquired those properties not as
trustees but as creditors.

Pooling and voting agreements

What are the advantages/disadvantages of a
pooling agreement?
Advantages:

(1) A VTA is prepared in writing, notarized, and filed

with the corporation and SEC.
(2) The certificates of stock covered by the VTA are
cancelled and new ones (voting trust certificates)
are issued in the name of the trustee/s stating that
they are issued pursuant to the VTA.
(3) The transfer is noted in the books of the
corporation.
(4) The trustee/s execute and deliver to transferors
the voting trust certificates. (Note that these
certificates shall be transferable in the same
manner and with the same effect as certificates of
stock.)
(5) At the end of the period of the VTA (or the full
payment of the loan to which the VTA is made a
condition, as the case may be), in the absence of
any express renewal, the voting trust certificates
as well as the certificates of stock in the name of
the trustee/s shall be deemed cancelled and new
certificates of stock shall be reissued in the name
of the transferors.

1. there is a commitment to agree to

a certain manner of voting
2. minority stockholders are able to
control the corpo
Disadvantages:
1. possibility of disagreement thus
the need for an arbitration clause
2. there is no compelling reason for
stockholders to act together

What rights does a shareholder give up/ retain

with a pooling agreement?
Shareholders retain their right to vote
because the parties are not constituted as
agents. However, the will of the parties may
not be carried out due to non-compliance with
the pooling agreement.

RINGLING v. RINGLING (29 Del. Ch. 318, 49 A. 2d

603; 1946)
EVERETT V. ASIA BANKING (49 Phil. 512; 1926)
This case illustrates how VTA can give rise to
effective control and how it can be abused. Original
stockholders can set aside the VTA when their rights are
trampled upon by the trustee.

Generally, agreements and combinations to vote

stock or control corporate fiction & policy are valid if they
seek without fraud to accomplish only what parties might
do as stockholders and do not attempt it by illegal proxies,
trusts or other means in contravention of statutes or law.

BUCK RETAIL STORE v. HARKERT (62 N.W. 2d

288; 1954)

2.

Baker & Carys formula (minimum no. of votes needed to

elect multiple directors)

Stockholders control agreements are valid where

it is for the benefit of corporation where it works no fraud
upon creditors or other stockholders and where it violates
no statute or recognized public policy.

X= # of shares required
Y= # of shares represented at meeting
D= # of directors the minority wants to elect
D= total # of directors to be elected
X= Y x D + 1
D' + 1

MCQUADE v. STONEHAM (189 N.E. 234; 1934)

An agreement among stockholders to divest
directors of their power to discharge an unfaithful
employee is illegal as against public policy. Stockholders
may not by agreement among themselves control the
directors in the exercise of the judgment vested in them
by virtue of their office to elect officers and fix salaries.

NOTES

Levels playing field or at least ensures that the

minority can elect at least one representative to
the board of directors (BOD)

Cannot of itself give the minority control of

corporate affairs, but may affect and limit the
extent of the majoritys control

By-laws cannot provide against cumulative voting

since this right is mandated by law in Section 24.

CLARK v. DODGE (199 N.E. 641; 1936)

If the enforcement of a particular contract
damages nobody-not even the public, there is no reason
for holding it illegal. Test is WON it causes damage to the
corporation and stockholders.

Cumulative voting (see sec. 24)

Classification of shares (see sec. 6)

Type of shares

Methods of Voting
1.

Straight voting:
If A has 100 shares and there
are 5 directors to be elected, he shall
multiply 100 by five (equals
500) and distribute equally
among the five candidates
without preference

Cumulative voting:
If A has 100 shares and there
are 5 directors to be elected, he shall
(one candidate)
multiply 100 by five (equals
500) and he can vote the 500 for only one
candidate.

1.

Common:

2.

Preferred:
share has preference over dividends
and distribution of assets upon liquidation;
right to vote may be restricted (Sec.
6)

3.

Redeemable: share is purchased or taken up by

the corporation upon the expiration of a fixed
period (Sec. 8); right to vote may be
restricted (Sec. 6)

2.

share with right to vote

NOTES

Cumulative voting:
If A has 100 shares, there are
5 directors to be elected, and he only
(multiple candidates) wants to vote for two
nominees, he can divide 500 votes between the
two, giving each one 250
votes.

Stock can also be both preferred and redeemable.

Even though the right to vote of preferred and

redeemable shares may be restricted, owners of
these shares can still vote on certain matter
provided for in Sec. 6.

How to compute votes needed to get a director

elected by cumulative voting:

SEC requires that where no dividends are

declared for three consecutive years, in spite of
available profits, preferred stocks will be given the
right to vote until dividends are declared.

3.

1.

Freys formula (minimum no. of votes to elect one

director)
X= # of shares required
Y= # of outstanding votes
Z= # of directors to be elected
X = _ Y__ + 1
Z+1

GOTTSCHALK V. AVALON REALTY (23 N.W. 2d

606; 1946)

Provision granting right to vote to preferred stock

previously prohibited from voting, constitutes
diminution of the voting power of common stock.
Provision in the articles of incorporation granting
holders of preferred stock right to vote in case of
default in payment of dividends after July 1, 1951 was
construed as denial by necessary implication of the
right to vote even prior to July 1, 1951.

Contract to manage the day-to-day affairs of the

corporation in accordance with the policies laid down
by the board of the managed corporation.

BOD can and usually delegate many of its functions but

it cant abdicate its responsibility to act as a governing
body by giving absolute power to officers or others, by
way of a management contract or otherwise. It must
retain its control over such officers so that it may recall
the delegation of power whenever the interests of the
corporation are seriously prejudiced thereby.

Restriction on transfer of shares

Peculiar to close corporations.

Most common restriction: granting first option to

the other stockholders and/or the corporation to
acquire the shares of a stockholder who wishes to
sell them.

SHERMAN & ELLIS VS. INDIANA MUTUAL

CASUALTY (41 F. 2d 588; 1930)

Restrictions on shares of stock must conform to

the requirements in Sec. 98

This gives to the corporation and/or to its current

management the power to prevent the transfer of
shares to persons who they may see as having
interests adverse to theirs.

Prescribing qualifications
founders shares

for

UNUSUAL
VOTING
AND
QUORUM
REQUIREMENTS (Sec. 25, 97 [for close
corporations])

As long as the qualifications imposed are reasonable

and not meant to unjustly or unfairly deprive the
minority of their rightful representation in the BOD,
such provisions are within the power of the majority to
provide in the by-laws.
According to Gokongwei vs. SEC, aside from
prescribing qualifications, by-laws can also provide for
the disqualification of anyone in direct competition with
the corporation.

Exception to the rule in sec. 6 that non-voting shares

shall be limited to preferred and redeemable shares
If founders shares enjoy the right to vote, this privilege
is limited to 5 years upon SECs approval, so as to
prevent the perpetual disqualification of other
stockholders.

Management contracts (sec. 44)

In exchange for the numerical majority in the BOD,

minority can ask for a stronger veto power in major
corporate decisions.

A requirement that there shall be no election of

directors at all unless every single vote be cast for the
same nominees, is in direct opposition to the statutory
rule that the receipt of plurality of the votes entitles a
nominee to election. (See Sec. 24)

Requiring unanimity before the BOD can take action

on any corporate matter makes it impossible for the
directors to act on any matter at all. In all acts done
by the corporation, the major number must bind the
lesser, or else differences could never be determined
nor settled.

The State has decreed that every stock corporation

must have a representative government, with voting
conducted conformably to the statutes, and the power
of decision lodged in certain fractions, always more
than half, of the stock. This whole concept is
destroyed when the stockholders, by agreement, bylaw or certificates of corporation provides for

See Sec. 7 for definition

Increases veto power of the minority in some

cases.

BENITENDI VS. KENTON HOTEL (60 N.E. 2d 829;

1945)

Founders shares

directors;

Directors (See Sec. 23, 27, 47)

Although corporations may, for a limited period,

delegate to a stranger certain duties usually performed by
the officers, there are duties, the performance of which
may not be indefinitely delegated to outsiders.

unanimous action, giving the minority an absolute,

permanent and all-inclusive power of veto.

The requirement of unanimous vote to amend by-laws

is valid. Once proper by-laws have been adopted, the
matter of amending them is no concern of the State.

Device

Favorable To:

Limitations

Cumulative
voting

MINORITY:
assures them of
representation on
the board

Cant give
minority control
of corp. affairs

Classification
of shares

MINORITY: so
long as they hold
more common
stock as opposed
to the majority
who holds more
preferred stock

Preferred and
redeemable
stock can still
vote on certain
matters as
provided in Sec.
6 or as may be
provided by the
corp.

Restriction on
transfer of
shares
*applicable only
to close
corporations

MAJORITY: they
can choose
whether to keep
or release shares
and they can
prevent
opposition from
acquiring shares

See Sec. 98

Prescribing
qualifications
for directors;
founders
shares

MAJORITY:
theyre the ones
who can
prescribe the
qualifications in
the by-laws

Qualifications
must be
reasonable and
do not deprive
minority of
representation
on the board

Management
contracts

MAJORITY:
allows them to
delegate certain
functions and
duties without
losing control
over the
corporation

Unusual voting
and quorum
requirements

MINORITY: gives
them stronger
veto power in
certain corp.
affairs

Cannot
exceed five
years
BOD must
retain
control over
corp.
policies
BOD must
have power
to recall
contract

Subject to the
limitations in
Sec. 103.

MEETINGS
Meetings of Directors / Trustees

KINDS:
Meetings of the Board of
Directors or Trustees may be either regular
or
special. (Sec. 49)
REGULAR:
Held
monthly,
unless otherwise provided in the bylaws.
(Sec. 53)
SPECIAL:
At any time upon call
of the president or as provided in the bylaws.
NOTICE:

Must be sent at least 1

day prior to the scheduled
meeting, unless otherwise
provided by the by-laws.
Note:
Notice
may be waived
expressly
or
impliedly. (Sec.
53)

WHERE:

Anywhere in or outside the

Philippines, unless the bylaws provide otherwise.

QUORUM:

Generally, a majority of the

number of directors or
trustees as fixed in the
articles of incorporation
shall constitute a quorum
for the transaction of
corporate business. (Sec.
25)

Exceptions:
(1) If the AOI or by-laws
provide for a greater majority;
(2) If the meeting is for the
election of officers, which requires
the vote of a majority of all the
members of the Board
WHO PRESIDES:
The president, unless the bylaws provide otherwise. (Sec. 54)

Meetings of Stockholders / Members

KINDS:
Meetings of stockholders or
members may be either regular or special.
(Sec. 49)
REGULAR:

Held annually on a
date fixed in the
by-laws. If no
date is fixed, on
any date in April
of every year as
determined by the
Board of Directors
or trustees.

Notice: Written, and sent

to all stockholders or
members of record at
least 2 weeks prior to the
meeting, unless a different
period is required by the
by-laws.

represented at the
meeting. (Sec. 51)

DUTIES OF DIRECTORS
AND CONTROLLING STOCKHOLDERS

SPECIAL:
At any time deemed
necessary or as provided in the by-laws.

Duties and Liabilities of Directors

Notice: Written, and sent
to all stockholders or
members of record at
least 1 week prior to the
meeting, unless otherwise
provided in the by-laws.
Note:
Notice of any meeting may be waived
expressly or impliedly by any SH or member. (Sec. 50)

WHAT IS THE 3-FOLD

DIRECTORS
OWE
CORPORATION?

DUTY
TO

THAT
THE

(1) Diligence
(2) Loyalty
(3) Obedience

WHERE:

In the city of municipality

where the principal office of
the corporation is located,
and if practicable in the
principal office of the
corporation. Metro Manila
is considered a city or
municipality. (Sec. 51)

Obedience - directors must act only

within corporate powers and are liable for
damages if they acted beyond their
powers unless in good faith. Assuming
that they acted within their powers,
liability may still arise if they have not
observed due diligence or have been
disloyal to the corporation.

QUORUM:

Generally, a quorum shall

consist of the stockholders
representing a majority of
the outstanding capital
stock, or a majority of the
members.

WHEN DOES LIABILITY ON THE PART OF

DIRECTORS, TRUSTEES OR OFFICERS
ARISE?
In general, liability of directors,
trustees or officers arises when they either:

Exception: If
otherwise
provided for in the
Code or in the
b
y-laws.
WHO PRESIDES:
The president, unless the bylaws provide otherwise. (Sec. 54)
WHAT IS THE EFFECT IF A
STOCKHOLDER'S MEETING IS
IMPROPERLY
HELD
OR
CALLED?
Generally, the proceedings
had and/or any business transacted
shall be void.
However, the
proceedings
and/or
transacted
business may still be deemed valid
if:
(1) Such proceedings or
business are within the
powers or authority of
the corporation; and
(2) All the stockholders or
members
of
the
corporation
were
present
or
duly

(1) willfully and knowingly vote for or

assent to patently unlawful acts of the
corporation; or
(2) are guilty of gross negligence of
bad faith in directing the affairs of the
corporation; or
(3) acquire any personal or
pecuniary interest in conflict with
their duty as such directors or
trustees.
In such cases, the directors or trustees shall
be liable jointly and severally for all damages
resulting therefrom suffered by the
corporation, its stockholders or members and
other persons.
When a director, trustee or officer
attempts to acquire or acquires, in violation of
his duty, any interest adverse to the
corporation in respect of any matter which has
been reposed in him in confidence, as to
which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a
trustee for the corporation and must account
for the profits which would otherwise have
accrued to the corporation. (Sec. 31)

In addition to this general liability, the

Corporation Code provides for specific rules
to govern the following situations:
(1) Self-dealing directors
(Sec. 32)
(2) Contracts
between
interlocking directors
(Sec. 33)
(3) Disloyalty
to
the
corporation (Sec. 34)
(4) Watered stocks (Sec.
65)

Duty of Diligence: Business Judgment

Rule.
WHAT IS THE BUSINESS JUDGMENT
RULE?
As a general rule, directors and
trustees of the corporation cannot be held
liable for mistakes or errors in the exercise of
their business judgment, provided they have
acted in good faith and with due care and
prudence. Contracts intra vires entered into
by the board of directors are binding upon the
corporation, and the courts will not interfere
unless such contracts are so unconscionable
and oppressive as to amount to a wanton
destruction of the rights of the minority.
However, if due to the fault or
negligence of the directors the assets of the
corporation are wasted or lost, each of them
may be held responsible for any amount of
loss which may have been proximately
caused
by
his
wrongful
acts
or
omissions. Where there exists gross
negligence or fraud in the management of the
corporation, the directors, besides being
liable for damages, may be removed by the
stockholders in accordance with Sec. 28 of
the Code. (Campos & Campos)
GENERAL
RULE: Contracts intra
vires entered into by BoD are binding upon
the
corporation
and courts will not interfere.
EXCEPTION:
When such contracts
are so unconscionable and oppressive
as
to amount to a
wanton destruction of the rights of the
minority.
WHAT KIND OF DILIGENCE IS EXPECTED
OF DIRECTORS?
Directors are expected to manage the
corporation with reasonable diligence, care
and prudence, i.e. the degree of care and
diligence which men prompted by self-interest
generally exercise in their own affairs. Thus,

they can be held liable not only

for willful dishonesty but also for negligence.
Although they are not expected to
interfere with the day-to-day administrative
details of the business of the corporation, they
should keep themselves sufficiently informed
about the general condition of the business.
WHAT
FACTORS
SHOULD
BE
CONSIDERED
IN
DETERMINING
WHETHER REASONABLE DILIGENCE
HAS BEEN EXERCISED?
The nature of the business, as well as the
particular circumstances of each case. The
court should look at the facts as they exist at
the time of their occurrence, not aided or
enlightened by those which subsequently
took place. (Litwin v. Allen)

OTIS AND CO. VS PENNSYLVANIA RAILROAD

CO. (155 F. 2d 522; 1946)
If in the course of management, the directors
arrive at a decision for which there is a reasonable basis
and they acted in good faith, as a result of their
independent judgment, and uninfluenced by any
consideration other than what they honestly believe to be
for the best interest of the railroad, it is not the function of
the court to say that it would have acted differently and to
charge the directors for any loss or expenditures incurred.
In the present case, the bond issue was adequately
deliberated and planned, properly negotiated and
executed; there was no lack of good faith; no motivation
of personal gain or profit; there was no lack of diligence,
skill or care in selling the issue at the price approved by
the Commission and which resulted in a saving of
approximately $9M to the corporation.
MONTELIBANO VS. BACOLOD-MURCIA
MILLING CO. (5 SCRA 36; 1962)
The Bacolod-Murcia Milling Co. adopted a
resolution which granted to its sugar planters an increase
in their share in the net profits in the event that the sugar
centrals of Negros Occidental should have a total annual
production exceeding one-third of the production of all
sugar central mills in the province. Later, the company
amended its existing milling contract with its sugar
planters, incorporating such resolution. The company,
upon demand, refused to comply with the contract, stating
that the stipulations in the resolution were made without
consideration and that such resolution was, therefore, null
and void ab initio, being in effect a donation that
was ultra vires and beyond the powers of the corporate
directors to adopt. This is an action by the sugar planters
to enforce the contract.

The terms embodied in the resolution were

supported by the same cause and consideration
underlying the main amended milling contract; i.e., the
premises and obligations undertaken thereunder by the
planters, and particularly, the extension of its operative
period for an additional 15 years over and beyond the
thirty years stipulated in the contract.
As the resolution in question was passed in good
faith by the board of directors, it is valid and binding, and
whether or not it will cause losses or decrease the profits
of the central, the court has no authority to review
them. They hold such office charged with the duty to act
for the corporation according to their best judgment, and
in so doing, they cannot be controlled in the reasonable
exercise and performance of such duty. It is a well-known
rule of law that questions of policy or of management are
left solely to the honest decision of officers and directors
of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board
is the business manager of the corporation, and so long as
it acts in good faith, its orders are not reviewable by the
courts.
LITWIN (ROSEMARIN ET. AL., INTERVENORS)
VS. ALLEN ET. AL.
(25 N.Y.S. 2d 667; 1940)
FACTS:
Alleghany Corp. bought terminals in
Kansas City and St. Joseph. It needed to raise money to
pay the balance of the purchase price but could not
directly borrow money due to a borrowing limitation in
its charter. Thus, it sold Missouri Pacific bonds to J.P.
Morgan and Co. worth $IOM. J.P. Morgan, in turn, sold
$3M worth of the bonds to Guaranty Trust
Company. Under the contract, the seller was given an
option to repurchase at same price within six months.
HELD:
Option given to seller is invalid. It is
against public policy for a bank to sell securities and buy
them back at the same price; similarly, it is against public
policy for the bank to buy securities and give the seller the
option to buy them back at the same price because the
bank incurs the entire risk of loss with no possibility of
gain other than the interest derived from the securities
during the period that the bank holds them. Here, if the
market price of the securities rise, the holder of the
repurchase option would exercise it to recover the
securities at a lower price at which he sold them. If the
market price falls, the seller holding the option would not
exercise it and the bank would sustain the loss.
Directors are not in a position of trustees of an
express trust who, regardless of good faith, are personally
liable. In this case, the directors are liable for the
transaction because the entire arrangement was

improvident, risky, unusual and unnecessary so as to be

contrary to fundamental conceptions of prudent banking
practice. Yet, the advice of counsel was not
sought. Absent a showing of exercise of good faith, the
directors are thus liable.
WALKER VS. MAN, ET. AL. (253 N.Y.S. 458;
1931)
FACTS:
Frederick Southack and Alwyn Ball
loaned Avram $20T evidenced by a promissory note
executed by Avram and endorsed by Lacey. The loan was
not authorized by any meeting of the board of directors
and was not for the benefit of the corporation. The note
was dishonored but defendant-directors did not protest the
note for non-payment; thus, Lacey, the indorser who was
financially capable of meeting the obligation, was
subsequently discharged.
HELD:
Directors are charged not with
misfeasance, but with non-feasance, not only with doing
wrongful acts and committing waste, but with acquiescing
and confirming the wrong doing of others, and with doing
nothing to retrieve the waste. Directors have the duty to
attempt to prevent wrongdoing by their co-directors, and
if wrong is committed, to rectify it. If the defendant knew
that an unauthorized loan was made and did not take steps
to salvage the loan, he is chargeable with negligence and
is accountable for his conduct.
STEINBERG VS. VELASCO (52 Phil. 953; 1929)
FACTS:
The board of directors of Sibuguey
Trading Company authorized the purchase of 330 shares
of stock of the corporation and declared payment of P3T
as dividends to stockholders. The directors from whom
300 of the stocks were bought resigned before the board
approved the purchase and declared the dividends. At the
time of purchase of stocks and declaration of dividends,
the corporation had accounts payable amounting to
P9,241 and accounts receivable amounting to P12,512,
but the receiver who made diligent efforts to collect the
amounts receivable was unable to do so.
It has been alleged that the payment of cash
dividends to the stockholders was wrongfully done and in
bad faith, and to the injury and fraud of the creditors of
the corporation. The directors are sought to be made
personally liable in their capacity as directors.
HELD:
Creditors of a corporation have the right
to assume that so long as there are outstanding debts and
liabilities, the BOD will not use the assets of the
corporation to buy its own stock, and will not declare
dividends to stockholders when the corporation is
insolvent.

In this case, it was found that the corporation did

not have an actual bona fide surplus from which
dividends could be paid. Moreover, the Court noted that
the Board of Directors purchased the stock from the
corporation and declared the dividends on the stock at the
same Board meeting, and that the directors were permitted
to resign so that they could sell their stock to the
corporation. Given all of this, it was apparent that the
directors did not act in good faith or were grossly ignorant
of their duties. Either way, they are liable for their actions
which affected the financial condition of the corporation
and prejudiced creditors.
BARNES V. ANDREWS (298 F. 614; 1924)
A complaint was filed against a corporate director
for failing to give adequate attention (he relied solely on
the Presidents updates on the status of the corp) to the
affairs of a corporation which suffered depletion of funds.
The director was not liable. The court said that
despite being guilty of misprision in his office, still the
plaintiff must clearly show that the performance of the
directors duties would have avoided the losses. When a
business fails from general mismanagement, business
incapacity, or bad judgment, it is difficult to conjecture
that a single director could turn the company around, or
how much dollars he could have saved had he acted
properly.
FOSTER V. BOWEN (41 N.E. 2d 181; 1942)
Cushing, a director and in charge of leasing a
roller skating rink of the corp, leased the same to himself.
Minority stockholders filed suit against Bowen, the
corporation's President, to recover for company losses
arising out of an alleged breach of fiduciary duty.
Bowen was held to be not liable because: (1)
Cushing's acts were not actually dishonest or fraudulent;
(2) Cushing performed personal work such as keeping the
facility in repair which redounded to the benefit of the
company and even increased its income; (3) Bowen did
not profit personally through Cushing's lease; and (4) the
issue of the possible illegality of the lease was put before
the Board of Directors, but the Board did not act on it but
instead moved on to the next item on the agenda. Absent
any bad faith on Bowen's part, and a showing that it was
a reasonable exercise of judgment to take no action on the
lease agreement at the time it was entered into, Bowen
was not liable.
LOWELL HOIT & CO. V. DETIG (50 N.E. 2d 602;
1943)

Lowell Hoit filed action against directors of a

cooperative grain company for an alleged willful
conversion by the manager of grain stored in the company
facility. The court said that the directors were not
personally liable. There was no evidence that the directors
had knowledge of the transaction between the manager
and Lowell Hoit.
The court will treat directors with leniency with
respect to a single act of fraud on the part of a subordinate
officer/agent. But directors could be held liable if the act
of fraud was habitual and openly committed as to have
been easily detected upon proper supervision. To hold
directors liable, he must have participated in the
fraudulent act; or have been guilty of lack of ordinary and
reasonable supervision; or guilty of lack of ordinary care
in the selection of the officer/agent.
BATES V. DRESSER (40 S.Ct.247; 1920)
Coleman, an employee of the bank, was able to
divert bank finances for his benefit, resulting in huge
losses to the bank. The receiver sued the president and the
other directors for the loss.
The court said that the directors were not
answerable as they relied in good faith on the cashiers
statement of assets and liabilities found correct by the
government examiner, and were also encouraged by the
attitude of the president that all was well (the president
had a sizable deposit in the bank). But the president is
liable. He was at the bank daily; had direct control of
records; and had knowledge of incidents that ordinarily
would have induced scrutiny.

The self-dealing director

WHAT IS A SELF-DEALING DIRECTOR?
(Sec. 32)
A self-dealing director is one who
enters into a contract with the corporation
of which he is a director.
WHAT IS THE NATURE OF CONTRACTS
ENTERED INTO BY SELF-DEALING
DIRECTORS?
Voidable at the option of the
corporation, whether or not it suffered
damages. It is possible that the selfdealing director may have the greatest
interest in its welfare and may be willing
to deal with it upon reasonable terms.
However, such contract may be upheld by the
corporation if all of the following
conditions are present:

(1) The presence of the selfdealing director or trustee in the

board meeting for which the
contract was approved was not
necessary to constitute a
quorum for such meeting;
(2) The vote of such self-dealing
director or trustee was not
necessary for the
approval of the contract;
(3) The contract is fair
reasonable
under
circumstances;

and
the

(4) In the case of an officer, the

contract has been previously
authorized by the
Board of Directors.
In the event that either of or both
conditions (1) and (2) are absent (i.e., the
presence of the director/trustee was
necessary for a quorum and/or his vote was
necessary for the approval of the
contract), the contract may be ratified by a 2/3
vote of the OCS or all of the members, in a
meeting called for the purpose. Full
disclosure of the adverse interest of the
directors or trustees involved must be made
at such meeting.
DOCTRINE:
A director of a corporation
holds a position of trust and as such, he owes
a duty of loyalty to his corporation. In case his
interests conflict with those of the corporation,
he cannot sacrifice the latter to his own
advantage and benefit. As corporate
managers, directors are committed to seek
the maximum amount of profits for the
corporation. This trust relationship "is not a
matter of statutory or technical law. It springs
from the fact that directors have the control
and guidance of corporate affairs and
property and hence of the property interests
of the stockholders." (Prime White Cement
Corp. v. IAC, 220 SCRA 103; 1993)

PALTING V. SAN JOSE PETROLEUM (Dec. 17,

1966)
The articles of inc. of respondent included a
provision that relieves any director of all responsibility for
which he may otherwise be liable by reason of any
contract entered into with the corp., whether it be for his
benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested,
except in case of fraud.
SC: This is in direct contravention of the Corp Law, of
the traditional fiduciary relationship between directors
and the SH. The implication is that they can do anything
short of fraud, even to their benefit, and with immunity.

Note: This case was decided in 1966 under the

Corporation Law, which had no
provisions on self-dealing directors.

MEAD V. MCCULLOUGH (21 Phil. 95; 1911)

Issue: validity of sale of corp. property and assets to the
directors who approved the same.
Gen Rule: When purely private corporations remain
solvent, its directors are agents or trustees for the SH.
Exception: when the corp. becomes insolvent, its
directors are trustees of all the creditors, whether they are
members of the corp. or not, and must manage its property
and assets with strict regard to their interest; and if they
are themselves creditors while the insolvent corp is under
their management, they will not be permitted to secure to
themselves by purchasing the corp property or otherwise
any personal advantage over the other creditors.
Exception to Exception: A director or officer may
in good faith and or an adequate consideration
purchase from a majority of the directors or SH
the property even of an insolvent corp, and a sale
thus made to him is valid and binding upon the
minority.
In the case at bar, the sale was held to be valid
and binding. Company was losing. 4 directors present
during meeting all voted for the sale. They likewise
constitute majority of SH. Contract was found to be fair
and reasonable.
PRIME WHITE CEMENT CORP. V. IAC (220
SCRA 103; 1993)
Prime White Cement Corp. (through the
President and Chairman of the Board) and Alejandro Te,
a director and auditor of the corporation, entered into a
dealership agreement whereby Te was obligated to act as
the corporation's exclusive dealer and/or distributor of its
cement products in the entire Mindanao area for 5
years. Among the conditions in the dealership agreement
were that the corporation would sell to and supply Te with
20,000 bags of white cement per month, and that Te
would purchase the cement from the corporation at a price
of P 9.70 per bag.
Relying on the conditions contained in the
dealership agreement, Te entered into written agreements
with several hardware stores which would enable him to
sell his allocation of 20,000 bags per month. However,
the Board of Directors subsequently imposed new
conditions, including the condition that only 8,000 bags
of cement would be delivered per month. Te made
several demands on the corporation to comply with the

dealership agreement. However, when the corporation

refused to comply with the same, Te was constrained to
cancel
his
agreements
with
the
hardware
stores. Notwithstanding the dealership agreement with
Te, the corporation entered into an exclusive dealership
agreement with a certain Napoleon Co for marketing of
corporation's products in Mindanao. The lower court held
that Prime White was liable to Te for actual and moral
damages for having been in breach of the agreement
which had been validly entered into.
On appeal, the Supreme Court held that the
dealership agreement is not valid and enforceable, for not
having been fair and reasonable: the agreement protected
Te from any market increases in the price of cement, to
the prejudice of the corporation. The dealership
agreement was an attempt on the part of Te to enrich
himself at the expense of the corporation. Absent any
showing that the stockholders had ratified the dealership
agreement or that they were fully aware of its provisions,
the contract was not valid and Te could not be allowed to
reap the fruits of his disloyalty.

to disclose arises, and concealment is

fraud.
In the case of Gokongwei v.
SEC (89 SCRA 336; 1979), the Supreme
Court, quoting from the US case
of Pepper v. Litton (308 U.S. 295-313;
1939) stated that a director cannot, "by
the intervention of a corporate entity
violate the ancient precept against
serving two masters He cannot utilize
his inside information and his strategic
position for his own preferment. He
cannot violate rules of fair play by doing
indirectly through the corporation what he
could not do directly. He cannot use his
power for his personal advantage and to
the detriment of the stockholders and
creditors no matter how absolute in terms
that power may be and no matter how
meticulous he is to satisfy technical
requirements. For that power is at all
times subject to the equitable limitation
that it may not be exercised for the
aggrandizement,
preference,
or
advantage of the fiduciary to the
exclusion or detriment of the cestuis."

Seizing Corporate Opportunity (Sec. 34)

Using inside information
USE OF INSIDE INFORMATION: Do
directors and officers of a company owe
any duty at all to stockholders in relation
to transactions whereby the officers and
directors buy for themselves shares of
stock from the stockholders?
MINORITY
RULE:
YES. Directors and officers
have
an
obligation
to
the
stockholders individually as well as
collectively.
MAJORITY
RULE:
NO. Directors and officers
owe
no
fiduciary
duty
at
all to
stockholders, but may deal with them at
arms
length. No duty of disclosure of facts
known
to
the
director or officer exists. Nondisclosure
cannot
constitute constructive fraud.
SPECIAL FACTS DOCTRINE: IT
DEPENDS.
Where
special
circumstances
or facts are present which make in
inequitable
to
withhol
d information from the stockholder, the
duty

If a director acquires for himself, by

virtue of his office, a business opportunity
which
should
belong
to
the
corporation, thereby obtaining profits to the
prejudice of the corporation, he must account
to the corporation for all such profits by
refunding the same. However, if his act
was ratified by 2/3 stockholders' vote, he
need not refund said profits. This provision
applies even though the director may have
risked his own funds in the venture.
Note: This provision is to be distinguished
from Sec. 32 on contracts of self-dealing
directors: contracts of self-dealing
directors are voidable at the option
of the corporation even if it has not
suffered any injury; on the other
hand, Sec. 34 applies only if the
corporation has been prejudiced by
the contract.

SINGER VS. CARLISLE (27 N.Y.S. 2d 190; 1941)

In this case, it was held that the general
allegations in the complaint of conspiracy of the directors
to obtain corporate opportunity were deficient. The
complaint should state specific transactions.
Directorship in 2 competing corporations does
not in and of itself constitute a wrong. It is only when a

business opportunity arises which places the director in a

position of serving two masters, and when, dominated by
one, he neglects his duty to the other, that a wrong has
been done.
IRVING TRUST CO. VS. DEUTSCH (79 L. Ed.
1243; 1935)
Fiduciary duty applies even if the corporation is
unable to enter into transactions itself.
LITWIN V ALLEN (25 N.Y.S. 2d 667; 1940)
In this case, it was held that the common stock
purchased by the defendants wasnt a business
opportunity for the corporation. Having fulfilled their
duty to the corporation in accordance with their best
judgment, the defendant directors were not precluded
from a transaction for their own account and risk.

Interlocking directors
WHAT IS AN INTERLOCKING DIRECTOR?
An interlocking director is one who
occupies a position in 2 companies dealing
with each other.
WHAT IS THE RULE ON CONTRACTS
INVOLVING
INTERLOCKING
DIRECTORS?
Except in cases of fraud, and provided
the contract is fair and reasonable under the
circumstances, a contract between 2 or more
corporations having interlocking directors
shall not be invalidated on that ground
alone. This practice is tolerated by the Courts
because such an arrangement oftentimes
presents definite advantages to the
corporations involved.
However, if the interest of the
interlocking director in one corporation is
substantial (i.e., stockholdings exceed20% of
the OCS) and his interest in the other
corporation or corporations is merely nominal,
he shall be subject to the conditions stated in
Sec. 32, i.e., for the contract not to be
voidable, the following conditions must be
present:
(1) The presence of the
self-dealing director or
trustee in the board
meeting for which the
contract was approved
was not necessary to
constitute a quorum
for such meeting;
(2) The vote of such selfdealing director or
trustee
was
not

necessary for the

approval
of
the
contract;
(3) The contract is fair and
reasonable under the
circumstances;
(4) In the case of an
officer, the contract
has been previously
authorized by the
Board of Directors.
In the event that either of or both
conditions (1) and (2) are absent (i.e., the
presence of the director/trustee was
necessary for a quorum and/or his vote was
necessary for the approval of the
contract), the contract may be ratified by a 2/3
vote of the OCS or all of the members, in a
meeting called for the purpose. Full
disclosure of the adverse interest of the
directors or trustees involved must be made
at such meeting.
Note: The Investment House Law
prohibits a director or officer of an
investment house to be concurrently
a director or officer of a bank, except
as otherwise authorized by the
Monetary Board. In no event can a
person be authorized to be
concurrently an officer of an
investment house and of a bank
except where the majority or all of
the equity of the former is owned by
the bank. (P.D. 129, Sec. 6, as
amended)
The Insurance Code likewise
prohibits a person from being a
director and/or officer of an
insurance
company
and
an
adjustment company. (Sec. 187)

GLOBE WOOLEN CO. V. UTICA GAS &

ELECTRIC (121 N.E. 378; 1918)
Maynard, president and chief stockholder of
Globe but nominal SH in Utica Gas, obtained a cheap, 10year contract for Utica to supply power. Maynard did not
vote during the meeting for the approval of the contract.
Can Globe seek to enforce contract? The
Supreme Court held that Globe could not enforce the
contract and that said contract was voidable at the election
of Utica. It was found that based on the facts of the case,
the contract was clearly one-sided. Maynard, although he
did not vote, exerted a dominating influence to obtain the
contract from beginning to end.
The director-trustee has a constant duty not to
seek harsh advantage in violation of his trust.

Watered stocks (Sec. 65)

Any
corporation:

director

or

officer

of

the

(1) 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
(2) who, having knowledge
thereof, does not forthwith
express his objection in
writing and file the same
with
the
corporation
secretary

GOV'T OF THE PHILIPPINES VS. EL HOGAR

FILIPINO (50 Phil. 399; 1927)
The compensation provided in sec. 92 of the bylaws of El Hogar Filipino which stipulated that 5% of the
net profit shown by the annual balance sheet shall be
distributed to the directors in proportion to the attendance
at board meetings is valid. The Corporation Law does not
prescribe the rate of compensation for the directors of a
corporation. The power to fix it , if any is left to the
corporation to be determined in its by-laws. In the case at
bar, the provision in question even resulted in
extraordinarily good attendance.
BARRETO VS. LA PREVISORA FILIPINA

shall be solidarily liable with the stockholders

concerned to the corporation and its creditors
for the difference between the fair value
received at the time of the issuance of the
stock and the par or issued value of the same.

Fixing compensation of directors and

officers
GENERAL RULE:

Directors as such
are not entitled
to compensation
for performing
services
ordinarily
attached to their
office.

EXCEPTIONS:
(1) If the articles
of incorporation or the by-laws
expressly
so provide;
(2) If a contract is
expressly made in advance.
WHO FIXES THE COMPENSATION? The
stockholders only (majority of the OCS)
EXCEPTION:
Per diems,
which can be fixed by the directors
themselves
APPLICABILITY OF COMPENSATION:
Only to future and NOT past services.
MAXIMUM AMOUNT ALLOWED BY
LAW:
Total
yearly income of the
directors shall not
exceed 10% of the net
income before income
tax of the corporation
during the preceding
year (Sec. 30)

This action was brought by the directors of

defendant corporation to recover 1% from each of the
plaintiffs of the profits of the corporation for 1929
pursuant to a by-law provision which grants the directors
the right to receive a life gratuity or pension in such
amount for the corporation.
The SC held that the by-law provision is not
valid. Such provision is ultra vires for a mutual loan and
building association to make. It is not merely a provision
for the compensation of directors. The authority conferred
upon corporations refers only to providing compensation
for the future services of directors, officers, and
employees after the adoption of the by-law in relation
thereto. The by-law can't be held to authorize the giving
of continuous compensation to particular directors after
their employment has terminated for past services
rendered gratuitously by them to the corporation.
CENTRAL COOPERATIVE EXCHANGE INC VS.
TIBE (33 SCRA 596; 1970)
The questioned resolutions which appropriated
the funds of the corporation for different expenses of the
directors are contrary to the by-laws of the corporation;
thus they are not within the board's power to enact. Sec. 8
of the by-laws explicitly reserved to the stockholders the
power to determine the compensation of members of the
board and they did restrict such compensation to actual
transportation expenses plus an additional P30 per diems
and actual expenses while waiting. Hence, all other
expenses are excluded. Even without the express
reservation, directors presumptively serve without pay
and in the absence of any agreement in relation thereto,
no claim can be asserted therefore.
FOGELSON VS. AMERICAN WOOLEN CO. (170
F. 2d. 660; 1948)

A retirement plan which provides a very large

pension to an officer who has served to within one year of
the retirement age without any expectation of receiving a
pension would seem analogous to a gift or bonus. The size
of such bonus may raise a justifiable inquiry as to whether
it amounts to wasting of the corporate property. The
disparity also between the president's pension plan and
that of even the nearest of the other officers and
employees may also be inquired upon by the courts.
KERBS VS. CALIFORNIA EASTERN
AIRWAYS (90 A. 2d 652; 1952)
This is an appeal filed to enjoin the California
Eastern Airways from putting into effect a stock option
plan and a profit-sharing plan. The SC held that the stock
option plan was deficient as it was not reasonably created
to insure that the corporation would receive contemplated
benefits. A validity of a stock option plan depends upon
the existence of consideration and the inclusion of
circumstances which may insure that the consideration
would pass to the corporation. The options provided may
be exercised in toto immediately upon their issuance
within a 6 month period after the termination of
employment. In short, such plan did not insure that any
optionee would remain with the corporation.
With regard to the profit-sharing plan, it was held
valid because it was reasonable and was ratified by the
stockholders pending the action.

Close Corporations
Sec. 97 provides that the AOI of a close corp. may
specify that it shall be managed by the stockholders rather than
the BoD. So long as this provision continues in effect:

No stockholders meeting need be called to elect

directors;
Generally, stockholders deemed to be directors for
purposes of this Code, unless the context clearly
requires otherwise;
Stockholders shall be subject to all liabilities of
directors. The AOI 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 BoD.

Further, Sec. 100 provides that for stockholders managing corp.

affairs:

They shall be personally liable for corporate torts

(unlike ordinary directors liable only upon finding
of negligence)

If however there is reasonable adequate liability

insurance, injured party has no right of action v.
stockholders-managers

Duty of Controlling Interest

A SH/director is still entitled to vote in a stockholders
meeting even if his interest is adverse to a corporation. But a
stockholder able to control a corp. is still subject to the duty of
good faith to the corp. and the minority.
Persons with management control of corporation hold
it in behalf of SHs and can not regard such as their own personal
property to dispose at their whim.
The ff. acts are legal:

Transfer of managerial control through BoD

resignation & seriatim election of successors if
concomitant with the sale and actual transfer of
majority interest or that which constitutes voting
control;

Disposal by controlling SH of his stock at any time

& at such price he chooses

The ff. are illegal:

Selling corp. office or management control by

itself, that is NOT accompanied by stocks or
stocks are insufficient to carry voting control;

Transferring office to persons who are known or

should be known as intending to raid the corporate
treasury or otherwise improperly benefit
themselves
at
the
expense
of
the
corp. (Insuranshares Corp. V. Northern Fiscal);

Receiving a bonus or premium specifically in

consideration of their agreement to resign & install
the nominees of the purchaser of their stock,
above and beyond the price premium normally
attributable to the control stock being sold;

INSURANSHARES CORP. V. NORTHERN

FISCAL CORP. (35 F. Supp. 22; 1940)
The corp. is suing its former directors to recover
damages as a result of the sale of its control to a group
(corporate raiders) who proceeded to rob it of most of its
assets mainly marketable securities.
Are previous directors who sold corp. control
liable? Yes, they are under duty not to sell to raiders.
Owners of corp. control are liable if under the
circumstances, the proposed transfer are such as to
awaken a suspicion or put a prudent man on his guard. As
in this case, control was bought for so much aside from
being warned of selling to parties they knew little about,

and also from fair notice that such outsiders indeed

intended to raid the corp.

Duty to Creditors

In the instant case, there was a showing of bad

faith: the Board Resolution retrenching the respondents
on the feigned ground of serious business losses had no
basis apart from an unsigned and unaudited Profit and
Loss Statement which had no evidentiary value
whatsoever.

General rule: Corporate creditors can run after the corp. itself
only, and not the directors for mismanagement of a solvent corp.
If corp. becomes insolvent, directors are deemed
trustees of the creditors and should therefore manage its assets
with due consideration to the creditors interest.
If directors are also creditors themselves, they are
prohibited from gaining undue advantage over other creditors.

CORPORATE BOOKS AND RECORDS

AND
THE RIGHT OF INSPECTION
Corporate Books and Records

Personal Liability of Directors

In what instances does personal liability of
a corporate director, trustee or officer
validly attach together with corporate
liability?
When the director / trustee / officer:
I.

II.

III.

IV.

(1) assents to a patently unlawful

act of the corporation;
(2) is in bad faith or gross
negligence in directing the affairs of
the corporation;
(3) creates a conflict of interest,
resulting in damages to the
corporation, its stockholders or other
persons

WHAT BOOKS AND RECORDS

CORPORATION KEEP? (Sec. 74)

MUST

(1) Record of all business transactions;

(2) Minutes of all meetings of stockholders
or members;
(3) Minutes of all meetings of Board of
Directors or Trustees;
(4) Stock and Transfer book
WHAT IS A STOCK AND TRANSFER BOOK? (Sec.
75)
A stock and transfer book is a record
of all stocks in the names of the stockholders
alphabetically arranged. It likewise contains
the following information:

Consents to the issuance of watered

stocks, or who, having knowledge
thereof, does not forthwith file with
the corporate secretary his written
objection thereto;

Installments paid and unpaid on

all stock for which subscription
has been made, and the date of
any installment;

Agrees to hold himself personally

and solidarily liable with the
corporation;

A statement of every alienation,

sale or transfer of stock made,
the date thereof, and by whom
and to whom made;

Such other entries as the bylaws may prescribe

Is made, by a specific provision of

law, to personally answer for his
corporate action.

(Tramat Mercantile v. CA, 238 SCRA 14)

UICHICO v. NLRC (G.R. No. 121434, June 2, 1997)

In labor cases, particularly, corporate directors
and officers are solidarily liable with the corporation for
the termination of employment of corporate employees
done with malice or in bad faith.

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.
WHAT
IS
A
STOCK
AGENT? (Sec. 75)

TRANSFER

A stock transfer agent is one who is

engaged principally in the business of
registering transfers of stocks in behalf of a
stock corporation. He or she must be
licensed by the SEC; however, 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, shall be applicable.

contracts, papers pertaining to such

contracts, voting trust agreements (sec. 59)
2.

WHO
IS
THE
CUSTODIAN
CORPORATE RECORDS?

OF

In the absence of any provision to the

contrary, the corporate secretary is the
custodian of corporate records. Corollarily,
he keeps the stock and transfer book and
makes
the
proper
and
necessary
entries. (Torres, et al. vs. CA, 278 SCRA
793; 1997)

Basis of the Right of Inspection

These are expressly required to be open to

inspection by SH/members during office
hours (Sec. 46). Note: There is no similar
provision as to AOI, but these are filed with
the SEC anyway.
3.

4.

Minutes of stockholders' meetings

5.

Stock and transfer books

These are records of all stocks in the names
of
the
stockholders
alphabetically
arranged. contain all names of the
stockholders of record. Useful for proxy
solicitation for elections. SEC has however
ruled that a SH cannot demand that he be
furnished such a list but he is free to examine
corp. books.

WHAT IS THE NATURE OF THE

RIGHT TO INSPECT?
6.
deterrent to an
management
are
subject to scrutiny; and
REMEDIAL: A dissatisfied SH may
avail of
this
right as
a
prelimin
ary step
towards
seeking
more
direct
and
appropr
iate
remedi
es
against
misman
ageme
nt.

What Records Covered

1.

Records of ALL business transactions

This includes book of inventories and
balances, journal, ledger, book for copies of
letters and telegrams, financial statements,
income tax returns, vouchers, receipts,

Minutes of directors meetings

This is to inform stockholders of Board
policies. Such right arises only upon approval
of the minutes, however.

Ordinary stockholders, the beneficial owners of the

corporation, usually have no say on how business affairs of the
corp. are run by the directors. The law therefore gives them the
right to know not only the financial health of the corp. but also
how its affairs are managed so that if they find it unsatisfactory,
they can seek the proper remedy to protect their investment.

PREVENTIVE :
ill-intentioned
knowing its acts

By-laws

Most recent financial statement

Sec. 75 of the Code provides that within
10 days from the corporation's receipt of
a written request from any stockholder or
member, the corporation must furnish the
requesting party with a copy of 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.
Note: Under the Secrecy of Bank Deposits
Act, records of bank deposits of the
corporation are NOT open to inspection,
EXCEPT
under
the
following
circumstances:

(1) Upon written consent

of
concerned
depositor (presumably
the
corporation);
(2) In cases of impeachment;
(3) Upon court order in cases of
bribery or dereliction of duty of a public
official; and
(4) In cases where the
money deposited / invested
is the subject matter
of litigation
(5) Upon order of a
competent court in
cases of unexplained
wealth
under RA 3019 or
the Anti-Graft and Corrupt
Practices Act

(6)

Upon

order

of

the

Who May Exercise Right

Ombudsman

Extent and Limitations on Right

1.

Every director, trustee, stockholder, member may

exercise right personally or through an agent who can better
understand and interpret records (impartial source, expert
accountant, lawyer).

The exercise of this right is subject to reasonable

limitations similar to a citizens exercise of the right to
information. Otherwise, the corp. might be impaired, its
efficiency in operations hindered, to the prejudice of
SHs.

2.

Such limitations to be valid must be reasonable and not

inconsistent with law ( Sec. 36[5] and 46).

3.

A corp. may regulate time and manner of inspection

but provisions in its by-law which gives directors
absolute discretion to allow or disallow inspection are
prohibited.
Limitations as to time and place:

Exercise of right only at REASONABLE

HOURS on BUSINESS DAYS.

Such business days should be

THROUGHOUT THE YEAR. BoD cannot
limit such to merely a few days within the
year. (Pardo v. Hercules Lumber)

4.

By-laws cannot prescribe that authority of president

must first be obtained.

5.

Inspection should be made in such a manner as not to

impede the efficient operations

6.

Place of inspection: Principal office of the corp. SH

cannot demand that such records be taken out of the
principal office.

7.

As to purpose:

As to VTA: both voting trustee and transferor

SH of parent corp. over subsidiary:
If the two are operated as SEPARATE
: NO right of inspection

entities

If they are ONE AND THE SAME with respect

to management and control, and inspection
is
demanded

due

to

mismanagement

subsidiary

by the parents directors who are also

directors
of
: With right of inspection

Remedies available if Inspection

Refused

WHAT REMEDIES ARE AVAILABLE IF

INSPECTION IS REFUSED BY THE
CORPORATION?
(1) Writ of mandamus.

BURDEN OF PROOF: lies with corp. which

should show that purpose was illegal.

To be legitimate, the purpose for inspection

must be GERMANE to the INTEREST of the
stockholder as such, and it is not contrary to
the interests of the corporation.

NOTE:
Writ shall not issue where
it is shown that the petitioners purpose
is
improper and inimical
to the interests of the corporation.

the

If the subsidiary is wholly-owned by the parent,

and its books & records are in the possession
and
control
of
the
parent
corporation
: With right of inspection
(Gokongwei v. SEC)

PRESUMPTION: that SHs purpose is

proper. Corp. cannot refuse on the mere
belief that his motive is improper (sec 74).

Legitimate:
inquiry about failure
to declare dividends
Not legitimate:
for mere satisfaction
or speculation.

of

subsidiary

Writ should be directed

against the corporation. The secretary
and
the president may
be joined as party defendants.
(2) Injunction

Belief in good faith that a corp. is being

mismanaged may be given due course even
if later, this is proven unfounded.

(3) Action for damages against the

officer or agent refusing inspection. Also,
penal
sanctions such as fines and / or
imprisonment (Sec. 74; Sec. 144)

If motive can be clearly shown as inimical to

corp., right may be denied.

What defenses are available to the

officer or agent?
(1)

The person demanding

has improperly used any

(2)
(3)

information
secured
through
any
prior
examination; or
Was not acting in good
faith; or
The demand was not for a
legitimate purpose.

PARDO V. HERCULES LUMBER (47 Phil. 965;

1924)
BOD/Officers may deny inspection when sought
at unusual hours or under improper conditions. But they
cannot deprive the stockholders of the right altogether. In
CAB, by-law provided that the inspection be made
available only for a few days in a year, chosen by the
directors. This is void.

Nature and Basis of derivative suit

Suits of stockholders/ members based on wrongful or
fraudulent acts of directors or other persons:
a.

Individual suits - wrong done to stockholder

personally and not to other stockholders
(ex. When right of inspection is
denied to a stockholder)

b.

Class suit - wrong done to a group of

stockholders
(ex. Preferred stockholders' rights
are violated)

c.

Derivative suit - wrong done to the corporation

itself

Cause of action belongs to the

corp. and not the stockholder

But since the directors who are

charged with mismanagement
are also the ones who will
decide WON the corp. will sue,
the corp. may be left without
redress; thus, the stockholder is
given the right to sue on behalf
of the corporation.

An effective remedy of the

minority against the abuses of
management

An individual stockholder is
permitted to bring a derivative
suit to protect or vindicate
corporate rights, whenever the
officials of the corp. refuse to
sue or are the ones to be sued
or hold the control of the corp.

Suing stockholder is merely the

nominal party and the corp. is
actually the party in interest.

A SH can only bring suit for an

act that took place when he was
a
stockholder;
not
before. (Bitong v. CA, 292
SCRA 503)

GONZALES V. PNB (122 SCRA 490; 1983)

G acquired 1 share of stock purposely to be able
to exercise right to inspection with respect to transactions
before he became a SH. G not in good faith. His obvious
purpose was to arm himself with materials which he can
use against the bank for acts done by the latter when G
was a total stranger to the same. Right not available here.

VERAGUTH V. ISABELA SUGAR CO. (57 Phil.

266; 1932)
There was nothing improper in the secretarys
refusal since the minutes of these prior meetings have to
be verified, confirmed and signed by the directors then
present. Hence, Veraguth has to wait until after the next
meeting.

GOKONGWEI V. SEC (April 11, 1979)

The law takes from the SH the burden of showing
impropriety of purpose and places upon the corporation
the burden of showing impropriety of purpose and
motive.
Considering that the foreign subsidiary is wholly
owned by SMC and therefore under its control, it would
be more in accord with equity, good faith and fair dealing
to construe the statutory right of Gokongwei as petitioner
as SH to inspect the books and records of such wholly
subsidiary which are in SMCs possession and control.

Requirements Relating to Derivative

Suits

WHAT ARE THE LEGAL PRINCIPLES

CONCERNING DERIVATIVE SUITS?
1)

Stockholder/ member must have

exhausted all remedies within the
corp.

2)

Stockholder/ member must be a

stockholder/ member at the time of

DERIVATIVE SUITS

acts or transactions complained of or

in case of a stockholder, the shares
must have devolved upon him since
by operation of law, unless such
transaction or act continues and is
injurious to the stockholder.
3)

4)

Any benefit recovered by the

stockholder as a result of bringing
derivative suit must be accounted for
to the corp. who is the real party in
interest.
If suit is successful, plaintiff entitled
to reimbursement from corp. for
reasonable expenses including
attorneys' fees.

EVANGELISTA VS. SANTOS (86 Phil. 387; 1950)

The injury complained of is against the
corporation and thus the action properly belongs to the
corporation rather than the stockholders. It is a derivative
suit brought by the stockholder as a nominal party
plaintiff for the benefit of the corporation, which is the
real party in interest. In this case, plaintiffs brought the
suit not for the benefit of the corporation's interest, but for
their own. Plaintiffs here asked that the defendant make
good the losses occasioned by his mismanagement and to
pay them the value of their respective participation in the
corporate assets on the basis of their respective
holdings. Petition dismissed for venue improperly laid.

REPUBLIC BANK VS. CUADERNO (19 SCRA 671;

1967)
In a derivative suit, the corporation is the real
party in interest, and the stockholder merely a nominal
party. Normally, it is the corp. through the board of
directors which should bring the suit. But as in this case,
the members of the board of directors of the bank were
the nominees and creatures of respondent Roman and
thus, any demand for an intra-corporate remedy would be
futile, the stockholder is permitted to bring a derivative
suit.
Should the corporation be made a party? The
English practice is to make the corp. a party plaintiff while
the US practice is to make it a party defendant. What is
important though is that the corporation should be made a
party in order to make the court's ruling binding upon it
and thus bar any future re-litigation of the
issues. Misjoinder of parties is not a ground to dismiss
the action.

REYES VS. TAN (3 SCRA 198; 1961)

The importation of textiles instead of raw

materials, as well as the failure of the board of directors
to take actions against those directly responsible for the
misuse of the dollar allocations constitute fraud, or
consent thereto on the part of the directors. Therefore, a
breach of trust was committed which justified the suit by
a minority stockholder of the corporation.
The claim that plaintiff Justiniani did not take
steps to remedy the illegal importation for a period of two
years is also without merit. During that period of time
plaintiff had the right to assume and expect that the
directors would remedy the anomalous situation of the
corporation brought about by their wrong-doing. Only
after such period of time had elapsed could plaintiff
conclude that the directors were remiss in their duty to
protect the corporation property and business.

BITONG v. CA (292 SCRA 503)

The power to sue and be sued in any court by

a corporation even as a stockholder is lodged
in the Board of Directors that exercises its
corporate powers and not in the president or
officer thereof.
It was JAKA's Board of Directors,
not Senator Enrile, which had the
power to grant Bitong authority to
institute a derivative suit for and in
its behalf.

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 fideownership
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 action for the benefit of the
corporation.

FINANCING THE CORPORATION

Sources of Financing
WHERE CAN CAPITAL TO FINANCE THE
CORPORATION BE SOURCED?

1)

2)
3)

h
entit
les
the
own
er of
suc
h
stoc
ks
to
an
equ
al
pro
rata
divis
ion
of
profi
ts

s the
holde
r to
some
prefer
ence
either
in the
divide
nds
or
distrib
ution
of
asset
s
upon
liquid
ation,
or in
both

VALU
E

Dep
end
s if
its
par
or
no
par

State
d par
value

Fixe
d in
the
AOI
,
and
indi
cate
d in
the
stoc
k
certi
ficat
e.
May
be
sold
at a
valu
e
high
er,
but
not
low
er,
tha
n
that
fixe
d in
the
AOI
.

Value
not
fixed
in the
AOI,
and
theref
ore
not
indicat
ed in
the
stock
certific
ate. P
rice
may
be set
by
BOD,
SHs
or
fixed
in the
AOI
eventu
ally.

VOTI
NG
RIGH
TS

Usu
ally
vest
ed
with
the
excl
usiv
e
right

Can
vote
only
under
certai
n
circu
msta
nces

Dep
end
s if
its
com
mo
n or
pref
erre
d.

Depen
ds if
its
comm
on or
preferr
ed.

Contributions (stockholders); also

known as stockholder equity/equity
investment
Loans or advances (creditors)
Profits (corporation itself)

Capital Structure
WHAT
IS
MEANT
STRUCTURE?

BY

CAPITAL

This refers to the aggregate of the

securities -- instruments which represent
relatively long-term investment -- issued
by the corporation. There are basically
2 kinds of securities: shares of
stock and debt securities.

have
been
issue
d
and
fully
paid
but
subs
eque
ntly
reac
quire
d by
the
issui
ng
corp
orati
on by
lawfu
l
mea
ns.

by the
corpor
ation
that
may
be
taken
up by
the
corpor
ation
upon
expira
tion of
a
fixed
period
.
r
egardl
ess of
the
existe
nce of
unrest
ricted
retain
ed
earnin
gs

No
votin
g
rights
for
as
long
as
such
stock

Usuall
y
denie
d
voting
rights.

Capital and Capital Stock Distinguished

CAPITAL
STOCK

CAPITAL

DEFINITION

the amount
fixed, usually
by the
corporate
charter, to be
subscribed
and paid in or
secured to be
paid in by the
SHS of a
corporation,
and upon
which the
corporation is
to conduct its
operation

actual property of
the corporation,
including cash,
real, and personal
property. Includes
all corporate
assets, less any
loss which may
have been incurred
in the business.

CONSTANCY

CONSTANT,
unless
amended by
the AOI

FLUCTUATING

Shares of Stock: Kinds

DEFI
NITIO
N

CO
MM
ON

PREF
ERR
ED

Stoc
k
whic

Stock
which
entitle

PA
R

NO
PAR*

TRE
ASU
RY

REDE
EMA
BLE

FOU
NDE
RS

Shar
es
that

Share
s
issued

Spec
ial
shar

es
whos
e
exclu
sive
rights
and
privil
eges
are
deter
mine
d by
the
AOI.

to
vote

PREF
EREN
CE
UPO
N
LIQUI
DATI
ON

No
adv
anta
ge,
prior
ity,
or
pref
eren
ce
over
any
othe
r SH
in
the
sam
e
clas
s

rema
ins in
the
treas
ury
(Sec.
57)

subscription is made until such time

that the subscription is fully paid.

GARCIA V. LIM CHU SING (59 Phil. 562;

1934)

First
crack
at
divide
nds /
profit
s/
distrib
ution
of
asset
s

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.
The capital stock of a corporation is a trust fund
to be used more particularly for the security of the
creditors of the corporation who presumably deal with it
on the credit of its capital.

Pre-incorporation subscription

NOTE: Only preferred and redeemable shares may be deprived of the

right to vote. (Sec. 6, Corporation Code)
EXCEPTION: As otherwise provided in the Corporation
Code.

RULE: When a group of persons sign a subscription contract,

they are deemed not only to make a continuing offer to the
corporation, but also to have contracted with each other as
well. Thus, no one may revoke the contract even prior to
incorporation without the consent of all
the others.

* No-par value shares may not be issued by the following

entities: banks, trust companies, insurance companies, public utilities,
building & loan association (Sec. 6)

WHEN IS A PRE-INCORPORATION
SUBSCRIPTION IRREVOCABLE?
1)

Nature of Subscription Contract

WHAT IS A SUBSCRIPTION CONTRACT?

For a period of at least 6 months

from the date of subscription;

EXCEPTIONS:
(1) unless all of
the other subscribers consent to
the
revo
cation; or

It is any contract for the acquisition of

unissued stock in an existing corporation or a
corporation still to be formed. This is
notwithstanding the fact that the parties refer
to it as a purchase or some other
contract. (Sec. 60)

(2) unless the

incorporation of said corporation fails
to
materia
lize within the said period or within a
longer
period
as
may be
stipulated in the contract of subscription

WHAT
IS
THE
NATURE
SUBSCRIPTION CONTRACT?

2) After the AOI have been submitted to

the SEC (Sec. 61)

OF

Subscriptions constitute a fund to

which the creditors have a right to
look for satisfaction of their claims.
The assignee in insolvency can
maintain an action upon any unpaid
stock subscription in order to realize
assets for the payment of its debts.

A
subscription
contract
INDIVISIBLE (Sec. 64).

A subscription contract subsists as a

liability from the time that the

is

UTAH HOTEL CO V. MADSEN (43 Utah 285,

134 Pac. 557; 1913)
Sec 332 in express terms confers powers upon the
stockholders to regulate the mode of making
subscriptions to its capital stock and calling in the same
by-laws or by express contract.
Since it may be done by express contract, this shows that
it was intended that a contract to that effect may be
entered into even before the corporation is organized, and

the contract agreement is enforced if the corporation is in

fact organized.

WALLACE V. ECLIPSE POCAHONTAS

COAL CO (98 S.E. 293; 1919)
One who has paid his subscription to the capital
stock of the corporation may compel the issuance of
proper certificates therefor.

Post-incorporation subscription
NOTE:
Under the Corporation Code, there is no longer
any distinction between a
subscription and a purchase. Thus, a
subscriber is liable to pay for the shares even
if the corporation has become insolvent.

WHAT IS THE EXTENT OF THE PREEMPTIVE RIGHT?

All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to
all issues or dispositions of shares of any
class, in proportion to their respective
shareholdings.
Exception: When such right is denied by
the AOI or an amendment thereto.
LIMITATIONS: The pre-emptive right does
not extend to: (Sec. 39)
1)

Initial Public Offerings (IPOs);

2)

Issuance of shares in exchange

for
property
needed
for
corporate purposes, including
cases wherein an absorbing
corporation issues new stocks
to the SHs in pursuance to the
merger agreement (Sec. 39)
Why?
(a) Because it is
beneficial for the corporation to
save its
cash;
(b) A swap is more
expedient than determining the
monetary
equivalent of the
property.

The Preemptive Right to Shares

WHAT IS THE PRE-EMPTIVE RIGHT?
It is the option privilege of an existing
stockholder
to
subscribe
to
a
proportionate
part
of
shares
subsequently issued by the corporation,
before the same can be disposed of in
favor others.
WHY A PRE-EMPTIVE RIGHT?
To protect existing stockholder
equity. If the right is not recognized, the
SHs interest in the corporation will be
diluted by the subsequent issuance of
shares.

Basis of Right; Common Law Rule

Under the prevailing view in common law, the
preemptive right is limited to shares issued in pursuance of an
increase in the authorized capital stock and does not apply to
additional issues of originally authorized shares which form part
of the existing capital stock.
This common law principle which was generally
understood to be applicable in this jurisdiction has now to give
way to the express provisions of the Corporation Code on the
matter.

Extent and Limitations of Preemptive Right

under the Code

3)

Issuance of shares in payment

of a previously contracted debt
(Sec. 39)

Why? (a) The obligation is

extinguished outright;
(b) Corporation does not
have to shell out money to fulfill
its
obligations;
(c) Money that would
have otherwise been used for
interest
payments can be
channelled
to
more
productive
corporate activities.
Note: In Nos. (2) and (3), such
acts require approval of 2/3 of the OCS
or
2/3 of total members.

In Close Corporations
In close corporations, the preemptive rights extends to
ALL stock to be issued, including re-issuance of treasury
shares, EXCEPT if provided otherwise by the AOI. (Sec.
102). Note that the limitations in Sec. 39 do not apply.

Waiver of Preemptive Right

The waiver of the preemptive right must appear in the

Articles of Incorporation or an amendment thereto in order to be
binding on ALL stockholders, particularly future stockholders.
(Sec. 39)
If it appears merely in a waiver agreement and NOT in
the AOI, and was unanimously agreed to by all existing
stockholders:
The existing stockholders cannot later
complain since they are all bound to their
private agreement.
However, future stockholders will NOT be
bound to such an agreement.
Any stockholder who has not exercised his preemptive
right within a reasonable time will be deemed to have waived it.

When the issue is in breach of trust

The issue of shares may still be objectionable if the
Directors have acted in breach of trust and their primary purpose
is to perpetuate or shift control of the corporation, or to freeze
out the minority interest.

Remedies when right violated/denied

WHAT ARE THE REMEDIES WHEN THE
PRE-EMPTIVE RIGHT IS UNLAWFULLY
DENIED?
(1) Injunction;
(2) Mandamus;
(3) Cancellation of the shares
(NOTE: but only if no innocent 3rd
parties are
prejudiced)
(4) In certain cases, a derivative suit

when the privilege can be exercised consistently with the

object which the disposition of the additional stock is
legally designed to accomplish. In the present case, every
SH of the bank, for each of the shares, was to receive 1
1/2 shares of the stock co. (share in exchange for
property). It would not be feasible to consummate a
transfer based upon such consideration if the preemptive
right were to be held enforceable with respect to every
new issue of stock regardless of the object of the
disposition.

FULLER V. KROGH (113 N.W. 2d 25; 1962)

Preemptive right is not to be denied when the
property is to be taken as consideration for the stock
except in those peculiar circumstances when the
corporation has great need for the particular property, and
the issuance of stock is the only practical and feasible
method by which the corp. can acquire it for the best
interest of the SHs. Ground: practical necessity. [cf. Sec.
39]

DUNLAY V. M. GARAGE AND REPAIR (170

N.E. 917; 1930)
If the issue of shares is reasonably necessary to
raise money to be issued in the business of the corporation
rather than the expansion of such business beyond
original limits, the original SHs have no right to count on
obtaining and keeping their proportional part of original
stock.
But even if preemptive right does not exist, the
issue of shares may still be objectionable if the directors
have acted in breach of trust and their primary purpose is
to perpetuate or shift control of the corporation, or to
freeze out minority interest.

STOKES V. CONTINENTAL TRUST CO. (78

N.E. 1090; 1906)

ROSS TRANSPORT V. CROTHERS (45 A.

2d 267; 1946)

The directors were under the legal obligation to

give the SH-plaintiff an opportunity to purchase at the
price fixed before they could sell his property to a third
party. By selling to strangers without first offering to sell
to him, the defendant wrongfully deprived him of his
property and is liable for such damages as he actually
sustained.

The doctrine of preemptive right is not affected

by the identity of the purchasers. What it is concerned
with is who did not get it. But when officers and directors
sell to themselves and thereby gain an advantage, both in
value and in voting power, another situation arises. In the
case at bar, the directors were not able to prove good faith
in the purchase and equity of transaction, since the corp.
was a financial success. There was constructive fraud
upon the other SHs.

THOM V. BALTIMORE TRUST (148 Atl. 234;

1930)
Independently of the charters, the SHs of a
corporation have a preferential right to purchase new
issues of shares, to the proportional extent of their
respective interests in the capital stock then outstanding,

Debt Securities
Borrowings

Borrowings are usually represented

by promissory notes, bonds or debentures.
Oftentimes, a financial institution will
be willing to lend large amounts to private
corporations only on the condition that such
institution will have some representation on
the Board of Directors. The role of such
representative is to see to it that his
institution's investment is protected from
mismanagement or unfavorable corporate
policies.

Bonds and Debentures

BONDS:
secured by a mortgage
or pledge of corporate property

must be registered
with the SEC, as
provided by Sec. 38 of
the
Corporation
Code
DEBENTURES: issued on the general
credit of the corporation

MERRITT-CHAPMAN & SCOTT CORP. VS.

NEW YORK TRUST CO. (184 F. 2d 954; 1950)
If the corporation is allowed to declare stock
dividends without taking account of the warrant holders
(who have not yet exercised their warrant), the percentage
of interest in the common stock capital of the corporation
which the warrant holders would acquire, should they
choose to do so, could be substantially reduced/diluted.
Thus, the corporation is wrong in contending that a
warrant holder must first exercise his warrant before they
may be issued stock dividend.

Hybrid securities
Because preferred shares and bonds are created by
contract, it is possible to create stock which approximates the
characteristics of debt securities. Hybrid securities, as the name
implies, therefore combine the features of preferred shares and
bonds.
Determining the true nature of the security is crucial for
tax purposes. The American courts use the following criteria:

(1) Is the corporation liable to pay back the investor at

not

secured by any
collateral; THER
EFORE, are not
bonded indebted
ness in the true
sense,
and
stockholder
approval is NOT
required
(although it would
generally be a
good
idea
to
obtain it)

Convertible securities; stock options

NOTE: Under the SEC rules, stock
option must first be approved by the
SEC.
Also, if the stock option is
granted to nonstockholders, or
to directors, officers, or
managing groups, there
must first be SH approval
of 2/3 of the OCS before
the matter is submitted to
the SEC for approval.
Of course it goes
without saying that the
corporation must set aside
enough of the junior
securities in case the
holders of the option
decide to exercise such
option.

a fixed maturity date?

(2) Is interest payable unconditionally at definite

intervals, or is it dependent on earnings?

(3) Does the security rank at least equally with the

claims of other creditors, or is it subordinate to
them?

WHAT IS THE NATURE OF THE SECURITY

AND THE PAYMENT MADE?
BONDS

STOCK

WHAT IS
PAID?

Interest

Dividends

TO WHOM
PAID?

Creditorinvestor

Stockholder

WHEN PAID?

Whether the
corporation
has profits
or not

Only if there
are profits

NATURE

Expense

Not an
expense

TAXABILITY

Can be
deducted
for tax
purposes

CANNOT be
deducted

MATURITY
DATE?

Yes

No

RANK ON
DISSOLUTION

Ranked
together
with other

Superior to
stockholders,
inferior to

corporate
creditors

corporate
creditors

(2) creditor-bondholder
(3) trustee: representative

of

all

the

bondholders

JOHN KELLY VS. CIR TALBOT MILLS VS.

CIR (326 U.S. 521; 1946)
In the Kelly case, the annual payments made were
interest on indebtedness (therefore, a bond is held)
because there were sales of the debentures as well as
exchanges of preferred stock for debentures, a promise to
pay a certain annual amount if earned, a priority for the
debentures over common stock and a definite maturity
date in the reasonable future.
In the Talbot Mills case, the annual payments
made were dividends and not interest (therefore, shares
are held), because of the presence of fluctuating annual
payments with a 2% minimum, and the limitation of the
issue of notes to stockholders in exchange only for stock.
Besides, it is the Tax Court which has final determination
of all tax issues which are not clearly delineated by law.

JORDAN CO. VS. ALLEN (85 F. Supp. 437;

1949)
The payments made, regardless of what they are
called, are in fact dividends (on stocks) because of the
absence of a maturity date and the right to enforce
payment of the principal sum by legal action, among other
factors.
The following criteria should be used in
determining whether a payment is for interest or
dividends:
(1) maturity date and the right to enforce
collection;
(2) treatment by the parties;
(3) rank on dissolution;
(4) uniform rate of interest payable or
income payable only out of profits;
(5) participation in management and the
right to vote.
It must be noted that these criteria are not of equal
importance and cannot be relied upon individually. E.g.
treatment accorded the issuance by the parties cannot be
sufficient as this would allow taxpayers to avoid taxes by
merely naming payments as interest.

The trust indenture

Here, the bond issue usually involves 3 parties:

(1) debtor-corporation

ALADDIN HOTEL CO. VS. BLOOM (200 F.

2d 627; 1953)
The rights of bondholders are to be determined by
their contract and courts will not make or remake a
contract merely because one of the parties may become
dissatisfied with its provisions. If the contract is legal, the
courts will interpret and enforce it.
In the deed of trust and bonds in this case, there
are provisions empowering bondholders of 2/3 of the
principal amount or more, by agreement with the
company, to modify and extend the date of payment of the
bonds provided such extension affected all bonds alike.
When this was done, the bondholders only followed such
provisions in good faith. The company benefited because
of such move, and the bondholders were not necessarily
prejudiced, as defendants Joneses in this case were
themselves owners of 72% of the bond issue.

CONSIDERATION FOR ISSUANCE OF

SHARES
Form of Consideration
WHAT FORMS OF CONSIDERATION
ARE ACCEPTABLE FOR ISSUANCE OF
SHARES?

cash;
property actually received by
the corporation:
must be
necessary or convenient for its
use and lawful purposes;

labor performed for or services

actually rendered to the
corporation
(NOTE: Future services are
NOT acceptable!);

previously
incurred
indebtedness
by
the
corporation;

amounts
transferred
from
unrestricted retained earnings
to stated capital;

outstanding shares exchange

for stocks in the event of
reclassification or conversion

WHAT FORMS ARE UNACCEPTABLE?

future services
promissory notes
value less than the stated par
value

HOW IS THE ISSUED PRICE OF NO-PAR

SHARES FIXED?
It may be fixed as follows:

is less than the par value

of the shares; and
(4)

In the guise of stock dividends

representing surplus profits or
an increase in the value of
property, when there are no
sufficient profits or sufficient
increases in value to justify it.

WHAT IS THE LIABILITY OF DIRECTORS

FOR THE ISSUANCE OF WATERED
STOCK?

(1) In the AOI; or

(2) By the BOD pursuant to
authority conferred upon it by
the AOI or the by-laws; or
(3) In the absence of the foregoing,
by the SHs representing at least
a majority of the outstanding
capital stock at a meeting duly
called for the purpose (Sec. 62)

IF THE CONSIDERATION FOR SHARES IS

OTHER THAN CASH, HOW IS THE VALUE
THEREOF DETERMINED?
It is initially determined by the
incorporators or the Board of Directors,
subject to approval by the SEC. (Sec. 62)

Directors and officers who

consented to the issuance of watered
stocks are solidarily liable with the holder
of such stocks to the corp. and its
creditors for the difference between the
fair value received at the time of the
issuance and the par or issued value of
the share.
The liability will be to all creditors,
whether they became such prior or
subsequent to the issuance of the
watered stock. Reliance by the creditors
on the alleged valuation of corporate
capital is immaterial and fraud is not
made an element of liability.
NOTE: In the Philippines, it is the statutory
obligation theory that is controlling
(cf. Sec. 65).

Watered Stocks
WHAT IS WATERED STOCK?
Stocks issued as fully paid up in
consideration of property at an
overvaluation.
Oftentimes,
the
consideration received is less than the
par value of the share.
NOTE: No-par shares CAN be
watered stock: when they are issued
for less
than their issued value as
fixed by the corp. in accordance with
law.

WHAT ARE THE WAYS BY WHICH

WATERED STOCK CAN BE ISSUED?
(1)

Gratuitously,
under
an
agreement that nothing shall
be paid to the corporation;

(2)

Upon payment of less than its

par value in money or for cost
at a discount;

(3)

Upon payment with property,

labor or services, whose value

PRIVATE TRIPLEX SHOE V. RICE &

HUTCHINSTC \L 1 "TRIPLEX SHOE V.
RICE & HUTCHINS" (72 A.L.R. 932; 1930)
In this case, the stocks issued to the Dillman faction
were no par value shares, the consideration for which were
never fixed as required by law. Hence, their issuance was
void. Moreover, the stocks were issued to the Dillmans for
services rendered and to be rendered. Future services are not
lawful consideration for the issuance of stock.

PRIVATE MCCARTY V. LANGDEAUTC \L 1

"MCCARTY V. LANGDEAU" (337 S.W.
2d 407; 1960)
McCarty agreed to purchase shares of a corp. with a
downpayment of only $20, with the balance due to be
evidenced by a note. McCarty failed to pay a big portion of
the balance. The Court affirmed the judgement against
McCarty for the balance due on the contract.
McCarty contends that the contract is void. But the
law only prohibits the issuance of stock. If it is understood

that the stock will not be issued to the subscriber until the
note is paid, the contract is valid and not illegal.
If a security such as a note, which is not a valid
consideration, is accepted, the law does not say that such
note, or the stock issued for it, shall be void. What is void
by express provision of law is the fictitious increase of stock
or indebtedness. The law was designed for the protection of
the corporation and its creditors. It emphasizes the
stockholders obligations to make full and lawful payment
in accord with its mandate, rather than furnish him with a
defense when he has failed in that obligation. Its purpose is
to give integrity to the corporations capital. None of these
objects would be promoted by declaring a note given by a
subscriber for stock uncollectible in the hands of a bona fide
stockholder.

CONDITION FOR ISSUANCE:

amount of subscription price plus

interest, if any is
due (Sec. 64)
CERTIFICATION THAT: person named therein is a
holder or owner of a
stated number of
shares in the corporation.
INDICATES:

1. kind of shares
2. date of issuance
3. par value, if par value

shares
BEARS:
proper officers, usually president

Signatures of

This case involves an action to collect unpaid

balances on par value of shares. It was held that innocent
transferees of watered stock cannot be held to answer for
the deficiency of the stocks even at the suit of the creditor
of the company. The creditors remedy is against the
original owner of the watered stock.

PRIVATE BING CROSBY V. EATONTC \L 1

"BING CROSBY V. EATON" (297 P. 2d 5;
1956)
A subscriber to shares who pays only part of what
he agreed to pay is liable to creditors for the balance.
Holders of watered stock are generally held liable to
the corporations creditors for the difference between the
par value of the stock and the amount paid in.
Under the misrepresentation theory, the creditors
who rely on the misrepresentation of the corporations
capital stock are entitled to recover the water from holders
of the watered stock. Reliance of creditors on the
misrepresentation is material.
However, under the
statutory obligation theory, reliance of creditors on the
capital stock of the corporation is irrelevant. (It must be
noted that here in the Philippines, it is the statutory obligation
theory which is prevailing.)

Issuance of Certificate
Certificate of stock

the

or secretary, as
well as the corporate seal
AMOUNT ISSUED:
number of shares authorized in

RHODE V. DOCK-HOP CO. (12 A.L.R. 437;

1920)

payment of full

For no more than the

articles
incorporation;
would be void

of
excess

Nature and function of a certificate of stock

A certificate of stock is not necessary
to render one a stockholder in a
corporation. Nevertheless, a certificate of
stock is the paper representation 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 shares
represented thereby, but is not in law the
equivalent of such ownership. It expresses
the contract between the corporation and the
SH, but it is not essential to the existence of a
share in stock or the creation of the relation of
shareholder to the corporation. (Tan v. SEC,
206 SCRA 740)

Requisites for valid issuance of formal

certificate of stock (Sec. 63)
(1) The certificates must be signed by the
President / Vice-President, countersigned by
the secretary or assistant secretary, and
sealed with the seal of the corporation.
A mere typewritten statement advising a
SH of the extent of his ownership in a
corporation without qualification and/or
authentication cannot be considered as a
formal certificate of stock. (Bitong v. CA,
292 SCRA 503)
(2) Delivery of the certificate

 There is no issuance of a stock

certificate where it is never detached from
the stock books although blanks therein are
properly filled up if the person whose name
is inserted therein has no control over the
books of the company. (Bitong v. CA, 292
SCRA 503)
(3) Par value of par value shares / Full
subscription of no par value shares must be
fully paid.
(4) Surrender of the original certificate if the
person requesting the issuance of a
certificate is a transferee from a SH.

BITONG V. CA (292 SCRA 503)

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 since an
estoppel cannot operate to create stock which under the
law cannot have existence.

Unpaid Subscriptions

Unpaid subscriptions are not due and

payable until a call is made by the
corporation for payment. (Sec. 67)

An obligation arising from non-payment

of stock subscriptions to a corporation
cannot be offset against a money claim
of
an
employee
against
the
employer. (Apodaca v. NLRC, 172
SCRA 442)

Interest on all unpaid subscriptions shall

be at the rate of interest fixed in the bylaws. If there is none, it shall be the legal
rate. (Sec. 66)

How Payment of Shares Enforced

HOW ARE UNPAID SUBSCRIPTIONS
COLLECTED?
(1) Call for payment as necessary, i.e. the
BOD declares the unpaid subscriptions
due and payable (Sec. 67);

(2) Delinquency sale (Sec. 68; to be

discussed in the next section)
(3) Court action for collection (Sec. 70)

VELASCO VS POIZAT (37 Phil. 802; 1918)

Poizat subscribed to 20 shares but only paid for
5. Board made a call for payment through a
resolution. Poizat refused to pay. Corporation became
insolvent. Assignee in insolvency sued Poizat whose
defense was that the call was invalid for lack of
publication.
It was held that the Board call became immaterial
in insolvency which automatically causes all unpaid
subscriptions to become due and demandable.

LINGAYEN GULF ELECTRIC VS

BALTAZAR (93 Phil. 404; 1953)
Companys president subscribed to shares and
paid partially. The Board made a call for payment
through a resolution. However, the president refused to
pay, prompting the corporation to sue. The defense was
that the call was invalid for lack of publication.
It was held that the call was void for lack of
publication required by law. Such publication is a
condition precedent for the filing of the action. The ruling
in Poizat does not apply since the company here is
solvent.

DA SILVA VS ABOITIZ (44 Phil. 755; 1923)

Da Silva subscribed to 650 shares and paid for
200. The company notified him that his shares will be
declared delinquent and sold in a public auction if he does
not pay the balance. Da Silva did not pay. The company
advertised a notice of delinquency sale. Da Silva sought
an injunction because the by-laws allegedly provide that
unpaid subscriptions will be paid from the dividends
allotted to stockholders.
The Court held that by-laws provide that unpaid
subscriptions
may
be
paid
from
such
dividends. Company has other remedies provided for by
law such as a delinquency sale or specific performance.

NATIONAL EXCHANGE VS DEXTER (51

Phil. 601; 1928)

Dexter subscribed to 300 shares. The

subscription contract provided that the shares will be paid
solely from the dividends. Company became
insolvent. Assignee in insolvency sued Dexter for the
balance. Dexter's defense was that under the contract,
payment would come from the dividends. Without
dividends, he cannot be obligated to pay.

attached and levied upon to satisfy his debt with China

Banking Corp. Fua Cun brought an action to have himself
declared to hold priority over the claim of China Bank, to
have the receipt for the shares delivered to him, and to be
awarded damages for wrongful attachment, on the ground
that he was owner of 250 shares by virtue of Chua Soco's
payment of half of the subscription price.

The Court held that the subscription contract was

void since it works a fraud on creditors who rely on the
theoretical capital of the company (subscribed
shares). Under the contract, this theoretical value will
never be realized since if there are no dividends,
stockholders will not be compelled to pay the balance of
their subscriptions.

The Court held that payment of half the

subscription price does not make the holder of stock the
owner of half the subscribed shares. Plaintiff's rights
consist in an equity in 500 shares and upon payment of
the unpaid portion of the subscription price he becomes
entitled to the issuance of certificate for the said 500
shares in his favor.

LUMANLAN VS CURA (59 Phil. 746; 1934)

BALTAZAR V. LINGAYEN GULF ELECTRIC

POWER (14 SCRA 522; 1965)

Lumanlan had unpaid subscriptions. Companys

receiver sued him for the balance and won. While the
case was on appeal, the company and Lumanlan entered
into a compromise whereby Lumanlan would directly pay
a creditor of the company. In exchange, the company
would forego whatever balance remained on the unpaid
subscription. Lumanlan agreed since he would be paying
less than his unpaid subscription. Afterwards, the
corporation still sued him for the balance because the
company still had unpaid creditors. Lumanlans defense
was the compromise agreement.
The Court held that the agreement cannot
prejudice creditors. The subscriptions constitute a fund to
which they have a right to look to for satisfaction of their
claims. Therefore, the corporation has a right to collect
all unpaid stock subscriptions and any other amounts
which may be due it, notwithstanding the compromise
agreement.

Rights and Obligations of Holders of

Unpaid but Non-delinquent Stock
WHAT
UNPAID SHARES?

ARE

THE

RIGHTS

OF

Holders of subscribed
shares not fully paid which are not
delinquent shall have all the rights of
a stockholder. (Sec. 72)

FUA CUN V. SUMMERS (44 Phil. 704; 1923)

Chua Soco bought 500 shares of China Banking
Corp. at par value of P100.00, paying the sum of
P25,000.00, 50% of the subscription price. Chua
mortgaged the said shares in favor of plaintiff Fua Cun to
secure a promissory note for the sum of P25,000.00. In
the meantime, Chua Soco's interest in the 500 shares were

Baltazar, et al. subscribed to a certain number of

shares of Lingayen Gulf Electric Power. They had made
only partial payment of the subscription but the
corporation issued them certificates corresponding to
shares covered by the partial payments. Corporation
wanted to deny voting rights to all subscribed shares until
total subscription is paid.
The Court held that shares of stock covered by
fully paid capital stock shares certificates are entitled to
vote. Corporation may choose to apply payments to
subscription either as: (a) full payment for corresponding
number of stock the par value of which is covered by such
payment; or (b) as payment pro-rata to each subscribed
share. The corporation chose the first option, and, having
done so, it cannot unilaterally nullify the certificates
issued.
Note: The Camposes are of the opinion that 64
of Corporation Code makes
the Lingayen Gulf inapplicable at
present.

NAVA V. PEERS MARKETING (74 SCRA 65;

1976)
Teofilo Co subscribed to 80 shares of Peers
Marketing Corp. at P100.00 a share for a total of
P8,000.00. He, however, paid only P2,000.00
corresponding to 20 shares or 25% of total subscription.
Nava bought 20 shares from Co and sought its transfer in
the books of the corporation. The corporation refused to
transfer said shares in its books.
It was held that the transfer is effective only
between Co and Nava and does not affect the corporation.
The Fua Cun ruling applies. Lingayen Gulf does not

apply because, unlike in Lingayen Gulf, no certificate of

stock was issued to Co.

Effect of delinquency

published once a week for 2

consecutive weeks in a
newspaper
of
general
circulation in the province or city
where the principal office of the
corporation is located.
(3) Sale at public auction

WHAT IS DELINQUENT STOCK? (Sec. 67)

Stock that remains unpaid 30 days
after the date specified in the
subscription contract or the date
stated in the call made by the Board.
WHAT
ARE
THE
DELINQUENCY?

EFFECTS

1.

The holder thereof loses all his

rights as a stockholder except
only the rights to dividends;

2.

Dividends will not be paid to the

stockholder but will be applied
to the unpaid balance of his
subscription plus costs and
expenses.
Also,
stock
dividends will be withheld until
full payment is made.

3.

OF

Such stockholder cannot vote at

the election of directors or at
any meeting on any matter
proper for stockholder action.

4.

Stockholder cannot be counted

as part of the required quorum.

5.

Stockholder cannot be voted for

as director of the corporation.

WHAT IS THE PROCEDURE FOR THE CONDUCT

OF A DELINQUENCY SALE? (Sec. 68)
(1) Issuance of Board resolution
The BOD issues a resolution
ordering the sale of delinquent
stock, specifically stating the
amount
due
on
each
subscription plus all accrued
interest, and the date, time and
place of the sale.
Note: The sale shall not be
less than 30 days nor more
than 60 days from the date
the
stocks
become
delinquent.
(2) Notice of sale and publication
Notice
of
the
date
of
delinquency sale and a copy of
the resolution is sent to every
delinquent stockholder either
personally or by registered
mail. The notice is likewise

If the delinquent stockholder

fails to pay the corporation on or
before the date specified for the
delinquency
sale,
the
delinquent stock is 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.
(4) Transfer and issuance of
certificate of stock
The stock so purchased is
transferred to such purchaser in
the books of the corporation
and a certificate of stock
covering such shares is issued.
If there is no bidder at the public
auction who offers to pay the full
amount of the balance on the
subscription and its attendant costs,
the corporation may bid for the
shares, 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
Code.
Note that this is subject to
the restrictions imposed by
the Code on corporations
as regards the acquisition
of their own shares. (See
the
discussion
under
Dividends and Purchase by
Corporation of its Own
Shares.)
CAN A DELINQUENCY
QUESTIONED? (Sec. 69)

SALE

BE

Yes. This is done by filing a

complaint within 6 months from the date of
sale, and paying or tendering to the party
holding the stock the sum for which said stock
was sold, with interest at the legal rate from
the date of sale. 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 these requirements

are complied with.

Lost or Destroyed Certificate

WHAT IS THE PROCEDURE FOR THE
ISSUANCE OF NEW CERTIFICATES TO
REPLACE THOSE STOLEN, LOST OR
DESTROYED? (Sec. 73)

(1) File an affidavit in triplicate with the

corporation. The affidavit must state
the following:
(a) Circumstances as to
how the certificates
were SLD;
(b) Number of shares
represented; and
(c) Serial number of the
certificate
(d) Name of issuing
corporation

(2) The

corporation
will
publish
notice after the affidavit and other
information and evidence have been
verified with the books of the corporation,
(Note
however
that
this
is not mandatory. The corporation has
the discretion to decide whether to
publish or not.)
The notice will contain the following
information:
(a) Name
of
the
corporation
(b) Name
of
the
registered owner;
(c) Serial number of the
certificate;
(d) Number of shares
represented by the
certificate;
(e) Effect of expiration of
1 year period from
publication and failure
to present contest
within that period.

(3) SLD certificate is removed from the

books if after one year from date of last
publication, no contest is presented.
NOTE: One-year period will not be
required if the applicant files a bond
good for
1 year.
(4) The corporation will then issue new
certificates.
However, if a contest has been
presented to the corporation, or if an

action is pending court regarding the

ownership of the SLD certificate, the
issuance of the new certificate shall be
suspended until the final decision by the
court.
NOTE: Should corporation issue
new
certificates
without
the
conditions being fulfilled and a third
party proves that he is the rightful
owner of the shares, the corporation
may be held liable to the latter EVEN
IF it acted in good faith.
NOTE: Even if the above procedure
was followed, if there was fraud, bad
faith, or negligence on the part of the
corporation and its officers, the
corporation may be held liable.

TRANSFER OF SHARES
HOW ARE
TRANSFERRED?

SHARES

OF

STOCK

By delivery of the certificate/s

indorsed by the owner or his attorney-in-fact
or other person legally authorized to make the
transfer. (Sec. 63)

WHAT ARE THE REQUISITES FOR A VALID

TRANSFER?
(1) Delivery;
(2) Indorsement by the owner or his
attorney-in-fact
or
other
persons legally authorized to
make the transfer
Indorsement of the
certificate of stock is a
mandatory requirement of
law for an effective transfer
of
a
certificate
of
stock. (Razon v. CA, 207
SCRA 234)
(3) Recording of the transfer in the
books of the corporation (so as
to make the transfer valid as
against third parties)
Until registration is
accomplished, the transfer,
though valid between the
parties, cannot be effective
as
against
the
corporation.
Thus, the
unrecorded
transferee
cannot enjoy the status of a
SH: he cannot vote nor be
voted for, and he will not be
entitled to dividends.

RURAL BANK OF SALINAS, INC. V. CA (210

SCRA 510)
A corporation, either by its board, its by-laws or
the act of its officers, cannot create restrictions in stock
transfers.

TAN V. SEC (206 SCRA 740)

A by-law which prohibits a transfer of stock
without the consent or approval of all the SHs or of the
President or Board of Directors is illegal as constituting
undue limitation on the right of ownership and in restraint
of trade (citing Fleisher v. Botica Nolasco Co., Inc., 47
Phil. 583)
While Sec. 47 (9) of the Corporation Code grants
to stock corporations the authority to determine in the bylaws 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 SHs to transfer their shares. To uphold the
cancellation of a stock certification as null and void for
lack of delivery of the cancelled "mother" certificate
whose endorsement was deliberately withheld by
petitioner, is to prescribe certain restrictions on the
transfer of stock in violation of the Corporation Code as
the only law governing transfer of stocks.

Is a bona fide transfer of the shares of corp., not

registered or noted on the books of the corp., valid as
against a subsequent lawful attachment of said shares,
regardless of whether the attaching creditor had actual
notice of said transfer or not.
NO, it is not valid. The transfer of the 75 shares
in the North Electric Co., Inc made by the defendant
Diosomito as to the defendant Barcelon was not valid as
to the plaintiff. Toribia Uson, on 18 Jan. 1932, the date
on which she obtained her attachment lien on said shares
of stock which still stood in the name of Diosomito on the
books of the corp. Sec. 35 says that No transfer, however,
is valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as
to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate, and the
number of shares transferred.
All transfers of shares not so entered are invalid
as to attaching or execution creditors of the assignors, as
well as to the corporation and to subsequent purchasers in
good faith, and indeed, as to all persons interested, except
the parties to such transfers.

No registration of transfer of unpaid

shares
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation. (Sec. 63)

Remedy if registration refused

USON V. DIOSOMITO (61 Phil. 535; 1935)
Toribia Uson filed a civil action for debt against
Vicente Dioisomito. Upon institution of said action, an
attachment was duly issued and D's property was levied
upon, including 75 shares of the North Electric Co., which
stood in his name on the books of the company when the
attachment was levied on 18 January 1932. The sheriff
sold said shares at a public auction with Uson being the
highest bidder. Jollye claims to be the owner of said
certificate of sock issued to him by the co. on 13 February
1933.
There is no dispute that Diosomito was the
original owner of said shares, which he sold to
Barcelon. However, Barcelon did not present these
certificates to the corporation for registration until 19
months after the delivery thereof by Barcelon, and 9
months after the attachment and levy on said shares. The
transfer to Jollye was made 5 months after the issuance of
a certificate of stock in Barcelon's name.

The proper remedy is a petition for a

writ of mandamus to compel the corporation
to record the transfer or issue a new
certificate in favor of the transferee, as the
case may be. The writ will be granted
provided it is shown that he transferee has no
other plain, speedy and adequate remedy and
that there are no unpaid claims against the
stocks whose transfer is sought to be
recorded. It must be noted that unless the
latter fact is alleged, mandamus will be denied
due to failure to state a cause of
action. (Campos & Campos)

RURAL BANK OF SALINAS, INC. V. CA (210

SCRA 510)
The right of a transferee/assignee to have stocks
transferred to his name is an inherent right flowing from
his ownership of the stocks. Thus, whenever a
corporation refuses to transfer and register stock,
mandamus will lie to compel the officers of the
corporation to transfer said stock in the books of the
corporation. This is because the corporation's obligation

to register is ministerial. (Note, however, that in such

cases, the person requesting the registration must be the
prima facie owner of the shares. Cf. Lim Tay v. CA, 293
SCRA 634)

must appear in the AOI and

in the by-laws, as well as in
the
certificate
of
stock.
Otherwise, the
restriction shall not be
binding on any purchaser
thereof in good faith.

TORRES V. CA (278 SCRA 793)

It is the corporate secretary's duty and obligation
to register valid transfers of stocks and if said corporate
officer refuses to comply, the transferor SH may
rightfully bring suit to compel performance.
Note: In this case, Judge Torres had no right to
enter the assignments (conveyances) of
his shares himself in the corporation's
stock and transfer book since he was not
corporate secretary.

RIVERA V. FLORENDO (144 SCRA 647; 1986)

Isamu Akasako, a Japanese national who was
allegedly the real owner of the shares of stock in the name
of one Aquilino Rivera, a registered SH of Fujuyama
Hotel and Restaurant, Inc., sold 2550 shares of the same
to Milagros Tsuchiya along with the assurance that
Tsuchiya would be made President of the corporation
after the purchase. Rivera assured her that he would sign
the stock certificates because Akasako was the real
owner. However, after the sale was consummated and the
consideration paid, Rivera refused to make the
indorsement unless he is also paid.
Tsuchiya, et al. attempted several times to have
the shares registered but were refused compliance by the
corp. They filed a special action for mandamus and
damages.
The Supreme Court held that mandamus was
improper in this case since the shares of stock were not
even indorsed by the registered owner who was
specifically resisting the registration thereof in the books
of the corporation. The rights of the parties would have
to be threshed out in an ordinary action.

Restrictions on Transfer; Close

Corporations

General rule: Shares of stock are freely

transferable, without restriction.
Exception:

In

close
corporations,
restrictions may be placed
on
the
transfer
of
shares. Such restrictions

The restrictions imposed shall

be no 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 this
option is not exercised
upon the expiration of the
period, the transferring
stockholder may sell his
shares
to
any
third
person. (Sec. 98)

WHAT IS THE EFFECT OF ISSUANCE OR

TRANSFER OF STOCK IN BREACH OF THE
RESTRICTIONS?
The corporation may, at its option,
refuse to register the transfer of stock in the
name
of
the
transferee.
(Sec.
99.4) However, this shall not be applicable if
the transfer, though otherwise contrary to
subsections (1), (2) and (3) of Sec. 99, has
been consented to by all the stockholders of
the close corporation, or if the close
corporation has amended its AOI in
accordance with Title XII of the Code.
For his part, the transferee may
rescind the transfer or recover from the
transferor under any applicable warranty,
whether express or implied.

UNAUTHORIZED TRANSFERS
Certificates indorsed in blank; when
quasi-negotiable
A possessor, even without authority,
may transfer good title to a bona fide
purchaser if:

the real owner endorses the

certificate in blank

the conveyance is for purposes

other than transfer

that relying on the stock

certificate, the purchaser believes
the possessor to be the owner

thereof or has authority to transfer

the same.
This proceeds from the theory of quasinegotiability which provides that in endorsing
a certificate in blank, the real owner clothes
the possessor with apparent authority, thus,
estopping him later from asserting his rights
over the shares of stock against a bona fide
purchaser.
Quasi-negotiability does not apply in
cases where the real owner:
a. did not entrust the
certificate to anyone; and
b. is not otherwise guilty
of estoppel
For example, in case the
transfer is made by a finder
or a thief.

Forged Transfers
A corporation does not incur any
misrepresentation in the issuance of a
certificate made pursuant to a forged transfer.
It can always recall from the person the
certificate issued, for cancellation.
In case where the certificate so
issued comes into the hands of a bona fide
purchaser for value from the original
purchaser, the corporation is estopped from
denying its liability. It must recognize both the
original and the new certificate. But if
recognition results to an over-issuance of
shares, only the original certificate may be
recognized, without prejudice to the right of
the bona fide purchaser to sue the corporation
for damages.

SANTAMARIA VS. HONGKONG (89 Phil. 780;

1951)
Santamaria secured her order for a number of
shares with Campos Co. with her stock certificate
representing her shares with Batangas Minerals. The said
certificate was originally issued in the name of her broker
and endorsed in blank by the latter. As Campos failed to
make good on the order, Santamaria demanded the return
of the certificate. However, she was informed that
Hongkong Bank had acquired possession of it inasmuch
as it was covered by the pledge made by Campos with the
bank. Thereafter, she instituted an action against
Hongkong Bank for the recovery of the certificate. Trial
court decided in her favor. The bank appealed.
Issues: 1) WON Santamaria was chargeable with
negligence which gave rise to the case

2) WON the Bank was obligated to inquire into

the ownership of the certificate
(1) The facts of the case justify the conclusion
that she was negligent. She delivered the certificate,
which was endorsed in blank, to Campos without having
taken any precaution. She did not ask the Batangas
Minerals to cancel it and instead, issue another in her
name. In failing to do so, she clothed Campos with
apparent title to the shares represented by the certificate.
By her misplaced confidence in Campos, she made
possible the wrong done. She was therefore estopped
from asserting title thereto for it is well-settled that
where one of the innocent parties must suffer by reason
of a wrongful or unauthorized act, the loss must fall on
the one who first trusted the wrongdoer.
(2) The subject certificate is what is known as a
street certificate. Upon its face, the holder is entitled to
demand its transfer into his name from the issuing
corporation. The bank is not obligated to look beyond the
certificate to ascertain the ownership of the stock. A
certificate of stock, endorsed in blank, is deemed quasinegotiable, and as such, the transferee thereof is justified
in believing that it belongs to the transferor.

DE LOS SANTOS VS. MCGRATH (96 Phil.

577; 1955)
De los Santos filed a claim with the Alien
Property Custodian for a number of shares of the Lepanto
corporation. He contended that said shares were bought
from one Campos and Hess, both of them dead. The
Philippine Alien Property Administrator rejected the
claim. He instituted the present action to establish title to
the aforementioned shares of stock.
The US Attorney General, the successor of the
Alien Property Administrator, opposed the action on the
ground that the said shares of stock were bought by one
Madrigal, in trust for the true owner, Matsui, and then
delivered to the latter indorsed in blank.
Issue: Had de los Santos in fact purchased the shares of
stock?
De los Santos sole evidence that he purchased
the said shares was his own unverified testimony. The
alleged vendors of the stocks who could have verified the
allegation, were already dead. Further, the receipt that
might have proven the sale, was said to have been lost in
a fire. On the other hand, it was shown that the shares of
stock were registered in the records of Lepanto in the
name of Madrigal, the trustee of Matsui; that Matsui was
subsequently given possession of the corresponding stock

certificates, though endorsed in blank; and, that Matsui

had neither sold, conveyed nor alienated these to
anybody.
It is the rule that if the owner of the certificate has
endorsed it in blank, and is stolen, no title is acquired by
an innocent purchaser of value. This is so because even
though a stock certificate is regarded as quasi-negotiable,
in the sense that it may be transferred by endorsement,
coupled with delivery, the holder thereof takes it without
prejudice to such rights or defenses as the registered
owner or credit may have under the law, except in so far
as such rights or defenses are subject to the limitations
imposed by the principles governing estoppel.

Collateral Transfers
Shares of stock are personal property. Thus, they can
either be pledged or mortgaged. However, such pledge or
mortgage cannot have any legal effect if it is registered only in
the corporate books.
Where a certificate is delivered to the creditor as a
security, the contract is considered a pledge, and the Civil Code
will apply.

The Chattel Mortgage Law provides two ways of

executing a valid chattel mortgage: 1) the possession of
mortgaged property is delivered and retained by the
mortgagee; and, 2) without delivery, the mortgage is
recorded in the register of deeds. But if chattel mortgage
of shares may be made validly, the next question then
becomes: where should such mortgage be properly
registered?
It is the general rule that the situs of shares is the
domicile of the owner. It is also generally held that for the
purpose of execution, attachment, and garnishment, it is
the domicile of the corporation that is decisive. Going by
these principles, it is deemed reasonable that chattel
mortgage of shares be registered both at the owners
domicile and in the province where the corporation has its
principal office. It should be understood that the property
mortgaged is not the certificate but the participation and
share of the owner in the assets of the corporation.
It is recognized that this method of hypothecating
shares of stock in a chattel mortgage is rather tedious and
cumbersome. But the remedy lies in the legislature.
Note: The provision of the
Chattel Mortgage Law (Act No.
1508) providing for delivery of
mortgaged property to the
mortgagee as a mode of
constituting a chattel mortgage
is no longer valid in view of the
Civil Code provision defining
such as a pledge.

If the certificate of stock is not delivered to the creditor,

it must be registered in the registry of deeds of the province
where the principal office of the corporation is located, and in
case where the domicile of the stockholder is in a different
province, then registration must also be made there.
In a situation where, the chattel mortgage having been
registered, the stock certificate was not delivered to the creditor
but transferred to a bona fide purchaser for value, it is the rule
that the bona fide purchaser for value is bound by the
registration in the chattel mortgage registry. It is said that such
a rule tends to impair the commercial value of stock certificates.

NON-TRANSFERABILITY
IN NON-STOCK CORPORATIONS

CHUA GUAN VS. SAMAHANG

MAGSASAKA (62 Phil. 473; 1935)
To guarantee payment of a debt, Co mortgaged
his shares of Samahang Magsasaka stock to Chiu. The
said mortgage was duly registered in the City of Manila.
Chiu later assigned his rights in the mortgage to Guan
who soon foreclosed the same after Co failed to pay. Guan
won in the public bidding. He requested the corporation
that new certificates be issued in his name. The
corporation refused because apparently prior to Guans
demand, several attachments against the shares covered
by the certificates had been recorded in its books.
Did the chattel mortgage in the registry of deeds of
Manila gave constructive notice to the attaching
creditors?

Although shares of stock are as a rule freely

transferable, membership in a non-stock corporation is personal
and non-transferable, unless the articles of incorporation or bylaws provide otherwise. The court may not strip him of his
membership without cause. (Sec. 90)

DIVIDENDS AND PURCHASE BY

CORPORATION OF ITS OWN SHARES

Form of Dividends
IN WHAT FORMS CAN DIVIDENDS BE
ISSUED?
1.

Cash

2.

Property

3.

scrip - certificate issued to SHs

instead of cash dividends which
entitles them to a certain amount in
the future

FROM WHERE
SOURCED?

Stock dividends

Stock dividends are distribution to

the SHs of the companys own stock.
Stock dividends cannot be declared
without first increasing the capital
stock unless unissued shares are
available.
New shares are issued to the SHs in
proportion to their interest.
No new income unless sold for cash.
Civil fruits belong to the usufructuary
and not to the naked owner.
Can only be issued to SHs.
Whenever fractional shares result,
corp may pay in cash or issue
fractional share warrants.

DIFFERENTIATE
BETWEEN
CASH
DIVIDENDS AND STOCK DIVIDENDS.
Cash Dividend

Stock
Dividend

Voting
requireme
nts
for
issuance

Board
of
Direct
ors

Boar
d of
Direct
ors +
2/3
OCS

Effect on
delinquent
stock

Shall
be
applied to the
unpaid
balance on the
subscription
plus costs and
expenses.

Shall
be
withheld
from
the
delinquent
stockholder
until
his
unpaid
subscription
is fully paid.

No. (
Sec.
35)

No,
since
this requires
SH
approval. (S
ec. 35)

Can this
be issued
by
Executive
Committe
e?

part of the stock dividends are issued to a non-stockholder

- then the proportion of the stockholder's interest changes
radically. Stock dividends are civil fruits of the original
investment, and to the owners of the shares belong the
civil fruits.

NIELSON v LEPANTO (26 SCRA 540; 1968)

Stock dividends are issued only to SHs This is so
because only stockholders are entitled to dividends. A
stock dividend really adds nothing to the interest of each
stockholder; the proportional interest of each stockholder
remains the same. If a stockholder is deprived of his stock
dividends - and this happens if the shares of stock forming

CAN

DIVIDENDS

BE

Dividends can be sourced only out of

the unrestricted retained earnings of the
corporation.
Unrestricted retained earnings is defined
as "the undistributed earnings of the
corporation which have not been allocated for
any managerial, contractual or legal purposes
and which are free for distribution to the
stockholders as dividends." (SEC Rules
Governing Redeemable and Treasury
Shares, 1982)
Retained earnings has been defined as "net
accumulated earnings of the corporation out
of transactions with individuals or firms
outside the corporation." (Simmons, Smith,
Kimmel, Intermediate Accounting, 1977, ed.
P. 635) The term implies the limitation that no
corporation can declare dividends unless its
legal or stated capital is maintained. It does
not include:

premium on par stock i.e.

difference between par
value and selling price of
stock by corp since this is
regarded as paid-in capital;
but
SEC
allowed
declaration
of
stock
dividends out of such
premiums

transactions
involving
treasury stocks which are
considered
expansions
and contractions of paid-in
capital;

donations as
paid- in capital;

increase in value of existing

assets,
being
merely
unrealized capital element

additional

If subscribed shares have not been fully paid,

the unpaid portion of subscribed capital stock
is an asset, and as long as the net capital
asset (after payment of liabilities) including
this unpaid portion is at least equal to the total
par value of the subscribed shares, any
excess would be surplus or earnings from
which dividends may be declared. However, if
a deficit exists, subsequent profits must first
be applied to cover the deficit.
Restrictions on dividend distribution include:

BODs
appropriation of
certain earnings
for
certain
purposes;
Agreements with
creditors,
bondholders and
preferred
SHs
requiring retention
of certain percent
of
corporate
earnings
to
protect
their
interest and to
secure
redemption
of
their
securities
upon maturity;
SEC-imposed
restrictions
pursuant to law,
like
those
imposed on banks
and
insurance
companies;
Restriction on the
retained earnings
equivalent to the
cost of treasury
shares held by the
corporation,
which is lifted only
after such shares
are reissued or
retired (Sec. 195,
PD 612)

BERKS BROADCASTING v CRAUMER (52 A.2d

571; 1947)
Dividends can only be declared only from the
surplus, i.e. the excess in the value of the assets over the
liabilities and the issued capital stock. To do otherwise
would be illegal The object of the prohibition is to protect
the creditors in view of the limited liability of the SHs and
also to protect the SHs by preserving the capital so that
the purposes of the corp. may be performed.
Surplus must be bona fide i.e. founded upon
actual earnings or profits and not to be dependent for its
existence upon a theoretical estimate of an appreciation in
the value of the companys assets.
The prohibition does not apply, however, to stock
dividends because creditors and SHs will not be affected
by their declaration since they do not decrease the
companys assets.

LICH V UNITED STATES RUBBER (39 F.

Supp. 675; 1941)
Dividends on non-cumulative preferred stock are
payable only out of net profits and for the years in which
said net profits are actually earned.
The right to dividends is conditional upon: (1)
accrual of net profits, and (2) retention in the business.
If the annual net earnings of a corp. are justifiably
applied to legitimate corp. purposes, such as payment of
debts, reduction of deficits and restoration of impaired
capital, the right of non-cumulative preferred
stockholders to the payments of dividends is lost. If they
are applied against prior losses and thereby completely
absorbed, there are no net profits from which dividends
may be lawfully paid.

SOME RULES ON DIVIDEND DECLARATION:

1.

BOD has discretion whether or not to

declare dividends and in what form.
Exception:
Stock dividends, in
which case a 2/3 vote of OCS is
necessary.
However, such discretion cannot be
abused and the BOD cannot accumulate
surplus profits unreasonably on the
excuse that it is needed for expansion or
reserves.

2.

BOD should declare dividends when

surplus profits of the corporation exceed
100% of the corporation's paid-in capital
stock.
Exceptions:
(a) When justified by definite
corporate expansion projects or
programs approved by the
Board;
(b) When creditors prohibit dividend
declaration
without
their
consent as a condition for the
loan, and such consent has not
yet been secured;
(c) When retention is necessary
under
special
circumstances
obtaining in the
corporation, e.g. when there is a
need for special reserve for
probable contingencies. (Sec.
43)

4.

The corporation may be subjected to

additional tax when it fails to declare
dividends,
thereby
unreasonably
accumulating profits. (See Sec. 25,
NIRC)

5.

The dividends received are based on

stock held whether or not paid. However,
if the stocks are delinquent, the amount
will first be applied to the payment of the
delinquency plus costs and expenses;
stock dividends will not be given to a
delinquent SH.

KEOGH v ST. PAUL MILK (285 N.W. 809; 1939)

The mere fact that a large corporate surplus exists
is not enough to warrant equitable intervention; the test is
good faith and reasonableness of the policy of retaining
the profits. However, where dividends are withheld for
an unlawful purpose to deprive a SH of his right to a just
proportion of the corporation's profit, the court may
compel the corporation to declare dividends.

DODGE v FORD MOTOR CO (170 N.W. 668; 1919)

This case involves an action against the Ford
Motor Company to compel declaration of dividends. At
the time this complaint was made, Ford had concluded its
most prosperous year of business, and the demand for its
cars at the price of the previous year continued. While it
had been the practice, under similar circumstances, to
declare larger dividends, the corporation refused to
declare any special dividends. The Board justified its
refusal to declare larger dividends on the expansion plans
of the company by erecting a smelting plant, but
maintaining the selling price of its cars (instead of
reducing it as had been the practice in previous
years). The plaintiffs contend that such a proposal would
be tantamount to the business being conducted as a semieleemosynary (or charitable) institution instead of a
business institution.
The court pointed out that a business corporation
is organized and carried on primarily for the profit of
SHs. The discretion of the directors is to be exercised in
the choice of means to attain that end and does not extend
to a change in the end itself reduction of profits or to
devote profits to another purpose. While the Court noted
the capable management of the affairs of the corporation
and therefore was not convinced that the motives of the
directors were prejudicial to the company's interests, it
likewise noted that the annual dividends paid were very
small in relation to the profits that the company had been
making. It therefore affirmed the amount fixed by the
lower court to be distributed to the stockholders.

Note: Prof. Jacinto is of the opinion that what

happened in this case is
possible under the present Code, even
without changing the AOI.

Preference as to Dividends
Review discussion under kinds of stock.

WABASH RAILWAY CO. V. BARCLAY (67

A.L.R. 762; 1930)
In the AOI and the certificate of stock of Stock A,
it was stated that the holders of said stocks are entitled to
receive to receive preferential dividends of 5% per fiscal
year, non-cumulative, before dividends are paid to other
stocks. From 1915 to 1926, no dividends were
declared. The net earnings were instead used for the
improvements and additions to property and
equipment. Due to this, the corporation became
prosperous and proposed to pay dividends to A & B
common stock. Plaintiffs filed this case in order to collect
the dividends for fiscal years 1915-1926 before the other
classes of stock are paid.
Were the Class A stockholders entitled to dividends for FY
1915 to 1926?
No, they were not. By the plain meaning of the
words in the AOI and the certificates of stock, the holders
are not entitled to dividends unless directors declare so. It
is likewise generally understood that in cases where the
company's net earnings are applied for improvements and
no dividend is declared, the claim for such year is gone in
case of non-cumulative stock, and cannot be later
asserted.

BURK V. OTTAWA GAS & ELECTRIC

CO. (123 Pac. 875; 1912)
An action was brought by the preferred SHs of
Ottawa against the directors of Ottawa to (1) require the
directors to account for all the property and assets of the
corporation, (2) declare such dividends from the net
profits of the business of such co. as should have been
declared since 1 Jan. 1906, and (3) restrain the officers
and directors during the pendency of the action from
paying out any of the money or disposing of the assets of
the company except such amounts as should be necessary
to pay the actual necessary current expenses of
conducting the business of the corporation.

The BOD maintained that the corporation's funds

were exhausted by expenditures for the extension of the
cos plant, hence it was unable to declare
dividends. Expenditures were said to be necessary and
for the betterment of the plant.
Were the corp funds were wrongfully diverted, and were
preferred SHs entitled to dividends?
The case was remanded to the trial court, with
instructions to make further findings to protect the
preferred SHs in their rights.
The fair interpretation of the contract between
Ottawa and its SHS is that if in any year net profits are
earned, a dividend is to be declared. To hold otherwise,
meaning if the BOD had absolute discretion when to
declare dividends and when not to, when the corporation
has funds for such dividends, would result in temptation
to unfair dealing, giving one party the option to pay the
other or not. In the case at bar, the accumulated profits
would be lost forever since the dividends were noncumulative.
Preferred SHs, however, are not generally
creditors until dividends are declared. In the case at bar,
if dividends should have been declared to such SHs, they
are considered creditors from that time.

When Right to Dividends Vests; Rights

of Transferee

WHEN DOES THE RIGHT TO DIVIDENDS

VEST?
As soon as the BoD has declared
dividends. From this time, it becomes a
debt owed by the corporation, and
therefore can no longer be revoked
(McLaran v. Crescent Planning).
EXCEPTION:
If the declaration
has
not
yet
been
announced
or communicated to the stockholders.
NOTE: When no dividends are
declared for 3 consecutive
years, preferred SHs are given
the right to vote for directors
until dividends are declared.
NOTE: The extent of the SHs
share in the dividends will
depend
on
the capital
contribution; NOT the number
of shares he has.

MCLARAN V. CRESCENT PLANNING MILL

CO. (93 S.W. 819; 1906)
CPM Corp., having a surplus of $29,000,
declared a 6% cash dividend payable in four
installments. The first installment was paid by the Board
after which an error was discovered in the computation of
the assets: from the initial recognized surplus of $29,000
to $6,000. Mainly for this reason, the Board adopted a
resolution rescinding the dividends payable on the three
other installments despite the solvency of the corp and the
existence of ample funds to pay said dividends. The
original P was Humber, a SH, and was substituted by
McLaran, the administrator of his estate when he died.
The defendant corp maintained that there was no valid
declaration of dividends because the corporation failed to
set aside funds to pay for the same.
A cash dividend, properly declared, cannot be
revoked by the subsequent action of the corp. for by its
declaration, the corp had become the debtor of the SH and
it goes without saying that the debtor cannot revoke, recall
or rescind the debt or otherwise absolve itself from its
payment by a unilateral action or without the consent of
the creditor. Thus, the rescission by the BOD of the
subsequent installments was of no force.
Dividends are defined as portions of
profits/surplus funds of the corp. which have been
actually set apart by a valid board resolution or by the SH
at a corp. mtg. for distribution among SH according to
their respective interests. The mere declaration of the
dividend, without more, by competent authority under
proper circumstances, creates a debt against the
corporation in favor of the stockholders the same as any
other general creditor of the corporation. By the mere
declaration, the dividend becomes immediately fixed and
absolute in the stockholder and from henceforth the right
of each individual stockholder is changed by the act of
declaration from that of partner and part owner of the
corporate property to a status absolutely, adverse to every
other stockholder and to the corporation itself, insofar as
his pro rataproportion of the dividend is concerned.

Liability for Illegal Dividends

WHAT ARE ILLEGAL DIVIDENDS?
Illegal dividends are dividends declared
in violation of law.
WHAT ARE THE EFFECTS OF THE
ILLEGAL DECLARATION OF DIVIDENDS?

(1) If the directors acted wilfully, or with

negligence or in bad faith, they will
be liable to the corporation. If the
corporation has become insolvent,
they are liable to the corporation's
creditors for the amount of
dividends
based
out
of
capital. (Based on Sec. 31)
(2) If the directors cannot be held liable
because they acted with due
diligence and in good faith, in the
absence of an express provision of
law, an innocent stockholder is not
liable to return the dividends
received by him out of capital,
unless the corporation was
insolvent
at
the
time
of
payment. (Majority view; Campos)

get out of the corporation by demanding

payment of the fair value of his shares.
IN
WHAT
INSTANCES
CAN
THE
APPRAISAL RIGHT BE EXERCISED?
The Corporation Code lists 4 instances:
(1) In case any amendment to the AOI has the effect
of changing or restricting the rights of any SH 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 (Sec. 81);
(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 this Code (Sec. 81; Sec. 40);
(3) In case of merger or consolidation (Sec. 81);

Purchase by Corporation of its own

shares

WHAT ARE THE REQUISITES FOR

ACQUISITION BY THE CORPORATION OF
ITS OWN SHARES? (Sec. 41)
1.

2.

unrestricted retained earnings

to cover the shares to be
acquired;
legitimate corporate purpose

FOR
WHAT
PURPOSES
CAN
A
CORPORATION ACQUIRE ITS OWN
SHARES? (Sec. 41)
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;

3.

To
pay
dissenting
or
withdrawing
stockholders
entitled to payment for their
shares under the Corporation
Code (Appraisal Right).

Appraisal Right (Sec. 81)

WHAT IS THE APPRAISAL RIGHT?
The appraisal right refers to the right of a
stockholder who dissented and voted against
a proposed fundamental corporate action to

(4) In case the corporation invests its funds in any

other corporation or business or for any purpose other
than the primary purpose for which it was organized
(Sec. 42)

WHAT ARE THE REQUISITES FOR THE

EXERCISE OF THE APPRAISAL RIGHT?
(Sec. 82)
(1) SH must have voted against he proposed
corporate action;
(2) Written demand on the corporation for payment of
the fair value of his shares;
(3) Such demand must have been made within 30
days after the date on which the vote was taken;
(4) Surrender of the stock certificate/s representing
his shares;
(5) Unrestricted retained earnings in the books of the
corporation to cover such payment.

WHAT IS THE EFFECT OF DEMAND FOR

PAYMENT IN ACCORDANCE WITH THE
APPRAISAL RIGHT? (Sec. 83)
All rights accruing to the shares, including
voting and dividend rights, are suspended in
accordance
with
the
Corporation
Code, except for the right of the SH to receive
payment of the fair value thereof.
Such suspension shall be from the time
of demand until either:
(1) abandonment of the corporate
action involved; or
(2) the purchase of the said shares
by the corporation.
However, if said dissenting SH is not
paid the value of his shares within 30 days
after the award, his voting and dividend rights
shall immediately be restored.

WHAT ARE THE DUTIES OF THE

DISSENTING
STOCKHOLDER
IN
RELATION TO THE EXERCISE OF THE
APPRAISAL RIGHT?
The dissenting SH must submit the
certificates of stock representing his shares to
the corporation for notation thereon that such
shares are dissenting shares within 10
days after demanding payment for his
shares. Failure to do so shall, at the option of
the corporation, terminate his rights under
Title X of the Corporation Code. (Sec. 86)

WHAT ARE THE EFFECTS OF TRANSFER

OF THE CERTIFICATES BEARING THE
NOTATION THAT THEY REPRESENT
DISSENTING SHARES?
If the certificates are consequently
cancelled, the rights of the transferor as a
dissenting SH cease and the transferee has
all the rights of a regular stockholder. All
dividend contributions which would have
accrued on the shares will be paid to the
transferee. (Sec. 86)

AMENDMENTS OF CHARTER
The charter of a private corporation consists of its
articles of incorporation as well as the Corporation Code
and such other law under which it is organized.

Amendment by Legislature
Subject to the limitation that no
accrued rights or liabilities be impaired, the
legislature has the power to make changes in
existing corporations through an amendment
to the Corporation Code.

VOTE:
membership

WHAT ARE THE LIMITATIONS ON THE

POWER TO AMEND?
PURPOSE:

must be legitimate

of

OCS

(1)
The appraisal right must be recognized in
case the amendment has the effect of changing 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 extending or
shortening the term of corporate existence.
(2)
Extension of corporate term cannot exceed
50 yrs. in any one instance
(3)
A copy of the amended articles should be filed
with the SEC, and with the proper governmental
agencies, as appropriate (e.g., in the case of banks,
public utilities, etc.)
(4)
Original and amended articles should contain
all matters required by law to be set out in said articles.
(5)
An amendment to increase/decrease capital
stock as well as to extend/shorten corporate term
cannot be made under Sec. 16, but must be made
under Sec. 37-38, respectively, both of which require a
meeting; and
(6)
Amendment must be in the form prescribed
by the Code

ON WHAT GROUNDS CAN THE SEC

DISAPPROVE
THE
PROPOSED
AMENDMENTS?
The same grounds as for the disapproval of
the original articles (Sec. 17):

Not substantially in accordance with

the form prescribed by the Code;

Purpose(s) patently unconstitutional,

illegal, immoral, or contrary to
government rules and regulations;

Treasurers Affidavit concerning

amount
of
capital
stock
subscribed/paid is false;

Required percentage of ownership

of capital stock to be owned by
citizens of the Phils. has not been
complied with as required by the
Constitution or existing laws;

Absence
of
a
favorable
recommendation
from
the
appropriate government agency.

Amendment by Stockholders
One of the powers expressly granted
by law to all corporations is the power to
amend its articles of incorporation. This, in
effect, is a grant of power to owners of 2/3 of
the outstanding stocks to change the basic
agreement between the corporation and its
stockholders, making such change binding on
all the stockholders, subject only to the right
of appraisal, if proper.

2/3

Amendment changing stockholders

rights
The
law
expressly
allows
amendments which would change or restrict

existing rights of stockholders or any class of

shares. (Sec. 81)

MARCUS V. RH MACY (74 N.E. 2d 228; 1947)

The Board of Directors gave notice to SH that
among the matters to be acted upon in its annual meeting
would be a proposal to amend certificate of incorporation
to add to the rights of preferred stockholders, voting rights
equal to those of common stockholders. Marcus, objected
and demanded payment for the common stock owned by
her.
The Court held that Marcus may invoke her
appraisal right. The aggregate number of shares having
voting rights equal to those of common shares was
substantially increased and thereby the voting power of
each common share outstanding prior to the meeting was
altered or limited by the resulting pro rata diminution of
its potential worth as a factor in the management of the
corporate affairs. Considering that she held diminished
voting power; that she notified the corpo of her objection;
that her shares were voted against the amendmentthese
were sufficient to qualify her to invoke her statutory
appraisal right.

Effectivity of amendment
Amendments take effect only from
the approval by the SEC. However, such
approval or rejection must be made within
six months of filing of amendment;
otherwise it shall take effect even w/o such
approval (as of the date of filing), unless
cause of delay is attributable to the
corporation. (Sec. 16)

Special amendments
Increase of capital stock
After the authorized capital
stock has been fully subscribed and
the corporation needs to increase
its capital, it will have to amend its
articles to increase its capital
stock. A corporation does not have
the implied power to increase capital
stock; such a power can only be
granted by law.
The power to increase or
decrease capital stock must be
exercised in accordance with the
provisions of Sec. 38 of the Code.

Reduction of capital stock

Reduction of capital stock

is not allowed if it will prejudice the
rights of corporate creditors.

PHILIPPINE TRUST CO. V. RIVERA (44 Phil.

469; 1923)
It is established doctrine that subscriptions to the
capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts.
A corporation has no power to release an original
subscriber to its capital stock from the obligation of
paying for his shares, without valuable consideration for
such release; and as against creditors a reduction of the
capital stock can take place only in the manner and under
the conditions prescribed by the statute or charter or the
articles of incorporation.

Change in corporate term

The Code allows a
corporation not only to extend
but also to shorten its term of
existence. As in the case of
increase/decrease of capital
stock, change must be approved
at a members/stockholders
meeting by 2/3 of the
members/outstanding
capital
stock.

Amendments in close corporations

To recall, the provisions required to
be contained in the AOI of a close
corporation:

(1) All issued stock of all classes

(2)

(3)

should be held by not more than

20;
All issued stock shall be subject
to one or more specified
restrictions
on
transfer
permitted by law;
Corporation should not be listed
in the stock exchange or make
any public offering of its stock.

If any of these are deleted, then the

corporation will cease to be a close
corporation and will lose the special
privileges of such corporations. Thereafter,
it will be governed by the general

provisions of the Code. Since such

amendment involves a change in the nature
of the corporation, even non-voting stocks
are given a voice in the decision. A
stockholders meeting is required and a 2/3
vote must approve the amendment, unless
otherwise provided by the articles of
incorporation.

Date: not less than 30 days nor more than 60 days

after the entry of the order
(3) Publication of order
Before the date fixed by the SEC, the SEC order shall
be published and posted accordingly.
Newspaper: Once a week for 3 weeks in a newspaper
of general circulation published in the municipality or
city where the corporation's principal office is situated,
or there be no such newspaper, in a newspaper of
general circulation in the Philippines

DISSOLUTION

Posting: For 3 consecutive weeks in 3 public places in

the city or municipality where the corporation's principal
office is situated

Modes of Dissolution

(4) Hearing of the petition for dissolution

HOW MAY
DISSOLVED?

CORPORATION

BE

(1) Failure to organize and commence

business (Sec. 22);

(2) Cessation of business for 5

years (Continuous inoperation; Sec. 22);

(3) Expiration of original, extended, or

shortened term;

(4) Voluntary dissolution (Sec. 118-119);

(a) Where no creditors are affected (Sec.
118)
This is effected by majority vote of the BOD and a 2/3
vote of the OCS or members. (Note the special notice
requirements.) The copy of the resolution authorizing
the dissolution shall be certified by a majority of the
BOD and countersigned by the secretary of the
corporation. THE SEC shall thereupon issue the
certificate of dissolution.
(b) Where creditors are affected (Sec.
119)
(1) Filing
of
dissolution with SEC

petition

for

A petition for dissolution must be filed with the SEC

after having been signed by a majority of the BOD,
verified by the president or secretary or one of the
directors, and resolved upon by the affirmative vote of
2/3 of the OCS or members. The petition must set forth
all claims and demands against the corporation, and
the fact that the dissolution was approved by the SHs
with the requisite 2/3 vote.
(2) Fixing of date by SEC for filing of
objections to petition
If the petition is sufficient in form and substance, the
SEC shall fix a date on or before which objections
thereto may be filed by any person.

Upon 5 days notice, given after the date on which the

right to file objections to the order has expired, the SEC
shall proceed to hear the petition and try any issue
made by the objections filed.
If no objection is sufficient, and the material allegations
are true, the SEC shall render judgment dissolving the
corporation and directing such disposition of its assets
as justice requires.
Note: The SEC may appoint a receiver to collect such
assets and pay the debts of the corporation.

(3) Involuntary dissolution (Sec. 121):

(a) Revocation of Certificate of Registration

by SEC (Sec. 121)
A corporation may be dissolved by the SEC upon filing
of a verified complaint and after proper notice and
hearing on grounds provided by existing laws, rules
and regulations.

(b) Quo Warranto proceedings (See Sec. 5b,

PD 902-A and Rule 66, Rules of Court. Previously, the
SEC had exclusive jurisdiction over quo warranto
proceedings involving corporation.
Under the
Securities Regulation Code or RA 8799, however, the
jurisdiction of the SEC over all cases enumerated
under Sec. 5 of PD 902-A have been transferred to the
Regional Trial Courts.
The grounds for involuntary dissolution of
corporation under quo warranto proceedings are:
(1) When the corporation has offended
against a provision of an act for its creation or
renewal;
(2) When it has forfeited its privileges and
franchises by non-user;
(3) When it has committed or omitted an act
which amounts to a surrender of its corporate
rights, privileges or franchises;
(4) When it misused a right, privilege or
franchise conferred upon it by law, or when it
has exercised a right, privilege or franchise in
contravention of law
(PNB v. CFI, 209 SCRA 294; 1992)

(4) Shortening of corporate term (Sec. 120)

NOTE: The simplest and most
expedient way of effecting dissolution
is by shortening the corporate
term and waiting for such term
to expire.

right or remedy in favor of or against, nor any

liability incurred by, any corporation, its
stockholders, members, directors, trustees or
officers. (Sec. 145)

Loss of juridical personality

NATIONAL ABACA V. PORE (2 SCRA 989;
1961)

Dissolution of close corporations

In
close
corporations,
any
stockholder may, by written petition to the
SEC, compel the dissolution of such
corporation when:
(1) Any of the acts of the directors,
officers, or those in control
of the corporation is:

Illegal;
Fraudulent;
Dishonest;
Oppressive or unfairly
prejudicial
to
the
corporation
or any other SH;

(2) Corporate assets are being

misapplied or wasted. (Sec.
105)

Effects of Dissolution
WHAT
ARE
DISSOLUTION?

THE

EFFECTS

OF

Corporation ceases to be a juridical

person and consequently can no
longer continue transacting its
business.

Corporate existence continues for 3

years following dissolution for the ff.
purposes only:

(a) winding up of affairs;

and

(b) liquidation of
corporate assets.

Corporation can no longer continue

its business, except for winding up.

Corporation CANNOT even be a de

facto corporation.

Corporate existence may be subject

to COLLATERAL attack.

NOTE that the subsequent dissolution of a

corporation may not remove or impair any

Plaintiff National Abaca Corporation filed a

complaint against Pore for the recovery of a sum
of money advanced to her for the purchase of hemp. She
moved to dismiss the complaint by citing the fact that
National Abaca had been abolished by EO 372 dated Nov.
24, 1950. Plaintiff objected to such by saying that it shall
nevertheless be continued as a corporate body for a period
of 3 years from the effective date of said order for the
purpose of prosecuting and defending suits by or against
it and to enable the Board of Liquidators to close its
affairs.
Can an action commenced within 3 years after the
abolition of plaintiff corporation be continued by the
same after the expiration of said period?
The Corp. Law allows a corporation to continue
as a body for 3 years after the time when it would have
been dissolved for the purposes of prosecuting and
defending suits by or against it. But at any time during the
3 years, the corporation should convey all its property to
trustees so that the latter may be the ones to continue on
with such prosecution, with no time limit on its
hands. Since the case against Pore was strong, the corp.'s
amended complaint was admitted and the case was
remanded to the lower court.

CLEMENTE V. CA (242 SCRA 717)

The termination of the life of a juridical entity
does not by itself cause the extinction or diminution
of the right and liabilities of such entity nor those of
its owners and creditors. If the 3-year extended life
has expired without a trustee or receiver having been
expressly designated by the corporation itself within
that period, the board of directors or trustees itself
may be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation. In
the absence of a board of directors or trustees, those
having any pecuniary interest in the assets, including
not only the shareholders but likewise the creditors
of the corporation, acting for and in its behalf, might
make proper representations with the SEC, which

has primary and sufficiently broad jurisdiction in

matters of this nature, for working out a final
settlement of the corporate concerns.
Executory contracts
The prevailing view is that executory
contracts
are
not
extinguished
by
dissolution. Sec. 145 of the Code states that
"No right or remedy in favor of or against any
corporation.nor
any
liability
incurredshall be removed or impaired
either by the subsequent dissolution of said
corp. or by any subsequent amendment or
repeal of this Code or of any part thereof."

Liquidation
WHAT IS LIQUIDATION? (Sec. 122)
Liquidation, or winding up, refers to the
collection of all assets of the corporation,
payment of all its creditors, and the
distribution of the remaining assets, if any,
among
the
stockholders
thereof
in
accordance with their contracts, or if there be
no special contract, on the basis of their
respective interests.

WHAT
ARE
THE
METHODS
OF
LIQUIDATING A CORPORATION? AND
WHO
MAY
UNDERTAKE
THE
LIQUIDATION OF A CORPORATION?
1.

Liquidation by the corporation

itself through its board of
directors
Although there is no
express provision authorizing
this method, neither is there any
provision
in
the
Code
prohibiting it.

2.

FOR HOW LONG MAY THE LIQUIDATION

OF A CORPORATION BE UNDERTAKEN?
Generally, a corporation may be
continued as a body corporate for the purpose
of liquidation for 3 years after the time when it
would
have
so
dissolved.
(Sec.
122) However, it was held in the case
ofClemente v. CA (supra) that if the 3-year
period has expired without a trustee or
receiver having been expressly designated by
the corporation itself within that period, the
BOD itself may be permitted to so continue as
"trustees" by legal implication to complete the
corporate liquidation.
WHAT CAN AND SHOULD BE DONE
DURING THE PERIOD OF LIQUIDATION?
(Sec. 122)
(1)

Collection of corporate assets and

property;

(2)

Conveyance of all corporate

property to trustees for the benefit
of SHs, members, creditors, and
other persons in interest;

(3)

Payment of corporation's debts

and liabilities;

(4)

Distribution
property

Liquidation is conducted by the

receiver who may be appointed by
the SEC upon its decreeing the
dissolution of the corp.

As with the previous method, the three-year rule shall

not apply. However, the mere appointment of a

of

assets

and

Distribution of assets after payment of

debts
GENERAL RULE:

No corporation shall
distribute any of
its
assets
or
property except
upon
lawful
dissolution
and
after payment of
all its debts and
liabilities.
(Sec.
122)

EXCEPTION:

In cases of decrease
of capital stock,
and as otherwise
allowed by the
Corporation Code

Conveyance of all corporate

assets to trustees who will take
charge of liquidation.

If this method is used, the 3-year limitation will not

apply provided the designation of the trustees is made
within said period. There is no time limit within which
the trustee must finish liquidation, and he may sue and
be sued as such even beyond the 3-year period unless
the trusteeship is limited in its duration by the deed of
trust. (See Nat'l Abaca Corp. v. Pore, supra)
3.

receiver, without anything more, does not result in the

dissolution of the corporation nor bar it from the
exercise of its corporation rights.

WHAT HAPPENS IF AN ASSET CANNOT

BE DISTRIBUTED TO THE PERSON
ENTITLED TO IT?
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. (Sec. 122)

CHINA BANKING V. MICHELIN & CIE. (58

Phil. 261; 1933)
The appointment of a receiver by the court to wind
up the affairs of the corporation upon petition of voluntary
dissolution does not empower the court to hear and pass
on the claims of the creditors of the corporation at first
hand. In such cases, the receiver does not act as a receiver
of an insolvent corporation. Since "liquidation" as
applied to the settlement of the affairs of a corporation
consists of adjusting the debts and claims, that is, of
collecting all that is due the corporation, the settlement
and adjustment of claims against it and the payment of its
just debts, all claims must be presented for allowance to
the receiver or trustees or other proper persons during the
winding-up proceedings within the 3 years provided by
the Corporation Law as the term for the corporate
existence of the corporation, and if a claim is disputed so
that the receiver cannot safely allow the same, it should
be transferred to the proper court for trial and allowance,
and the amount so allowed then presented to the receiver
or trustee for payment. The rulings of the receiver on the
validity of claims submitted are subject to review by the
court appointing such receiver though no appeal is taken
to the latter ruling, and during the winding-up
proceedings after dissolution, no creditor will be
permitted by legal process or otherwise to acquire
priority, or to enforce his claim against the property held
for distribution as against the rights of other creditors.
Note: Under the Corporation Code, it is
the SEC which may
appoint the receiver.

dissolution, while the 2nd and 3rd assessments were given

just 6 months after dissolution (within the 3-year
rule). Such facts definitely established that the
Government was a creditor of the corp. for whom the
liquidator was supposed to hold assets of the corp.

TAN TIONG BIO V. CIR (G.R. No. L-15778;

April 23, 1962)
The creditor of a dissolved corp. may follow its
assets, as in the nature of a trust fund, once they pass into
the hands of the stockholders. The dissolution of a corp.
does not extinguish the debts due or owing to it.
An indebtedness of a corp. to the government for
income and excess profit taxes is not extinguished by the
dissolution of the corp. The hands of government cannot,
of course, collect taxes from a defunct corporation, it loses
thereby none of its rights to assess taxes which had been
due from the corporation, and to collect them from
persons, who by reason of transactions with the
corporation hold property against which the tax can be
enforced and that the legal death of the corporation no
more prevents such action than would the physical death
of an individual prevent the government from assessing
taxes against him and collecting them from his
administrator, who holds the property which the decedent
had formerly possessed. Thus, petitioners can be held
personally liable for the corporation's taxes, being
successors-in-interest of the defunct corporation.

Distribution of assets of non-stock

corporations
WHAT
ARE
THE
RULES
FOR
DISTRIBUTION OF ASSETS OF NONSTOCK CORPORATIONS? (Sec. 94-95)

RP
V.
MARSMAN
DEVELOPMENT
COMPANY (44 SCRA 418; 1972)

(1)
All liabilities and obligations of the corporation
shall be paid, satisfied, and discharged, or adequate
provision shall be made therefor.

Defendant corp. was a timber license holder with

concessions in Camarines Norte. Investigations led to the
discovery that certain taxes were due on it. BIR assessed
Marsman 3 times for unpaid taxes. Atty. Moya, in behalf
of the corp., received the first 2 assessments. He
requested for reinvestigations. As a result, corp. failed to
pay within the prescribed period. Numerous BIR
warnings were given. After 3 years of futile notifications,
BIR sued the corp.

(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, education or similar
purposes, but not subject to condition (2) above, shall
be transferred or conveyed to one or more
corporations, societies or organization engaged in
activities in the Philippines substantially similar to those
of the dissolving corp. according to a plan of
distribution adopted pursuant to Sec. 95 of the Code.

Although
Marsman
was
extrajudicially
dissolved, with the 3-year rule, nothing however bars an
action for recovery of corporate debts against the
liquidators. In fact, the 1st assessment was given before

(4)
Assets other than those mentioned in preceding
paragraphs shall be distributed in accordance with the
AOI or by-laws.
(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 Sec. 95.
* The plan of distribution of
assets may be adopted by a
majority vote of the Board of trustees
and approval of 2/3 of the members
having voting rights present or
represented by proxy at the meeting
during which said plan is adopted.
It must be noted that the plan of
distribution of assets must not be
inconsistent with the provisions of
Title XI of the Code.

CORPORATE COMBINATIONS

(3) Execution of the Articles of

Merger/Consolidation, to be
signed by the Pres/VP and
certified by the secretary /
assistant secretary.
(4) Submission to the SEC for
approval.
WHAT ARE THE EFFECTS OF MERGER OR
CONSOLIDATION? (Sec. 80)
(1) The constituent corporation
shall become a single
corporation:
If merger:
the
surviving corporation
designated in the plan of
m
erger
If consolidation: the
consolidated corporation
designated in the plan of
C
onsolida
tion.

Techniques to achieve corporate

combinations
WHAT ARE THE TECHNIQUES TO
ACHIEVE A CORPORATE COMBINATION?

(1) Merger (A + B = A)
(2) Consolidation (A + B = C)
(3) Sale of substantially all
corporate assets and purchase
thereof by another corporation;

(4) Acquisition of all / substantially

all of the stock of one
corporation from its SHs in
exchange for the stock of the
acquiring corporation

Merger or Consolidation
WHAT IS THE PROCEDURE FOR MERGER
OR CONSOLIDATION?
(1) Board of Directors of the
constituent corporations must
prepare and approve a plan of
merger or consolidation.
(2) 2/3 vote of OCS of
constituent corporations.

the

(2) The separate existence of the

constituent corporations shall
cease, except that of the
surviving
or
consolidated
corporation.
(3) The surviving or consolidated
corporation shall possess all
rights, privileges, immunities
and powers and shall be
subject to all the duties and
liabilities of a corporation
organized
under
the
Corporation Code.
(4) The surviving or consolidated
corporation shall thereupon and
thereafter possess all the rights,
privileges, immunities and
franchises of each of the
constituent corporations;
(5) 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 belong to, or due
to each constituent corporation,
shall be deemed transferred
and vested in such surviving or
consolidated
corporation without
further
act or deed.
(6) 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.
(Note:
The
merger
or
consolidation
does not impair the rights of
creditors or liens upon the
property of any such constituent
corporations.)

LOZANO V. DE LOS SANTOS (274 SCRA 452)

Consolidation becomes effective not upon
mere agreement of the members but only upon
issuance of the certificate of consolidation by the
SEC. There can be no intra-corporate nor
partnership relation between 2 jeepney drivers' and
operators' associations whose plans to consolidate
into a single common association is still a proposal.
WHAT ARE THE RULES GOVERNING MERGER
OR CONSOLIDATION INVOLVING A FOREIGN
CORPORATION LICENSED IN THE
PHILIPPINES? (Sec. 132)

If the absorbed corporation

in such a merger / consolidation
happens to be the foreign
corporation doing business in
the Philippines, it shall file a
petition for withdrawal of its
license in accordance with Sec.
136.

Sale of substantially all corporate assets

WHEN
IS
A
SALE
OR
OTHER
DISPOSITION DEEMED TO COVER
SUBSTANTIALLY ALL THE CORPORATE
PROPERTY AND ASSETS?
If by the sale the corporation would be
rendered incapable of continuing the
business or accomplishing the purpose for
which it was incorporated. (Sec. 40)

WHAT ARE THE REQUIREMENTS? (Sec.

40)
(1) Majority vote of BOD + 2/3 vote
of OCS or members at a
meeting duly called for the
purpose;
(2) Compliance with the laws on
illegal
combinations
and
monopolies

A foreign corporation authorized

to transact business in the
Philippines may merge or
consolidate with any domestic
corporation if such is permitted
under Philippine law and by the
law of its incorporation.

Note, however, that after such approval

by the SHs, the BOD may nevertheless, in its
discretion, abandon such sale or other
disposition without further action or approval
by the SHs. This, of course, is subject to the
rights of third parties under any contract
relating thereto.

The requirements on merger or

consolidation as provided in the
Corporation Code must be
complied with.

WHEN
IS
SH
APPROVAL NOT NECESSARY FOR THE
ABOVE DISPOSITION?

Whenever a foreign corporation

authorized to transact business
in the Philippines is a party to a
merger or consolidation in its
home country or state, such
foreign corporation shall file a
copy of the articles or merger or
consolidation with the SEC and
the appropriate government
agencies within 60 days after
such merger or consolidation
becomes effective. Such copy
of the articles must be duly
authenticated by the proper
officials of the country or state
under the laws of which merger
or consolidation was effected.

(1) If the disposition is necessary in

the usual and regular course of
business; or

(2) If the proceeds of the disposition

be appropriated for the conduct
of its remaining business (Sec.
40)

IS THE APPRAISAL RIGHT AVAILABLE TO

DISSENTING STOCKHOLDERS?
Yes. However, it must be stressed
that this right is generally available only to
dissenting
stockholders
of

the selling corporation, not the purchasing

corporation. (It can be argued, though, that in
instances wherein the purchase constitutes
an investment in a purpose other than its
primary purpose, stockholders' approval of
such investment is necessary, and anyone
who objects thereto will have the appraisal
right under Sec. 42.)

Exchange of stocks
In this method, all or substantially all
the stockholders of the "acquired"
corporation are made stockholders of the
acquiring
corporation.
With
the
exchange, the acquired corporation
becomes a subsidiary of the acquiring
corporation. Although this method does
not combine the 2 businesses under a
single corporation as in merger and sale
of assets, from the point of view of the
acquiring (parent) corporation, there is
hardly any difference between owing the
acquired corporation's business directly
and operating it through a controlled
subsidiary.
In
fact,
the
parent
corporation would have the power to buy
all the subsidiary's assets and dissolve it,
achieving the same result as in the other
methods of combination. (Campos &
Campos)

FOREIGN CORPORATIONS
WHAT
IS
A
CORPORATION? (Sec. 123)

FOREIGN

A corporation formed and organized

under laws other than those of the
Philippines, regardless of the citizenship
of
the
incorporators
and
stockholders. Such corporation must
have been organized and must operate
in a country which allows Filipino citizens
and corporations to do business there.
In times of war:
For
purposes of security of the state, the
citizenship
of
the
controlling
stockholders
determines
the
corporations nationality.

IN WHAT WAYS CAN A FOREIGN

CORPORATION DO BUSINESS IN THE
PHILS.?

(3) Joint venture

partner.

with

local

Permitted areas of investment

100% EQUITY: Mass media, except recording
The practice of a profession (law, medicine, etc.)
Operation of rural banks
Cooperatives
Private security agencies
Small-scale mining
Utilization of marine resources
Ownership, operation, and management of cockpits;
Manufacture, repair, stockpiling of nuclear, biological,
chemical, and radiological weapons;
Note: Retail trade is no longer required to be
100% Filipino-owned on account
of the Retail Trade Liberalization
Act.
75%-25% EQUITY:
Inter-island
shipping (R.A. 1937, Sec. 8)
Private recruitment Contracts for construction and
repair of locally-funded public works
Except: Public works that would fall under the BuildOperate-Transfer Law, as well as those that are
foreign-funded
70%-30% EQUITY:

Advertising

60%-40% EQUITY:

Other industries.

WHAT
"GRANDFATHER RULE"?

IS

THE

SO-CALLED

Where a domestic corporation which has both

Philippine and foreign stockholders is an investor in
another domestic corporation which has also both
Philippine and foreign stockholders, the so-called
"grandfather rule" is used to determine whether or not
the latter corporation is qualified to engage in a partially
nationalized business, i.e. by determining the extent of
Philippine equity therein.
Under present SEC rules, if the percentage of Filipino
ownership in the first corporation is at least 60%, then
said corporation will be considered as a Philippine
national and all of its investment in the second
corporation would be treated as Filipino equity. On the
other hand, if the Philippine equity in the first
corporation is less than 60%, then only the number of
shares corresponding to such percentage shall be
counted as of Philippine nationality. (See SEC Rule
promulgated on 28 Feb. 1967, cited in Opinion # 18,
Series of 1989, Department of Justice, dated 19
January 1989.)
NOTE: The reader would be well-advised to crossreference this definition of the "grandfather rule" with a
trusted commentary.

(1) Wholly-owned subsidiary; or

(2) Branch office; or

Legal Requirements Prior to Transaction

of Business

Documentary Requirements (Sec. 125)

(1) BOI certificate

The BOI certificate is issued upon a
finding of the Board of Investments that
the business operations of the foreign
corp. will contribute to the sound and
balanced development of the national
economy
on
a
self-sustaining
basis. (See Omnibus Investments
Code, Sec. 48-49)
NOTE: Applications, if not acted
upon within 10 days from official
acceptance thereof, shall be
considered
automatically
approved! (Art.
53,
Omnibus
Investments Code)
(2) SEC license to do business (Sec. 125)

Application under oath setting forth the information

specified in Sec. 125;

Additional information as may be necessary or

appropriate to enable the SEC to determine whether
the corporation is entitled to a license to transact
business in the Philippines, and to determine and
assess the fees payable;

Duly executed certificate under oath by authorized

official/s of the jurisdiction of the company's
incorporation, attesting to the fact that the laws of the
country of the applicant allow Filipino citizens and
corporations to do business therein, and that the
applicant is an existing corporation in good standing;

Statement under oath of the president or any other

person authorized by the corporation showing that the
applicant is solvent and in good financial condition, and
setting forth the assets and liabilities of the corporation
within 1 year immediately prior to the application.
(3)
Certificate
from
government agency

appropriate

NOTE: Certain sectors such as

banking, insurance, etc. require prior
approval
from the government
agencies concerned. (Sec. 17)

Deposit requirement (Sec. 126)

Within 60 days after the issuance of the
license, the licensee shall deposit with the SEC
securities with an actual market value of at least P
100,000.00. These securities are for the benefit of
present and future creditors, and shall consist of any of
the following:

Bonds or other evidence of

indebtedness
of
the

Government
or
its
instrumentalities, etc.;
Shares of stock in "registered
enterprises" as defined in R.A.
5186;
Shares of stock in domestic
corporations registered in the
stock exchange;
Shares of stock in domestic
insurance
companies
and
banks.

Once the licensee ceases to do business in the Philippines,

these deposited securities shall be returned, upon the licensee's
application and proof to the satisfaction of the SEC that the
licensee has no liability to Philippine residents or the Philippine
government.
Note: Foreign banking and insurance corporations
are the exceptions to this requirement.

Designation of a resident agent (Sec. 128)

The designation of a resident agent is a condition
precedent to the issuance of the license to transact business in
the Philippines.
WHO:

A resident of the Philippines.

PURPOSE:
To be served any summons and other
legal processes which may be served in all actions or
other
legal
proceedings
against
such
corporation. Service upon such resident shall be
admitted and held as valid as if served upon the duly
authorized officers of the foreign corporation at its
home office.

Laws applicable to foreign corporations

Foreign corporations lawfully doing business in the
Philippines are bound by all laws, rules and regulations
applicable to domestic corporations of the same class.
Exceptions: (1) As regards the
creation, formation, organization or
dissolution of the corporation;
(2) As regards the
fixing of relations, liabilities,
responsibilities, or duties of
stockholders, members, or
officers or corporations to
each other or to the
corporation (Sec. 129)

Effects of Failure to Secure SEC License

WHAT ARE THE EFFECTS OF FAILURE

TO SECURE A LICENSE?

(1) The corporation will not be

permitted to maintain agency in the
Philippines;

(2) The corporation will be subject to

penalties and fines;

(3) The corporation will not be

permitted to maintain or intervene in
any action before Philippine courts
or administrative agencies; it can
be SUED.

Isolated transactions

affirmatively pleaded. In short, facts showing foreign

corporations capacity to sue should be pleaded.

Curing of defect
HOME INSURANCE V. EASTERN
SHIPPING (123 SCRA 424; 1983)
A contract entered into by a foreign insurance
corp. not licensed to do business in the Phil. is not
necessarily void and the lack of capacity to sue at the time
of execution of the contract is cured by its subsequent
registration.

MARSHALL WELLS V. ELSER (46 Phil. 71;

1924)
Protection of intellectual property rights
Marshall Wells, a corporation organized under
the State of Oregon, sued a domestic corp. for the unpaid
balance on a bill of goods. Defendant demurred to the
complaint on the ground that it did not show that plaintiff
had complied with the law regarding corp. desiring to do
business in the Phil., nor that the plaintiff was authorized
to do business in the Phil.
The Supreme Court, in ruling for Marshall Wells,
stated that the object of the statute was to subject the
foreign corp. doing business in the Phil. to the jurisdiction
of its courts. The object of the statute was not to prevent
it from performing single acts but to prevent it from
acquiring a domicile for the purpose without taking the
steps necessary to render it amenable to suit in the local
courts. The implication of the law 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 Phil., from securing redress in Phil. Courts, and
thus, in effect to permit persons to avoid their contract
made with such foreign corporation.

ATLANTIC MUTUAL V. CEBU

STEVEDORING (G.R. No. 18961; Aug. 31, 1966)
A foreign corp. engaged in business in the Phil.
can maintain suit in this jurisdiction if it is duly licensed.
If a foreign corp. is not engaged in business in the Phil., it
can maintain such suit if the transaction sued upon is
singular and isolated, in which no license is required. In
either case, the fact of compliance with the requirement
of license, or the fact that the suing corp. is exempt
therefrom, as the case may be, cannot be inferred from the
mere fact that the party suing is a foreign corp. The
qualifying circumstance, being an essential part of the
element of the plaintiffs capacity to sue, must be

GENERAL GARMENTS CORP. V. DIR. OF

PATENTS (41 SCRA 50; 1971)
Domestic corporation General Garments
registered Puritan trademark for its mens wear. US
corporation Puritan Sportswear petitioned the Phil. Patent
Office for cancellation of said trademark, alleging its
ownership and prior use in the Phil.
The Supreme Court held that a foreign corp.
which does not do business in the Phil. and is unlicensed
but is widely known in the Phil. through the use of its
products here has legal right to maintain an action to
protect its reputation, corporate name and goodwill. The
right to use the corporate name is a property right which
the corp. may assert and protect in any of the courts of the
world.

LE CHEMISE LACOSTE V.
FERNANDEZ (129 SCRA 377; 1984)
A foreign corporation not doing business in the
Phil. needs no license to sue in the Phil. for trademark
violations.
Where a violation of our unfair trade laws which
provide a penal sanction is alleged, lack of capacity to sue
of injured foreign corp. becomes immaterial (because a
criminal offence is essentially an act against the State).
NOTE: Sec. 160 of R.A. 8293 (Intellectual Property
Code) provides that any foreign national or juridical
person who meets the requirements of Sec. 3 of the
Act (i.e., is a national or is domiciled in a country party
to any convention, treaty or agreement relating to
intellectual property rights or the repression of unfair

competition, to which the Philippines is also a party, or

extends reciprocal rights to Philippine nationals by
law) and does not engage in business in the
Philippines may bring a civil or administrative action for
opposition,
cancellation,
infringement,
unfair
competition, or false designation of origin and false
description, whether or not it is licensed to do business
in the Philippines under existing laws.

WHAT IS THE TEST OF DOING BUSINESS

IN THE PHILIPPINES?
Whether or not there is continuity of
transactions which are in pursuance of the
normal
business
of
the
corporation. (Metholatum v. Mangaliman)

What Constitutes Transacting Business

MENTHOLATUM V. MANGALIMAN (72 Phil.
525; 1941)
WHAT IS CONSIDERED AS NOT DOING
BUSINESS, AND THEREFORE NOT
SUBJECT
TO
THE
LICENSING
REQUIREMENT?

Mere investment as a
shareholder and the exercise
of the rights as such investor;

Having a nominee director or

officer represent the foreign
investors interests;

Appointing a representative or
distributor in the Philippines
who transacts business in his
own name and for his own
account
Example:
Rustans
exclusive distributorship of
Lacoste t-shirts

Publication of a general
advertisement;
NOTE: Under the Code of
Commerce, the publication of
an ad is prima
facie evidence (or
at least creates a
presumption) of
doing business in
the Philippines.

Maintaining stock of goods for

processing by another entity in
the Philippines;

Consignment of equipment to
be used in processing products
for export;

Collecting information in the

Philippines;

Performing services incidental

to an isolated contract of sale
Example: Installi
ng machinery
sold by a foreign
corporation to a
Philippine buyer

The true test as to whether a foreign corporation

is doing business in the Philippines seems to be whether
the foreign corp. is continuing the body or substance of
the business for which it was organized or whether it has
substantially retired from it and turned it over to
another. The term implies a continuity of dealings and
arrangements and contemplates performance of
acts/works or the exercise of the functions normally
incident to and in progressive prosecution of the purpose
and object of its organization.

FACILITIES MANAGEMENT CORP. V. DE

LA OSA (89 SCRA 131; 1979)
The Court of Industrial Relations ordered
Facilities Management Corporation (FMC) to pay Dela
Osa his overtime compensation, swing shift and
graveyard shift premiums. FMC filed a petition for
review on certiorari on the issue of whether the CIR can
validly affirm a judgment against persons domiciled
outside and not doing business in the Phil. and over whom
it did not acquire jurisdiction.
The Supreme Court held that the petitioner may
be considered as doing business in the Philippines within
the scope of Sec. 14, Rule 14 of the Rules of Court:
Sec. 14. Service upon private
foreign corp. - If the defendant is a
foreign corp., or a non-resident joint
stock corporation or association,
doing business in the Phil., service
may be made on its resident agent,
on
the
government
official
designated by law to the effect, or to
an y of its officers or agents within
the Philippines.

FMC had appointed Jaime Catuira as its agent

with authority to execute Employment Contracts and
receive, on behalf of the corp., legal services from, and
be bound by processes of the Phil. Courts, for as long as
he remains an employee of FMS. If a foreign corp. not

engaged in business in the Phil., through an Agent, is not

barred from seeking redress from courts in the Phil., that
same corp. cannot claim exemption done against a person
or persons in the Phil..
NOTE:

Under Sec. 12, Rule 14 of the

1997
Rules
of
Civil
Procedure, the term "doing
business" has been replaced
with
the
phrase
"has
transacted
business," thereby allowing
suits based on isolated
transactions.

MERRILL LYNCH FUTURES INC. V. CA (211

SCRA 824)
Merrill Lynch Futures, Inc. (MLF) filed a
complaint against the spouses Lara for the recovery of a
debt. MLF is a non-resident foreign corp. not doing
business in the Phil., organized under the laws of
Delaware, USA. It is a futures commission merchant
duly licensed to act as such in the futures markets and
exchanges in the US, essentially functioning as a broker
executing orders to buy and sell futures contract received
from its customers on US futures exchanges. (Futures
contract is a contractual commitment to buy and sell a
standardized quantity of a particular item at a specified
future settlement date and at a price agreed upon with the
purchase or sale being executed on a regulated futures
exchange.)
The spouses refused to pay and moved to dismiss
the case alleging that plaintiff had no legal capacity to sue
because (1) MLF is doing business in the country without
a license; and (2) the transactions were made with Merrill
Lynch Pierce, Fenner and Smith and not with plaintiff
MLF.
Issue: Can MLF sue in Philippine courts to establish and
enforce its rights against spouses in light of the
undeniable fact that it had transacted business without a
license?
Legal capacity to sue may be understood in two
senses: (1) That the plaintiff is prohibited or otherwise
incapacitated by law to institute suit in the Phil. Courts, or
(2) although not otherwise incapacitated in the sense just
stated, that it is not a real party in interest.
The Court finds that the Laras were transacting
with MLF fully aware of its lack of license to do business
in the Phils., and in relation to those transactions had
made payments and the spouses are estopped to impugn
MLF's capacity to sue them. The rule is that a party is
estopped to challenge the personality of a corp after

having acknowledged the same by entering into a contract

with it. The principle is 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.

PACIFIC VEGETABLE OIL

V. SINGSON (G.R. No. 7917; April 29, 1955)
This is an action instituted by the plaintiff, a
foreign corporation, against the defendant to recover a
sum of money for damages suffered by the plaintiff as a
consequence of the failure of the defendant to deliver
copra which he sold and bound himself to deliver to the
plaintiff. Defendant filed a motion to dismiss on the
ground that the plaintiff failed to obtain a license to
transact business in the Phil and, consequently, it had no
personality to file an action.
Has appellant transacted business in the Philippines in
contemplation of law?
Contrary to the findings of the trial court, the
copra in question was actually sold by the defendant to
the plaintiff in the US, the agreed price to be covered by
an irrevocable letter of credit to be opened at the Bank of
California, and delivery to be made at the port of
destination. It follows that the appellant corporation has
not transacted business in the Phil in contemplation of
Sec. 68 and 69 which require any foreign corporation to
obtain a license before it could transact business, or before
it could have personality to file a suit in the Phil.. It was
never the purpose of the Legislature to exclude a foreign
corporation which happens to obtain an isolated order of
business from the Phil., from securing redress in the Phil.
Courts, and thus, in effect, to permit persons to avoid their
contracts made with such foreign corp.. The lower court
erred in holding that the appellant corporation has no
personality to maintain the present action.

AETNA CASUALTY & SURETY CO. VS.

PACIFIC STAR LINE (80 SCRA 635; 1977)
Aetna as subrogee of I. Shalom sued Pacific Star
Line (PSL), the common carrier for the loss of Linen &
Cotton piece goods due to pilferage and damage
amounting to US$2,300.00. PSL contends that Aetna has
no license to transact insurance business in the Philippines
as gathered from the Insurance Commission and SEC . It
also argues that since said company has filed 13 other
civil suits, they should be considered as doing business
here and not merely having entered into an isolated
transaction.

Based on rulings in Mentholatum and Eastboard

Navigation, the Supreme Court held that Aetna is not
transacting business in the Philippines for which it needs
to have a license. The contract was entered into in New
York and payment was made to the consignee in the New
York branch. Moreover, Aetna was not engaged in the
business of insurance in the Philippines but was merely
collecting a claim assigned to it by consignee. Because it
was not doing business in the Philippines, it was not
subject to Sec. 68-69 of the Corporation Law and
therefore was not barred from filing the instant case
although it had not secured a license to transact insurance
business in the Philippines.

TOPWELD MANUEL VS. ECED (138 SCRA

120; 1985)
Topweld entered into 2 separate contracts with
foreign entities: a license and technical assistance
agreement with IRTI, and a distributor agreement with
ECED, SA. When Topweld found out that the foreign
corporations were looking into replacing Topweld as
licensee and distributor, the latter went to court to ask for
a writ of preliminary injunction to restrain the foreign
corporations from negotiating with 3rd parties as violative
of RA 5445 (4).
Although IRTI and ECED were doing business in
the Philippines, since they had not secured a license from
BOI, the foreign corporations were not bound by the
requirement on termination and Topweld could not
invoke the same against the former. Moreover, it was
incumbent upon Topweld to know whether or not IRTI
and ECED were properly authorized to engage in such
agreements. The Supreme Court held that both parties
were guilty of violating RA 5445. Being in pari delicto,
Topweld was not entitled to the relief prayed for.

ANTAM CONSOLIDATED VS. CA (143 SCRA

289; 1986)
Stokely Van Camp Inc. filed a complaint against
Banahaw, Antam, Tambunting and Unicorn for the
collection of a sum of money for failure to deliver 500
tons of crude coconut oil. Antam et al asked for dismissal
of case on ground that Stokely was a foreign corporation
not licensed to do business in the Philippines and
therefore had no personality to maintain the suit.
The SC held that the transactions entered into by
Stokely with Antam et al (3 transactions, either as buyer
or seller) were not a series of commercial dealings which
signify an intent on the part of the respondent to do

business in Philippines but constitute an isolated

transaction. The records show that the 2nd and
3rd transactions were entered into because Antam wanted
to recover the loss it sustained from the failure of the
petitioners to deliver the crude oil under the first
transaction and in order to give the latter a chance to make
good on their obligation. There was only one agreement
between the parties, and that was the delivery of the 500
tons of crude coconut oil.

How Courts Acquire Jurisdiction over

Foreign Corporations

As a rule, jurisdiction over a foreign corporation is acquired

by the courts through service of summons on its resident agent.
If there is no assigned resident agent, the government official
designated by law can receive the summons on their behalf and
transmit the same to them by registered mail within 10
days. This will complete the service of the summons. Summons
can also be served on any of the corporation's officers or agents
within the Philippines. (See Sec. 128; Rule 14, Sec. 12, Rules
of Court. Note that while Sec. 128 presupposes that the foreign
corporation has a license, Rule 14 does not make such an
assumption.)
Note that if there is a designated agent, summons served
upon the government official is not deemed a valid process.

Johnlo Trading case holds that the

service on the attorney of an FC who was
also charged with the duty of settling
claims against it is valid since no other
agent was duly appointed.

Service on Officers or Agents of an

foreign corporations domestic subsidiary
will only vest jurisdiction if there is
sufficient ground to disregard the
separate personalities.

GENERAL CORPORATION OF THE

PHILIPPINES VS UNION INSURANCE (87
Phil. 313; 1950)
General Corporation and Mayon investment
sued Union Insurance and Firemens Fund Insurance
(FFI) for the payment of 12 marine insurance
policies. The summons was served on Union which
was then acting as FFIs settling agent in the
country. At that time, it was not yet registered and
authorized to transact business in the Philippines.
Issue: Did the trial court acquire valid jurisdiction over
FFI?

Yes. The service of summons for FFI on its

settling agent was legal and gave the court jurisdiction
upon FFI. Section 14, Rule 7 of ROC embraces Union in
the phrase, or agents within the Philippines. The law
does not make distinctions as to corporations with or
without authority to do business in the Philippines. The
test is whether a foreign corporation was actually doing
business here. Otherwise, a foreign corporation doing
business illegally because of its refusal or neglect to
obtain the corresponding 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 courts.

Withdrawal of Foreign Corporation

(Sec.
136)

articles of merger or consolidation within the time

prescribed by the Code;
(5)
A misrepresentation of any material matter in
any application, report, affidavit or other document
submitted by such corporation pursuant to Title XV;
(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/s for which such corporation is
authorized under its license;
(8)
Transacting business in the Philippine 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.

HOW: By filing a petition for withdrawal of license

REQUISITES FOR ISSUANCE OF CERTIFICATE OF
WITHDRAWAL:
(1) All claims which have accrued
in the Philippines have been
paid, compromised and 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 3 consecutive
weeks in a newspaper of
general circulation in the
Philippines.

SPECIAL AND MISCELLANEOUS

PROVISIONS
Educational corporations (Sec. 106-108)

Educational corporations other than

government-run
institutions
are
governed first by special laws, second,
by the special provisions of the
Corporation Code, and lastly, by the
general provisions of the Corporation
Code. (Sec. 106)

At least 60% of the authorized capital

stock of educational corporations must
be owned by Filipino citizens, and
Congress may require increased Filipino
equity participation therein. (With the
exception of educational institutions
established by religious groups and
mission boards, which are not subject to
this equity requirement.) However,
control and administration of educational
institutions must be vested exclusively in
citizens of the Philippines. (Art. XIV, Sec.
4 (2), 1987 Constitution) This means
that no alien may be elected as a
member of the BOD nor appointed as
Principal or officer thereof.

Once a school, college or university has

been granted government recognition by
the DECS, it must incorporate within 90
days from the date of such recognition,
unless it is expressly exempt by DECS
for special reasons. (Act 2706, Sec.
5) In addition, it must file a copy of its
AOI and by-laws with the DECS. Without
the favorable recommendation of the

Revocation and Suspension of License

(Sec. 134)
WHAT ARE THE GROUNDS FOR
REVOCATION OR SUSPENSION OF A
LICENSE OF A FOREIGN CORPORATION?
(1)
Failure to file its annual report or pay any fees as
required by the Corporation Code;
(2)
Failure to appoint and maintain a resident agent
in the Philippines as required;
(3)
Failure, after change of resident agent or of his
address, to submit to the SEC a statement of such
change;
(4)
Failure to submit to the SEC an authenticated
copy of any amendment to its AOI or by-laws or of any

DECS Secretary, the SEC will not accept

or approve such articles. (Sec. 107,
Corporation Code)

Religious corporations

(Sec. 109-116)

Religious corporations are governed by Title

XIII, Chapter II of the Corporation Code and by the
general provisions of the Code on non-stock
corporations insofar as they may be applicable. (Sec.
109)

Corporation sole (Sec. 110-115)

A corporation sole is an incorporated office,
composed of a single individual who may be a bishop,
priest, minister or presiding officer of a religious sect,
denomination or church. Its purpose is to administer
and manage as trustee the property and affairs of such
religious sect, denomination or church, within the
territorial jurisdiction of such office. (Sec. 110; Sec.
111 (3))
In case of death, resignation, transfer or
removal of the person in office, his successor replaces
him and continues the corporation sole. The property
is not owned but is merely administered by the
corporation sole, and ownership pertains to the church
or congregation he represents. On the other hand, he
is the person authorized by law as the administrator
thereof and the court may take judicial notice of such
fact and of the fact that the parish priests have no
control over such property.
In determining whether the constitutional
provision requiring 60% Filipino capital for corporation
ownership of private agricultural lands, the Supreme
Court has held that it is the nationality of the
constituents of the diocese, and not the nationality of
the actual incumbent of the office, which must be taken
into consideration. Thus, where at least 60% of the
constituents are Filipinos, land may be registered in the
name of the corporation sole, although the holder of the
office is an alien. This ruling is based on the fact that
the corporation sole is not the owner but merely the
administrator of the property, and that he holds it in
trust for the faithful of the diocese concerned. (See
Gana v. Roman Catholic Archbishop of Manila, 43
O.G. No. 8, 3225; 1947)

Religious societies (Sec. 116)

In contrast to a corporation sole, religious
societies are composed of more than one person. The
requirements for incorporation of such societies are set
forth in Sec. 116 of the Code.

Close Corporations

A close corporation, within the

meaning of the Corporation 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 20;
(2) All the issued stock of all classes shall be
subject to one or more specified restrictions on
transfer permitted by Title XII of the Code; and
(3) The corporation shall not list in any stock
exchange or make any public offering of any of its
stock of any class.
Notes:

A narrow distribution of ownership does not, by

itself, make a close corporation. (San Juan Structural
and Steel Fabricators v. CA, 296 SCRA 631)

A corporation shall not be deemed a close

corporation when at least 2/3 of its voting stock or
voting rights is owned or controlled by another
corporation which is not a close corporation.
CAN A CORPORATION THAT IS
NOT A CLOSE CORPORATION
BE A STOCKHOLDER IN A
CLOSE CORPORATION?
YES, provided that said
corporation owns less than 2/3 of
voting stock or voting rights.
WHAT
ENTITIES
MAY
NOT
BE
ORGANIZED AS CLOSE CORPORATIONS? (Sec.
96)

Mining
Oil
Stock Exchange
Bank
Insurance
Public Utilities
Educational Institutions
Corporations declared vested with
public interest

DISTINGUISH CLOSE CORPORATIONS

FROM REGULAR CORPORATIONS.
Close
Corporation
No. of
stockholders

Not more than 20

(Sec. 96)

No limit

Management

Can be managed
by the stockholders
(Sec. 97)

Managed by
Board of
Directors

Meetings

May be dispensed
with (Sec. 101)

Actual
meetings are
required.

(Sec. 96-105)

WHAT ARE THE REQUISITES OF A

CLOSE CORPORATION? (Sec. 96)

"Regular"
Corporation

of directors, until such time as he shall be

removed by order of the SEC or by all the
stockholders. (Sec. 104)

Quorum and
Voting

Greater quorum
and voting
requirements
allowed. (Sec. 97)

Pre-emptive
right

Extends
to
all
stock,
including
treasury
shares
(Sec. 102)

Does
extend
treasury
shares.

Buy-back of
shares

Must be > par

value (Sec. 105)

May be < par

value

Resolution of
deadlocks

SEC has the power

to
arbitrate
disputes in case of
deadlocks,
upon
written petition by
any
stockholder. (Sec.
104) This includes
the
power
to
appoint
a
provisional director,
as well as to
dissolve
the
corporation.

Dissolution

May be petitioned
by any stockholder
whenever any of
the acts of the
directors or officers
or those in control
of the corporation is
illegal, fraudulent,
dishonest,
oppressive
or
unfairly prejudicial
to the corporation
or any stockholder,
or
whenever
corporate assets
are
being
misapplied
or
wasted. (Sec. 105)

not
to

COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT

IN CLOSE CORPORATIONS. (Sec. 105)
Withdrawal
Right

Appraisal
Right

Type
of
corporation
involved

Close
corporation

"Regular"
corporation

When availed
of

For any reason

(Sec. 105)

Only
the
grounds
enumerated in
Sec. 81 and
Sec. 42

Fair value of
shares

Must be > par

or issued value
(Sec. 105)

May be < par

or issued value

Miscellaneous Provisions (Sec. 137-149)

Generally
requires a 2/3
vote of the
stockholders
and
a
majority vote
of the BOD.
(Note
however that
in case of
involuntary
dissolution
under
Sec.
121,
a
corporation
may
be
dissolved by
the
SEC
upon filing of
a
verified
complaint
and
after
proper notice
and hearing.)

WHAT IS A PROVISIONAL DIRECTOR? (Sec. 104)

A provisional director is 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
qualifications, if any, may be determined by
the SEC. He is not a receiver of the
corporation and does not have the title and
powers of a custodian or receiver. However,
he has all the rights and powers of a dulyelected director of the corporation, including
the right to notice of and to vote at meetings

The SEC has the power to issue rules and

regulations reasonably necessary to enable it to
perform its duties under the Code, particularly in the
prevention of fraud and abuses on the part of the
controlling stockholders, members, directors, trustees
or officers. (Sec. 143)
Whenever the SEC conducts any examination of
the operations, books and records of any corporation,
the results thereof must be kept strictly confidential,
unless the law requires them to be made public or
where they are necessary evidence before any
court. (Sec. 142)

All domestic and foreign corporations doing

business in the Philippines must submit an annual
report to the SEC of its operations, with a financial
statement of its assets and liabilities and such other
requirements as the SEC may impose. (Sec. 141)

No right or remedy in favor of or against, nor any

liability incurred by, any corporation, its stockholders,
members, directors, trustees or officers, may be
removed or impaired by the subsequent dissolution of
said corporation or by any subsequent amendment or
repeal of the Code. (Sec. 145)

Violations of the Corporation Code not otherwise

specifically penalized therein are punishable by a fine
of not less than P 1,000.00 but not more than P
10,000.00 or by imprisonment for not less than 30 days
but not more than 5 years, or both, in the discretion of
the court. If the violation is committed by a corporation,
the same may be dissolved in appropriate proceedings
before the SEC. (Sec. 144)