Definition and attributes of a corporationStock v. Non-Stock Corporations


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) (2) (3) (4) It is an artificial being; Created by operation of law; With right of succession; Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.


Stock Definition 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, agricultural and like chambers, or any combination thereof. (§88) Whatever incidental profit made is not distributed among its members but is used for furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among its members upon its dissolution. Before then, no profit may be made by members.

Distribution of Profits

Profit is distributed to shareholders

Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto.

WILMAR K. REQUINA, BAR 2011 Composition Scope of right to vote Stockholders 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) May be denied by the AOI or the by-laws. (Sec. 89) May be authorized by the bylaws, with the approval of and under the conditions prescribed by the SEC. (Sec. 89) Board of Directors or Trustees Board of Directors or Trustees, consisting of 5-15 directors / trustees. or Directors / trustees shall hold office for 1 year and until their successors are elected and qualified (Sec. 23). Members


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 by proxy Voting by mail

Cannot be denied. (Sec. 58) Not possible.

Who exercises Corporate Powers §23 Governing Board

Members of the corporation Board of Trustees, which may consist of more than 15 trustees unless otherwise provided by the AOI or by-laws. (Sec, 92) 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 may directly elected by the members UNLESS the AOI or by-laws provide otherwise. (Sec. 92)

Term of trustees


Election of officers

Officers are elected by the Board of Directors (Sec. 25), except in close corporations where the stockholders themselves may elect the officers. (Sec. 97) Any place within the Philippines, if provided for by the by-laws (Sec. 93)

Place of meetings

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

Transferability of interest or membership


Distribution of assets in case of dissolution

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.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto.



Requirements Steps in the formation in the formation of a corporation of a corporation
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.


Who may form a corporation (See SEC. 10) INCORPORATORS Definition REQUIREMENTS stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof • • natural persons • COMMENTS compare with Corporators which include all stockholders or members, whether incorporators or joining the corporation after its incorporation.


• •

excludes corporations and partnerships may be more than 15 for nonstock corp. except educational corp. does not prevent the “one-man (person) corporation” wherein the other incorporators may have only nominal ownership of only one share of stock; not necessarily illegal


not less than 5; not more than 15

Age Residence

• •

of legal age majority should be residents of the Philippines • residence a requirement; citizenship requirement only in certain areas such as public utilities, retail trade banks, investment houses, savings and loan associations, schools

Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto.

shall take over the same. organization or operation will not be consistent w/ the declared national economic policies (to be determined by the SEC. the SEC must give the incorporators a reasonable time w/in w/c to correct or modify the objectionable portions.WILMAR K. c) Treasurer’s Affidavit is false. Virgilio Jacinto. Sec. Filing of articles. Drafting articles of incorporation (See SEC. buys the rights and property which the business may need. after consultation w/ BOI. Process: a) SEC shall examine them in order to determine whether they are in conformity w/ law. It will not even be a de facto corp. NEDA or any appropriate government agency -. (see chart below) a. payment of fees. 6 (k)) • Decisions of the SEC disapproving or rejecting AOI may be appealed to the CA by petition for review in accordance w/ the ROC. comments. 1982). REQUINA. 2. b) If not. Based on the outline. Grounds for rejection or disapproval of AOI: a) AOI /amendment not substantially in accordance w/ the form prescribed b) purpose/s are patently unconstitutional. Examination of articles. with the understanding that the corporation when formed. notes and selected cases of Prof. BAR 2011 Mutual Agreement to perform certain acts required for organizing a corporation 4 12345STEPS Organize and establish a corporation Comply with requirements of corporation code Contribute capital/resources Mode of use of capital/resource and control/management of capital/resource distribution/disposition of capital/resource (embodied in constitutive documents) COMMENTS Promoter • 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. 14) c. (SEC Circular # 4. . Under present SEC rules. approval or rejection by SEC. Jr. Promotional Stage (See SEC. and Maria Clara L. and the lectures and additional cases of Prof.PD 902-A as amended by PD 1758. • • • • AOI & the treasurer’s 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. the AOI once filed . will be published in the SEC Weekly Bulletin at the expense of the corp. if necessary. immoral. Definitions) b. illegal. Jose Campos. d. 17) e) corp. Campos.’s establishment. d) required percentage of ownership has not been complied with (Sec. or contrary to government rules & regulations.

medicine or accountancy must be within the Philippines specify city or province street/number not necessary • Principal Office • • • Based on the outline. and b) there are no reasons for rejecting or disapproving the AOI. Campos. Issuance of certificate of incorporation. 2. Virgilio Jacinto. the same may be revoked by the SEC. Drafting articles of incorporation (See SEC. and Maria Clara L. 18) (2) LYCEUM OF THE PHILS. comments. the reduction of difficulties of administration and supervision over corporations. Jr. and the lectures and additional cases of Prof. notes and selected cases of Prof. b. Commencement of corporate existence) • Should it be subsequently found that the incorporators were guilty of fraud in procuring the certificate of incorporation. 19. Corporation may not be formed for the purpose of practicing a profession like law. the avoidance of fraud upon the public which would have occasion to deal with the entity concerned. BAR 2011 5 e. those which may be incidental to such conferred powers . confusing or contrary to existing laws. 14) CONTENTS OF AOI Corporate Name • • 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: (1) identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law. VS. Purpose Clause • • A corporation can only have one (1) primary purpose. Jose Campos. A corporation has only such powers as are expressly granted to it by law & by its articles of incorporation.WILMAR K. and 3. the prevention of evasion of legal obligations and duties. it can have several secondary purposes. (Sec. Certificate of Incorporation will be issued if: a) SEC is satisfied that all legal requirements have been complied with. (See Sec. • It is only upon such issuance that the corporation acquires juridical personality. REQUINA. or patently deceptive. CA (219 SCRA 610) 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: 1. after proper notice & hearing. However. those reasonably necessary to accomplish its purposes & those which may be incident to its existence. .

and if some or all of the shares are without par value. 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. which has all the powers and liabilities of a ‘de jure’ corporation and. 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. If the corporation is engaged in a wholly or partially nationalized business or activity. Virgilio Jacinto. nationalities & residences of the incorporators. names. the amount of its capital.. nationalities and residences of the original subscribers. . b) stock exchanges. d) insurance companies. comments. names. the names. & g) corporations declared to be vested w/ public interest User of Corporate Powers What is a ‘de facto’ corporation? A ‘de facto’ corporation is a defectively organized corporation. and the lectures and additional cases of Prof. and the amount subscribed and paid by each on his subscription. 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. preferences of & restrictions on any such class. except: a) mining or oil companies. e) public utilities. Campos. c) banks. except as to the State. Jr. and any denial or restriction of the pre-emptive right of stockholders should also be expressly stated in said articles. BAR 2011 • important in determining De Facto Corporations: Requisites venue in an action by or against the corp.000 Classes of shares into w/c the shares of stock have been divided. such fact must be stated for a non-stock corporation. names. REQUINA. 6 Term of Existence • • Incorporators and Directors • • • Capital Stock • • • • • • • Other matters • • Any corporation may be incorporated as a close corporation. all subscriptions /contributions paid by them. treasurer who has been chosen by the pre-incorporation subscribers/members to receive on behalf of the corporation. 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. nationalities & residences of the directors or trustees who will act as such until the first regular directors or trustees are elected. and Maria Clara L. the par value of each.WILMAR K. Jose Campos. has a Based on the outline. f) educational institutions. but not earlier than 5 years prior to the original or subsequent expiry date UNLESS there are justifiable reasons for an earlier extension. notes and selected cases of Prof.

St. nor the signing of the articles of incorporation which are not filed. Piccio ( 86 Phil.W. 85) The constitutive documents of the proposed corporation were deposited with the Register of Deeds but not on file in said office. 65 Am.e. One of the requirements for valid incorporation is the filing of constitutive documents in the Register of Deeds. and. 187. Neither the hope. DAVIS (168 F. in the case at bar. Colorable compliance with the legal requirements in good faith. 603. HARRIL V. HOBBS (71 N. 1056. Rep. 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. the belief. 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. 1909) 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.WILMAR K. no immunity from individual liability is secured. Jose Campos. i. and the lectures and additional cases of Prof. . Jr. Campos. (2) That there has been colorable compliance with the legal requirements in good faith. 1950). Was there ‘colorable’ compliance enough to give the supposed corporation at least the status of a ‘de facto’ corporation? No. (3) That there has been use of corporate powers. REQUINA. remains undone. where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation. Arkansas law requires filing in both offices. Can a corporation transact business as a ‘de facto’ corporation while application is still pending with SEC? No. Virgilio Jacinto. required as a condition precedent. MUNICIPALITY OF MALABANG V. nor the statement by parties that they are incorporated. where filing Based on the outline. the transaction of business in some way as if it were a corporation. comments.. No. In the case of Hall v. 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. BERGERON V. 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. notes and selected cases of Prof. Was there ‘colorable’ compliance enough to give the supposed corporation at least the status of a ‘de facto’ corporation? No. Hence. The filing of the constitutive documents in the Register of Deeds is a condition precedent to the right to act as a corporate body. 1969) WON a corporation organized under a statute subsequently declared void acquires status as ‘de facto’ corporation. BENITO (29 SCRA 533. 7 Formation under apparently valid statute. As long as an act. and Maria Clara L. BAR 2011 juridical personality distinct and separate from its shareholders.

1881) Company was sued on a promissory note. The Corporation cannot repudiate the transaction or evade responsibility when sued thereon by setting up its own mistake affecting the original organization. 1919) Corporation sued a partnership on a promissory note. WOODS (104 Kan. HALL v. NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit to which such corporation may be a party. The ‘de facto’ doctrine differs from the estoppel doctrine in that where all the requisites of a ‘de facto’ corporation are present. There could be no incorporation or color of it under the law until the articles were filed (requisites for valid 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. if any of the requisites are absent. STUART (46 Mich. nor the use of the pretended franchise of the nonexistent corporation. PICCIO (29 SCRA 533. Piccio. REQUINA. and Maria Clara L. it was defectively organized and therefore could not be sued as such. 482. Its defense was that at the time of its issuance. where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation. 21) Distinguish a de facto corporation from a corporation by estoppel. Such inquiry must be through a quo warranto proceeding made by the Solicitor General. 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. 527. except separate personality against State. (2) against third party? Third party cannot deny existence of corporation if it dealt with it as such. then the defectively organized corporation will have the status of a ‘de jure’ corporation in all cases brought by and against it. On the other hand. Jose Campos. and the lectures and additional cases of Prof. (De facto – has status of ‘de jure’ corpo. notes and selected cases of Prof. Based on the outline. 20) (Sec. 729. . 9 N. 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. Jr.WILMAR K. EMPIRE vs. then the estoppel doctrine can apply only if under the circumstances of the particular case then before the court. Virgilio Jacinto. or the defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence. LOWELL-WOODWARD vs. (Sec. 1969) In the case of Hall v. BAR 2011 8 CORPORATION BY ESTOPPEL is requisite to create the corporation. comments. Campos. The latter as defense alleged that the plaintiff was not a corporation. either the defendant association is estopped from defending on the ground of lack of capacity to be sued.W. except only as to the State in a direct proceeding.

and Maria Clara L. The Supreme Court found that Aruego represented a non-existent entity and induced not only Albert but the court to believe in such representation. 1965) Mariano Albert entered into a contract with University Publishing Co. BAR 2011 9 BY-LAWS (Sec.WILMAR K. Based on the outline. and the lectures and additional cases of Prof. Aruego as the real defendant. he assumed the risk arising from the transaction. is estopped from asserting that it was not incorporated. 757. University opposed. It is also estopped from denying the other’s corporate existence. 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. REQUINA. President complains for being held personally liable. was the real party to the contract sued upon. from denying its corporate existence. The defense was that the plaintiff was not able to prove the corporate existence of both parties. acting as representative of such non-existent principal. in an action brought thereon by such party under the same designation. 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. having dealt with the defectively organized company as if it were properly organized and having relied on its credit instead of Cranson’s. 477. The contract stipulated that failure to pay one installment would render the rest of the payments due. The general rule is that in the absence of fraud. 200 A. 2D 33 . it was found that University was not registered with the SEC. its President. When University failed to pay the second installment. Jr. Albert sued for collection and won. He is liable. 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. rescission and damages against the corporation and its president for his share of the produce. through Jose M. . ALBERT VS UNIVERSITY PUBLISHING CO. INC. SALVATIERRA VS GARLITOS (103 Phil. Albert petitioned for a writ of execution against Jose M. 1958) Salvatierra leased his land to the corporation. Jose Campos. Aruego. Virgilio Jacinto. notes and selected cases of Prof.. He filed a suit for accounting. on the ground that Aruego was not a party to the case. An agent who acts for a non-existent principal is himself the principal. (Jan. 1924) The corporation sued another corporation a promissory note. It cannot sue Cranson personally. However. whereby University would pay plaintiff for the exclusive right to publish his revised Commentaries on the Revised Penal Code. Inc. 30. comments. IBM. and thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as such agent.. ASIA BANKING VS STANDARD PRODUCTS (46 Phil. Campos. The defendant is estopped from denying its own corporate existence. 145. CRANSON VS IBM (234 MD. In acting on behalf of a corporation which he knew to be unregistered. upon execution. Judgment against both was obtained. 46 & 47) One who enters into a contract with a party described therein as a corporation is precluded. Aruego.

Subject to the provisions of the Constitution. 3) the required quorum in meetings of stockholders or members and the manner of voting herein. . Jr. 7) the manner of election or appointment and the term of office of all officers other than directors or trustees. 1925) Based on the outline. the manner of issuing certificates. duties and compensation of directors or trustees. 9) in the case of stock corporations.) or members (Non-Stock) Must be signed by stockholders or members voting for them (b) Prior to incorporation Requirement: Where kept: When effective: Approval of all incorporators. BOTICA NOLASCO CO. 6) the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof. of incorporation. 583. comments. officers and employees.WILMAR K. and 10) such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. Jose Campos. notes and selected cases of Prof. (47 Phil. Campos. a private corporation may provide in its by-laws for: 1) the time. and Maria Clara L. Virgilio Jacinto. BAR 2011 When adopted: (a) No later than one (1) month after receipt from SEC of official notice of issuance of Cert. this Code. FLEISCHER V. Requirement: 10 Affirmative vote of stockholders representing at least majority of outstanding capital stock (Stock Corp. 4) the form for proxies of stockholders and members and the manner of voting them. 8) the penalties for violation of the by-laws. 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. REQUINA. place and manner of calling and conducting regular or special meetings of the directors or trustees. must be signed by all of them (1) In the principal office of the corporation . and (2) Securities and Exchange Commission Only upon the SEC’s issuance of a certification that the by-laws are not inconsistent with the Corporation Code. 5) the qualifications. 2) the time and manner of calling and conducting regular and special meetings of the stockholders or members. and the lectures and additional cases of Prof. and the articles of incorporation. other special laws. • • • • • • • banks or banking institutions building and loan associations trust companies insurance companies public utilities educational institutions other special corporations governed by special laws Contents of By-laws .

RULING: No. Failure to file by-laws does not result in the automatic dissolution of the corporation.WILMAR K. It is a patent nullity. . It only constitutes a ground for such dissolution. EL HOGAR Is a provision in the by-laws allowing the BOD. Virgilio Jacinto. v. notes and selected cases of Prof. Campos. Jose Campos. can do no more than prescribe a general mode of transfer on the corp. Law which prohibits forced surrender of unmatured stocks except in case of dissolution. as mandated by Art.A.000 shares valid? Yes. it is deemed to have approved its foreign-enacted by-laws. 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. 46 of the Corporation Code. 163 SCRA 534) Incorporators must be given the chance to explain their neglect or omission and remedy the same. Under a statute authorizing by-laws for the transfer of stock. V. GOVT. being in direct conflict with Sec. REQUINA. books and cannot justify an restriction upon the right of sale. by vote of absolute majority. 46 of the Corporation Code which states that by-laws are not valid without SEC approval applies only to domestic corporations. • LOYOLA GRAND VILLAS v. ( Cf. 187 of the Corp. the power to fix compensation lies with the corporation. N. The Corporation Law gives the corporation the power to provide qualifications of its directors. Jr. IAC. Since the Corporation Law does not prescribe the rate of compensation. 19) Based on the outline. a corp. THE CORPORATE ENTITY When does the corporation’s existence as a legal entity commence? Upon issuance by the SEC of the certificate of incorporation (Sec. 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. CHUA (220 SCRA 75) • Where the SEC grants a license to a foreign corporation. Chung Ka Bio 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. Sec. CITIBANK. results in the corporation's automatic dissolution. and Maria Clara L. BAR 2011 11 The Theory of Corporate Entity As a general rule. to cancel shares valid? No. Is a provision in the by-laws fixing the salary of directors valid? Yes. Is a provision requiring persons elected to the Board of Directors to own at least P 5. and the lectures and additional cases of Prof.I. OF P. comments.

. CA (151 SCRA 373. Granting that the petitioners benefited from the services rendered. they do not represent property of the corporation. SAN JUAN STRUCTURAL & STEEL FABRICATORS v. 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. as well as the distribution of the assets. Jose Campos. enter into contracts with third persons. responsible for its obligations. & perform all other legal acts. and Maria Clara L. such is no justification to hold them Based on the outline. her act could not bind the corporation since she was not the sole controlling stockholder. It is.WILMAR K. fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance. Jr. but its holder is not the owner of any part of the capital of the corporation. GUANZON V. the Airline should alone be liable for its corporate acts as duly authorized by its officers and directors. In this case. but rather a transfer or conveyance of the title of its assets to the individual stockholders. Nor is he entitled to the possession of any definite portion of its property or assets. is to transfer their title from the corporation to the stockholders in proportion to their shareholdings. therefore. BAR 2011 12 What rights does the corporation acquire? The right to: 1) 2) 3) 4) sue and be sued. notes and selected cases of Prof. hold property in its own name. Campos. to invest in the proposed airline. the stockholders have no claim on it as owners. Virgilio Jacinto. 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. 1987) The case of the unpaid compensation for the preparation of the project study. and the lectures and additional cases of Prof. or that the said contract was ratified by Motorich. Remember that the liability of the stockholders is limited to the amount of shares. Accordingly. that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. a corporation has no interest in the individual property of its stockholders. Since the purpose of the liquidation. REQUINA. The act of liquidation made by the stockholders of the corp of the latter’s assets is not and cannot be considered a partition of community property. Even though Gruenberg and her husband owned 99. CARAM V. 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. unless transferred to the corporation. They were merely among the financiers whose interest was to be invited and who were in fact persuaded. Conversely. 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. While shares of stock constitute personal property. The petitioners were not involved in the initial stages of the organization of the airline. STOCKHOLDERS OF F. on the strength of the project study.866% of Motorich. There was no showing that the Airline was a fictitious corp and did not have a separate juridical personality to justify making the petitioners. CA (296 SCRA 631) A corporation is a juridical person separate and distinct from its stockholders or members. As a bona fide corp. as principal stockholders thereof. comments. 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. Since corporate property is owned by the corporation as a juridical person.

The court found no badges of fraud on the part of the president of the corporation. Here. all the other stockholders of the corporation. Q: What is the theory of corporate entity? A: That a corporation has a personality distinct from its stockholders. 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. comments. While a share of stock represents a proportionate or aliquot interest in the property of the corp. is indirect. and regardless of the amount of their shareholdings. of petitioners. Based on the outline. adjunct or business conduit for the sole benefit of the stockholders. notes and selected cases of Prof. or for purposes that could not have been intended by law that created it or to defeat public convenience. without the establishment of which plaintiff could not recover." to allow petitioners to intervene. 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. which is owned by the corp as a distinct legal person. BAR 2011 13 PIERCING THE CORPORATE VEIL personally liable therefor. . after payment of the corporate debts and obligations. 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. consequential and collateral. his interest in the corporate property being equitable and beneficial in nature. and is not affected by the personal rights. Campos. remote. and which would put the intervenor in a legal position to litigate a fact alleged in the complaint. MAGSAYSAY V. be made personally liable because he appears to be the controlling stockholder. contingent. 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. would be equally and personally liable also with the petitioner for the claims of the private respondent. PALAY V. if it exists at all. REQUINA. and Maria Clara L. Virgilio Jacinto. conjectural. At the very least. 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. and the lectures and additional cases of Prof. no sufficient proof exists on record that he used the corp to defraud private respondent. The words "an interest in the subject. the interest. 1983) The case of the reliance on a default provision of the contract granting automatic extrajudicial rescission. As president and controlling stockholder of the corp. He cannot. obligations and transactions of the latter. mean a direct interest in the cause of action as pleaded. Otherwise. CLAVE (124 SCRA 640. their interest is purely inchoate. it does not vest the owner thereof with any legal right or title to any of the property. Shareholders are in no legal sense the owners of corporate property. Jr. justify wrong.WILMAR K. 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. therefore. The BOD had literally and mistakenly relied on the default provision of the contract. Jose Campos. including those who came in late.

Sycip (who together with wife. as if it had been a formal resolution of its Board of Directors and the acts done is ultra vires. 833. DAVID (94 Phil. Obviously. through its pres. JARENCIO (163 SCRA 205. Jose Campos. Based on the outline. comments. V. corpo used merely as an instrumentality. the act should be regarded as the act of the corporation. 14 Contrary to law / public policy. 279. and Maria Clara L. STANDARD OIL (49 Ohio. and the lectures and additional cases of Prof.E. LAGUNA TRANS V. CORP. the board is using PADCO to shield G from fulfilling liability to T. (AFC). Sycip held jointly and severally liable with AFC. F.. 1967) Associated Financing Corp. another corpo intercedes. notes and selected cases of Prof. 376. 1988) Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter fails to pay. BAR 2011 (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. MARVEL BLDG. NAMARCO v. corporate veil may be pierced. and directors never met. . refined). evasion of liability to government STATE V. shows that other shareholders may be considered dummies of Castro. Hence. SSS (107 Phil. own 76% of AFC) contracts with NAMARCO for an exchange of sugar (raw v. 1954) The fact that: • • • • certificates in possession of Castro were endorsed in blank. and may be challenged by the state in a quo warrranto proceeding. AFCorp (19 SCRA 962. Castro had enormous profits and had motive to hide them. Evasion of liability to creditors TAN BOON BEE CO. Jr. Virgilio Jacinto. other subscribers had no incomes of sufficient magnitude. St. 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. Campos. Both G and PADCO's corporate entities pierced because they have: the same board of directors. 15. having leased such to G. REQUINA. V. PADCO never engaged in the business of printing. PADCO owns 50% of G. AFC's corporate veil was pierced because it was used as Sycip's alter ego. such corporation is presumed to have assumed partnership debts. AFC doesn't since it did not have sugar to supply in the first place. N delivers.WILMAR K. G's printing machine levied upon to satisfy claim but PADCO. 137. saying it is the owner of the machine. Printing machine was allowed by the Court to satisfy G's liability. 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. N sues to recover sum of money plus damages. agency or conduit of another to evade liability. N.

OPLE (143 SCRA 125. 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). Mere fact that businesses were related. or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality. CIR (65 SCRA 613. ASIONICS PHILS. 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. Jr. and Maria Clara L. The veil of corporate fiction must be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees. Jose Campos. Here.WILMAR K. and that physical plants. 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. owes MetroBank sum of money. Based on the outline. that some of the employees of Indophil are the same persons manning and providing for auxiliary services to the other company. Union does not seek to impose such claim against Acrylic. INDOPHIL TEXTILE MILL WORKERS UNION V. v. 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. All the assets of the dissolved Plant were turned over to the emerging corporation. the company having maintained a run-away shop and transferred its machines and assets there. NAFLU V. justify wrong. president/GM and owner of 52% of corpo. BAR 2011 15 JACINTO V. the former must bear the consequences of the latter's unfair acts. 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. conduit or adjunct of another corporation. CA (198 SCRA 211) Jacinto. Jacinto absconds. protect fraud or defend crime. agency. REQUINA. and the lectures and additional cases of Prof. signs trust receipts therefor. 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. comments.not sufficient to apply doctrine. the veil of corporate fiction was pierced in order to safeguard the right to selforganization and certain vested rights which had accrued in favor of the union. There was no clear cut delimitation between the personality of Jacinto and the corporation. Second corporation sought the protective shield of corporate fiction to achieve an illegal purpose. notes and selected cases of Prof. CALICA (205 SCRA 698) Rule: The doctrine of piercing the veil of corporate entity applies when corporate fiction is used to defeat public convenience. Virgilio Jacinto. 1986) Libra/Dolphin Garments was but an alter ego of Lawman Industrial. therefore. . It cannot deny reinstatement of petitioners simply because of cessation of Lawman's operations. officers and facilities are situated in the same compound . Evasion of liability / obligation to employees CLAPAROLS V. since it was in fact an illegal lock-out. Campos. 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.

he sold the said CPCs to Pantranco. comments. . judgment creditor. These circumstances negate Villarama's claim that he was only a part-time General Manager. sold 2 CPCs to Pantranco. The PSC issued an order that pending resolution of the applications.WILMAR K. he cannot be held solidarily and personally liable with the corporation. 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. BAR 2011 16 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. 1968) Jose M. Close Corporations CEASE V. Thus. and applied with the Public Service Commission (PSC) for approval of the sale. and Maria Clara L. and that Villarama and/or the Corporation is qualified from operating the CPCs by virtue of the agreement entered into between Villarama and Pantranco. Villarama." Barely 3 months after the sale. During the public sale conducted. REQUINA. Villarama as one of the incorporators and who was subsequently elected as treasurer of the Corporation. alleging that Villarama and Villa Rey Transit are one and the same. 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. Jr. FERRER (25 SCRA 849. was organized. Given the evidence. and they jointly submitted their contract of sale to the PSC for approval. Inc. judgment debtor. 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. and the lectures and additional cases of Prof. with the wife of Jose M. against Valentin Fernando. which was authorized to operate 32 units from Pangasinan to Manila and vice-versa. apply for any TPU service identical or competing with the buyer (Pantranco). A seller may not make use of a corporate entity as a means of evading the obligation of his covenant. Pantranco filed a third-party complaint against Jose M. it can be enjoined from competing with the covenantee. Villa Rey Transit took issue with this. operator of a bus company. Where the Corporation is substantially the alter ego of one of the parties to the covenant or the restrictive agreement. Villa Rey Transit. the Court found that the finances of Villa-Rey. Ferrer was the highest bidder. 2 of the 5 CPCs were levied upon pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer. Barely a month after its registration with the SEC. 1979) The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation whose license to operate already expired. 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. Campos. notes and selected cases of Prof. Based on the outline. Shortly thereafter. CA (93 SCRA 483. Villarama. however. for a period of 10 years from the date of the sale. One of the conditions included in the contract of sale was that the seller (Villarama) "shall not. Inc. and show beyond doubt that the corporation is his alter ego. Evasion of liability on contract VILLA-REY TRANSIT V. Jose Campos. and a certificate of sale was issued in his name. a corporation called Villa Rey Transit. the restrictive clause with Pantranco applies. Villarama even admitted that he mingled the corporate funds with his own money. Before the PSC could take final action on the said application. the corporation bought 5 CPCs and 49 buses from one Valentin Fernando. Virgilio Jacinto.

Jr. notes and selected cases of Prof. however. --. 6. DELPHER TRADES V. 1988) The Delpher Trades Corp. 8. 3. comments. There is not even a showing that his children were subscribers or purchasers of the stocks they own. 11. the parent and subsidiary have common directors and officers the parent finances the subsidiary the parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation the subsidiary has grossly inadequate capital the parent pays the salaries and other expenses or losses of the subsidiary the subsidiary has substantially no business except with the parent corp. the subsidiary is described as a department or division of the parent corp. or no assets except those conveyed to or by the parent corp. BAR 2011 17 Parent-Subsidiary Relationship While originally. is a business conduit of the Pachecos. in the latter’s interest the formal legal requirements of the subsidiary are not observed (Garrett vs. Campos. 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. 2. and the lectures and additional cases of Prof. The head of the corporation. 9. Southern Railway) (Note: Sir Jack said that we must not stop after we’ve gone through the 11 points in order to determine whether or not there is a subsidiary or instrumentality. the parent corp. Q: What is the general rule governing parent-subsidiary 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. in the papers of the parent corp. used the Tiaong plantation as his instrumentality. This is the reverse of Cease. or in the statements of its officers. It was his business conduit and an extension of his personality.WILMAR K. This saved them inheritance taxes. Jose Campos. CA (157 SCRA 349.Em) Based on the outline. 5. 10. owns all or most of the capital stock of the subsidiary. there were other incorporators of Tiaong. Cease. It stands on its own because of the facts. 4. or its business or financial responsibility is referred as the parent’s own the parent uses the property of the subsidiary as its own 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. 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 Q: What are the criteria by which the subsidiary can be considered a mere instrumentality of the parent company? 1. and Maria Clara L. it has developed into a closed family corporation (Cease). Virgilio Jacinto. . it does not modify the other cases. REQUINA. 7. We must go further and consider other circumstances which may help determine clearly the true nature of the relationship.

Campos.’s stock belonged to Frank Liddel. There was also no evidence that Lenoir was run solely for the benefit of Southern. . the manager of the subsidiary. The plaintiff sought to claim from Southern Railway Company. etc. Moreover. also bore alone its own incidental expenses (e.g. 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. 1959) This case involved a Workers Compensation claim by a wheel moulder employed by Lenoir Car Works.WILMAR K. it dismissed the complaint saying that in the transactions involved in the case. 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. the complaint against Southern Railway was dismissed. Jose Campos. was an alter ego of Liddel & Co. Inc. In fact. and then sell them to the general public. 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.5% of the shares of stocks of K-Phil were owned by K-USA. K-Phil. KOPPEL VS. comments. 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. Moreover. Yutivo financed principally. K-Phil’s share in the profits was left in the hands of K-USA. Inc. under protest to the Collector of Internal Revenue. the business of Southern Motors and actually exceeded the Based on the outline. Plaintiff contended that Southern so completely dominated Lenoir that the latter was a mere adjunct or instrumentality of Southern. Virgilio Jacinto. 98% of the Liddel Inc. it would allow the taxpayer to do by indirection what the tax laws prohibit to be done directly. Liddel Motors pursued no other activities except to secure cars. SOUTHERN RAILWAY (173 F. and was therefore liable for merchant sales tax. YUTIVO VS. REQUINA. E. a substantial part of its requirements in the field of operation of Lenoir was bought elsewhere. Lenoir sold substantial quantities to other companies. In the case. He established prices. Frank supplied the original capital funds. 496. Policy decisions remained in the hands of Marius. As to Liddel Motors. Clearly. Also. or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. YATCO (77 Phil. 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. 915. Tenn. VS. and the lectures and additional cases of Prof. it was found that there were two distinct operations. was in full control of the operation. Hence. acted as a representative of K-USA and not as an agent. handled negotiations in CBAs. for any and all purposes. BAR 2011 18 GARRETT VS. evidence shows that Marius. and Maria Clara L." The facts show that 99. K-Phil was a mere branch or dummy of K-USA. 1961) Liddel Motors Inc. There was no evidence that Southern dictated the management of Lenoir. At the time of its incorporation. Jr.D. 1946) This case involved a complaint for the recovery of merchant sales tax paid by Koppel (Philippines). CIR (2 SCRA 632. K-Phil. The bulk of the business of Liddel Inc. had local counsel and maintain a Workmen’s Compensation Fund. was channeled through Liddel Motors. unless the separate corporate existence of the subsidiary is a mere sham. trucks and spare parts from Liddel Inc. In fact. Cable expenses) and also those of its “principal”. LIDDELL & CO. Lenoir paid local taxes. Although the Court of First Instance did not deny legal personality to Koppel (Philippines). CTA (1 SCRA 160. which acquired the entire capital stock of Lenoir Car Works. if not wholly. Supp. notes and selected cases of Prof.

McARTHUR V. or (2) Accepts its benefits with knowledge of the terms thereof. TOMB (21 F. a continuing offer to be accepted or rejected by the corporation). until organized. PROMOTER’S CONTRACTS PRIOR TO INCORPORATION 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. or at least should be put upon such notice as would lead. that the contract must be adopted in its entirety. Moreover. comments. but it may be inferred from acts or acquiescence on the part of the corporation. adoption. policies. it: (1) Adopts or ratifies the contract. novation. has no life therefore no faculties. or its authorized agents. 2d 893. 1953) The La Campana Gaugau Packing and La Campana Coffee Factory were operating under one single business although with 2 trade names. REQUINA. 216. to the knowledge of the facts. the corporation cannot adopt only the part that is beneficial to it and discard that which is burdensome. CO. 319. being a mere instrumentality or adjunct of Yutivo. 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. Jr. 1892) It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be expressed. upon reasonable inquiry. Campos. (48 Minn. Hence. Jose Campos. and the lectures and additional cases of Prof. It must be noted. however.WILMAR K. Based on the outline. after incorporation. Southern Motors.W. it is necessary in all cases that the corporation should have full knowledge of the facts. LA CAMPANA VS. Virgilio Jacinto. v. 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. CLIFTON v. 223. Yutivo. 1921) Whatever may be the proper legal theory by which a corporation may be bound by the contract (ratification. In the case at bar. BAR 2011 19 Liability of Corporation for Promoter’s Contracts credit of the latter . the corporation may make the contracts its own and become bound thereon if. The corporation had no juridical personality to enter into a contract. as any similar original contract might be shown. At all times. expenditures and obligations of the latter. 51 N. and Maria Clara L. and one which the usual agents of the company have express or implied authority to enter. 1937) A promoter could not have acted as agent for a corporation that had no legal existence. . CAGAYAN FISHING DEV. the CTA correctly disregarded the technical defense of separate corporate identity in order to arrive at the true tax liability of Yutivo. 160. A corporation. 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. TIMES PRINTING CO. notes and selected cases of Prof. 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 contract must be one which is within the powers of the corporation to enter. through the officers and directors common to it and the Southern Motors exercised full control over the cash funds. SANDIKO (65 Phil. KAISAHAN (93 Phil.

873. the acts of the incorporators were an adoption of the contract. If there is an express or implied agreement to the contrary. Virgilio Jacinto. 258-259). Supp. 17 S. 732. Campos. BUILDERS DUNTILE CO. 936. 85 S. CA Should the other contracting party fail to perform its part of the bargain. not only perfected a contract between the municipality and Morong but also cured the deficiency pointed out by the petition. Jr. WELLS VS.W. HOW & ASSOCIATES INC. 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. as Morong later obtained its certificate of incorporation and accepted the franchise. and ratified all that had been done on its behalf. 2d 715. VS. REQUINA. receive them in their possession and authorize one member to issue a note. 1963) Based on the outline. The making of partial payments by the corporation. when later formed. FAY & EGAN CO. .E. (143 Ga. DUNN (229 Ky. (see Campos' notes p. comments. the acceptance of which by the creditor does not release the debtors from liability over the balance. notes and selected cases of Prof. RIZAL LIGHT V. PSC (25 SCRA 285. does not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another. BAR 2011 20 Corporate Personal Liability Rights under of Promoter Promoter’s on Pre-Incorporation Contracts Contracts Also see Caram v. v. 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. 569. 1915) Individual promoters cannot escape liability where they buy machinery. Jose Campos. The fact that Morong did not have a corporate existence on the day the franchise was granted does not render the franchise invalid. 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.WILMAR K. Therefore the corporation has the right to sue for damages for the breach of contract. in contemplation of organizing a corporation which was not formed. the incorporators took upon themselves the whole thing. 1929) When the corporation was formed. or (2) Damages resulting from breach of contract. there is no adoption or ratification. and the lectures and additional cases of Prof. the corporation which has adopted or ratified the contract may either sue for: (1) Specific performance. and Maria Clara L. GENERAL RULE: EXCEPTION: Promoters are personally liable on their contracts made on behalf of a corporation to be formed. BOSS (222 F. Though there was no formal assignment of the contract to the corporation. Hence. The agent is personally liable for contracts if there is no principal.

and Maria Clara L. 364 P. morals. and make full disclosure to the corporation through them. The promoter is liable. notes and selected cases of Prof. may still sell properties to it. Virgilio Jacinto. BAR 2011 21 Fiduciary General Powers relationship of Corporation between corporation (Sec. Campos. 193. To adopt and use a corporate seal. . PARR (148 Colo. 159. There was no intent here by plaintiff-creditor to look to the promoters for the performance of the obligation. A purported adoption by the corporation of the contract must be expressed in a novation or agreement to that effect. or 4) be himself the real subscriber of all the shares of the capital stock contemplated as a part of the promotion scheme. 36) and promoter The rule is that if the contract is partly to be performed before incorporation." there was here an intention of the parties to have a present obligor. These are: 1) provide an independent board of officers in no respect directly or indirectly under his control.E. Even if the promoter signed "on behalf of corporation to be formed. Jr. Based on the outline.WILMAR K. with or without incorporation. and the lectures and additional cases of Prof. because three-fourths of the payment are to be made at the time the drawings or plans in the architectural contract are completed. and to amend or repeal the same in accordance with this Code. though made on behalf of a corporation to be formed. who will be obligor. This is an exception to the general rule that promoters are personally liable on their contracts. 89 N. 2) make full disclosure of all material facts to each original subscriber of shares in the corporation. To amend its articles of incorporation in accordance with the provisions of this Code. To adopt by-laws not contrary to law. or public policy. but he must pursue one of four courses to make the contract binding. The creditorplaintiff 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. BIGELOW (203 Mass. QUAKER HILL VS. CORPORATE POWERS • • • • • To sue and be sued in its corporate name. even if owning all the stock of the corporation at the time of the transaction. Jose Campos. the promoters solely are liable. 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. comments. 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. 2d 1056. OLD DOMINION VS. 3) procure a ratification of the contract after disclosing its circumstances by vote of the stockholders of the completely established corporation. 45. if further original subscription to capital stock contemplated as an essential part of the scheme of promotion came in after such transaction. notwithstanding his fiduciary duties to the corporation. REQUINA. 1909) A promoter. 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. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation.

and the lectures and additional cases of Prof. (Sec. and to admit members to the corporation if it be a non-stock corporation. and Maria Clara L. BAR 2011 22 Specific Powers of CorporationImplied Powers • In case of stock corporations. scientific. Jr.) • • To adopt any plan of merger or consolidation as provided in this Code. Campos. receive. notes and selected cases of Prof. civic. Jose Campos. officers and employees. pledge. mortgage and otherwise deal with such real and personal property. (Sec. Based on the outline. create or increase bonded indebtedness (Sec. (NOTE: There are two (2) general restrictions on the power of the corp. domestic or foreign. subject to the limitations prescribed by law and the Constitution. (Sec. to acquire and hold properties: • (1) that the property must be reasonable and necessarily required by the transaction of its lawful business. (Sec. retirement and other plans for the benefit of its directors. To purchase. 39) Sale or other disposition of substantially all its assets. 38) Incur. . convey. 41) Investment in another corporation or business. 40)  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. 37) Increase or decrease of the capital stock (Sec. 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. 38) Denial of the pre-emptive right (Sec. lease.WILMAR K. (Sec. cultural. that it would not be at all difficult to defend a corporate act versus an allegation that it is ultra vires. • • • • • Extension or shortening of the corporate term (Sec. 42) Declaration of dividends. hold. to issue of sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code. including those for the public welfare of for hospital. or similar purposes: Provided that: no corporation. • • • • Acquisition of its own shares. trustees. sell. including securities and bonds of other corporations. 43) Entering into management contracts. shall give donations in aid of any political party or candidate or for purposes of partisan political activity. Virgilio Jacinto. REQUINA. • • To establish pension. This phrase gives rise to such a wide range of implied powers. 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. grant. as the transaction of the lawful business of the corporation may reasonably and necessarily require. charitable. and (2) that the power shall be subject to the limitations prescribed by other special laws and the Constitution. take. 36. comments. 44) Under Sec. To make reasonable donations.

and the other has not with the latter having benefited from the former’s performance.WILMAR K. Campos. will be enforced. v. and generally applied either when a corporation has no power whatever to do an act. Parties to the ultra vires contract will be left as they are. Neither party can ask for specific performance. PTC paid plaintiff the corresponding interest payments until July 1. Q: What are the consequences of ultra vires acts? • • • The corporation may be dissolved under a quo warrranto proceeding. a derivative suit for damages against the directors maybe filed. The Certificate of Registration may be suspended or revoked by the SEC. BAR 2011 23 The Ultra Vires Doctrine A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority. where one party has performed his part. . (57 SCRA 343. but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contracts. Black’s Law Dictionary Definition: Ultra vires acts are those acts beyond the scope of the powers of the corporation. • • REPUBLIC OF THE PHILS. 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. adopted a resolution which authorized its president to purchase at par and in the name of the corp. If the act or contract has already been performed. Based on the outline. it will. provided that it is not illegal. unless third parties are prejudiced thereby. 1932) The BOD of the Phil Trust Co. MINDORO SUGAR CO. or when the corporation has the power but exercises it irregularly. be presumed valid. if the contract has been fully executed on both sides. Jose Campos. convenience. Virgilio Jacinto. notes and selected cases of Prof. careless or negligent act of its appointed postmaster is NOT ULTRA VIRES because the act covers a subject which concerns the benefit. in the absence of proof to the contrary. CARLOS v. Ultra vires acts may become binding by the ratification of all the stockholders. or unless the acts are illegal. 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. 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. The contract. The term has a broad application and includes not only acts prohibited by the charter. bonds of MSC. 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. comments. These bonds were later resold and guaranteed by PTC to third persons. and welfare of the company’s employees and their families. Jr. but acts which are in excess of powers granted and not prohibited. 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. REQUINA. if the contract is executory on both sides. and the lectures and additional cases of Prof. Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or contract. and Maria Clara L. ACOJE MINING (7 SCRA 361. as defined by its charter or laws of state of incorporation.

Campos. Compensation to the promoter and organizer allegedly excessive and unconscionable. notes and selected cases of Prof. it was found to be necessary and legally acquired and developed. they should not be held liable for the injury of the plaintiff who was a passenger in one of their trains. Held: first two valid. All business enterprises encounter periods of gains and losses. Law does not expressly grant the power of maintaining reserve funds but such power is implied. Law provides that "any person" may become a SH on a bldg. having received money or property by virtue of the contract which is not illegal. it is estopped from denying liability. 1. at a business district in Manila allegedly in excess of its reasonable requirements.) A quo warranto proceeding instituted by the Gov't against El Hogar. 3. Based on the outline. 7. 1932) (This case is an example of how the implied powers concept may be used to justify certain acts of a corporation. sufficient assets were made available to secure the payment of the corresponding liabilities brought about by the bonds. the by-laws 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. it administered and managed properties belonging to delinquent SHs. The word "person" is used on a broad sense including not only natural persons but also artificial persons. Virgilio Jacinto. 1860) Two railroad corporations contend that they transcended their own powers and violated their own organic laws. MICHIGAN SOUTHERN ( 22 NY 258. 5. 173 of the Corp. BAR 2011 24 Held: The act of guaranty by PTC was well within its corporate powers. or its SHs who may bring a complaint on such.. 6. EL HOGAR (50 Phil 399. franchise. and the lectures and additional cases of Prof. and loan ass'n. REQUINA. Corporate policy of using a depreciation rate of 10 % per annum is not excessive. 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. GOV’T v. and its officers would usually provide for the creation of a reserve to act as a buffer for such circumstances. Even if the then prevailing law (Corp. 4.WILMAR K. Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp. El Hogar held title to real property for a period in excess of 5 years in good faith. with all the MSC properties transferred to PTC based on the deed of trust. held valid bec. El Hogar owned a lot and bldg. comments. Law) prohibited PTC from guaranteeing bonds with a total value in excess of its capital. The Corp. Sec. Jr. 9. and managed properties of its SHs even if such were not mortgaged to them. homes. 2. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid bec. 8. Hence. there is no statute which expressly declares that loans may be made by these ass'ns solely for the purpose of bldg. a building and loan ass'n to deprive it of its corp. El Hogar leased some office space in its bldg. Furthermore. . BISSEL v. bec. Jose Campos. hence this cause will not prosper. accdg. and Maria Clara L. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n nor make its loans usurious. to the SC.

However.WILMAR K. notes and selected cases of Prof. in another mining corp. The AOI of the corporation provided two relevant items: “(1) to invest and deal with moneys of the company not immediately required. if any violation has been committed. 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. BAR 2011 25 Allocation of Power and Control Who Exercises Corporate Powers Held: The contract between the two corporations was an ultra vires act. DELA RAMA STEAMSHIP (96 Phil 335 . Held: Harden has no standing bec. 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.have residual power over fundamental corporate changes like amendments of articles of incorporation. Jr. Stockholders or members.Law which restricts the acquisition of interest by a mining corp. the accompanying rights and obligations based on the contract of carriage between them and the plaintiff cannot be avoided by raising such a defense. .” From this. therefore. and Maria Clara L. in such manner as from time to time may be determined. REQUINA.execute the policies laid down by the board. CONTROL AND MANAGEMENT Q: What are the three levels of corporate control/power? Board of directors or trustees. BENGUET CONSOLIDATED (58 Phil 141) A contract between Benguet and Balatoc provided that Benguet will bring in capital. and the lectures and additional cases of Prof. it is not one tainted with illegality. HARDEN v. Jose Campos. eqpt.responsible for corporate policies and the general management of the business and affairs of the corporation. comments. 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. Officers. and technical expertise in exchange for capital shares in Balatoc. Campos. 1954) 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. and (2) to aid in any other manner any person. Held: NO. Board of directors or trustees Based on the outline. the deceased president of the defendant company under whose management the company grew and progressed to become a multi-million peso corporation. Virgilio Jacinto. Harden was a SH of Balatoc and he contends that this contract violated the Corp. PIROVANO v.

BAR 2011 26 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. 28) By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock. prison . Campos. or in the same or trustees: meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. comments. May be filled by the vote of at least a majority of Based on the outline. 24) (b) Requirements (i) (ii) (iii) (iv) Qualifying share (Sec. (See Citibank v Chua) (a) Authority (Sec.WILMAR K. 24) Nationality Disqualifications (Sec. REQUINA. All other vacancies: the remaining directors or trustees. (e) How vacancy filled (Sec. or by a vote of at least 2/3 of the members entitled to vote. notes and selected cases of Prof. In both cases.conviction by final judgment of offense punishable > 6 yrs. 24 of the Code.violation of Corporation code within 5 years prior to date of election or appointment (c) How elected (Sec. and Maria Clara L. Removal may be with or without cause. 30) If provided in by-laws: That compensation stated in the by-laws. 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. 29) If vacancy due to removal meeting or expiration of term: Must be filled by the SHs in a regular or special called for that purpose. Virgilio Jacinto. provided that such removal takes place at either a regular meeting of the corporation or at a special meeting called for the purpose. there must be previous notice to the SHs / members of the intention to propose such removal at the meeting. However. and the lectures and additional cases of Prof. (f) How compensated (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 N+1 +1 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 (d) How removed (Sec. 24) Residence (Sec. 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. 27) . if still constituting a quorum. . Jose Campos. Jr. Note: unexpired Directors or trustees so elected to fill vacancies shall be elected only for the term of their predecessors in office.

WILMAR K. REQUINA, BAR 2011 If not provided in by-laws:

27 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) (v) (vi) Disloyalty (Sec. 34) Watered stocks (Sec. 65)

(i) Executive Committee (Sec. 35) See subsequent discussion under Board Committees.

RAMIREZ VS. ORIENTALIST CO AND FERNANDEZ (38 Phil. 634; 1918) 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 by-laws, 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.

Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto.



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 and their qualifications ( Sec. 25) 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 Stockholders)

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.


Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto.



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 V. BACHRACH MOTORS (52 Phil. 244; 1928) 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.)

Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto.

"FULL POWERS" does not mean unlimited or absolute power. 2. the amendment or repeal of by-laws or the adoption of new by-laws. it would put the corp. to be appointed by the Board. on such specific matters within the competence of the board.WILMAR K. HAYES V. or (2) on a majority vote of the board. REQUINA.000. Board Committees The By-laws of the corporation may create an executive committee. as may be delegated to it in either (1) the By-laws. There were even partial payments made with the knowledge of the three directors.S CO. 3. although action is usually initiated by the board of directors or trustees. However. by majority vote of all its members.. LTD. . BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION (20 SCRA 526. Stockholders or Members In the following basic changes in the corporation. Acuna was assured that there need not be any board approval for his constitution as agent for it would only be a mere formality. proven by these acts: 1. The SC ruled that the agreement was valid due to the ratification of the corp. would have absorbed the powers of the entire corporation. performed his work with the knowledge of the board. Campos. the board disapproved the agency and did not pay him. If their actions was valid. notes and selected cases of Prof. "Full powers" should be interpreted only in the ordinary conduct of business and not total abdication of board and stockholders' powers to the ExeCom. ATLANTIC AND PLANT S. Later on. 289. 1910) In this case. He delivered P 20. comments. and (5) a distribution of cash dividends to the shareholders. During the face-toface meeting with the board. the board cannot disown or disapprove the contract. in which the former would be constituted as the latter's agent in Manila. BAR 2011 30 2. Was these actions valid? No. and Maria Clara L. ACUNA V. their decision is not final. Jr. manager of PROCOMA. the following acts may never be delegated to an executive committee: (1) (2) (3) (4) approval of any action for which shareholders' approval is also required. 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. The corporation took advantage of the benefits of the chattel mortgage. 3. Jose Campos. Due to acquiescence. acting in their own pecuniary interests. 29). 1967) Acuna entered into an agreement with Verano. composed of not less than 3 members of the Board. and approval of the stockholders or members would be necessary: Based on the outline. (181 F. CANADA. the filling of vacancies in the board (refer to Sec. because the Executive Commmittee usurped the powers vested in the board and the stockholders. Virgilio Jacinto. Acuna diligently went about his business and even used personal funds for the benefit of the corporation. and the lectures and additional cases of Prof. The executive committee may act. He was assured by the board that no board approval was necessary. in a situation wherein only two men. Two other directors approved his actions and expressed satisfaction with the advantages obtained by him in securing the chattel mortgage. the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable.

the Court may grant a stockholder the authority to call such a meeting. 1965) As a general rule. creating or increasing bonded indebtedness. such as a Chairman of the Board failing to call a meeting. CLORIBEL (26 SCRA 225. JOHNSTON (61 O. . thereby prompting the walkout. F. Investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized.WILMAR K. ENCARNACION (94 Phil. and Maria Clara L. Sale. Amended by-laws are valid for the corporation has its inherent right to protect itself. March 26 posting not enough for March 28 election. mortgage or other disposition of substantially all corporate assets. PONCE VS. DELA ROSA (49 Phil. 609. It noted however that there was no formal declaration of a quorum before the withdrawal from the meeting by F. even non-voting stocks. (8) Dissolution of corporation In all of these cases. comments. By-laws provide for a 5-day notice before meeting. a quorum at a stockholders' meeting. 6160. TAN (105 Phil. The Court of Appeals held that the walkout was neither unreasonable nor unjustifiable. Logan Johnston. BAR 2011 (1) (2) (3) (4) (5) 31 Amendment of articles of incorporation. Johnston (of whom he was guardian) on the ground that such shares must first be registered in the names of the wards. 1953) Upon good cause. Campos.G. In this case. 6) BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. who owned and/or represented more than 50% of the corporation's outstanding shares. or non-voting members. as the case may be. SEC (89 SCRA 336. once reached. Jr. will be entitled to vote. was prohibited from voting the shares of the Silos family (which he had validly purchased) and of the minor children of Albert S. Increase and decrease of capital stock. 1959) Meeting was invalid for lack of notice. However. ROXAS V. amendment and repeal of by-laws. 1968) The Corporation Law says that every director must own at least one (1) share of the capital stock of the corporation. REQUINA. No. DETECTIVE AND PROTECTIVE BUREAU VS. 1926) Based on the outline. cannot be nullified by a subsequent walkout. the proceedings can be nullified if the walkout was for a reasonable and justifiable cause. Jose Campos. and the lectures and additional cases of Prof. (Sec. Virgilio Jacinto. Logan Johnston. notes and selected cases of Prof. (6) Adoption. 81. A stockholder has no vested right to be elected director for he impliedly contracts that the will of the majority shall govern. lease. GOKONGWEI VS. 426. 1979) • • • Section 21 of the Corporation Law provides that a corporation may prescribe in its by-laws the qualifications. either by his absence or neglect. and compensation of its directors. Incurring. duties. 39. JOHNSTON VS. (7) Merger and consolidation.

and Maria Clara L. stockholders cannot sue on behalf of the corporation.Generally. 1957) The stockholders have an implied power to remove a director for cause. However. 56) . . 2d 852. Proxies (Sec. .Pledgors or mortgagors have the right to attend and vote at stockholders' meetings. Pledgors. receivers. comments. while vacancies can be filled by a mere majority. the vote of the stockholders is necessary.WILMAR K. 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. Treasury shares (Sec. and administrators ( Sec. INC. stockholders can still remove directors for cause. Joint owners of stock (Sec. 55) . Virgilio Jacinto. A director cannot be removed by a mere majority by disguising it as filling a vacancy. Campos. Jr. MA-AO SUGAR CENTRAL CO. 57) . (134 A.Unless otherwise provided in the proxy. No proxy shall be valid and effective for a period longer than five (5) years at any one time. 697. 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. 58) . mortgagors. and the lectures and additional cases of Prof. 1937) Court may appoint a receiver when corporate remedy is unavailable when board of directors perform acts harmful to the corporation. . Generally. REQUINA. directors can only be removed from office by a vote of the stockholders representing 2/3 of subscribed capital stock. (27 SCRA 247. administrators. Even when there is cumulative voting. it shall be valid only for the meeting for which it is intended. The exception is when the defendants are in complete control of the corporation. DELA RAMA V. Based on the outline. signed by the stockholder/member. BAR 2011 32 VOTING Under the Law. CAMPBELL V. Jose Campos. filed before the scheduled meeting with the corporate secretary. consent of all co-owners shall be necessary. LEOW’S INC. if it is purely for investment. notes and selected cases of Prof.Proxies must be in writing.Executors. 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. ANGELES V. SANTOS (64 Phil. executors.Treasury shares have no voting right for as long as such shares remain in the Treasury.

it shall be valid only for the meeting for which it is intended. 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. 59) Pooling agreement . notarized. 2 of the Corporation Code provides for pooling and voting agreements in close corporations.Voting trusts must be in writing. – Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. except when coupled with interest or is a security. . 6) . 25) . BAR 2011 33 Devices Affecting Control . revocable at will (by express revocation.WILMAR K.Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. Proxy Device Sec 58. .Sec. comments. Jr. 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. Although there is no equivalent provision for widely-held corporations.Note that in Sec. in the case of a voting trust specifically required as a condition in a loan agreement. 100. Jose Campos. However. . 56) .Any one of the joint owners can vote said shares or appoint a proxy thereof. Proxies. signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary.It must be noted however that directors or trustees cannot vote by proxy at board meetings. REQUINA. No proxy shall be valid and effective for a period longer than five (5) years at any one time. notes and selected cases of Prof. certified copy filed with SEC. and Maria Clara L. Campos. Character: agency relationship.As a general rule. par. Proxies shall be in writing.Voting trusts may be voted by proxy unless the agreement provides otherwise. by attending the meeting) and by death. Voting trust (Sec. Based on the outline. voting trusts are valid for a period not exceeding 5 years at any one time. Virgilio Jacinto. Justice and Prof.Pooling agreements refer to agreements between 2 or more SHs to vote their shares the same way. . Non-voting shares (Sec. (Sec.Preferred or redeemable shares. ITF shares And/or shares (Sec. 59) . said voting trust may exceed 5 years but shall automatically expire upon payment of the loan. 89. specifying the terms and conditions thereof. and automatically expire at the end of the agreed period unless expressly renewed. Failure to comply with this requirement renders the agreement ineffective and unenforceable. non-stock corporations are permitted to waive the right to use proxies via their AOI or by-laws. 59) . (Sec. and the lectures and additional cases of Prof. Unless otherwise provided in the proxy.

2d 697.L. Reason: in these days of giant corporations with vast numbers of SH’s. 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. FAIRCHILD (128 N. But corp expense may be disallowed by courts where money was shown to have been spent for personal power. The SHs. 1955) In a contest over policy. 152 A. Campos. corporate directors have the right to make reasonable and proper expenditures. provided: (a) their existence is established. ROSENFELD V.E. Ch. (b) where authority is given as part of a security and is necessary to effectuate such a security. However. Advantages Based on the outline. individual gain or private advantage. 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. as compared to a purely personal power contest. 1941) Even if stocks are sold. 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. DUFFY V LOFT (17 Del. (21 A. (b) the agents were so designated to attend and act in SH’s behalf. 297. corporate business may be hampered by difficulty in procuring quorum. comments. and Maria Clara L. in all good faith. 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. Q: Is it valid for the corporation to pay the expenses for proxy solicitation? A: In the case of Rosenfeld v. STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER. notes and selected cases of Prof. (c) the agents were present in the meeting. or where the fairness and reasonableness of the amounts allegedly expended are duly and successfully challenged. a proxy given by the stockholder of record even if he has already sold the share/s of stock remains effective. moreover.E. where it is established that such monies have been spent for personal power. the proxies must be deemed present even if the proxies were not presented. subject to like court scrutiny.WILMAR K. if directors are not allowed to authorize reasonable expenses in soliciting proxies. corporate directors have the right to make reasonable and proper expenditures. 1955). have the right to reimburse successful contestants for the reasonable and bona fide expenses incurred by them in any such policy contest. Thus. BAR 2011 34 IN RE GIANT PORTLAND CEMENT CO.R. Virgilio Jacinto. 1945) The general rule is that a proxy is revocable even though by its express terms it is irrevocable. 376. the courts will not hesitate to disallow them. Jr. Voting Trust A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is separated from the voting rights. capacity to obtain majority). 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. are in the best interests of the corporation. The exceptions are: (a) when authority is coupled with interest. and the lectures and additional cases of Prof. 849. and not in the belief that such expenditures are in the best interest of the stockholders and the corporation. 1930) Where a stockholder’s meeting was validly convened. subject to the scrutiny of the courts when duly challenged. Fairchild Engine and Airplane Corp. REQUINA. individual gain or private advantage. (159 A. Jose Campos. 2d 291. ( 128 N. it was held that in a contest over policy (as opposed to a purely personal power contest). . or where fairness and reasonableness of amount spent has been successfully challenged. 2d 291.

and Maria Clara L. ( Note that these certificates shall be transferable in the same manner and with the same effect as certificates of stock. Virgilio Jacinto. BAR 2011 • • • • 35 Accumulates power. 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? (1) A VTA is prepared in writing. 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. . Continuity of management. Jr. REQUINA. 2d 783. Small shareholders are given the chance to have a representation in the BOD or at least a spokesperson during stockholders’ meetings. (3) The transfer is noted in the books of the corporation. 1926) This case illustrates how VTA can give rise to effective control and how it can be abused. V. MACKIN. EVERETT V. notarized. in the absence of any express renewal. as the case may be ). (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. 1928) Invalidating circumstances of a VTA are: • • • • Want of consideration Voting power not coupled with interest Fraud Illegal or improper purpose Based on the outline. 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. and the lectures and additional cases of Prof. and filed with the corporation and SEC. notes and selected cases of Prof. NICOLLET HOTEL (25 F. (4) The trustee/s execute and deliver to transferors the voting trust certificates. comments. to be elected. More effective than proxies because it is irrevocable. Campos.) (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.WILMAR K. Ensures that the required number of stockholders is met thereby facilitating smooth corporate operations. Jose Campos. ASIA BANKING (49 Phil. Original stockholders can set aside the VTA when their rights are trampled upon by the trustee. 512. ET AL.

W. DODGE (199 N. Ch. Test is WON it causes damage to the corporation and stockholders. Jr. AQUINO (163 SCRA 153. REQUINA. PNB-NIDC acquired those properties not as trustees but as creditors. 1988) A VTA transfers only voting or other rights pertaining to the shares subject of the agreement. 234. 49 A. 641. Straight voting: If A has 100 shares and there are 5 directors to be elected. the will of the parties may not be carried out due to noncompliance with the pooling agreement. or control over the stock.E. 2d 603. . trusts or other means in contravention of statutes or law. 2d 288. comments. 1936) If the enforcement of a particular contract damages nobody-not even the public. there is no reason for holding it illegal. there is a commitment to agree to a certain manner of voting 2. 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. that lost all its assets through foreclosures cannot go after those properties. Pooling and voting agreements What are the advantages/disadvantages of a pooling agreement? Advantages: 1. RINGLING v. However. notes and selected cases of Prof. 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.E. 1934) An agreement among stockholders to divest directors of their power to discharge an unfaithful employee is illegal as against public policy. Stockholders of a corp. 24) Methods of Voting 1. minority stockholders are able to control the corpo Disadvantages: 1. Virgilio Jacinto. STONEHAM (189 N. CLARK v. HARKERT (62 N. he shall multiply 100 by five (equals 500) and distribute equally among the five candidates without preference Based on the outline. and Maria Clara L. and the lectures and additional cases of Prof. 1946) Generally. Cumulative voting (see sec.WILMAR K. Campos. 318. RINGLING (29 Del. BUCK RETAIL STORE v. Jose Campos. possibility of disagreement thus the need for an arbitration clause 2. 1954) 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. 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. BAR 2011 36 NIDC V. MCQUADE v.

Jose Campos. Classification of shares (see sec. right to vote may be restricted (Sec. comments. but may affect and limit the extent of the majority’s control By-laws cannot provide against cumulative voting since this right is mandated by law in Section 24. Common : Preferred: liquidation. Even though the right to vote of preferred and redeemable shares may be restricted. Virgilio Jacinto. he shall multiply 100 by five (equals 500) and he can vote the 500 for only Cumulative voting: If A has 100 shares. preferred stocks will be given the right to vote until dividends are declared. of votes needed to elect multiple directors) 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 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.WILMAR K. 6) Type of shares 1. the two. 6) NOTES • • • Stock can also be both preferred and redeemable. Baker & Cary’s 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 2. one candidate. there are 5 directors to be elected. he can divide 500 votes between How to compute votes needed to get a director elected by cumulative voting: 1. and Maria Clara L. Redeemable: fixed share with right to vote share has preference over dividends and distribution of assets upon right to vote may be restricted (Sec. in spite of available profits. and he only (multiple candidates) wants to vote for two nominees. notes and selected cases of Prof. giving each one 250 votes. share is purchased or taken up by the corporation upon the expiration of a period (Sec. Cumulative voting : (one candidate) 37 If A has 100 shares and there are 5 directors to be elected. SEC requires that where no dividends are declared for three consecutive years. 2. 3. owners of these shares can still vote on certain matter provided for in Sec. BAR 2011 2. REQUINA. Jr. 6. Frey’s formula (minimum no. . Based on the outline. 6) 3. and the lectures and additional cases of Prof. Campos. 8).

INDIANA MUTUAL CASUALTY (41 F. Virgilio Jacinto. AVALON REALTY (23 N. REQUINA. 27. delegate to a stranger certain duties usually performed by the officers. UNUSUAL VOTING AND QUORUM REQUIREMENTS (Sec. there are duties. notes and selected cases of Prof. constitutes diminution of the voting power of common stock. and Maria Clara L. the performance of which may not be indefinitely delegated to outsiders. 47) • 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. Jose Campos. . Management contracts (sec. Jr. 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. Restrictions on shares of stock must conform to the requirements in Sec. and the lectures and additional cases of Prof. 1951. aside from prescribing qualifications. 25. 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. 44) • • 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. SHERMAN & ELLIS VS. founder’s shares Directors (See Sec. by way of a management contract or otherwise.WILMAR K. 1946) • • Provision granting right to vote to preferred stock previously prohibited from voting. for a limited period. According to Gokongwei vs. so as to prevent the perpetual disqualification of other stockholders. such provisions are within the power of the majority to provide in the by-laws. Prescribing qualifications for directors. by-laws can also provide for the disqualification of anyone in direct competition with the corporation. 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. • Founder’s shares See Sec. 2d 606. 2d 588. 7 for definition • • Exception to the rule in sec. comments. 6 that non-voting shares shall be limited to preferred and redeemable shares If founder’s shares enjoy the right to vote. Restriction on transfer of shares • • • • Peculiar to close corporations. 23. 1930) Although corporations may. 97 [for close corporations]) Based on the outline. SEC.W. BAR 2011 38 GOTTSCHALK V. 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. BOD can and usually delegate many of its functions but it can’t abdicate its responsibility to act as a governing body by giving absolute power to officers or others. Campos. 1951 was construed as denial by necessary implication of the right to vote even prior to July 1. this privilege is limited to 5 years upon SEC’s approval.

with voting conducted conformably to the statutes. Jose Campos.E. REQUINA. 103. giving the minority an absolute. notes and selected cases of Prof. founder’s shares MAJORITY: they can choose whether to keep or release shares and they can prevent opposition from acquiring shares MAJORITY: they’re 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 • • • Cannot exceed five years BOD must retain control over corp. The requirement of unanimous vote to amend by-laws is valid. by-law or certificates of corporation provides for unanimous action. policies BOD must have power to recall contract 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. Once proper by-laws have been adopted. . KENTON HOTEL (60 N. See Sec. This whole concept is destroyed when the stockholders. or else differences could never be determined nor settled. 2d 829. BENITENDI VS. 98 Restriction on transfer of shares *applicable only to close corporations Prescribing qualifications for directors. Campos. 1945) • A requirement that there shall be no election of directors at all unless every single vote be cast for the same nominees. (See Sec. always more than half. Based on the outline. 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. Virgilio Jacinto. and Maria Clara L. comments. affairs Subject to the limitations in Sec. Jr. affairs Preferred and redeemable stock can still vote on certain matters as provided in Sec. of the stock. minority can ask for a stronger veto power in major corporate decisions. In exchange for the numerical majority in the BOD. and the lectures and additional cases of Prof. the matter of amending them is no concern of the State. by agreement.WILMAR K. 6 or as may be provided by the corp. the major number must bind the lesser. BAR 2011 • • 39 Increases veto power of the minority in some cases. Device Cumulative voting Classification of shares Favorable To: MINORITY: assures them of representation on the board MINORITY: so long as they hold more common stock as opposed to the majority who holds more preferred stock • • • Limitations Can’t give minority control of corp. permanent and all-inclusive power of veto. and the power of decision lodged in certain fractions. In all acts done by the corporation. is in direct opposition to the statutory rule that the receipt of plurality of the votes entitles a nominee to election. The State has decreed that every stock corporation must have a representative government.

25) Exceptions: (1) If the AOI or by-laws provide for a greater majority. notes and selected cases of Prof. Notice: Written. 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. Meetings of stockholders or members may be either regular or Notice: Written. and Maria Clara L. unless the by-laws provide otherwise. Virgilio Jacinto. (Sec. 50) At any time deemed necessary or as provided in the by- In the city of municipality where the principal office of the corporation is located. Metro Manila is considered a city or municipality. REQUINA. comments. (Sec. unless otherwise provided in the by-laws. Note: 53) WHERE: QUORUM: Notice may be waived expressly or impliedly. unless otherwise provided by the by-laws. NOTICE: Must be sent at least 1 day prior to the scheduled meeting. Held monthly.WILMAR K. and sent to all stockholders or members of record at least 1 week prior to the meeting. on any date in April of every year as determined by the Board of Directors or trustees. Jr. (Sec. 51) Based on the outline. BAR 2011 40 MEETINGS Meetings of Directors / Trustees KINDS: regular or Meetings of the Board of Directors or Trustees may be either special. (Sec. and the lectures and additional cases of Prof. and sent to all stockholders or members of record at least 2 weeks prior to the meeting. (Sec. Note: WHERE: Notice of any meeting may be waived expressly or impliedly by any SH or member. (Sec. (Sec. Jose Campos. unless a different period is required by the by-laws. (2) If the meeting is for the election of officers. Generally. 53) At any time upon call of the president or as provided in the Anywhere in or outside the Philippines. 54) Meetings of Stockholders / Members KINDS: special. Campos. unless the by-laws provide otherwise. If no date is fixed. . (Sec. unless otherwise provided in the by-laws. 49) REGULAR: SPECIAL: bylaws. and if practicable in the principal office of the corporation. 49) REGULAR: Held annually on a date fixed in the by-laws. which requires the vote of a majority of all the members of the Board WHO PRESIDES: The president. SPECIAL: laws.

or (3) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees. a quorum shall consist of the stockholders representing a majority of the outstanding capital stock. Virgilio Jacinto. he shall be liable as a trustee for the corporation and must account for the profits which would otherwise have accrued to the corporation. However. In such cases. liability may still arise if they have not observed due diligence or have been disloyal to the corporation. 54) MEETING IS 41 WHAT IS THE EFFECT IF A STOCKHOLDER'S IMPROPERLY HELD OR CALLED? Generally. (Sec. 32) (2) Contracts between interlocking directors ( Sec. . or (2) are guilty of gross negligence of bad faith in directing the affairs of the corporation. (Sec. Campos. 51) DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS Duties and Liabilities of Directors WHAT IS THE CORPORATION? 3-FOLD DUTY THAT DIRECTORS OWE TO THE (1) Diligence (2) Loyalty (3) Obedience Obedience . unless the by-laws provide otherwise. TRUSTEES OR OFFICERS ARISE? In general. its stockholders or members and other persons. and (2) All the stockholders or members of the corporation were present or duly represented at the meeting.WILMAR K. When a director. and the lectures and additional cases of Prof. liability of directors. Assuming that they acted within their powers. Exception: If otherwise provided for in the Code or in the by-laws. (Sec. WHO PRESIDES: The president. in violation of his duty. trustees or officers arises when they either: 1 2 3 (1) willfully and knowingly vote for or assent to patently unlawful acts of the corporation. 31) In addition to this general liability. the directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation. or a majority of the members. and Maria Clara L.directors must act only within corporate powers and are liable for damages if they acted beyond their powers unless in good faith. the proceedings had and/or any business transacted shall be void. BAR 2011 QUORUM: Generally. 33) Based on the outline. as to which equity imposes a disability upon him to deal in his own behalf. Jose Campos. trustee or officer attempts to acquire or acquires. REQUINA. the Corporation Code provides for specific rules to govern the following situations: (1) Self-dealing directors (Sec. WHEN DOES LIABILITY ON THE PART OF DIRECTORS. comments. Jr. 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. notes and selected cases of Prof. any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence.

The court should look at the facts as they exist at the time of their occurrence. 28 of the Code. (155 F. directors and trustees of the corporation cannot be held liable for mistakes or errors in the exercise of their business judgment. 65) 42 Duty of Diligence: Business Judgment Rule. Where there exists gross negligence or fraud in the management of the corporation. However. 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. the bond issue was adequately deliberated and planned. REQUINA. MONTELIBANO VS. the directors. the directors arrive at a decision for which there is a reasonable basis and they acted in good faith. Virgilio Jacinto. and the lectures and additional cases of Prof. provided they have acted in good faith and with due care and prudence. Allen) OTIS AND CO.WILMAR K. and uninfluenced by any consideration other than what they honestly believe to be for the best interest of the railroad. care and prudence. are so unconscionable and to amount to a wanton WHAT KIND OF DILIGENCE IS EXPECTED OF DIRECTORS? Directors are expected to manage the corporation with reasonable diligence. In the present case. notes and selected cases of Prof. (Litwin v. WHAT FACTORS SHOULD BE CONSIDERED IN DETERMINING WHETHER REASONABLE DILIGENCE HAS BEEN EXERCISED? The nature of the business. properly negotiated and executed. no motivation of personal gain or profit. 34) (4) Watered stocks (Sec. there was no lack of good faith. 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. 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. Although they are not expected to interfere with the day-to-day administrative details of the business of the corporation. if due to the fault or negligence of the directors the assets of the corporation are wasted or lost. Campos. Later. each of them may be held responsible for any amount of loss which may have been proximately caused by his wrongful acts or omissions. they should keep themselves sufficiently informed about the general condition of the business. not aided or enlightened by those which subsequently took place. 2d 522. Jose Campos. BAR 2011 (3) Disloyalty to the corporation (Sec. . as a result of their independent judgment. may be removed by the stockholders in accordance with Sec. EXCEPTION: When such contracts oppressive as destruction of the rights of the minority. the degree of care and diligence which men prompted by self-interest generally exercise in their own affairs. 1962) The Bacolod-Murcia Milling Co. ( Campos & Campos) the GENERAL RULE: Contracts intra vires entered into by BoD are binding upon corporation and courts will not interfere. Contracts intra vires entered into by the board of directors are binding upon the corporation. BACOLOD-MURCIA MILLING CO. Jr. as well as the particular circumstances of each case. 1946) If in the course of management. (5 SCRA 36. the company amended its existing Based on the outline.e. they can be held liable not only for willful dishonesty but also for negligence. WHAT IS THE BUSINESS JUDGMENT RULE? As a general rule. i. 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. there was no lack of diligence. Thus. besides being liable for damages. VS PENNSYLVANIA RAILROAD CO. and Maria Clara L. comments.

i.. Morgan and Co. The company. Directors have the duty to attempt to prevent wrongdoing by their co-directors. Joseph. regardless of good faith. Jose Campos. Based on the outline. he is chargeable with negligence and is accountable for his conduct. but with non-feasance. and the court is without authority to substitute its judgment of the board of directors. (253 N. comments. Directors are not in a position of trustees of an express trust who. MAN. and so long as it acts in good faith. the extension of its operative period for an additional 15 years over and beyond the thirty years stipulated in the contract. and with doing nothing to retrieve the waste. and particularly. The note was dishonored but defendant-directors did not protest the note for non-payment. the seller holding the option would not exercise it and the bank would sustain the loss. WALKER VS.Y.e.Y. J. Yet. and in so doing. BAR 2011 43 milling contract with its sugar planters. are personally liable. Virgilio Jacinto. 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. ET. This is an action by the sugar planters to enforce the contract. REQUINA. Lacey. the holder of the repurchase option would exercise it to recover the securities at a lower price at which he sold them. Campos. 458. They hold such office charged with the duty to act for the corporation according to their best judgment.S. and if wrong is committed. It is against public policy for a bank to sell securities and buy them back at the same price. AL. its orders are not reviewable by the courts. HELD: Directors are charged not with misfeasance.WILMAR K. Thus. LITWIN (ROSEMARIN ET.P. it is valid and binding. incorporating such resolution. null and void ab initio. therefore. the premises and obligations undertaken thereunder by the planters. it sold Missouri Pacific bonds to J. and the lectures and additional cases of Prof. not only with doing wrongful acts and committing waste. unusual and unnecessary so as to be contrary to fundamental conceptions of prudent banking practice. the directors are liable for the transaction because the entire arrangement was improvident. Morgan. and whether or not it will cause losses or decrease the profits of the central. sold $3M worth of the bonds to Guaranty Trust Company. INTERVENORS) VS. in turn. Here. the advice of counsel was not sought. The loan was not authorized by any meeting of the board of directors and was not for the benefit of the corporation. to rectify it. bought terminals in Kansas City and St. 1940) FACTS: Alleghany Corp. Under the contract. thus. was subsequently discharged. 2d 667.P. . and Maria Clara L. being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt. the board is the business manager of the corporation. the court has no authority to review them. they cannot be controlled in the reasonable exercise and performance of such duty. the directors are thus liable. Jr. notes and selected cases of Prof. stating that the stipulations in the resolution were made without consideration and that such resolution was. risky. Absent a showing of exercise of good faith. If the defendant knew that an unauthorized loan was made and did not take steps to salvage the loan. (25 N. worth $IOM. ALLEN ET. The terms embodied in the resolution were supported by the same cause and consideration underlying the main amended milling contract. similarly. refused to comply with the contract. upon demand. if the market price of the securities rise. 1931) FACTS: Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a promissory note executed by Avram and endorsed by Lacey. AL. AL. 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. If the market price falls. 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. the indorser who was financially capable of meeting the obligation. HELD: Option given to seller is invalid. the seller was given an option to repurchase at same price within six months. but with acquiescing and confirming the wrong doing of others.S.. As the resolution in question was passed in good faith by the board of directors. In this case.

Campos. 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. and the lectures and additional cases of Prof. The directors are sought to be made personally liable in their capacity as directors. still the plaintiff must clearly show that the performance of the director’s duties would have avoided the losses. 614. and to the injury and fraud of the creditors of the corporation. There was no evidence that the directors had knowledge of the transaction between the manager and Lowell Hoit. 953. VELASCO (52 Phil. When a business fails from general mismanagement. BAR 2011 44 STEINBERG VS. V. In this case. The court said that despite being guilty of misprision in his office. but the Board did not act on it but instead moved on to the next item on the agenda. Either way. The court said that the directors were not personally liable.512. Jose Campos. Given all of this. 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. it was found that the corporation did not have an actual bona fide surplus from which dividends could be paid. or bad judgment. and Maria Clara L. At the time of purchase of stocks and declaration of dividends. 1942) Cushing. Virgilio Jacinto. 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.241 and accounts receivable amounting to P12.E. leased the same to himself. 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. business incapacity. the BOD will not use the assets of the corporation to buy its own stock. Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest or fraudulent. to recover for company losses arising out of an alleged breach of fiduciary duty. DETIG (50 N. they are liable for their actions which affected the financial condition of the corporation and prejudiced creditors. and that the directors were permitted to resign so that they could sell their stock to the corporation. comments. The director was not liable. LOWELL HOIT & CO. Jr. 2d 181. (3) Bowen did not profit personally through Cushing's lease.E. Minority stockholders filed suit against Bowen. BARNES V. . it is difficult to conjecture that a single director could turn the company around. Based on the outline. notes and selected cases of Prof. It has been alleged that the payment of cash dividends to the stockholders was wrongfully done and in bad faith.WILMAR K. FOSTER V. the corporation's President. the corporation had accounts payable amounting to P9. Bowen was not liable. and will not declare dividends to stockholders when the corporation is insolvent. (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. but the receiver who made diligent efforts to collect the amounts receivable was unable to do so. or how much dollars he could have saved had he acted properly. it was apparent that the directors did not act in good faith or were grossly ignorant of their duties. a director and in charge of leasing a roller skating rink of the corp. HELD: Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities. and (4) the issue of the possible illegality of the lease was put before the Board of Directors. Moreover. 1924) A complaint was filed against a corporate director for failing to give adequate attention (he relied solely on the President’s updates on the status of the corp) to the affairs of a corporation which suffered depletion of funds. BOWEN (41 N. ANDREWS (298 F. The directors from whom 300 of the stocks were bought resigned before the board approved the purchase and declared the dividends. REQUINA.

Ct. and Maria Clara L. DRESSER (40 S. he must have participated in the fraudulent act.247. REQUINA. or have been guilty of lack of ordinary and reasonable supervision.WILMAR K. It is possible that the self-dealing director may have the greatest interest in its welfare and may be willing to deal with it upon reasonable terms. The receiver sued the president and the other directors for the loss. To hold directors liable. 32) A self-dealing director is one who enters into a contract with the corporation of which he is a director. But the president is liable. and had knowledge of incidents that ordinarily would have induced scrutiny. This trust relationship "is not a matter of statutory or technical law. In case his interests conflict with those of the corporation. resulting in huge losses to the bank. The self-dealing director WHAT IS A SELF-DEALING DIRECTOR? (Sec. 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. Jose Campos. had direct control of records. was able to divert bank finances for his benefit. 1920) Coleman. Jr. (4) In the case of an officer. Campos. notes and selected cases of Prof. directors are committed to seek the maximum amount of profits for the corporation. he owes a duty of loyalty to his corporation. he cannot sacrifice the latter to his own advantage and benefit. or guilty of lack of ordinary care in the selection of the officer/agent. (3) The contract is fair and reasonable under the circumstances. an employee of the bank. Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. whether or not it suffered damages. BATES V.. WHAT IS THE NATURE OF CONTRACTS ENTERED INTO BY SELF-DEALING DIRECTORS? Voidable at the option of the corporation. DOCTRINE: A director of a corporation holds a position of trust and as such. . and were also encouraged by the attitude of the president that all was well (the president had a sizable deposit in the bank). Virgilio Jacinto. As corporate managers. the presence of the director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the contract). (2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract. in a meeting called for the purpose. the contract has been previously authorized by the 4 Board of Directors. The court said that the directors were not answerable as they relied in good faith on the cashier’s statement of assets and liabilities found correct by the government examiner. comments. such contract may be upheld by the corporation if all of the following conditions are 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. BAR 2011 45 The court will treat directors with leniency with respect to a single act of fraud on the part of a subordinate officer/agent. He was at the bank daily. In the event that either of or both conditions (1) and (2) are absent ( i.e. the contract may be ratified by a 2/3 vote of the OCS or all of the members. and the lectures and additional cases of Prof. However. It springs from the fact that directors have the control and guidance Based on the outline.

firm. They likewise constitute majority of SH. its directors are trustees of all the creditors. . or not. when the corporation refused to comply with the same. Campos. becomes insolvent. BAR 2011 of corporate affairs and property and hence of the property interests of the stockholders. v. 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. which had no provisions on self-dealing directors. and with immunity. REQUINA. SAN JOSE PETROLEUM (Dec. even to their benefit. property and assets to the directors who approved the same. 17. and Maria Clara L.000 bags of white cement per month." (Prime White Cement Corp. Based on the outline.000 bags per month. (through the President and Chairman of the Board) and Alejandro Te. The implication is that they can do anything short of fraud. Gen Rule: When purely private corporations remain solvent. they will not be permitted to secure to themselves by purchasing the corp property or otherwise any personal advantage over the other creditors. Among the conditions in the dealership agreement were that the corporation would sell to and supply Te with 20. Note: This case was decided in 1966 under the Corporation Law. 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. 1966) The articles of inc. 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.. 1911) Issue: validity of sale of corp. Relying on the conditions contained in the dealership agreement. 4 directors present during meeting all voted for the sale. IAC. V. However.70 per bag. the corporation entered into an exclusive dealership agreement with a certain Napoleon Co for marketing of corporation's products in Mindanao. its directors are agents or trustees for the SH. 95. the sale was held to be valid and binding. of the traditional fiduciary relationship between directors and the SH. notes and selected cases of Prof. Exception: when the corp. In the case at bar. Notwithstanding the dealership agreement with Te. the Board of Directors subsequently imposed new conditions. and must manage its property and assets with strict regard to their interest. Jose Campos. Virgilio Jacinto. Te was constrained to cancel his agreements with the hardware stores. PRIME WHITE CEMENT CORP. including the condition that only 8. and a sale thus made to him is valid and binding upon the minority. whether they are members of the corp. and the lectures and additional cases of Prof. MCCULLOUGH (21 Phil. Te entered into written agreements with several hardware stores which would enable him to sell his allocation of 20. except in case of fraud. Company was losing. 1993) 46 PALTING V. a director and auditor of the corporation. and if they are themselves creditors while the insolvent corp is under their management. Jr. 220 SCRA 103. 1993) Prime White Cement Corp. IAC (220 SCRA 103. However.000 bags of cement would be delivered per month. 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. comments. and that Te would purchase the cement from the corporation at a price of P 9. SC: This is in direct contravention of the Corp Law.WILMAR K. Te made several demands on the corporation to comply with the dealership agreement. whether it be for his benefit or for the benefit of any other person. Contract was found to be fair and reasonable. MEAD V. association or partnership in which he may be interested.

the duty to disclose arises. the contract was not valid and Te could not be allowed to reap the fruits of his disloyalty. 1941) In this case. if his act was ratified by 2/3 stockholders' vote. Note: This provision is to be distinguished from Sec. on the other hand. YES. Nondisclosure cannot constitute constructive fraud. The dealership agreement was an attempt on the part of Te to enrich himself at the expense of the corporation. 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. it was held that the general allegations in the complaint of conspiracy of the directors to obtain corporate opportunity were deficient. 1939) stated that a director cannot. Directors and officers have an obligation the stockholders individually as well as Directors and officers owe no fiduciary all to stockholders. However. 295-313." Seizing Corporate Opportunity (Sec.Y. SINGER VS. 1979). by virtue of his office. thereby obtaining profits to the prejudice of the corporation. to the prejudice of the corporation. Where special circumstances or facts are present which make in inequitable to withhold information from the stockholder. The complaint should state specific transactions. No duty of disclosure director or officer MAJORITY RULE: NO. notes and selected cases of Prof. and the lectures and additional cases of Prof. Absent any showing that the stockholders had ratified the dealership agreement or that they were fully aware of its provisions. BAR 2011 47 On appeal. a business opportunity which should belong to the corporation. REQUINA. "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. This provision applies even though the director may have risked his own funds in the venture.S. he need not refund said profits. duty at them at arm’s of facts known to the exists. he must account to the corporation for all such profits by refunding the same. SPECIAL FACTS DOCTRINE: IT DEPENDS. Virgilio Jacinto. Based on the outline. preference. SEC (89 SCRA 336. 2d 190. Jose Campos. Jr. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement.WILMAR K. 34) If a director acquires for himself. and Maria Clara L. In the case of Gokongwei v. Sec. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. or advantage of the fiduciary to the exclusion or detriment of the cestuis. Litton (308 U. CARLISLE (27 N. 32 on contracts of selfdealing directors: contracts of self-dealing directors are voidable at the option of the corporation even if it has not suffered any injury. and concealment is fraud. for not having been fair and reasonable: the agreement protected Te from any market increases in the price of cement. 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: to collectively.S. the Supreme Court. 34 applies only if the corporation has been prejudiced by the contract. . comments. but may deal with length. the Supreme Court held that the dealership agreement is not valid and enforceable. Campos. quoting from the US case of Pepper v.

. 1940) In this case. the contract may be ratified by a 2/3 vote of the OCS or all of the members.WILMAR K. This practice is tolerated by the Courts because such an arrangement oftentimes presents definite advantages to the corporations involved. Having fulfilled their duty to the corporation in accordance with their best judgment. and Maria Clara L. Jose Campos. that a wrong has been done. notes and selected cases of Prof. BAR 2011 48 Directorship in 2 competing corporations does not in and of itself constitute a wrong.S. a contract between 2 or more corporations having interlocking directors shall not be invalidated on that ground alone. 1935) Fiduciary duty applies even if the corporation is unable to enter into transactions itself. 2d 667. 1918) Based on the outline.e. REQUINA. 1243. VS. (4) In the case of an officer. the presence of the director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the contract). V. 378. if the interest of the interlocking director in one corporation is substantial (i. and provided the contract is fair and reasonable under the circumstances. comments. he shall be subject to the conditions stated in Sec.. dominated by one. It is only when a business opportunity arises which places the director in a position of serving two masters. it was held that the common stock purchased by the defendants wasn’t a business opportunity for the corporation. the contract has been previously authorized by the Board of Directors. Virgilio Jacinto. IRVING TRUST CO. Sec. Note: The Investment House Law prohibits a director or officer of an investment house to be concurrently a director or officer of a bank. However. (2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract. In the event that either of or both conditions (1) and (2) are absent ( i. 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. Jr. and the lectures and additional cases of Prof. 129.E. Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. (Sec. (P. 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. stockholdings exceed20% of the OCS) and his interest in the other corporation or corporations is merely nominal. WHAT IS THE DIRECTORS? RULE ON CONTRACTS INVOLVING INTERLOCKING Except in cases of fraud. 187) GLOBE WOOLEN CO.e. 32. LITWIN V ALLEN (25 N. he neglects his duty to the other..Y. i. Campos. for the contract not to be voidable. except as otherwise authorized by the Monetary Board. as amended) The Insurance Code likewise prohibits a person from being a director and/or officer of an insurance company and an adjustment company. in a meeting called for the purpose. 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.e. Ed. 6. (3) The contract is fair and reasonable under the circumstances. UTICA GAS & ELECTRIC (121 N.D. . DEUTSCH (79 L. and when.

30) GOV'T OF THE PHILIPPINES VS. (1) If the articles of incorporation or the by-laws so provide. 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. 399. LA PREVISORA FILIPINA Based on the outline. and the lectures and additional cases of Prof. having knowledge thereof. obtained a cheap. valued in excess of its fair value. the provision in question even resulted in extraordinarily good attendance.WILMAR K. Watered stocks (Sec. The director-trustee has a constant duty not to seek harsh advantage in violation of his trust. president and chief stockholder of Globe but nominal SH in Utica Gas. Virgilio Jacinto. if any is left to the corporation to be determined in its by-laws. . 65) Any director or officer of the corporation: (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. Maynard. Jose Campos. 10-year contract for Utica to supply power. The stockholders only (majority of the WHO FIXES THE COMPENSATION? OCS) EXCEPTION: themselves Per diems. Jr. Maynard did not vote during the meeting for the approval of the contract. 1927) The compensation provided in sec. 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. the contract was clearly one-sided. Fixing compensation of directors and officers GENERAL RULE: EXCEPTIONS: expressly Directors as such are not entitled to compensation for performing services ordinarily attached to their office. and Maria Clara L. EL HOGAR FILIPINO (50 Phil. BAR 2011 49 Maynard. which can be fixed by the directors APPLICABILITY OF COMPENSATION: Only to future and NOT past services. comments. notes and selected cases of Prof. It was found that based on the facts of the case. exerted a dominating influence to obtain the contract from beginning to end. The power to fix it . (2) If a contract is expressly made in advance. does not forthwith express his objection in writing and file the same with the corporation secretary 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. or (2) who. The Corporation Law does not prescribe the rate of compensation for the directors of a corporation. Campos. although he did not vote. 92 of the by-laws 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. In the case at bar. BARRETO VS. REQUINA.

The size of such bonus may raise a justifiable inquiry as to whether it amounts to wasting of the corporate property. Based on the outline. The options provided may be exercised in toto immediately upon their issuance within a 6 month period after the termination of employment. comments. Such provision is ultra vires for a mutual loan and building association to make. REQUINA. 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. It is not merely a provision for the compensation of directors. Hence. such plan did not insure that any optionee would remain with the corporation. Jose Campos. all other expenses are excluded. 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. Jr. Close Corporations Sec. 2d. CALIFORNIA EASTERN AIRWAYS (90 A. Campos. directors presumptively serve without pay and in the absence of any agreement in relation thereto. 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. . 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. TIBE (33 SCRA 596. Even without the express reservation. 97 provides that the AOI of a close corp. In short. stockholders deemed to be directors for purposes of this Code. 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. FOGELSON VS. AMERICAN WOOLEN CO. it was held valid because it was reasonable and was ratified by the stockholders pending the action. no claim can be asserted therefore. (170 F. Stockholders shall be subject to all liabilities of directors. and Maria Clara L. 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. Virgilio Jacinto. thus they are not within the board's power to enact. Sec. and employees after the adoption of the by-law in relation thereto. unless the context clearly requires otherwise. CENTRAL COOPERATIVE EXCHANGE INC VS. So long as this provision continues in effect: • • • No stockholder’s meeting need be called to elect directors. The authority conferred upon corporations refers only to providing compensation for the future services of directors.WILMAR K. 660. may specify that it shall be managed by the stockholders rather than the BoD. With regard to the profit-sharing plan. 2d 652. officers. KERBS VS. BAR 2011 50 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. Generally. 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. The SC held that the by-law provision is not valid. 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. 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. notes and selected cases of Prof. and the lectures and additional cases of Prof.

becomes insolvent. 100 provides that for stockholders managing corp. REQUINA. Owners of corp. Supp. 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. itself only. (35 F. Duty to Creditors General rule: Corporate creditors can run after the corp. stockholders-managers Duty of Controlling Interest A SH/director is still entitled to vote in a stockholder’s meeting even if his interest is adverse to a corporation. V. 22. Based on the outline. Are previous directors who sold corp. BAR 2011 Further. affairs: • • 51 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. control are liable if under the circumstances. The ff. Jr. the proposed transfer are such as to awaken a suspicion or put a prudent man on his guard. Jose Campos. and Maria Clara L. above and beyond the price premium normally attributable to the control stock being sold. that is NOT accompanied by stocks or stocks are insufficient to carry voting control. and the minority. and the lectures and additional cases of Prof. As in this case. 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. directors are deemed trustees of the creditors and should therefore manage its assets with due consideration to the creditor’s interest. .WILMAR K. injured party has no right of action v. Campos. Disposal by controlling SH of his stock at any time & at such price he chooses • The ff. 1940) The corp. office or management control by itself. 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. control liable? Yes. is still subject to the duty of good faith to the corp. and also from fair notice that such outsiders indeed intended to raid the corp. are illegal: • • Selling corp. Northern Fiscal). • INSURANSHARES CORP. 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. Virgilio Jacinto. and not the directors for mismanagement of a solvent corp. NORTHERN FISCAL CORP. Sec. notes and selected cases of Prof. But a stockholder able to control a corp. If corp. comments. control was bought for so much aside from being warned of selling to parties they knew little about. V. they are under duty not to sell to raiders. Receiving a bonus or premium specifically in consideration of their agreement to resign & install the nominees of the purchaser of their stock.

III. BAR 2011 52 Personal Liability of Directors If directors are also creditors themselves. IV. and the lectures and additional cases of Prof. 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. resulting in damages to the corporation. they are prohibited from gaining undue advantage over other creditors. Virgilio Jacinto. 238 SCRA 14) II. by a specific provision of law. Jose Campos. 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. 74) (1) (2) (3) (4) Record of all business transactions. notes and selected cases of Prof. Campos. comments. 1997) In labor cases. REQUINA. It likewise contains the following information: • Installments paid and unpaid on all stock for which subscription has been made. (Tramat Mercantile v. Minutes of all meetings of stockholders or members. Agrees to hold himself personally and solidarily liable with the corporation. or who. No. . having knowledge thereof. (3) creates a conflict of interest. Minutes of all meetings of Board of Directors or Trustees. and the date of any installment. Is made. 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. does not forthwith file with the corporate secretary his written objection thereto. 121434. CA. its stockholders or other persons Consents to the issuance of watered stocks. to personally answer for his corporate action. Stock and Transfer book WHAT IS A STOCK AND TRANSFER BOOK? (Sec. UICHICO v.R. Based on the outline. In the instant case. CORPORATE BOOKS AND RECORDS AND THE RIGHT OF INSPECTION Corporate Books and Records WHAT BOOKS AND RECORDS MUST A CORPORATION KEEP? (Sec. particularly. (2) is in bad faith or gross negligence in directing the affairs of the corporation. NLRC (G. and Maria Clara L. June 2. (1) assents to a patently unlawful act of the corporation. Jr. 75) A stock and transfer book is a record of all stocks in the names of the stockholders alphabetically arranged.WILMAR K.

the date thereof. 46). Note: There is no similar provision as to AOI. What Records Covered 1. . contracts. journal. vouchers. usually have no say on how business affairs of the corp. voting trust agreements (sec. he keeps the stock and transfer book and makes the proper and necessary entries. Such other entries as the by-laws may prescribe 53 The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent. By-laws These are expressly required to be open to inspection by SH/members during office hours (Sec. they can seek the proper remedy to protect their investment. a stock corporation is not precluded from performing or making transfer of its own stocks. The law therefore gives them the right to know not only the financial health of the corp. REQUINA. WHAT IS THE NATURE OF THE RIGHT TO INSPECT? PREVENTIVE : acts REMEDIAL: deterrent to an ill-intentioned management knowing its are subject to scrutiny. Campos. Minutes of stockholders' meetings 5. and A dissatisfied SH may avail of this right as a preliminary step towards seeking more direct and appropriate remedies against mismanagement. financial statements. WHO IS THE CUSTODIAN OF CORPORATE RECORDS? In the absence of any provision to the contrary. Virgilio Jacinto. Records of ALL business transactions This includes book of inventories and balances. 59) 2. 4. 278 SCRA 793. notes and selected cases of Prof. receipts. sale or transfer of stock made. He or she must be licensed by the SEC. but these are filed with the SEC anyway. but also how its affairs are managed so that if they find it unsatisfactory. shall be applicable. are run by the directors. ( Torres. BAR 2011 • • A statement of every alienation. WHAT IS A STOCK TRANSFER AGENT? (Sec. Such right arises only upon approval of the minutes. Minutes of director’s meetings This is to inform stockholders of Board policies. in which case all the rules and regulations imposed on stock transfer agents. CA. vs. however. 75) A stock transfer agent is one who is engaged principally in the business of registering transfers of stocks in behalf of a stock corporation. and the lectures and additional cases of Prof. and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. and Maria Clara L. however. ledger. the beneficial owners of the corporation. Jose Campos. comments. 3. Jr. papers pertaining to such contracts. Stock and transfer books Based on the outline. income tax returns.WILMAR K. except the payment of a license fee. and by whom and to whom made. Corollarily. et al. book for copies of letters and telegrams. 1997) Basis of the Right of Inspection Ordinary stockholders. the corporate secretary is the custodian of corporate records.

books. Such limitations to be valid must be reasonable and not inconsistent with law ( Sec.WILMAR K. Jose Campos. 5. As to purpose: • • • PRESUMPTION: that SH’s purpose is proper. 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. Legitimate: inquiry about failure to declare dividends Based on the outline. the corp. (Pardo v. BAR 2011 These are records of all stocks in the names of the stockholders alphabetically arranged. 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. (2) In cases of impeachment. contain all names of the stockholders of record. Note: Under the Secrecy of Bank Deposits Act. • Such business days should be THROUGHOUT THE YEAR. and Maria Clara L. BoD cannot limit such to merely a few days within the year. Hercules Lumber) 4. records of bank deposits of the corporation are NOT open to inspection. and it is not contrary to the interests of the corporation. A corp. SH cannot demand that such records be taken out of the principal office. Inspection should be made in such a manner as not to impede the efficient operations 6. the corporation must furnish the requesting party with a copy of its most recent financial statement. (3) Upon court order in cases of bribery or dereliction of duty of a public official. . notes and selected cases of Prof. The exercise of this right is subject to reasonable limitations similar to a citizen’s exercise of the right to information. Useful for proxy solicitation for elections. To be legitimate. Place of inspection: Principal office of the corp. and the lectures and additional cases of Prof. which should show that purpose was illegal. and (4) In cases where the money deposited / invested is the subject matter 5 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 Ombudsman 6 54 Extent and Limitations on Right 1. SEC has however ruled that a SH cannot demand that he be furnished such a list but he is free to examine corp. By-laws cannot prescribe that authority of president must first be obtained. Limitations as to time and place: • Exercise of right only at REASONABLE HOURS on BUSINESS DAYS. BURDEN OF PROOF: lies with corp. to the prejudice of SHs. Jr. Otherwise. 7. Campos. might be impaired. cannot refuse on the mere belief that his motive is improper (sec 74). Virgilio Jacinto. comments. Most recent financial statement Sec. EXCEPT under the following circumstances: (1) Upon written consent of concerned depositor ( presumably the corporation). 36[5] and 46). its efficiency in operations hindered. 6. REQUINA. 2. the purpose for inspection must be GERMANE to the INTEREST of the stockholder as such. 75 of the Code provides that within 10 days from the corporation's receipt of a written request from any stockholder or member. 3. Corp.

. HERCULES LUMBER (47 Phil. expert accountant. or (2) Was not acting in good faith. penal sanctions such as fines and / or imprisonment (Sec. Also. This is void. In CAB. is being mismanaged may be given due course even if later.WILMAR K. The secretary the president may be joined as party defendants. 1924) BOD/Officers may deny inspection when sought at unusual hours or under improper conditions. notes and selected cases of Prof. Campos. over subsidiary: If the two are operated as SEPARATE entities : NO right of inspection If they are ONE AND THE SAME with respect to management and control. and (2) Injunction (3) Action for damages against the officer or agent refusing inspection. Based on the outline. REQUINA. Virgilio Jacinto. member may exercise right personally or through an agent who can better understand and interpret records (impartial source. and Maria Clara L. Who May Exercise Right Every director. 144) What defenses are available to the officer or agent? (1) The person demanding has improperly used any information secured through any prior examination. 55 Belief in good faith that a corp. chosen by the directors. Sec. 74. Jose Campos. stockholder. SEC) Remedies available if Inspection Refused WHAT REMEDIES ARE AVAILABLE IF INSPECTION IS REFUSED BY THE CORPORATION? (1) Writ of mandamus. and the lectures and additional cases of Prof. If motive can be clearly shown as inimical to corp. NOTE: purpose is corporation. Writ shall not issue where it is shown that the petitioner’s improper and inimical to the interests of the Writ should be directed against the corporation. this is proven unfounded. Jr. But they cannot deprive the stockholders of the right altogether. lawyer). trustee. 965. or (3) The demand was not for a legitimate purpose. BAR 2011 Not legitimate: • • for mere satisfaction or speculation.. As to VTA: both voting trustee and transferor SH of parent corp. and inspection is demanded due to mismanagement of subsidiary by the parent’s directors who are also directors of the subsidiary : With right of inspection If the subsidiary is wholly-owned by the parent. by-law provided that the inspection be made available only for a few days in a year. and its books & records are in the possession and control of the parent corporation : With right of inspection (Gokongwei v. right may be denied. PARDO V. comments.

whenever the officials of the corp. REQUINA. Individual suits . refuse to sue or are the ones to be sued or hold the control of the corp. 1932) There was nothing improper in the secretary’s refusal since the minutes of these prior meetings have to be verified. and Maria Clara L. . Class suit .wrong done to stockholder personally and not to other stockholders (ex.wrong done to a group of stockholders (ex. comments. BAR 2011 56 GONZALES V. 266. the stockholder is given the right to sue on behalf of the corporation. 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 SMC’s possession and control. 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. VERAGUTH V. Jr. SEC (April 11. GOKONGWEI V. Hence.wrong done to the corporation itself • • Cause of action belongs to the corp. PNB (122 SCRA 490. Right not available here. will sue. Veraguth has to wait until after the next meeting. (57 Phil. Considering that the foreign subsidiary is wholly owned by SMC and therefore under its control. ISABELA SUGAR CO. and not the stockholder But since the directors who are charged with mismanagement are also the ones who will decide WON the corp. Preferred stockholders' rights are violated) c. and the lectures and additional cases of Prof. may be left without redress.WILMAR K. Virgilio Jacinto. Suing stockholder is merely the nominal party and the corp. the corp. notes and selected cases of Prof. thus. When right of inspection is denied to a stockholder) b. it would be more in accord with equity. 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. is actually the party in interest. Jose Campos. A SH can only bring suit for an act that took place when he was a stockholder. (Bitong v. G not in good faith. 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. CA. 292 SCRA 503) • • • • Based on the outline. DERIVATIVE SUITS Nature and Basis of derivative suit Suits of stockholders/ members based on wrongful or fraudulent acts of directors or other persons: a. Derivative suit . Campos. 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. confirmed and signed by the directors then present. not before.

and the stockholder merely a nominal party. Misjoinder of parties is not a ground to dismiss the action. Virgilio Jacinto. a breach of trust was committed which justified the suit by a minority stockholder of the corporation. 387. BITONG v. Campos. the shares must have devolved upon him since by operation of law. it is the corp. Petition dismissed for venue improperly laid. 1967) In a derivative suit. which is the real party in interest. BAR 2011 57 Requirements Relating to Derivative Suits WHAT ARE THE LEGAL PRINCIPLES CONCERNING DERIVATIVE SUITS? 1) Stockholder/ member must have exhausted all remedies within the corp. It is a derivative suit brought by the stockholder as a nominal party plaintiff for the benefit of the corporation. or consent thereto on the part of the directors. Therefore. In this case. CA (292 SCRA 503) Based on the outline. REPUBLIC BANK VS. the corporation is the real party in interest. . 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. 2) Stockholder/ member must be a stockholder/ member at the time of acts or transactions complained of or in case of a stockholder. Jose Campos. 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. 4) If suit is successful. CUADERNO (19 SCRA 671. SANTOS (86 Phil. and the lectures and additional cases of Prof. TAN (3 SCRA 198. through the board of directors which should bring the suit. EVANGELISTA VS. plaintiff entitled to reimbursement from corp. 3) Any benefit recovered by the stockholder as a result of bringing derivative suit must be accounted for to the corp. any demand for an intra-corporate remedy would be futile. REQUINA. REYES VS. who is the real party in interest. plaintiffs brought the suit not for the benefit of the corporation's interest. 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. Should the corporation be made a party? The English practice is to make the corp. comments. and Maria Clara L. unless such transaction or act continues and is injurious to the stockholder. 1961) The importation of textiles instead of raw materials. a party plaintiff while the US practice is to make it a party defendant. 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. for reasonable expenses including attorneys' fees. the stockholder is permitted to bring a derivative suit. the members of the board of directors of the bank were the nominees and creatures of respondent Roman and thus. But as in this case. Jr. Normally.WILMAR K. but for their own. 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. 1950) The injury complained of is against the corporation and thus the action properly belongs to the corporation rather than the stockholders. notes and selected cases of Prof.

• The basis of a stockholder's suit is always one in equity. Virgilio Jacinto. including cash. and personal property.issued by the corporation. it cannot prosper without first complying with the legal requisites for its institution. There are basically 2 kinds of securities: shares of stock and debt securities. FINANCING THE CORPORATION Sources of Financing WHERE CAN CAPITAL TO FINANCE THE CORPORATION BE SOURCED? 1) Contributions (stockholders). less any loss which may have been incurred in the business. However. Capital and Capital Stock Distinguished CAPITAL STOCK DEFINITION the amount fixed. The most important of these is the bona fide ownership by a stockholder of a stock in his own right at the time of the transaction complained of which invests him with standing to institute a derivative action for the benefit of the corporation.  It was JAKA's Board of Directors. also known as stockholder equity/equity investment 2) Loans or advances (creditors) 3) Profits (corporation itself) Capital Structure WHAT IS MEANT BY CAPITAL STRUCTURE? This refers to the aggregate of the securities -. which had the power to grant Bitong authority to institute a derivative suit for and in its behalf. BAR 2011 58 • 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. Includes all corporate assets. Campos. to be subscribed and paid in or secured to be paid in by the SHS of a corporation.WILMAR K. real. and the lectures and additional cases of Prof. comments. and upon which the corporation is to conduct its operation CONSTANT. REQUINA. unless amended by the AOI CAPITAL actual property of the corporation. Jose Campos.instruments which represent relatively long-term investment -. usually by the corporate charter. and Maria Clara L. FLUCTUATING CONSTANCY Based on the outline. notes and selected cases of Prof. not Senator Enrile. . Jr.

6. or preference over any other SH in the same class First crack at dividends / profits / distribution of assets NOTE: Only preferred and redeemable shares may be deprived of the right to vote. May be sold at a value higher. and therefore not indicated in the stock certificate. Campos. priority. BAR 2011 59 Shares of Stock: Kinds COMMON DEFINITION Stock which entitles the owner of such stocks to an equal pro rata division of profits PREFERRED Stock which entitles the holder to some preference either in the dividends or distribution of assets upon liquidation. Jose Campos. REQUINA. notes and selected cases of Prof.WILMAR K. Corporation Code) EXCEPTION: As otherwise provided in the Corporation Code. insurance companies. (Sec. 57) Usually denied voting rights. and the lectures and additional cases of Prof. trust companies. SH’s or fixed in the AOI eventually. 6) Based on the outline. REDEEMABLE Shares issued by the corporation that may be taken up by the corporation upon expiration of a fixed period. . and indicated in the stock certificate. Depends if it’s common or preferred. or in both PAR NO PAR* TREASURY Shares that have been issued and fully paid but subsequently reacquired by the issuing corporation by lawful means. building & loan association (Sec. and Maria Clara L. VOTING RIGHTS Usually vested with the exclusive right to vote Can vote only under certain circumstances PREFERENCE UPON LIQUIDATION No advantage.  regardless of the existence of unrestricted retained earnings FOUNDER’S Special shares whose exclusive rights and privileges are determined by the AOI. Value not fixed in the AOI. * No-par value shares may not be issued by the following entities: banks. public utilities. but not lower. comments. No voting rights for as long as such stock remains in the treasury (Sec. Depends if it’s common or preferred. VALUE Depends if it’s par or no par Stated par value Fixed in the AOI. Price may be set by BOD. Jr. Virgilio Jacinto. than that fixed in the AOI.

(Sec. or (2) unless the incorporation of said corporation fails to materialize within the said period or within a may be stipulated in the longer period as contract of subscription 2) After the AOI have been submitted to the SEC (Sec. 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. A subscription contract subsists as a liability from the time that the subscription is made until such time that the subscription is fully paid. 61) UTAH HOTEL CO V. it is not a credit. but also to have contracted with each other as well. 60) WHAT IS THE NATURE OF A SUBSCRIPTION CONTRACT? • • • • Subscriptions constitute a fund to which the creditors have a right to look for satisfaction of their claims. BAR 2011 60 Nature of Subscription Contract WHAT IS A SUBSCRIPTION CONTRACT? It is any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. MADSEN (43 Utah 285. EXCEPTIONS: (1) unless all of the other subscribers consent to the revocation. GARCIA V. A subscription contract is INDIVISIBLE (Sec. 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. 557. This is notwithstanding the fact that the parties refer to it as a purchase or some other contract. 1934) A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and therefore. The assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. Pre-incorporation subscription RULE: When a group of persons sign a subscription contract. they are deemed not only to make a continuing offer to the corporation. REQUINA. 134 Pac. WHEN IS A PRE-INCORPORATION SUBSCRIPTION IRREVOCABLE? 1) For a period of at least 6 months from the date of subscription.WILMAR K. 562. no one may revoke the contract even prior to incorporation without the consent of all the others.” . Thus. 64). LIM CHU SING (59 Phil.

LIMITATIONS: The pre-emptive right does not extend to: (Sec. 1919) One who has paid his subscription to the capital stock of the corporation may compel the issuance of proper certificates therefor. a subscriber is liable to pay for the shares even if the corporation has become insolvent. and the contract agreement is enforced if the corporation is in fact organized. BAR 2011 61 Since it may be done by express contract. 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. 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 WHAT IS THE EXTENT OF THE PRE-EMPTIVE RIGHT? All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or dispositions of shares of any class. Exception: When such right is denied by the AOI or an amendment thereto. Post-incorporation subscription NOTE: Under the Corporation Code. 293. If the right is not recognized. Thus. ECLIPSE POCAHONTAS COAL CO (98 S. . there is no longer any distinction between a subscription and a purchase. Basis of Right. 39) 1) Initial Public Offerings (IPOs). REQUINA. 2) Issuance of shares in exchange for property needed for corporate purposes. before the same can be disposed of in favor others. this shows that it was intended that a contract to that effect may be entered into even before the corporation is organized.E. 39) Why? (a) Because it is beneficial for the corporation to save its cash. the SH’s interest in the corporation will be diluted by the subsequent issuance of shares. WALLACE V. in proportion to their respective shareholdings. 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. WHY A PRE-EMPTIVE RIGHT? To protect existing stockholder equity.WILMAR K. including cases wherein an absorbing corporation issues new stocks to the SH’s in pursuance to the merger agreement (Sec. Common Law Rule Under the prevailing view in common law.

REQUINA. 39 do not apply.E. the defendant wrongfully deprived him of his property and is liable for such damages as he actually sustained. CONTINENTAL TRUST CO. 39) If it appears merely in a waiver agreement and NOT in the AOI. (b) Corporation does not have to shell out money to fulfill its obligations. ( Sec. Note that the limitations in Sec. 62 Note: In Nos. future stockholders will NOT be bound to such an agreement. (c) Money that would have otherwise been used for interest payments can be channelled to more productive corporate activities. (3) Cancellation of the shares (NOTE: but only if no innocent 3rd parties are prejudiced) (4) In certain cases. and was unanimously agreed to by all existing stockholders: *0 *1 The existing stockholders cannot later complain since they are all bound to their private agreement. (Sec. a derivative suit STOKES V. Remedies when right violated/denied WHAT ARE THE REMEDIES UNLAWFULLY DENIED? WHEN THE PRE-EMPTIVE RIGHT IS (1) Injunction. 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. BAR 2011 (b) A swap is more expedient than determining the monetary equivalent of the property. 1906) 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. 102). particularly future stockholders. EXCEPT if provided otherwise by the AOI. 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. However. (2) Mandamus. 3) Issuance of shares in payment of a previously contracted debt (Sec. (78 N. Any stockholder who has not exercised his preemptive right within a reasonable time will be deemed to have waived it. the preemptive rights extends to ALL stock to be issued. By selling to strangers without first offering to sell to him. . (2) and (3). 39) Why? (a) The obligation is extinguished outright. such acts require approval of 2/3 of the OCS or 2/3 of total members.WILMAR K. including reissuance of treasury shares. 1090. or to “freeze out” the minority interest. In Close Corporations In close corporations.

REQUINA.W. can acquire it for the best interest of the SHs. The role of such representative is to see to it that his institution's investment is protected from mismanagement or unfavorable corporate policies. 39] DUNLAY V. the directors were not able to prove good faith in the purchase and equity of transaction. 1946) The doctrine of preemptive right is not affected by the identity of the purchasers. Bonds and Debentures BONDS:  secured by a mortgage or pledge of corporate property  must be registered with the SEC. the SHs of a corporation have a preferential right to purchase new issues of shares. 1930) Independently of the charters. Oftentimes. FULLER V. 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. another situation arises. ROSS TRANSPORT V. M. In the present case. and the issuance of stock is the only practical and feasible method by which the corp. KROGH (113 N. 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. CROTHERS (45 A. 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. There was constructive fraud upon the other SHs. as provided by Sec. 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. Sec. the original SHs have no right to count on obtaining and keeping their proportional part of original stock.WILMAR K. 234. But even if preemptive right does not exist. was a financial success. Debt Securities Borrowings Borrowings are usually represented by promissory notes. to the proportional extent of their respective interests in the capital stock then outstanding. 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. for each of the shares. 2d 267. What it is concerned with is who did not get it. both in value and in voting power. GARAGE AND REPAIR (170 N. every SH of the bank. when the privilege can be exercised consistently with the object which the disposition of the additional stock is legally designed to accomplish. BALTIMORE TRUST (148 Atl. BAR 2011 63 THOM V. 2d 25. In the case at bar. Ground: practical necessity. 917. [cf. 38 of the Corporation Code DEBENTURES:  issued on the general credit of the corporation . But when officers and directors sell to themselves and thereby gain an advantage. bonds or debentures. was to receive 1 1/2 shares of the stock co. or to ‘freeze out’ minority interest.E. (share in exchange for property). since the corp.

VS. if the stock option is granted to non-stockholders. the corporation is wrong in contending that a warrant holder must first exercise his warrant before they may be issued stock dividend. Hybrid securities. or is it subordinate to them? WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT MADE? BONDS WHAT IS PAID? TO WHOM PAID? WHEN PAID? NATURE TAXABILITY MATURITY DATE? Interest Creditor-investor Whether the corporation has profits or not Expense Can be deducted for tax purposes Yes Dividends Stockholder Only if there are profits Not an expense CANNOT be deducted No STOCK . 1950) If the corporation is allowed to declare stock dividends without taking account of the warrant holders (who have not yet exercised their warrant). (184 F. or is it dependent on earnings? (3) Does the security rank at least equally with the claims of other creditors. 2d 954. therefore combine the features of preferred shares and bonds. The American courts use the following criteria: (1) Is the corporation liable to pay back the investor at a fixed maturity date? (2) Is interest payable unconditionally at definite intervals. or to directors. REQUINA. as the name implies.WILMAR K. Determining the true nature of the security is crucial for tax purposes. THEREFORE. are not bonded indebtedness in the true sense. and stockholder approval is NOT required (although it would generally be a good idea to obtain it) 64 Convertible securities. officers. stock options NOTE: Under the SEC rules. 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. could be substantially reduced/diluted. MERRITT-CHAPMAN & SCOTT CORP. Thus. Hybrid securities Because preferred shares and bonds are created by contract. the percentage of interest in the common stock capital of the corporation which the warrant holders would acquire. or managing groups. BAR 2011  not secured by any collateral. it is possible to create stock which approximates the characteristics of debt securities. there must first be SH approval of 2/3 of the OCS before the matter is submitted to the SEC for approval. NEW YORK TRUST CO. should they choose to do so. Also. stock option must first be approved by the SEC.

VS. because of the presence of fluctuating annual payments with a 2% minimum. a priority for the debentures over common stock and a definite maturity date in the reasonable future. it is the Tax Court which has final determination of all tax issues which are not clearly delineated by law. 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 courts will interpret and enforce it. regardless of what they are called. and the limitation of the issue of notes to stockholders in exchange only for stock. the bondholders only followed such provisions in good faith. by agreement with the company. (5) participation in management and the right to vote. When this was done. The company benefited because of such move. JORDAN CO. In the deed of trust and bonds in this case. the annual payments made were interest on indebtedness (therefore. the bond issue usually involves 3 parties: (1) debtor-corporation (2) creditor-bondholder (3) trustee: representative of all the bondholders ALADDIN HOTEL CO. CIR (326 U. to modify and extend the date of payment of the bonds provided such extension affected all bonds alike. BLOOM (200 F. 2d 627. shares are held). . E. there are provisions empowering bondholders of 2/3 of the principal amount or more. a bond is held) because there were sales of the debentures as well as exchanges of preferred stock for debentures. (3) rank on dissolution.g. as defendants Joneses in this case were themselves owners of 72% of the bond issue. VS. 437. 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. 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. It must be noted that these criteria are not of equal importance and cannot be relied upon individually. (4) uniform rate of interest payable or income payable only out of profits. 521. BAR 2011 65 RANK ON DISSOLUTION Ranked together with other corporate creditors Superior to stockholders. inferior to corporate creditors JOHN KELLY VS.S. REQUINA. 1949) The payments made. The trust indenture Here. 1946) In the Kelly case. CIR TALBOT MILLS VS. among other factors. Supp. (2) treatment by the parties.WILMAR K. If the contract is legal. the annual payments made were dividends and not interest (therefore. 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. In the Talbot Mills case. a promise to pay a certain annual amount if earned. ALLEN (85 F. and the bondholders were not necessarily prejudiced. Besides.

HOW IS THE VALUE THEREOF DETERMINED? It is initially determined by the incorporators or the Board of Directors.WILMAR K. (2) Upon payment of less than its par value in money or for cost at a discount. . (Sec. in accordance with law. or (2) By the BOD pursuant to authority conferred upon it by the AOI or the by-laws. 62) Watered Stocks WHAT IS WATERED STOCK? Stocks issued as fully paid up in consideration of property at an overvaluation. labor performed for or services actually rendered to the corporation (NOTE: Future services are NOT acceptable!). property actually received by the corporation: must be necessary or convenient for its use and lawful purposes. previously incurred indebtedness by the corporation. subject to approval by the SEC. 62) IF THE CONSIDERATION FOR SHARES IS OTHER THAN CASH. Oftentimes. under an agreement that nothing shall be paid to the corporation. WHAT ARE THE WAYS BY WHICH WATERED STOCK CAN BE ISSUED? (1) Gratuitously. REQUINA. by the SHs representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose ( Sec. amounts transferred from unrestricted retained earnings to stated capital. BAR 2011 66 CONSIDERATION FOR ISSUANCE OF SHARES Form of Consideration WHAT FORMS OF CONSIDERATION ARE ACCEPTABLE FOR ISSUANCE OF SHARES? • • • • • • cash. the consideration received is less than the par value of the share. or (3) In the absence of the foregoing. NOTE: No-par shares CAN be watered stock: when they are issued for less than their issued value as fixed by the corp. 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: (1) In the AOI.

Moreover. shall be void. the contract is valid and not illegal. Sec. it is the statutory obligation theory that is controlling (cf. labor or services. EATON (297 P. The liability will be to all creditors. the consideration for which were never fixed as required by law. 1956) . whose value is less than the par value of the shares. BING CROSBY V. The creditor’s remedy is against the original owner of the watered stock. RICE & HUTCHINS (72 A. Future services are not lawful consideration for the issuance of stock. If it is understood that the stock will not be issued to the subscriber until the note is paid. when there are no sufficient profits or sufficient increases in value to justify it. Reliance by the creditors on the alleged valuation of corporate capital is immaterial and fraud is not made an element of liability. (12 A. REQUINA. rather than furnish him with a defense when he has failed in that obligation. Its purpose is to give integrity to the corporation’s capital. and (4) In the guise of stock dividends representing surplus profits or an increase in the value of property. with the balance due to be evidenced by a note. 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. NOTE: In the Philippines. LANGDEAU (337 S.WILMAR K. 2d 407. with a downpayment of only $20.W. the law does not say that such note. 1930) In this case. 1920) This case involves an action to collect unpaid balances on par value of shares. MCCARTY V. their issuance was void. DOCK-HOP CO. McCarty contends that the contract is void.R. It emphasizes the stockholder’s obligations to make full and lawful payment in accord with its mandate.L. McCarty failed to pay a big portion of the balance. If a security such as a note. whether they became such prior or subsequent to the issuance of the watered stock. 65). But the law only prohibits the issuance of stock. the stocks issued to the Dillman faction were no par value shares. 932. or the stock issued for it. 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. 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. is accepted.L. WHAT IS THE LIABILITY OF DIRECTORS FOR THE ISSUANCE OF WATERED STOCK? Directors and officers who consented to the issuance of watered stocks are solidarily liable with the holder of such stocks to the corp. What is void by express provision of law is the fictitious increase of stock or indebtedness. The Court affirmed the judgement against McCarty for the balance due on the contract. BAR 2011 67 (3) Upon payment with property. TRIPLEX SHOE V. The law was designed for the protection of the corporation and its creditors. 437. the stocks were issued to the Dillmans for services rendered and to be rendered. which is not a valid consideration.R. Hence. RHODE V. 2d 5. 1960) McCarty agreed to purchase shares of a corp.

 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.) Issuance of Certificate Certificate of stock CONDITION FOR ISSUANCE: payment of full amount of subscription price plus interest. reliance of creditors on the capital stock of the corporation is irrelevant. (Tan v. a certificate of stock is the paper representation or tangible evidence of the stock itself and of the various interests therein. it is the statutory obligation theory which is prevailing. (Bitong v. as well as the corporate seal For no more than the number of shares authorized in articles of incorporation. 63) (1) The certificates must be signed by the President / Vice-President. It expresses the contract between the corporation and the SH. but is not in law the equivalent of such ownership. if par value shares Signatures of the proper officers. the creditors who rely on the misrepresentation of the corporation’s capital stock are entitled to recover the “water” from holders of the watered stock. date of issuance 3. Under the misrepresentation theory.WILMAR K. SEC. if any is due (Sec. usually president or secretary. 206 SCRA 740) Requisites for valid issuance of formal certificate of stock (Sec. Holders of watered stock are generally held liable to the corporation’s creditors for the difference between the par value of the stock and the amount paid in. However. but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. Nevertheless. par value. 64) CERTIFICATION THAT: INDICATES: person named therein is a holder or owner of a stated number of shares in the corporation. his ownership of the shares represented thereby. under the statutory obligation theory. excess would be void BEARS: AMOUNT ISSUED: Nature and function of a certificate of stock A certificate of stock is not necessary to render one a stockholder in a corporation. 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 . and sealed with the seal of the corporation. BAR 2011 68 A subscriber to shares who pays only part of what he agreed to pay is liable to creditors for the balance. 1. The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation. REQUINA. countersigned by the secretary or assistant secretary. kind of shares 2. Reliance of creditors on the misrepresentation is material. CA. (It must be noted that here in the Philippines.

802. CA. Where there is an inherent lack of power in the corporation to issue the stock.WILMAR K. REQUINA. 404. LINGAYEN GULF ELECTRIC VS BALTAZAR (93 Phil. Board made a call for payment through a resolution. (4) Surrender of the original certificate if the person requesting the issuance of a certificate is a transferee from a SH. It was held that the Board call became immaterial in insolvency which automatically causes all unpaid subscriptions to become due and demandable. 68. Assignee in insolvency sued Poizat whose defense was that the call was invalid for lack of publication. ( Sec. the BOD declares the unpaid subscriptions due and payable (Sec. The defense was that the call was invalid for lack of publication. to be discussed in the next section) (3) Court action for collection (Sec. NLRC. 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. the president refused to pay. ( Bitong v. 1918) Poizat subscribed to 20 shares but only paid for 5. 67). . However. (Apodaca v. The Board made a call for payment through a resolution. Poizat refused to pay. 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. prompting the corporation to sue. 292 SCRA 503) (3) Par value of par value shares / Full subscription of no par value shares must be fully paid. 69 BITONG V. Corporation became insolvent. it shall be the legal rate. 66) • How Payment of Shares Enforced HOW ARE UNPAID SUBSCRIPTIONS COLLECTED? (1) Call for payment as necessary.e. (Sec. (2) Delinquency sale (Sec. 70) VELASCO VS POIZAT (37 Phil. 1953) Company’s president subscribed to shares and paid partially. Unpaid Subscriptions • • Unpaid subscriptions are not due and payable until a call is made by the corporation for payment. i. BAR 2011 is inserted therein has no control over the books of the company. 172 SCRA 442) Interest on all unpaid subscriptions shall be at the rate of interest fixed in the by-laws. 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. If there is none.

The subscription contract provided that the shares will be paid solely from the dividends. Fua Cun brought an action to have himself . NATIONAL EXCHANGE VS DEXTER (51 Phil. Therefore. 746. Lumanlan agreed since he would be paying less than his unpaid subscription. 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). Afterwards. at par value of P100. the corporation has a right to collect all unpaid stock subscriptions and any other amounts which may be due it. Chua mortgaged the said shares in favor of plaintiff Fua Cun to secure a promissory note for the sum of P25. the corporation still sued him for the balance because the company still had unpaid creditors. SUMMERS (44 Phil. Without dividends.000. Rights and Obligations of Holders of Unpaid but Non-delinquent Stock WHAT ARE THE RIGHTS OF UNPAID SHARES? Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Under the contract. the company would forego whatever balance remained on the unpaid subscription. Company has other remedies provided for by law such as a delinquency sale or specific performance. The Court held that by-laws provide that unpaid subscriptions may be paid from such dividends. 50% of the subscription price. In exchange. Company’s receiver sued him for the balance and won. notwithstanding the compromise agreement. he cannot be obligated to pay. The Court held that the agreement cannot prejudice creditors. REQUINA. 72) FUA CUN V. The company advertised a notice of delinquency sale. Da Silva did not pay. 1928) Dexter subscribed to 300 shares. The subscriptions constitute a fund to which they have a right to look to for satisfaction of their claims. In the meantime.00.00. The company notified him that his shares will be declared delinquent and sold in a public auction if he does not pay the balance. 601. this theoretical value will never be realized since if there are no dividends. 755. the company and Lumanlan entered into a compromise whereby Lumanlan would directly pay a creditor of the company. stockholders will not be compelled to pay the balance of their subscriptions. Da Silva sought an injunction because the by-laws allegedly provide that unpaid subscriptions will be paid from the dividends allotted to stockholders. Lumanlan’s defense was the compromise agreement.00. Chua Soco's interest in the 500 shares were attached and levied upon to satisfy his debt with China Banking Corp. LUMANLAN VS CURA (59 Phil. ( Sec. Assignee in insolvency sued Dexter for the balance. 1934) Lumanlan had unpaid subscriptions. payment would come from the dividends. 1923) Chua Soco bought 500 shares of China Banking Corp. Dexter's defense was that under the contract. Company became insolvent. 1923) Da Silva subscribed to 650 shares and paid for 200. BAR 2011 70 It was held that the call was void for lack of publication required by law. 704.WILMAR K. The ruling in Poizat does not apply since the company here is solvent. DA SILVA VS ABOITIZ (44 Phil. Such publication is a condition precedent for the filing of the action. paying the sum of P25. While the case was on appeal.000.

3. LINGAYEN GULF ELECTRIC POWER (14 SCRA 522. The Court held that payment of half the subscription price does not make the holder of stock the owner of half the subscribed shares. . however. Note: The Camposes are of the opinion that § 64 of Corporation Code makes the Lingayen Gulf inapplicable at present. The Fua Cun ruling applies. Nava bought 20 shares from Co and sought its transfer in the books of the corporation. subscribed to a certain number of shares of Lingayen Gulf Electric Power. on the ground that he was owner of 250 shares by virtue of Chua Soco's payment of half of the subscription price. BAR 2011 71 declared to hold priority over the claim of China Bank.00 a share for a total of P8. 2. paid only P2. at P100. Stockholder cannot be counted as part of the required quorum. PEERS MARKETING (74 SCRA 65. to have the receipt for the shares delivered to him. It was held that the transfer is effective only between Co and Nava and does not affect the corporation.00 corresponding to 20 shares or 25% of total subscription. Dividends will not be paid to the stockholder but will be applied to the unpaid balance of his subscription plus costs and expenses. Effect of delinquency WHAT IS DELINQUENT STOCK? (Sec. The corporation chose the first option. He. no certificate of stock was issued to Co. having done so. and to be awarded damages for wrongful attachment. 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. The Court held that shares of stock covered by fully paid capital stock shares certificates are entitled to vote. 1965) Baltazar.000. REQUINA.00. 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. The holder thereof loses all his rights as a stockholder except only the rights to dividends. and. WHAT ARE THE EFFECTS OF DELINQUENCY? 1. stock dividends will be withheld until full payment is made. The corporation refused to transfer said shares in its books. it cannot unilaterally nullify the certificates issued. 5. NAVA V. Such stockholder cannot vote at the election of directors or at any meeting on any matter proper for stockholder action. or (b) as payment pro-rata to each subscribed share. 4. Corporation wanted to deny voting rights to all subscribed shares until total subscription is paid. Also. 1976) Teofilo Co subscribed to 80 shares of Peers Marketing Corp. et al.WILMAR K. Lingayen Gulf does not apply because. They had made only partial payment of the subscription but the corporation issued them certificates corresponding to shares covered by the partial payments. 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. BALTAZAR V.000. Stockholder cannot be voted for as director of the corporation. unlike in Lingayen Gulf.

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. 68) (1) Issuance of Board resolution The BOD issues a resolution ordering the sale of delinquent stock. 73) (1) File an affidavit in triplicate with the corporation. costs of advertisement and expenses of sale.WILMAR K. The affidavit must state the following: (a) (b) (c) (d) Circumstances as to how the certificates were SLD. No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale. LOST OR DESTROYED? (Sec. (See the discussion under Dividends and Purchase by Corporation of its Own Shares. (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. (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 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. BAR 2011 72 WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE? (Sec.) CAN A DELINQUENCY SALE BE QUESTIONED? (Sec. 69) Yes. specifically stating the amount due on each subscription plus all accrued interest. or in the sale itself of the delinquent stock unless these requirements are complied with. time and place of the sale. 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. for the smallest number of shares or fraction of a share. and the total amount due shall be credited as paid in full in the books of the corporation. with interest at the legal rate from the date of sale. 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. and Serial number of the certificate Name of issuing corporation . Number of shares represented. Note that this is subject to the restrictions imposed by the Code on corporations as regards the acquisition of their own shares. and the date. Note: The sale shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent. 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. REQUINA. Lost or Destroyed Certificate WHAT IS THE PROCEDURE FOR THE ISSUANCE OF NEW CERTIFICATES TO REPLACE THOSE STOLEN. (3) Sale at public auction If the delinquent stockholder fails to pay the corporation on or before the date specified for the delinquency sale.

bad faith. 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. or negligence on the part of the corporation and its officers. 63) WHAT ARE THE REQUISITES FOR A VALID TRANSFER? (1) Delivery. the corporation may be held liable to the latter EVEN IF it acted in good faith. (Razon v.) The notice will contain the following information: (a) (b) (c) (d) (e) Name of the corporation Name of the registered owner. no contest is presented. RURAL BANK OF SALINAS. and he will not be entitled to dividends. the issuance of the new certificate shall be suspended until the final decision by the court. NOTE: One-year period will not be required if the applicant files a bond good for 1 year. Serial number of the certificate. 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. The corporation has the discretion to decide whether to publish or not. V.WILMAR K. if a contest has been presented to the corporation. though valid between the parties. the transfer. 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. INC. ( Sec. However. REQUINA. Number of shares represented by the certificate. or if an action is pending court regarding the ownership of the SLD certificate. ( Note however that this is not mandatory. BAR 2011 73 (2) The corporation will publish notice after the affidavit and other information and evidence have been verified with the books of the corporation. CA. NOTE: Even if the above procedure was followed. CA (210 SCRA 510) . Thus. if there was fraud. cannot be effective as against the corporation. TRANSFER OF SHARES HOW ARE SHARES OF STOCK TRANSFERRED? By delivery of the certificate/s indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. (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. the corporation may be held liable. the unrecorded transferee cannot enjoy the status of a SH: he cannot vote nor be voted for. (4) The corporation will then issue new certificates.

except as between the parties. 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. the number of the certificate. as the case may be. Sec. including 75 shares of the North Electric Co. is valid. BAR 2011 74 A corporation. and 9 months after the attachment and levy on said shares. 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. as to all persons interested. 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. 1935) Toribia Uson filed a civil action for debt against Vicente Dioisomito. DIOSOMITO (61 Phil. is to prescribe certain restrictions on the transfer of stock in violation of the Corporation Code as the only law governing transfer of stocks. not registered or noted on the books of the corp. however. 35 says that No transfer.. 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. 47 Phil. regardless of whether the attaching creditor had actual notice of said transfer or not. 583) While Sec. The transfer of the 75 shares in the North Electric Co. on 18 Jan.. either by its board. TAN V.. Is a bona fide transfer of the shares of corp. or to impose unreasonable restrictions of the right of SHs to transfer their shares.. The sheriff sold said shares at a public auction with Uson being the highest bidder. 47 (9) of the Corporation Code grants to stock corporations the authority to determine in the by-laws the "manner of issuing certificates" of shares of stock. 535. The writ will be granted provided it is shown that . which stood in his name on the books of the company when the attachment was levied on 18 January 1932. REQUINA. and indeed. 63) Remedy if registration refused 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. 1932. which he sold to Barcelon. the date of the transfer. the power to regulate is not the power to prohibit. on 13 February 1933.WILMAR K. it is not valid. Toribia Uson. USON V. Upon institution of said action. ( Sec.. its by-laws or the act of its officers. cannot create restrictions in stock transfers. 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. Inc made by the defendant Diosomito as to the defendant Barcelon was not valid as to the plaintiff. valid as against a subsequent lawful attachment of said shares. Inc. except the parties to such transfers. Jollye claims to be the owner of said certificate of sock issued to him by the co.. and the number of shares transferred. There is no dispute that Diosomito was the original owner of said shares. an attachment was duly issued and D's property was levied upon. 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. Barcelon did not present these certificates to the corporation for registration until 19 months after the delivery thereof by Barcelon. The transfer to Jollye was made 5 months after the issuance of a certificate of stock in Barcelon's name. However. NO. however. Botica Nolasco Co.

1986) Isamu Akasako. It must be noted that unless the latter fact is alleged. Exception: In close corporations. However. whenever a corporation refuses to transfer and register stock. Inc. conditions or period stated therein. Restrictions on Transfer. 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. Close Corporations General rule: Shares of stock are freely transferable. 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. without restriction. however. a registered SH of Fujuyama Hotel and Restaurant. BAR 2011 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. Cf. (Sec.WILMAR K. 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. ( Campos & Campos) 75 RURAL BANK OF SALINAS. after the sale was consummated and the consideration paid. (Note. The rights of the parties would have to be threshed out in an ordinary action. They filed a special action for mandamus and damages. attempted several times to have the shares registered but were refused compliance by the corp. mandamus will lie to compel the officers of the corporation to transfer said stock in the books of the corporation. If this option is not exercised upon the expiration of the period. as well as in the certificate of stock. This is because the corporation's obligation to register is ministerial. the transferring stockholder may sell his shares to any third person. 293 SCRA 634) TORRES V. restrictions may be placed on the transfer of shares. REQUINA. Otherwise. Rivera refused to make the indorsement unless he is also paid. RIVERA V. Rivera assured her that he would sign the stock certificates because Akasako was the real owner. 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. Thus. a Japanese national who was allegedly the real owner of the shares of stock in the name of one Aquilino Rivera. CA. FLORENDO (144 SCRA 647. the restriction shall not be binding on any purchaser thereof in good faith. Lim Tay v. the transferor SH may rightfully bring suit to compel performance. mandamus will be denied due to failure to state a cause of action. Such restrictions must appear in the AOI and in the bylaws. Tsuchiya. that in such cases. 98) . 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. INC. 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. the person requesting the registration must be the prima facie owner of the shares. Note: In this case.. et al.

WILMAR K. and is not otherwise guilty of estoppel For example. thus. UNAUTHORIZED TRANSFERS Certificates indorsed in blank. But if recognition results to an over-issuance of shares. the transferee may rescind the transfer or recover from the transferor under any applicable warranty. 99. SANTAMARIA VS. Santamaria demanded the return of the certificate. 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. 780. BAR 2011 76 WHAT IS THE EFFECT OF ISSUANCE OR TRANSFER OF STOCK IN BREACH OF THE RESTRICTIONS? The corporation may. ( Sec. estopping him later from asserting his rights over the shares of stock against a bona fide purchaser. or if the close corporation has amended its AOI in accordance with Title XII of the Code. with her stock certificate representing her shares with Batangas Minerals. It can always recall from the person the certificate issued. HONGKONG (89 Phil. REQUINA. the corporation is estopped from denying its liability. though otherwise contrary to subsections (1). has been consented to by all the stockholders of the close corporation. 1951) Santamaria secured her order for a number of shares with Campos Co. It must recognize both the original and the new certificate. 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. The said certificate was originally issued in the name of her broker and endorsed in blank by the latter. for cancellation. she instituted an action against Hongkong Bank for the recovery of the certificate. whether express or implied. only the original certificate may be recognized. In case where the certificate so issued comes into the hands of a bona fide purchaser for value from the original purchaser. the purchaser believes the possessor to be the owner thereof or has authority to transfer the same. without prejudice to the right of the bona fide purchaser to sue the corporation for damages. However. (2) and (3) of Sec. This proceeds from the theory of quasi-negotiability which provides that in endorsing a certificate in blank. Quasi-negotiability does not apply in cases where the real owner: a. As Campos failed to make good on the order. refuse to register the transfer of stock in the name of the transferee. For his part. the real owner clothes the possessor with apparent authority. Forged Transfers A corporation does not incur any misrepresentation in the issuance of a certificate made pursuant to a forged transfer. 99. . this shall not be applicable if the transfer. Thereafter.4) However. b. when quasi-negotiable A possessor. did not entrust the certificate to anyone. at its option. in case the transfer is made by a finder or a thief. even without authority. The bank appealed. Trial court decided in her favor.

The bank is not obligated to look beyond the certificate to ascertain the ownership of the stock. the loss must fall on the one who first trusted the wrongdoer. the transferee thereof is justified in believing that it belongs to the transferor. she clothed Campos with apparent title to the shares represented by the certificate. in the sense that it may be transferred by endorsement. This is so because even though a stock certificate is regarded as quasi-negotiable. the receipt that might have proven the sale. is deemed quasi-negotiable. and the Civil Code will apply. opposed the action on the ground that the said shares of stock were bought by one Madrigal. and. in trust for the true owner. . She delivered the certificate. Upon its face. Thus. issue another in her name. The US Attorney General. She did not ask the Batangas Minerals to cancel it and instead. 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. though endorsed in blank. It is the rule that if the owner of the certificate has endorsed it in blank. Matsui. conveyed nor alienated these to anybody.WILMAR K. the holder is entitled to demand its transfer into his name from the issuing corporation. were already dead. endorsed in blank. 1955) De los Santos filed a claim with the Alien Property Custodian for a number of shares of the Lepanto corporation. the successor of the Alien Property Administrator. that Matsui was subsequently given possession of the corresponding stock certificates. was said to have been lost in a fire. the trustee of Matsui. Further. BAR 2011 77 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. to Campos without having taken any precaution. REQUINA. coupled with delivery. which was endorsed in blank. such pledge or mortgage cannot have any legal effect if it is registered only in the corporate books. and then delivered to the latter indorsed in blank. Where a certificate is delivered to the creditor as a security. DE LOS SANTOS VS. Collateral Transfers Shares of stock are personal property. MCGRATH (96 Phil. the contract is considered a pledge. except in so far as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. 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. 577. it was shown that the shares of stock were registered in the records of Lepanto in the name of Madrigal. He instituted the present action to establish title to the aforementioned shares of stock. In failing to do so. both of them dead.” (2) The subject certificate is what is known as a street certificate. they can either be pledged or mortgaged. On the other hand. The alleged vendors of the stocks who could have verified the allegation. and is stolen. A certificate of stock. that Matsui had neither sold. no title is acquired by an innocent purchaser of value. and as such. The Philippine Alien Property Administrator rejected the claim. However. the holder thereof takes it without prejudice to such rights or defenses as the registered owner or credit may have under the law. By her misplaced confidence in Campos. she made possible the wrong done. He contended that said shares were bought from one Campos and Hess.

The corporation refused because apparently prior to Guan’s demand. NON-TRANSFERABILITY IN NON-STOCK CORPORATIONS Although shares of stock are as a rule freely transferable. 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. the chattel mortgage having been registered. He requested the corporation that new certificates be issued in his name. In a situation where. the mortgage is recorded in the register of deeds. 473. Chiu later assigned his rights in the mortgage to Guan who soon foreclosed the same after Co failed to pay. membership in a non-stock corporation is personal and non-transferable. Going by these principles. But if chattel mortgage of shares may be made validly. and. 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. Did the chattel mortgage in the registry of deeds of Manila gave constructive notice to the attaching creditors? 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. Co mortgaged his shares of Samahang Magsasaka stock to Chiu. it is deemed reasonable that chattel mortgage of shares be registered both at the owner’s domicile and in the province where the corporation has its principal office. several attachments against the shares covered by the certificates had been recorded in its books. and garnishment. SAMAHANG MAGSASAKA (62 Phil. 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. 2) without delivery. unless the articles of incorporation or by-laws provide otherwise. But the remedy lies in the legislature. REQUINA. CHUA GUAN VS.WILMAR K. and in case where the domicile of the stockholder is in a different province. 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. then registration must also be made there. The said mortgage was duly registered in the City of Manila. 1935) To guarantee payment of a debt. The court may not strip him of his membership without cause. BAR 2011 78 If the certificate of stock is not delivered to the creditor. It is also generally held that for the purpose of execution. 90) DIVIDENDS AND PURCHASE BY CORPORATION OF ITS OWN SHARES Form of Dividends . ( Sec. attachment. it must be registered in the registry of deeds of the province where the principal office of the corporation is located. Guan won in the public bidding. It is recognized that this method of hypothecating shares of stock in a chattel mortgage is rather tedious and cumbersome. it is the domicile of the corporation that is decisive. It is said that such a rule tends to impair the commercial value of stock certificates.

and to the owners of the shares belong the civil fruits. Kimmel.then the proportion of the stockholder's interest changes radically. No new income unless sold for cash.WILMAR K. ed. No. Cash Dividend Voting requirements for issuance Effect on delinquent stock Board of Directors Shall be applied to the unpaid balance on the subscription plus costs and expenses. corp may pay in cash or issue fractional share warrants. Smith. contractual or legal purposes and which are free for distribution to the stockholders as dividends. REQUINA. DIFFERENTIATE BETWEEN CASH DIVIDENDS AND STOCK DIVIDENDS. Unrestricted retained earnings is defined as "the undistributed earnings of the corporation which have not been allocated for any managerial. P. It does not include: . No. 1977. BAR 2011 79 IN WHAT FORMS CAN DIVIDENDS BE ISSUED? 1. (Sec. Whenever fractional shares result.and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder . the proportional interest of each stockholder remains the same. FROM WHERE CAN DIVIDENDS BE SOURCED? Dividends can be sourced only out of the unrestricted retained earnings of the corporation. Stock dividends • • • • • • • Stock dividends are distribution to the SHs of the company’s own stock. Stock dividends are civil fruits of the original investment. Cash 2." (Simmons. 1982) Retained earnings has been defined as "net accumulated earnings of the corporation out of transactions with individuals or firms outside the corporation. (Sec. Can only be issued to SHs. Civil fruits belong to the usufructuary and not to the naked owner. 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." (SEC Rules Governing Redeemable and Treasury Shares.certificate issued to SHs instead of cash dividends which entitles them to a certain amount in the future 3. A stock dividend really adds nothing to the interest of each stockholder. 35) Can this be issued by Executive Committee? NIELSON v LEPANTO (26 SCRA 540. If a stockholder is deprived of his stock dividends . Intermediate Accounting. 635) The term implies the limitation that no corporation can declare dividends unless its legal or stated capital is maintained. 35) Stock Dividend Board of Directors + 2/3 OCS Shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid. 1968) Stock dividends are issued only to SHs This is so because only stockholders are entitled to dividends. since this requires SH approval. Property • scrip .

the unpaid portion of subscribed capital stock is an asset. however. reduction of deficits and restoration of impaired capital. 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. LICH V UNITED STATES RUBBER (39 F. being merely unrealized capital element • • • If subscribed shares have not been fully paid. to stock dividends because creditors and SHs will not be affected by their declaration since they do not decrease the company’s assets.in capital. SEC-imposed restrictions pursuant to law. subsequent profits must first be applied to cover the deficit. 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. which is lifted only after such shares are reissued or retired ( Sec. 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. such as payment of debts. if a deficit exists. PD 612) • • BERKS BROADCASTING v CRAUMER (52 A. The right to dividends is conditional upon: (1) accrual of net profits. of certain earnings for certain Agreements with creditors. may be performed. Restrictions on dividend distribution include: • • BOD’s appropriation purposes. 1947) Dividends can only be declared only from the surplus. If the annual net earnings of a corp. 675. any excess would be surplus or earnings from which dividends may be declared. donations as additional paid. . difference between par value and selling price of stock by corp since this is regarded as paid-in capital.e. Supp. increase in value of existing assets. 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.e. BAR 2011 • 80 premium on par stock i. i. However. Surplus must be bona fide i. purposes. 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. 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 company’s assets. the excess in the value of the assets over the liabilities and the issued capital stock. and (2) retention in the business. like those imposed on banks and insurance companies. The prohibition does not apply.2d 571. are justifiably applied to legitimate corp. Restriction on the retained earnings equivalent to the cost of treasury shares held by the corporation. REQUINA.e. 195.WILMAR K.

when there is a need for special reserve for probable contingencies. 1939) The mere fact that a large corporate surplus exists is not enough to warrant equitable intervention. PAUL MILK (285 N. the corporation refused to declare any special dividends. The corporation may be subjected to additional tax when it fails to declare dividends. and such consent has not yet been secured. 668.W. 809. While it had been the practice. thereby unreasonably accumulating profits. ( See Sec. BOD should declare dividends when surplus profits of the corporation exceed 100% of the corporation's paid-in capital stock. However. KEOGH v ST. (c) When retention is necessary under special circumstances obtaining in the 7 corporation. to declare larger dividends. 25. it likewise noted that the . in which case a 2/3 vote of OCS is However. the amount will first be applied to the payment of the delinquency plus costs and expenses. If they are applied against prior losses and thereby completely absorbed. NIRC) 5. such discretion cannot be abused and the BOD cannot accumulate surplus profits unreasonably on the excuse that it is needed for expansion or reserves. e. The plaintiffs contend that such a proposal would be tantamount to the business being conducted as a semi-eleemosynary (or charitable) institution instead of a business institution. REQUINA. Stock dividends. the test is good faith and reasonableness of the policy of retaining the profits. The court pointed out that a business corporation is organized and carried on primarily for the profit of SHs.W. BOD has discretion whether or not to declare dividends and in what form. 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. but maintaining the selling price of its cars (instead of reducing it as had been the practice in previous years). 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. 1919) This case involves an action against the Ford Motor Company to compel declaration of dividends. SOME RULES ON DIVIDEND DECLARATION: 1. under similar circumstances.WILMAR K. (b) When creditors prohibit dividend declaration without their consent as a condition for the loan. The dividends received are based on stock held whether or not paid.g. (Sec. stock dividends will not be given to a delinquent SH. and the demand for its cars at the price of the previous year continued. BAR 2011 81 the right of non-cumulative preferred stockholders to the payments of dividends is lost. DODGE v FORD MOTOR CO (170 N. where dividends are withheld for an unlawful purpose – to deprive a SH of his right to a just proportion of the corporation's profit. Exceptions: (a) When justified by definite corporate expansion projects or programs approved by the Board. if the stocks are delinquent. Exception: necessary. there are no net profits from which dividends may be lawfully paid. 43) 4. The Board justified its refusal to declare larger dividends on the expansion plans of the company by erecting a smelting plant. 2. At the time this complaint was made. the court may compel the corporation to declare dividends. However. Ford had concluded its most prosperous year of business.

they were not. 875. (2) declare such dividends from the net profits of the business of such co. BAR 2011 82 annual dividends paid were very small in relation to the profits that the company had been making.R. Were the Class A stockholders entitled to dividends for FY 1915 to 1926? No. noncumulative. The net earnings were instead used for the improvements and additions to property and equipment. and cannot be later asserted. 1906. meaning if the BOD had absolute discretion when to declare dividends and when not to. (123 Pac. a dividend is to be declared. BARCLAY (67 A. Due to this. and were preferred SHs entitled to dividends? The case was remanded to the trial court. no dividends were declared. the claim for such year is gone in case of noncumulative stock. Note: Prof. Plaintiffs filed this case in order to collect the dividends for fiscal years 1915-1926 before the other classes of stock are paid. In the case at bar. Preference as to Dividends Review discussion under kinds of stock.WILMAR K. 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. 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. Expenditures were said to be necessary and for the betterment of the plant. From 1915 to 1926. 1930) In the AOI and the certificate of stock of Stock A. It therefore affirmed the amount fixed by the lower court to be distributed to the stockholders. with instructions to make further findings to protect the preferred SHs in their rights. 762.L. hence it was unable to declare dividends. . the corporation became prosperous and proposed to pay dividends to A & B common stock. BURK V. It is likewise generally understood that in cases where the company's net earnings are applied for improvements and no dividend is declared. The BOD maintained that the corporation's funds were exhausted by expenditures for the extension of the co’s plant. OTTAWA GAS & ELECTRIC CO. giving one party the option to pay the other or not. even without changing the AOI. when the corporation has funds for such dividends. V. Were the corp funds were wrongfully diverted. before dividends are paid to other stocks. would result in temptation to unfair dealing. the accumulated profits would be lost forever since the dividends were non-cumulative. the holders are not entitled to dividends unless directors declare so. By the plain meaning of the words in the AOI and the certificates of stock. The fair interpretation of the contract between Ottawa and its SHS is that if in any year net profits are earned. as should have been declared since 1 Jan. it was stated that the holders of said stocks are entitled to receive to receive preferential dividends of 5% per fiscal year. REQUINA. Jacinto is of the opinion that what happened in this case is possible under the present Code. To hold otherwise. WABASH RAILWAY CO.

Thus. CRESCENT PLANNING MILL CO. are not generally creditors until dividends are declared. 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. Liability for Illegal Dividends WHAT ARE ILLEGAL DIVIDENDS? Illegal dividends are dividends declared in violation of law. 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. By the mere declaration.000. 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. for distribution among SH according to their respective interests. the administrator of his estate when he died. and was substituted by McLaran. The mere declaration of the dividend. properly declared. the corp had become the debtor of the SH and it goes without saying that the debtor cannot revoke. A cash dividend. Mainly for this reason. . the rescission by the BOD of the subsequent installments was of no force. recall or rescind the debt or otherwise absolve itself from its payment by a unilateral action or without the consent of the creditor. The original P was Humber. without more. 1906) CPM Corp.000. REQUINA. mtg. In the case at bar. From this time. NOTE: The extent of the SH’s share in the dividends will depend on the capital contribution. 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. and therefore can no longer be revoked (McLaran v. it becomes a debt owed by the corporation. having a surplus of $29. EXCEPTION: If the declaration has not yet been announced or communicated to the stockholders. by competent authority under proper circumstances. a SH. insofar as his pro rata proportion of the dividend is concerned. MCLARAN V. Crescent Planning).. if dividends should have been declared to such SHs. When Right to Dividends Vests.000 to $6. BAR 2011 83 Preferred SHs. NOTE: When no dividends are declared for 3 consecutive years. 819. they are considered creditors from that time. however. preferred SHs are given the right to vote for directors until dividends are declared. NOT the number of shares he has. adverse to every other stockholder and to the corporation itself. 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.W. (93 S. creates a debt against the corporation in favor of the stockholders the same as any other general creditor of the corporation. Rights of Transferee WHEN DOES THE RIGHT TO DIVIDENDS VEST? As soon as the BoD has declared dividends. cannot be revoked by the subsequent action of the corp.WILMAR K. declared a 6% cash dividend payable in four installments. for by its declaration.

exchange. lease. they are liable to the corporation's creditors for the amount of dividends based out of capital. 31) (2) If the directors cannot be held liable because they acted with due diligence and in good faith. 82) (1) SH must have voted against he proposed corporate action. Campos) Purchase by Corporation of its own shares WHAT ARE THE REQUISITES FOR ACQUISITION BY THE CORPORATION OF ITS OWN SHARES? (Sec.WILMAR K. unless the corporation was insolvent at the time of payment. 81). 41) 1. . an innocent stockholder is not liable to return the dividends received by him out of capital. REQUINA. To eliminate fractional shares arising out of stock dividends. (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. in the absence of an express provision of law. they will be liable to the corporation. (2) In case of sale. 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. mortgage. pledge or other disposition of all or substantially all of the corporate property and assets as provided in this Code (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 get out of the corporation by demanding payment of the fair value of his shares. (2) Written demand on the corporation for payment of the fair value of his shares. ( Based on Sec. ( Majority view. 2. transfer. in a delinquency sale. or of authorizing preferences in any respect superior to those of outstanding shares of any class. To collect or compromise an indebtedness to the corporation. 81). To pay dissenting or withdrawing stockholders entitled to payment for their shares under the Corporation Code (Appraisal Right). If the corporation has become insolvent. legitimate corporate purpose FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES? (Sec. BAR 2011 WHAT ARE THE EFFECTS OF THE ILLEGAL DECLARATION OF DIVIDENDS? 84 (1) If the directors acted wilfully. 2. (3) In case of merger or consolidation ( Sec. Sec. 41) 1. Appraisal Right (Sec. 40). 42) WHAT ARE THE REQUISITES FOR THE EXERCISE OF THE APPRAISAL RIGHT? (Sec. and to purchase delinquent shares sold during said sale. or of extending or shortening the term of corporate existence ( Sec. 3. or with negligence or in bad faith. unrestricted retained earnings to cover the shares to be acquired. 81. arising out of unpaid subscription.

This. (Sec.WILMAR K. Such suspension shall be from the time of demand until either: (1) abandonment of the corporate action involved. However. if proper. subject only to the right of appraisal. 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. REQUINA. BAR 2011 85 (3) Such demand must have been made within 30 days after the date on which the vote was taken. in effect. 86) WHAT ARE THE EFFECTS OF TRANSFER OF THE CERTIFICATES BEARING THE NOTATION THAT THEY REPRESENT DISSENTING SHARES? If the certificates are consequently cancelled. or (2) the purchase of the said shares by the corporation. the legislature has the power to make changes in existing corporations through an amendment to the Corporation Code. at the option of the corporation. Amendment by Legislature Subject to the limitation that no accrued rights or liabilities be impaired. (Sec. 83) All rights accruing to the shares. WHAT ARE THE LIMITATIONS ON THE POWER TO AMEND? PURPOSE: must be legitimate . including voting and dividend rights. Amendment by Stockholders One of the powers expressly granted by law to all corporations is the power to amend its articles of incorporation. (4) Surrender of the stock certificate/s representing his shares. (5) Unrestricted retained earnings in the books of the corporation to cover such payment. terminate his rights under Title X of the Corporation Code. 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. if said dissenting SH is not paid the value of his shares within 30 days after the award. 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. WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE WITH THE APPRAISAL RIGHT? (Sec. except for the right of the SH to receive payment of the fair value thereof. making such change binding on all the stockholders. his voting and dividend rights shall immediately be restored. are suspended in accordance with the Corporation Code. 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. Failure to do so shall.

immoral. 81) MARCUS V. Absence of a favorable recommendation from the appropriate government agency. voting rights equal to those of common stockholders. 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. in any one instance A copy of the amended articles should be filed with the SEC. or contrary to government rules and regulations. in the case of banks. 2d 228. illegal. The Court held that Marcus may invoke her appraisal right. Treasurer’s Affidavit concerning amount of capital stock subscribed/paid is false. Marcus.E. . and with the proper governmental agencies.g. ( Sec. public utilities. but must be made under Sec.WILMAR K. Required percentage of ownership of capital stock to be owned by citizens of the Phils. and Amendment must be in the form prescribed by the Code (2) (3) (4) (5) (6) ON WHAT GROUNDS CAN THE SEC DISAPPROVE THE PROPOSED AMENDMENTS? The same grounds as for the disapproval of the original articles ( Sec. etc. Considering that she held diminished voting power. 37-38. or extending or shortening the term of corporate existence. objected and demanded payment for the common stock owned by her. BAR 2011 86 VOTE: (1) 2/3 of OCS / membership The appraisal right must be recognized in case the amendment has the effect of changing rights of any stockholder or class of shares.. Purpose(s) patently unconstitutional. REQUINA. RH MACY (74 N. as appropriate (e. 16. An amendment to increase/decrease capital stock as well as to extend/shorten corporate term cannot be made under Sec. both of which require a meeting. 17): • • • • Not substantially in accordance with the form prescribed by the Code. has not been complied with as required by the Constitution or existing laws. Extension of corporate term cannot exceed 50 yrs. 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. • Amendment changing stockholder’s rights The law expressly allows amendments which would change or restrict existing rights of stockholders or any class of shares. respectively. or of authorizing preferences in any respect superior to those of outstanding shares of any class.) Original and amended articles should contain all matters required by law to be set out in said articles.

BAR 2011 87 that she notified the corpo of her objection. 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 must be approved at a members’/stockholders’ meeting by 2/3 of the members/outstanding capital stock. Change in corporate term The Code allows a corporation not only to extend but also to shorten its term of existence. then the corporation will cease to be a close corporation and will lose the special privileges of such corporations. 469. 16) Special amendments Increase of capital stock After the authorized capital stock has been fully subscribed and the corporation needs to increase its capital. PHILIPPINE TRUST CO. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares. ( Sec. REQUINA. RIVERA (44 Phil. The power to increase or decrease capital stock must be exercised in accordance with the provisions of Sec. Reduction of capital stock Reduction of capital stock is not allowed if it will prejudice the rights of corporate creditors. it will be governed by the general provisions of the Code. A corporation does not have the implied power to increase capital stock. such approval or rejection must be made within six months of filing of amendment. Thereafter.WILMAR K. (3) Corporation should not be listed in the stock exchange or make any public offering of its stock. 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. Effectivity of amendment Amendments take effect only from the approval by the SEC. As in the case of increase/decrease of capital stock. without valuable consideration for such release. If any of these are deleted. otherwise it shall take effect even w/o such approval (as of the date of filing). However. it will have to amend its articles to increase its capital stock. Amendments in close corporations To recall. Since such amendment involves a change in the nature of the corporation. (2) All issued stock shall be subject to one or more specified restrictions on transfer permitted by law. unless cause of delay is attributable to the corporation. 38 of the Code. such a power can only be granted by law. V. that her shares were voted against the amendment—these were sufficient to qualify her to invoke her statutory appraisal right. the provisions required to be contained in the AOI of a close corporation: (1) All issued stock of all classes should be held by not more than 20. even non-voting stocks are .

(3) Expiration of original. 119) (1) Filing of petition for dissolution with SEC A petition for dissolution must be filed with the SEC after having been signed by a majority of the BOD. extended. and the fact that the dissolution was approved by the SHs with the requisite 2/3 vote. unless otherwise provided by the articles of incorporation. or there be no . REQUINA. Sec. the SEC order shall be published and posted accordingly. The petition must set forth all claims and demands against the corporation.WILMAR K. BAR 2011 given a voice in the decision. ( Note the special notice requirements. verified by the president or secretary or one of the directors. (b) Where creditors are affected (Sec. THE SEC shall thereupon issue the certificate of dissolution. 118) This is effected by majority vote of the BOD and a 2/3 vote of the OCS or members. (a) Where no creditors are affected (Sec. Date: the not less than 30 days nor more than 60 days after entry of the order (3) Publication of order Before the date fixed by the SEC. 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 shortened term. (2) Fixing of date by SEC for filing of objections to petition If the petition is sufficient in form and substance. 88 DISSOLUTION Modes of Dissolution HOW MAY A CORPORATION BE DISSOLVED? (1) Failure to organize and commence business (Sec. the SEC shall fix a date on or before which objections thereto may be filed by any person. 22). (4) Voluntary dissolution (Sec. 118-119). (2) Cessation of business for 5 years (Continuous inoperation. 22). A stockholders’ meeting is required and a 2/3 vote must approve the amendment. and resolved upon by the affirmative vote of 2/3 of the OCS or members.) 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.

CFI. and the material allegations are true. the SEC had exclusive jurisdiction over quo warranto proceedings involving corporation. privilege or franchise in contravention of law (PNB v.WILMAR K. given after the date on which the right to file objections to the order has expired. 5 of PD 902-A have been transferred to the Regional Trial Courts. the SEC shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires. in a newspaper of general circulation in the Philippines Posting: For 3 consecutive weeks in 3 public places in the city or municipality where the corporation's principal office is situated 89 (4) Hearing of the petition for dissolution Upon 5 days notice. Dissolution of close corporations . the SEC shall proceed to hear the petition and try any issue made by the objections filed. Under the Securities Regulation Code or RA 8799. BAR 2011 such newspaper. (4) When it misused a right. 5b. If no objection is sufficient. REQUINA. Rules of Court. The grounds for involuntary dissolution of a corporation under quo warranto proceedings are: (1) When the corporation has offended against a provision of an act for its creation or renewal. the jurisdiction of the SEC over all cases enumerated under Sec. Previously. 120) NOTE: The simplest and most expedient way of effecting dissolution is by shortening the corporate term and waiting for such term to expire. or when it has exercised a right. however. (b) Quo Warranto proceedings (See Sec. (3) Involuntary dissolution (Sec. (3) When it has committed or omitted an act which amounts to a surrender of its corporate rights. (2) When it has forfeited its privileges and franchises by non-user. privilege or franchise conferred upon it by law. privileges or franchises. PD 902-A and Rule 66. 209 SCRA 294. rules and regulations. 121): (a) Revocation of Certificate of Registration by SEC (Sec. 1992) (4) Shortening of corporate term (Sec. Note: such The SEC may appoint a receiver to collect and pay the debts of the assets corporation. 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.

purposes only: (a) winding up of affairs. BAR 2011 90 In close corporations. or those in control of the corporation is: • • • • Illegal. Corporation can no longer continue its business. (2) Corporate assets are being misapplied or wasted.WILMAR K. 105) Effects of Dissolution WHAT ARE THE EFFECTS OF DISSOLUTION? • • Corporation ceases to be a juridical person and consequently can no longer continue transacting its business. trustees or officers. members. (Sec. 24. 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. nor any liability incurred by. officers. 145) Loss of juridical personality NATIONAL ABACA V. its stockholders. PORE (2 SCRA 989. 1961) 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. any stockholder may. Corporation CANNOT even be a de facto corporation. by written petition to the SEC. She moved to dismiss the complaint by citing the fact that National Abaca had been abolished by EO 372 dated Nov. Oppressive or unfairly prejudicial to the corporation or any other SH.'s amended complaint was admitted and the case was remanded to the lower court. Dishonest. But at any time during the 3 years. . the corp. the corporation should convey all its property to trustees so that the latter may be the ones to continue on with such prosecution. 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. with no time limit on its hands. 1950. and (b) liquidation of corporate assets. • • • NOTE that the subsequent dissolution of a corporation may not remove or impair any right or remedy in favor of or against. any corporation. compel the dissolution of such corporation when: (1) Any of the acts of the directors. Fraudulent. directors. Corporate existence may be subject to COLLATERAL attack. ( Sec. REQUINA. except for winding up. 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. Since the case against Pore was strong. Corporate existence continues for 3 years following dissolution for the ff.

which has primary and sufficiently broad jurisdiction in matters of this nature. refers to the collection of all assets of the corporation. 2.nor any liability incurred……shall be removed or impaired either by the subsequent dissolution of said corp. and the distribution of the remaining assets. FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN? Generally. 145 of the Code states that "No right or remedy in favor of or against any corporation…. BAR 2011 91 CLEMENTE V. In the absence of a board of directors or trustees. Conveyance of all corporate assets to trustees who will take charge of liquidation . payment of all its creditors. Liquidation by the corporation itself through its board of directors Although there is no express provision authorizing this method. If this method is used. ( See Nat'l Abaca Corp. the three-year rule shall not apply. supra) 3." Liquidation WHAT IS LIQUIDATION? (Sec. or by any subsequent amendment or repeal of this Code or of any part thereof. including not only the shareholders but likewise the creditors of the corporation. 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. 122) Liquidation. might make proper representations with the SEC. As with the previous method. on the basis of their respective interests. for working out a final settlement of the corporate concerns. 122) However. or if there be no special contract. acting for and in its behalf. neither is there any provision in the Code prohibiting it. it was held in the case of Clemente v. CA (supra) that if the 3-year period has expired without a trustee or receiver having been expressly designated by the . REQUINA. There is no time limit within which the trustee must finish liquidation. Liquidation is conducted by the receiver who may be appointed by the SEC upon its decreeing the dissolution of the corp. ( Sec. Pore. among the stockholders thereof in accordance with their contracts. without anything more. does not result in the dissolution of the corporation nor bar it from the exercise of its corporation rights. if any. or winding up.WILMAR K. v. the board of directors or trustees itself may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. Sec. the 3-year limitation will not apply provided the designation of the trustees is made within said period. 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. 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. If the 3-year extended life has expired without a trustee or receiver having been expressly designated by the corporation itself within that period. those having any pecuniary interest in the assets. However. the mere appointment of a receiver. Executory contracts The prevailing view is that executory contracts are not extinguished by dissolution. WHAT ARE THE METHODS OF LIQUIDATING A CORPORATION? AND WHO MAY UNDERTAKE THE LIQUIDATION OF A CORPORATION? 1.

He requested for reinvestigations. BIR assessed Marsman 3 times for unpaid taxes. 92 Conveyance of all corporate property to trustees for the benefit of SHs.WILMAR K. 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. As a result. 122) In cases of decrease of capital stock. 261. or to enforce his claim against the property held for distribution as against the rights of other creditors. 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. and other persons in interest. Payment of corporation's debts and liabilities. 122) (1) (2) (3) (4) Collection of corporate assets and property. members. In such cases. (58 Phil. corp. in behalf of the corp. the settlement and adjustment of claims against it and the payment of its just debts. was a timber license holder with concessions in Camarines Norte. 122) CHINA BANKING V. no creditor will be permitted by legal process or otherwise to acquire priority. RP V. 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. it should be transferred to the proper court for trial and allowance. it is the SEC which may appoint the receiver. (Sec. MARSMAN DEVELOPMENT COMPANY (44 SCRA 418.. Distribution of assets and property 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. Investigations led to the discovery that certain taxes were due on it. creditors. BAR 2011 corporation itself within that period. Atty. and during the winding-up proceedings after dissolution. (Sec. REQUINA. Since "liquidation" as applied to the settlement of the affairs of a corporation consists of adjusting the debts and claims. received the first 2 assessments. MICHELIN & CIE. 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. Note: Under the Corporation Code. Moya. failed to pay within the prescribed . of collecting all that is due the corporation. 1972) Defendant corp. the receiver does not act as a receiver of an insolvent corporation. and if a claim is disputed so that the receiver cannot safely allow the same. and as otherwise allowed by the Corporation Code EXCEPTION: 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. and the amount so allowed then presented to the receiver or trustee for payment. that is.

The hands of government cannot. After 3 years of futile notifications. Assets received and held by the corporation subject to limitations permitting their use only for charitable. but not subject to condition (2) above. the 1st assessment was given before dissolution. religious. and which condition occurs by reason of the dissolution. BIR sued the corp. transferred or conveyed in accordance with such requirements. April 23. 95 of the Code. 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. once they pass into the hands of the stockholders. and discharged. Numerous BIR warnings were given. transfer or conveyance. 95. shall be transferred or conveyed to one or more corporations. with the 3-year rule. organizations or corporations. (3) (4) (5) * 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. does not extinguish the debts due or owing to it. who holds the property which the decedent had formerly possessed. 1962) The creditor of a dissolved corp. whether or not organized for profit. CIR (G. Such facts definitely established that the Government was a creditor of the corp. while the 2nd and 3rd assessments were given just 6 months after dissolution (within the 3-year rule). benevolent. shall be returned. nothing however bars an action for recovery of corporate debts against the liquidators. and to collect them from persons. The dissolution of a corp. of course. In any other case. 94-95) (1) (2) All liabilities and obligations of the corporation shall be paid. societies or organization engaged in activities in the Philippines substantially similar to those of the dissolving corp. No. education or similar purposes. Assets held by the corporation upon a condition requiring return. satisfied. Thus. collect taxes from a defunct corporation. TAN TIONG BIO V. Assets other than those mentioned in preceding paragraphs shall be distributed in accordance with the AOI or by-laws. it loses thereby none of its rights to assess taxes which had been due from the corporation.R. may follow its assets. . being successors-in-interest of the defunct corporation. Although Marsman was extrajudicially dissolved. as may be specified in a plan of distribution adopted pursuant to Sec. REQUINA. as in the nature of a trust fund. societies. L-15778. according to a plan of distribution adopted pursuant to Sec. An indebtedness of a corp. to the government for income and excess profit taxes is not extinguished by the dissolution of the corp. or adequate provision shall be made therefor. petitioners can be held personally liable for the corporation's taxes. In fact. for whom the liquidator was supposed to hold assets of the corp.WILMAR K. assets may be distributed to such persons. BAR 2011 93 period. Distribution of assets of non-stock corporations WHAT ARE THE RULES FOR DISTRIBUTION OF ASSETS OF NON-STOCK CORPORATIONS? (Sec.

WHAT ARE THE EFFECTS OF MERGER OR CONSOLIDATION? (Sec. (4) The surviving or consolidated corporation shall thereupon and thereafter possess all the rights. (2) 2/3 vote of OCS of the constituent corporations. or belong to. immunities and franchises of each of the constituent corporations. except that of the surviving or consolidated corporation. (4) Submission to the SEC for approval. (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. (3) The surviving or consolidated corporation shall possess all rights. privileges. (5) All property (real or personal) and all receivables due on whatever account (including subscriptions to shares and other choses in action) . BAR 2011 It must be noted that the plan of distribution of assets must not be inconsistent with the provisions of Title XI of the Code. privileges. REQUINA. (3) Execution of the Articles of Merger/Consolidation. shall be deemed transferred and vested in such surviving or consolidated corporation without further act or deed. immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under the Corporation Code. (2) The separate existence of the constituent corporations shall cease. 94 CORPORATE COMBINATIONS 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. or due to each constituent corporation.WILMAR K. and all and every other interest of. to be signed by the Pres/VP and certified by the secretary / assistant secretary. 80) (1) The constituent corporation shall become a single corporation: If merger: the surviving corporation designated in the plan of merger If consolidation: the consolidated corporation designated in the plan of Consolidation. .

40) (1) Majority vote of BOD + 2/3 vote of OCS or members at a meeting duly called for the purpose. in its discretion. it shall file a petition for withdrawal of its license in accordance with Sec. of course. BAR 2011 95 (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. WHAT ARE THE RULES GOVERNING MERGER OR CONSOLIDATION INVOLVING A FOREIGN CORPORATION LICENSED IN THE PHILIPPINES? ( Sec. abandon such sale or other disposition without further action or approval by the SHs. 40) WHAT ARE THE REQUIREMENTS? (Sec. however.) LOZANO V. (Note: The merger or consolidation does not impair the rights of creditors or liens upon the property of any such constituent corporations. 132) • 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. 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. (2) Compliance with the laws on illegal combinations and monopolies Note. • • 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. the BOD may nevertheless. ( 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. . 136. 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. This. is subject to the rights of third parties under any contract relating thereto. If the absorbed corporation in such a merger / consolidation happens to be the foreign corporation doing business in the Philippines. and any pending claim. REQUINA. 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. The requirements on merger or consolidation as provided in the Corporation Code must be complied with. action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation.WILMAR K. that after such approval by the SHs. 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.

stockholders' approval of such investment is necessary. all or substantially all the stockholders of the "acquired" corporation are made stockholders of the acquiring corporation. etc. that in instances wherein the purchase constitutes an investment in a purpose other than its primary purpose. the parent corporation would have the power to buy all the subsidiary's assets and dissolve it. and anyone who objects thereto will have the appraisal right under Sec. the citizenship of the controlling stockholders determines the corporation’s nationality. not the purchasing corporation.WILMAR K. though. REQUINA. (Campos & Campos) FOREIGN CORPORATIONS WHAT IS A FOREIGN CORPORATION? (Sec. except recording The practice of a profession (law. IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN THE PHILS. (It can be argued. or (3) Joint venture with a local partner. 42. regardless of the citizenship of the incorporators and stockholders. achieving the same result as in the other methods of combination. Such corporation must have been organized and must operate in a country which allows Filipino citizens and corporations to do business there.) Exchange of stocks In this method. Permitted areas of investment 100% EQUITY: Mass media. medicine. In times of war: For purposes of security of the state. 40) IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS? Yes. Although this method does not combine the 2 businesses under a single corporation as in merger and sale of assets. With the exchange. In fact. it must be stressed that this right is generally available only to dissenting stockholders of the selling corporation. or (2) If the proceeds of the disposition be appropriated for the conduct of its remaining business (Sec. 123) A corporation formed and organized under laws other than those of the Philippines. there is hardly any difference between owing the acquired corporation's business directly and operating it through a controlled subsidiary. BAR 2011 WHEN IS SH APPROVAL NOT NECESSARY FOR THE ABOVE DISPOSITION? 96 (1) If the disposition is necessary in the usual and regular course of business. from the point of view of the acquiring (parent) corporation. However.) Operation of rural banks Cooperatives Private security agencies Small-scale mining Utilization of marine resources . or (2) Branch office.? (1) Wholly-owned subsidiary. the acquired corporation becomes a subsidiary of the acquiring corporation.

if the percentage of Filipino ownership in the first corporation is at least 60%. by determining the extent of Philippine equity therein.A. repair. Sec. 8) Private recruitment Contracts for construction and repair of locally-funded 97 WHAT IS THE SO-CALLED "GRANDFATHER RULE"? 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. Manufacture. Department of Justice. Series of 1989. shall be considered automatically approved! (Art.) NOTE: The reader would be well-advised to cross-reference this definition of the "grandfather rule" with a trusted commentary. cited in Opinion # 18. and management of cockpits. stockpiling of nuclear. if the Philippine equity in the first corporation is less than 60%. dated 19 January 1989. biological. will contribute to the sound and balanced development of the national economy on a self-sustaining basis. the so-called "grandfather rule" is used to determine whether or not the latter corporation is qualified to engage in a partially nationalized business. 1937. Omnibus Investments Code) (2) SEC license to do business (Sec. Inter-island shipping (R. then only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. 75%-25% EQUITY: public works Except: Public works that would fall under the BuildOperate-Transfer Law. 48-49) NOTE: Applications. and radiological weapons. 125. 1967.WILMAR K. Under present SEC rules. operation. 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. Note: Retail trade is no longer required to be 100% Filipino-owned on account of the Retail Trade Liberalization Act. Legal Requirements Prior to Transaction of Business Documentary Requirements (Sec. 125) • • Application under oath setting forth the information specified in Sec. (See SEC Rule promulgated on 28 Feb. as well as those that are foreign-funded 70%-30% EQUITY: 60%-40% EQUITY: Advertising Other industries.e. 53. BAR 2011 Ownership. 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. On the other hand. Sec. chemical. (See Omnibus Investments Code. REQUINA. if not acted upon within 10 days from official acceptance thereof. Additional information as may be necessary or appropriate to enable the SEC to determine whether the corporation is entitled to a license to . i.

responsibilities. (Sec. REQUINA. Exceptions: dissolution (1) As regards the creation. Designation of a resident agent (Sec. Laws applicable to foreign corporations Foreign corporations lawfully doing business in the Philippines are bound by all laws. (2) As regards the fixing of relations. liabilities. Shares of stock in "registered enterprises" as defined in R. 128) The designation of a resident agent is a condition precedent to the issuance of the license to transact business in the Philippines. 126) Within 60 days after the issuance of the license. • Duly executed certificate under oath by authorized official/s of the jurisdiction of the company's incorporation. require prior approval from the government agencies concerned. and that the applicant is an existing corporation in good standing. Once the licensee ceases to do business in the Philippines. To be served any summons and other legal processes which may be served in all actions or other legal proceedings against such corporation. 17) Deposit requirement (Sec. 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.. BAR 2011 transact business in the Philippines.000.WILMAR K. and shall consist of any of the following: • • • • Bonds or other evidence of indebtedness of the Government or its instrumentalities. 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. These securities are for the benefit of present and future creditors. attesting to the fact that the laws of the country of the applicant allow Filipino citizens and corporations to do business therein. 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. the licensee shall deposit with the SEC securities with an actual market value of at least P 100. rules and regulations applicable to domestic corporations of the same class. etc. Shares of stock in domestic corporations registered in the stock exchange. and to determine and assess the fees payable. formation. 5186.A. etc. WHO: PURPOSE: A resident of the Philippines.00. organization or of the corporation. insurance. or . Note: Foreign banking and insurance corporations are the exceptions to this requirement. these deposited securities shall be returned. Shares of stock in domestic insurance companies and banks. 98 • (3) Certificate from appropriate government agency NOTE: Certain sectors such as banking. and setting forth the assets and liabilities of the corporation within 1 year immediately prior to the application.

is exempt therefrom. The Supreme Court. or officers or corporations to each other or to the corporation (Sec. being an essential part of the element of the plaintiff’s capacity to sue. The implication of the law is that it was never the purpose of the Legislature to exclude a foreign corp. must be affirmatively pleaded. stated that the object of the statute was to subject the foreign corp. 31. Aug. 1983) A contract entered into by a foreign insurance corp. a corporation organized under the State of Oregon.R. for the unpaid balance on a bill of goods. sued a domestic corp.. Courts. 129) 99 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. the fact of compliance with the requirement of license. 1971) . and thus. Protection of intellectual property rights GENERAL GARMENTS CORP. Curing of defect HOME INSURANCE V. 71. (2) The corporation will be subject to penalties and fines. 1924) Marshall Wells. to the jurisdiction of its courts. Isolated transactions MARSHALL WELLS V. REQUINA. V. In short. it can be SUED. doing 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. not licensed to do business in the Phil. can maintain suit in this jurisdiction if it is duly licensed. 18961. in effect to permit persons to avoid their contract made with such foreign corporation. EASTERN SHIPPING (123 SCRA 424. In either case. 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. BAR 2011 duties of stockholders. in ruling for Marshall Wells. 1966) A foreign corp.. If a foreign corp. Defendant demurred to the complaint on the ground that it did not show that plaintiff had complied with the law regarding corp. from securing redress in Phil. (3) The corporation will not be permitted to maintain or intervene in any action before Philippine courts or administrative agencies. No. The qualifying circumstance. ATLANTIC MUTUAL V. CEBU STEVEDORING (G. facts showing foreign corporation’s capacity to sue should be pleaded. cannot be inferred from the mere fact that the party suing is a foreign corp. OF PATENTS (41 SCRA 50.. DIR. engaged in business in the Phil. members. it can maintain such suit if the transaction sued upon is singular and isolated. as the case may be. in which no license is required. which happens to obtain an isolated order for business from the Phil. or the fact that the suing corp.WILMAR K. nor that the plaintiff was authorized to do business in the Phil. desiring to do business in the Phil. is not engaged in business in the Phil. ELSER (46 Phil.

A. AND THEREFORE NOT SUBJECT TO THE LICENSING REQUIREMENT? • • • Mere investment as a shareholder and the exercise of the rights as such investor. The right to use the corporate name is a property right which the corp. The Supreme Court held that a foreign corp. Appointing a representative or distributor in the Philippines who transacts business in his own name and for his own account Example: shirts • Rustan’s exclusive distributorship of Lacoste t- Publication of a general advertisement. 8293 (Intellectual Property Code) provides that any foreign national or juridical person who meets the requirements of Sec. Where a violation of our unfair trade laws which provide a penal sanction is alleged. whether or not it is licensed to do business in the Philippines under existing laws. the publication of an ad is prima facie evidence (or at least creates a presumption) of doing business in the Philippines.. corporate name and goodwill. alleging its ownership and prior use in the Phil. 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. lack of capacity to sue of injured foreign corp. needs no license to sue in the Phil. is a national or is domiciled in a country party to any convention. cancellation. Patent Office for cancellation of said trademark. through the use of its products here has legal right to maintain an action to protect its reputation. or false designation of origin and false description. US corporation Puritan Sportswear petitioned the Phil. 1984) A foreign corporation not doing business in the Phil. NOTE: Sec. infringement. REQUINA. 3 of the Act ( i. What Constitutes Transacting Business WHAT IS CONSIDERED AS NOT DOING BUSINESS. Having a nominee director or officer represent the foreign investors’ interests. . unfair competition. to which the Philippines is also a party. LE CHEMISE LACOSTE V. • • Maintaining stock of goods for processing by another entity in the Philippines.WILMAR K. which does not do business in the Phil.e. treaty or agreement relating to intellectual property rights or the repression of unfair competition. may assert and protect in any of the courts of the world. NOTE: Under the Code of Commerce. FERNANDEZ (129 SCRA 377. for trademark violations. becomes immaterial (because a criminal offence is essentially an act against the State). BAR 2011 100 Domestic corporation General Garments registered “Puritan” trademark for its men’s wear. Consignment of equipment to be used in processing products for export. and is unlicensed but is widely known in the Phil. 160 of R.

USA. Rule 14 of the 1997 Rules of Civil Procedure . 14. organized under the laws of Delaware. (Metholatum v. 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.. on the government official designated by law to the effect. doing business in the Phil. BAR 2011 101 • • Collecting information in the Philippines. . MLF is a non-resident foreign corp. through an Agent. V." thereby allowing suits based on isolated transactions. Mangaliman) MENTHOLATUM V. 1979) The Court of Industrial Relations ordered Facilities Management Corporation (FMC) to pay Dela Osa his overtime compensation. on behalf of the corp. and over whom it did not acquire jurisdiction. 12... Rule 14 of the Rules of Court: Sec.If the defendant is a foreign corp. essentially functioning as a broker executing orders to buy and sell futures contract received from its customers on US futures exchanges. V. REQUINA. 1941) The true test as to whether a foreign corporation is doing business in the Philippines seems to be whether the foreign corp. MANGALIMAN (72 Phil. is not barred from seeking redress from courts in the Phil. that same corp. or a non-resident joint stock corporation or association. 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. 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 be bound by processes of the Phil. service may be made on its resident agent. 14. Performing services incidental to an isolated contract of sale Example: Installing machinery sold by a foreign corporation to a Philippine buyer 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. MERRILL LYNCH FUTURES INC. Inc. FMC had appointed Jaime Catuira as its agent with authority to execute Employment Contracts and receive. It is a futures commission merchant duly licensed to act as such in the futures markets and exchanges in the US. 525. the term "doing business" has been replaced with the phrase " has transacted business. Service upon private foreign corp . cannot claim exemption done against a person or persons in the Phil. CA (211 SCRA 824) Merrill Lynch Futures. NOTE: Under Sec... swing shift and graveyard shift premiums. not doing business in the Phil.. legal services from. DE LA OSA (89 SCRA 131. (Futures contract is a contractual commitment to buy and sell a .. not engaged in business in the Phil. for as long as he remains an employee of FMS. FACILITIES MANAGEMENT CORP. (MLF) filed a complaint against the spouses Lara for the recovery of a debt. The Supreme Court held that the petitioner may be considered as doing business in the Philippines within the scope of Sec. Courts.WILMAR K. or to an y of its officers or agents within the Philippines. If a foreign corp.

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. Fenner and Smith and not with plaintiff MLF. or (2) although not otherwise incapacitated in the sense just stated. AETNA CASUALTY & SURETY CO. the common carrier for the loss of Linen & Cotton piece goods due to pilferage and damage amounting to US$2. 1955) This is an action instituted by the plaintiff. 7917. 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. from securing redress in the Phil. it had no personality to file an action. chiefly in cases where such person has received the benefits of the contract. Shalom sued Pacific Star Line (PSL). VS. The Court finds that the Laras were transacting with MLF fully aware of its lack of license to do business in the Phils. PSL contends that Aetna has no license to transact insurance business in the Philippines as gathered from the Insurance Commission and SEC .) 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. a foreign corporation. the copra in question was actually sold by the defendant to the plaintiff in the US. and delivery to be made at the port of destination. PACIFIC STAR LINE (80 SCRA 635. they should be considered as doing business here and not merely having entered into an isolated transaction.. April 29.300. No.WILMAR K.. SINGSON (G. The lower court erred in holding that the appellant corporation has no personality to maintain the present action.00. PACIFIC VEGETABLE OIL V. Defendant filed a motion to dismiss on the ground that the plaintiff failed to obtain a license to transact business in the Phil and. to permit persons to avoid their contracts made with such foreign corp. The principle is applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes. in effect. that it is not a real party in interest. 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. the agreed price to be covered by an irrevocable letter of credit to be opened at the Bank of California. and (2) the transactions were made with Merrill Lynch Pierce. It follows that the appellant corporation has not transacted business in the Phil in contemplation of Sec. 1977) Aetna as subrogee of I. consequently. 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. REQUINA. and in relation to those transactions had made payments and the spouses are estopped to impugn MLF's capacity to sue them. Courts.R. Has appellant transacted business in the Philippines in contemplation of law? Contrary to the findings of the trial court.. 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. and thus.. Courts. It also argues that since said company has filed 13 other civil suits. BAR 2011 102 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. .



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 3 rd 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.

WILMAR K. REQUINA, BAR 2011  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 corporation’s 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 Firemen’s Fund Insurance (FFI) for the payment of 12 marine insurance policies. The summons was served on Union which was then acting as FFI’s 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)
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.

Revocation and Suspension of License

(Sec. 134)

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



Educational corporations Religious corporations
(5) A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to Title XV; 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; Transacting business in the Philippines outside of the purpose/s for which such corporation is authorized under its license; 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 Any other ground as would render it unfit to transact business in the Philippines.


(7) (8)


(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 DECS Secretary, the SEC will not accept or approve such articles. ( Sec. 107, Corporation Code)

(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.

. • CAN A CORPORATION THAT IS NOT A CLOSE CORPORATION BE A STOCKHOLDER IN A CLOSE CORPORATION? YES. 116) In contrast to a corporation sole. REQUINA. Notes: • A narrow distribution of ownership does not. although the holder of the office is an alien. 3225. the Supreme Court has held that it is the nationality of the constituents of the diocese. This ruling is based on the fact that the corporation sole is not the owner but merely the administrator of the property. and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. where at least 60% of the constituents are Filipinos. 96-105) WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? (Sec. BAR 2011 106 In determining whether the constitutional provision requiring 60% Filipino capital for corporation ownership of private agricultural lands.G. exclusive of treasury shares. 96) • • • • • • • • Mining Oil Stock Exchange Bank Insurance Public Utilities Educational Institutions Corporations declared vested with public interest DISTINGUISH CLOSE CORPORATIONS FROM REGULAR CORPORATIONS.WILMAR K. (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. The requirements for incorporation of such societies are set forth in Sec. shall be held of record by not more than a specified number of persons not exceeding 20. make a close corporation. land may be registered in the name of the corporation sole. 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. Thus. provided that said corporation owns less than 2/3 of voting stock or voting rights. No. CA. ( See Gana v. within the meaning of the Corporation Code. religious societies are composed of more than one person. and not the nationality of the actual incumbent of the office. is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes. Close Corporations (Sec. 116 of the Code. 96) A close corporation. (San Juan Structural and Steel Fabricators v. 1947) Religious societies (Sec. Roman Catholic Archbishop of Manila. 8. which must be taken into consideration. and that he holds it in trust for the faithful of the diocese concerned. WHAT ENTITIES MAY NOT BE ORGANIZED AS CLOSE CORPORATIONS? (Sec. 43 O. by itself.

fraudulent. 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. upon written petition by any stockholder. REQUINA. BAR 2011 107 Close Corporation No. (Note however that in case of involuntary dissolution under Sec. 105) Withdrawal Right Type of involved corporation Close corporation For any reason (Sec. dishonest. including the right to notice of and to vote at meetings of directors. 105) . (Sec. (Sec. as well as to dissolve the corporation. 81 and Sec.WILMAR K. 96) Can be managed by the stockholders (Sec. 102) Must be > par value (Sec. (Sec. 105) SEC has the power to arbitrate disputes in case of deadlocks. and whose qualifications. 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. 105) Appraisal Right "Regular" corporation Only the grounds enumerated in Sec. ( Sec. he has all the rights and powers of a duly-elected director of the corporation. 105) "Regular" Corporation No limit Managed by Board of Directors Actual meetings are required. 42 May be < par or issued value When availed of Fair value of shares Must be > par or issued value (Sec.) WHAT IS A PROVISIONAL DIRECTOR? (Sec. 104) This includes the power to appoint a provisional director. of stockholders Management Meetings Not more than 20 (Sec. may be determined by the SEC. or whenever corporate assets are being misapplied or wasted. 97) May be dispensed with (Sec. Quorum and Voting Pre-emptive right Buy-back of shares Resolution of deadlocks Does not extend to treasury shares. 101) Greater quorum and voting requirements allowed. (Sec. if any. He is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. 97) Extends to all stock. oppressive or unfairly prejudicial to the corporation or any stockholder. a corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing. 104) COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT IN CLOSE CORPORATIONS. including treasury shares (Sec. until such time as he shall be removed by order of the SEC or by all the stockholders. However. May be < par value Dissolution Generally requires a 2/3 vote of the stockholders and a majority vote of the BOD. 121.

unless the law requires them to be made public or where they are necessary evidence before any court. with a financial statement of its assets and liabilities and such other requirements as the SEC may impose. ( Sec. trustees or officers. particularly in the prevention of fraud and abuses on the part of the controlling stockholders. (Sec. the results thereof must be kept strictly confidential. If the violation is committed by a corporation. may be removed or impaired by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of the Code. (Sec.00 but not more than P 10. the same may be dissolved in appropriate proceedings before the SEC. directors. 141) No right or remedy in favor of or against. 145) Violations of the Corporation Code not otherwise specifically penalized therein are punishable by a fine of not less than P 1. members. its stockholders. any corporation.000. 137-149) • The SEC has the power to issue rules and regulations reasonably necessary to enable it to perform its duties under the Code. BAR 2011 108 Miscellaneous Provisions (Sec.WILMAR K. 142) All domestic and foreign corporations doing business in the Philippines must submit an annual report to the SEC of its operations. members.00 or by imprisonment for not less than 30 days but not more than 5 years. 143) Whenever the SEC conducts any examination of the operations. books and records of any corporation. REQUINA. 144) • • • • . trustees or officers. or both. (Sec. (Sec.000. in the discretion of the court. directors. nor any liability incurred by.

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