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A.

Corporation
1. Definition
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. (Sec. 2, CC)
2. Attributes of the Corporation
(1) it is an artificial being
(2) it is created by operation of law
(3) it has the right of succession
(4) it has only the powers, attributes and properties expressly authorized by law or incident
to its existence.
B. Classes of Corporations
As to whether they are for public or private purpose:
(a)
Public Corporations - formed or organized for the government or a portion of the State
or any of its political subdivisions for the general good and welfare; governed by special
laws.
(b)
Private Corporations - formed by private persons alone or with the state; governed by
the law on Private Corporations.
Test: If the corporation is created by the State as its own agency or instrumentality for
political or public purpose connected with the administration of government, then it is a
public corporation.
Note: (Dual status of public corporations) a public or municipal corporation possesses two
kinds of power, governmental or public and proprietary or private. In the exercise of the
former, it is a municipal government, while as to the latter, it is a corporate legal
individual.
As to number of persons who compose them:
(a) Corporation aggregate consists of more than one member or corporator; or
(b) Corporation sole a religious corporation which consist of one member or corporator
only and his successors
As to their legal right to corporate existence:
(a)
De Jure Corporations juridical entities created or organized in strict or substantial
compliance with the statutory requirements of incorporation and whose rights to exist
as such cannot be successfully attacked even by the State in a quo warranto
proceeding.
(b)
De Facto Corporation organized with a colorable compliance with the requirements
of a valid law. Its existence cannot be inquired collaterally. Such inquiry may be made
by the Solicitor General in a quo warranto proceeding. (Sec. 20, Corporation Code)
(c)
Corporation by Estoppel exists when a group of persons assumes to act as a
corporation knowing it to be without authority to do so, and enters into a transaction

(d)

with a third person on the strength of such appearance. It cannot be permitted to deny
its existence in an action under said transaction. (Sec. 21, Corporation Code) It is
neither a de jure nor a de facto corporation.
Corporation by Prescription one which has exercised corporate powers for an
indefinite period without interference on the part of the sovereign powers, i.e. Roman
Catholic Church.

As to their relation to another corporation:


(a)
Parent or Holding corporation corporation that controls another as a subsidiary by
the power to elect management. It is one that holds stocks in other companies for
purposes of control rather than for mere investment.
(b)
Subsidiary corporation a corporation under the control of another corporation which
is the holding company.
(c)
Affiliated corporation corporations which are subject to common control of the
mother holding company and operated as part of a system. They are sometimes called
sister company.

(a)

(b)

(a)
(b)

As to the Existence of Shares of Stock


Stock Corporation a corporation whose capital stock is divided into shares and
which is authorized to distribute to holders thereof dividends on the basis of the shares
held. (Sec.3, Corporation Code)
NonStock Corporation corporation which does not issue stocks and do not
distribute dividends to their members. (Sec. 87, Corporation Code)
As to State under or by whose laws they have been created:
Domestic Corporations - organized or created under or by a virtue of Philippine Laws,
either by legislative act or under the provisions of the General Corporation Law.
Foreign Corporations - formed or organized or existing under any laws other than the
Philippines and whose laws allow Filipino citizens and corporations to do business in its
own country (Sec. 123, CC).

As to whether they are for religious purpose or not:


(a)
Ecclesiastical or Religious Corporations composed exclusively of ecclesiastics
organized for spiritual purposes or for administering properties held for religious ones.
(b)
Lay corporation one organized for a purpose other than for religion
As to whether they for charitable purposes or not:
Eleemosynary corporation one established for or devoted to charitable purposes or
those supported by charity
(b)
Civil corporation one established for business or profit
(a)

As to whether they are open to the public or not:


(a)
Open Corporations formed to openly accept outsiders or stockholders or investors.
(b)
Close Corporations one which is limited to selected persons or members of a family
or other closely-knit group.
Other Corporations:

(a)

(b)
(c)

Investment Companies - active in the sale or purchase of shares of stock or securities,


parent or holding companies that have passive portfolios and hold the securities merely
for purposes of control and management.
Quasi-Public Corporations - private corporations which have accepted from the State
the grant of a franchise or contract involving the performance of public duties.
Quasi-Corporations - possess some corporate functions and attributes but they are
primarily political subdivisions.

C. Nationality of Corporations
Incorporation test Determined by the state of incorporation, regardless of the nationality
of the stockholders.
Domiciliary
test
the corporation.

Determined

by

the principal

place

of

business

of

Control test Determined by the nationality of the controlling stockholders or members.


This test is applied in times of war.
Grandfather rule Nationality is attributed to the percentage of equity in the corporation
used in nationalized or partly nationalized area.
Note: This application of the test is limited however to resolving issues on investments.
Under the Foreign Investment Act, the grandfather rule is merely an ancillary rule to the
main method of determining nationality, wherein corporations that are 60% owned by
Filipinos are automatically considered as 100% Filipino-owned. Only when a corporation is
less than 60% owned shall the grandfather rule be applied.
DOJ Opinion No.19, s. 1989 (the 1998 DOJ Ruling), which states:
The Grandfather Rule, which was evolved and applied by the SEC in several cases, will not
apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural
resource corporation is not in doubt. Therefore, the Control Test generally applies.
D. Corporate Juridical Personality
1. Doctrine of Separate Juridical Personality
A corporation is juridical person capable of having rights and obligations, with a
personality separate and distinct from its members or stockholders.
(a) Liability for tort and crimes
It is liable when the act is committed by the officer or agent under express direction or
authority from the stockholder or members acting as a body or generally from directors
as governing body. (PNB vs. Court of Appeals, G.R. No. L-27155, [May 1978])
Corporations are incapable of intent, hence, they cannot commit felonies that are
punishable under the Revised Penal Code. They cannot commit crimes that are punishable

under special laws because crimes are personal in nature requiring a personal performance
of overt acts. In addition, the penalty of imprisonment cannot be imposed.
Note: Since a corporation is a mere legal fiction, it cannot be held liable for a crime
committed by its officers since it does not have malice, EXCEPT, if by express provision of
law (i.e. Anti-Dummy Act Law and Anti-Money Laundering Act), the corporation is held
criminally liable. In such case, the responsible officers would be criminally liable (People vs.
Tan Boon Kong, GR. 32652, [Mar. 1930])
Note: Doctrine of Corporate Negligence the hospitals failure to supervise its resident
physicians and nurses and to take an active step in order to remedy their negligence
renders it directly liable. The duty of providing quality medical service is no longer the sole
prerogative and responsibility of the physician. This is because the modern hospital now
tends to organize a highly-professional medical staff whose competence and performance
need also to be monitored by the hospital commensurate with its inherent responsibility to
provide quality medical care. Such responsibility includes the proper supervision of the
members of its medical staff. Accordingly, the hospital has the duty to make a reasonable
effort to monitor and oversee the treatment prescribed and administered by the physicians
practicing in its premises. (Divina 2010, p. 83 citing Professional Services, Inc. vs CA, G.R.
No. 126297 [Feb. 2008])
(b) Recovery of damages - A corporation is not entitled to moral damages because it has no
feelings, no emotions and no senses (ABS-CBN vs. Court of Appeals, GR. 128690 [Jan.
1999])
Exception: When the corporation has a good reputation that is debased, resulting in its
humiliation in the business realm (Coastal Pacific Trading, Inc. vs. Southern Rolling Mills
Co., Inc. [July 2006))
General Rule: Corporation cannot held liable for acts or liabilities of its stockholders or
members, and vice versa.
Ratio: Doctrine of Separate Juridical Personality
Exception: Doctrine of piercing the corporate veil
The corporate existence is disregarded under this doctrine when the corporation is formed
or used for illegitimate purposes, particularly, as a shield to perpetuate fraud, defeat public
convenience, justify wrong, evade a just and valid obligation or defend a crime.
Rationale: To remove the barrier between the corporation from the persons comprising it to
thwart the fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities. (Velarde vs. Lopez, Inc., G.R. No. 153886
[Jan. 2004])
Nature of the Doctrine of Piercing the Veil of Corporate Fiction

1. The question of whether a corporation is a mere alter ego is purely one of fact (Heirs of
Ramon Durano, Sr. vs. Uy, G.R. No. 136456 [Oct. 2000]).
2. The doctrine has res judicata effect (Cesar Villanueva, Philippine Corporate Law, 2001)
The doctrine could not be employed by a corporation to complete its claims against another
corporation and cannot therefore be employed by the claimant who does not appear to be
the victim of any wrong or fraud.
When the piercing doctrine is applied against a corporation in a particular case, such
corporation still possessed such separate personality in any other case, or with respect to
other issues. (Tantoco vs. Kaisahan ng mga Manggagawa sa La Campana and CIR, G.R. No.
L-13119 [Sept. [1959])
3. It is essentially a judicial prerogative only to pierce the veil of corporate fiction being a
power belonging to the courts. A sheriff who has ministerial duty to enforce a final and
executory decision cannot pierce the veil of corporate fiction by enforcing the decision
against the stockholders who are not parties to the action. (Cruz vs. Dalisay, Adm. Matter
No. R-181-P [July 1987])
4. Must be shown to be necessary and with factual basis.
(a)
Grounds for application of doctrine
1.
Used as a cloak to cover fraud, illegality, or it results in injustice
2.
To defeat public convenience, justify wrong, defend crime
3.
Where necessary to achieve equity or to protect creditors and other valid grounds
4.
Where two factories are made to appear as one and used as a device to defeat the
ends of law, or as a shield to confuse legitimate issues
5.

Where the parent corporation assumes complete control of its subsidiarys business
Note: The circumstance that a single stockholder owns 40% of the outstanding capital
stock of two corporations, standing alone, is insufficient to establish identity. There must be
at least a substantial identity of stockholders for both corporations in order to consider this
factor to be constitutive of corporate identity. (Kukan International Corp. vs. Reyes, GR.
182729 [Sept. 2010])

(b) Test in determining applicability


1. Complete domination not only of finances but also of policies and business practice;
2. Such control must have been used by the defendant to commit fraud or wrong to
perpetuate the violation of statutory or positive legal duty;
3. Such control and breach of duty must be the proximate cause of the injury. (Concept
Builder vs. NLRC G.R. No. 108734. [May 1996])

The two entities cannot be deemed as separate and distinct, where there is no showing
that one is merely the continuation of the other. In fact, even a change in the corporate
name does not make a new corporation, whether effected by a special act or under a

general law. It has no effect on the identity of the corporation or on its property, rights
or liabilities. (Avon Dale Garments, Inc vs. NLRC, G.R. No. 11793 [July 1995])

1.

2.

3.
4.
5.

When Not Applied (When the Veil Cannot Be Pierced)


When the director has no participation to a representation made by the President, and the
execution of a promissory note with we as maker has a reference to the corporation and
not to the directors
The mere fact that a corporation owns all of the stocks of another corporation, taken alone is
not sufficient to justify their being treated as one entity. If used to perform legitimate
functions, a subsidiarys separate existence may be respected, and the liability of the
parent corporation as well as the subsidiary will be confined to those arising in their
respective business
Fiction of separate and distinct entities cannot be disregarded there being no indication that
the second corporation is a dummy or serves as a client of the first corporate entity
Piercing the veil cannot be availed of by one who is not a victim of a fraud or wrong
Where real properties included in the inventory of the estate of a decedent are in the
possession of and are registered in the name of the corporations, in the absence of any
cogency to shred the veil of corporate fiction, the presumption of the conclusiveness of said
titles in favor of the said corporations should stand undisturbed.
Consequences if Veil is Pierced
1. If only one corporation is involved, to regard its existence as an association of persons; and
2. If two corporations participate, to merge them, and consider them only as one entity. (Remo
vs. IAC, G.R. No. L-67626 [April 1989))
Corporate Entity Theory - A corporation comes into existence upon the issuance of the
certificate of incorporation. Only then will it acquire a juridical personality to sue and be
sued, enter into contracts, hold or convey property or perform any legal act, in its own
name. As a legal entity, it is possessed with a personality separate and distinct from the
individual stockholders or members. The properties it possesses belong to it exclusively as
a separate juridical entity. The corporation is not likewise liable for debt, obligation or
liabilities of its stockholder. (Sec. 19, Corporation Code)
Mere consent of the parties to form a corporation is NOT sufficient; the State must give its
consent either through a special law (in the case of government corporation) or a general law
(for a private corporation)
The general law under which a private corporation may be formed or organized is the
Corporation Code
E. Incorporation and Organization
1. Promoter
One who takes it upon himself to organize a corporation: to procure the necessary
legislation, if necessary; to procure the necessary subscribers to the articles of the
incorporation ; to see that the necessary document is presented to the proper office to be
recorded and the certificate of incorporation issued; and generally, to float the company
(De Leon, 2010, p. 121)

(a) Liability of Promoter


If the proposed corporation failed to organize as a corporation:
Personally liable if money is paid by a subscriber for shares in a projected
corporation
Ratio: it is a case of money paid on a consideration which has failed
Not personally liable if subscriber agrees that the amount paid on his subscription
may be applied on certain promotional expenses and it is so applied
(b) Liability of Corporation for Promoters Contracts
Before incorporation A corporation cannot be liable upon any contract which a
promoter attempts to make for it prior to its organization
Ratio: A corporation has no being, franchise or faculties until the certificate of
incorporation has been issued by SEC. (Sec. 19, CC)
XPN: When the corporation expressly or impliedly adopts or ratifies the contract after
incorporation.
After incorporation A corporation can assume liability on a promoters contract.
PROVIDED: it is not an ultra vires contract. (De Leon, 2010, p.126)
2. Number and Qualifications of Incorporators
Any number of natural persons not less than five (5) but not more than fifteen (15), all of
legal age and a majority of whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of the incorporators of a stock
corporation must own or be a subscriber to at least one (1) share of the capital stock of the
corporation. (Sec. 10, CC)
3. Corporate NameLimitations on Use of Corporate Name
Incorporators may not propose to use a name that is:
1. identical or deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law
2. patently deceptive
3. confusing or contrary to existing laws
Test: Whether the similarity us such as to mislead a person using ordinary care and
discrimination and the court must look to the record as well as the names themselves.
Actual confusion need not be shown; it suffices that confusion is probably or likely to
occur. (Philips Export B.VS. vs. CA, G.R. No. 96161, [Feb. 1992].

Note: Parties organizing a corporation must choose a name at their peril; and the use of a
name similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right, by a suit for
injunction against the new corporation to prevent the use of the name. (Ang Mga Kaanib sa
Iglesia ng Diyos kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Diyos kay
Kristo Hesus, Haligi at Suhay ng Katotohanan, G.R. No. 137592 [Dec. 2001])
4. Corporate Term
General Rule: Corporate Term depends on the period stated in the Articles of
Incorporation.
Exception: Unless sooner dissolved or unless said period is extended.
Note: The term shall not exceed 50 years in any one instance and amendment must be
effected before the expiration of the corporate term of existence.
5. Minimum Capital Stock and Subscription Requirements
GR: There is no minimum authorized capital stock as long as the paidup capital is not less
than P5,000.00
XPN: As provided by special law (e.g. Banks).
Note: Each subscriber is NOT required to pay 25% of each subscribed share, the law only
requires that at least 25% of the subscribed capital must be paid.
6. Articles of Incorporation
a. Nature and Function of Articles
It is one that defines the charter of the corporation and the contractual relationships
between the State and the corporation, the stockholders and the State, and between the
corporation and its stockholders. (Lanuza vs. CA, G.R. No. 131394 [March 2005]
b. Contents
1) Name of corporation;
2) Purpose/s, indicating the primary and secondary purposes;
3) Place of principal office;
4) Duration;
5) Names, citizenship and residences of incorporators;
6) Number, names, citizenship and residences of directors;
7) Names, nationalities, and residences of the persons who shall act as directors of
trustees until the first regular ones are elected and qualified;
8) If stock corporation, amount of capital stocks, number of shares and in case of par
value stock corporations, the par value of each shares;

9) Names, residences, number of shares and amounts of subscription, which shall not be
less than 25% of ACS;
10) Name, residences, and amount paid by each subscriber on their subscription, which
shall not be less than 25% of total subscription;
11) Name of treasurer elected by subscribers; and
12) If the corporation engages in a nationalized industry, a statement that no transfer of
stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage
below the required legal minimum. (Sec. 14, CC)
c. Amendment
Unless otherwise prescribed by CC or by special law and for legitimate purposes, any
provision or matter in the AOI may be amended by:
(1)
Majority vote of the BOD/T; and
(2)
Vote or written assent of the stockholders representing at least 2/3 of the OCS or
members if it be a non-stock
Note: Validity of amendments may retroact to the date of filing if not acted upon by SEC
within 6 months without fault attributable to the corporation
d. Non-Amenable Items
(1)
The names and address of incorporators and incorporating directors or trustees.
(2)
The name of treasurer originally or first elected by the subscribers or members to act as
such until his successor has been duly elected and qualified.
(3)
The number of shares and amount originally subscribed and paid out of the original
authorized capital stock of the corporation.
(4)
The date and place of execution of the AOI.
(5)
The signatories and acknowledgement thereof.
(6)
Nationalities of founders
GR: Restriction and transfer of shares may be amended
XPN: in case of close corporations, restriction and transfer of shares cannot be amended
otherwise it will not be a close corporation
7. Registration and Issuance of Certificate of Incorporation
A private corporation formed or organized under this Code commences to have corporate
existence and juridical personality and is deemed incorporated from the date the Securities
and Exchange Commission issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their successors shall constitute
a body politic and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the corporation is
sooner dissolved in accordance with law. (Sec. 19, CC)
1. Adoption of By-Laws
Procedure in adopting By-laws:

Pre - Incorporation: It shall be signed and approved by all the incorporators and filed with
the SEC together with the AOI.
Post - Incorporation: It must be filed within 1 month after receipt of the official notice of the
issuance of its certificate of incorporation by the SEC with the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock, or at least a
majority of the members shall be necessary.
(a) Nature and Function of By-Laws
By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders
or members and directors and officers with relation thereto and among themselves in
their relation to it. (China Banking Corporation vs. CA, G.R. No. 117604 [March 1997])
(b) Requisites of valid by-laws
1.
It must be general and uniform in its effect or applicable to all alike or those similarly
situated;
2.
It must be reasonable, not arbitrary.
3.
It must be consistent with the AOI
4.
It must not be contrary to law, public policy or morals;
5.
It must not impair obligations and contracts and vested rights;
(c) Binding effects
By-laws are subordinates to the charter of the corporation and part of its charter is its
articles of incorporation.
A by-law which is not consistent with the charter but is in conflict with it is void.
A by-law can neither enlarge the rights and powers conferred by the charter nor restrict
the duties and liabilities imposed thereby, and in case it attempts to do so, the charter
will prevail.
(d) Amendments
By a majority vote of the directors or trustees and the majority vote of the owners of
outstanding capital stock or members in a non-stock corporation, at a regular or special
meeting called for that purpose.
By the Board of Directors alone when delegated by the owners of 2/3 of the outstanding
capital stock or 2/3 of members in a non-stock corporation.
Provided: any power delegated to the board of directors or trustees to amend or repeal any
by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning
or representing a majority of the stockholders or members in a non-stock corporation, shall
so vote at a regular or special meeting.
F. Corporate Powers
KINDS:

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1. Express Powers granted by law, the Corporation Code and its Articles of Incorporation or
Charter.
2. Inherent/Incidental Powers not expressly stated but are deemed to be within the capacity of
corporate entities.
3. Implied/Necessary Powers exist as a necessary consequence of the exercise of the express
powers of the corporation or the pursuit of its purposes.
Implied Powers Test - To determine whether an act is within the implied powers of a
corporation, it must be ascertained whether the act in question is in direct and immediate
furtherance of the corporations business, fairly incident to the express powers and reasonably
necessary to their exercise.
1. General Powers, Theory of General Capacity
a. To sue and be sued in its corporate name;
Venue of action- instituted at the place of the principal office of the corporation.
Service upon domestic private juridical entity may be made through:
1) President;
2) Managing partner;
3) General partner;
4) Corporate secretary;
5) Treasurer; or
6) In-house Counsel.
Note: Rule 14 Section 11 on Service of Summons is not applicable to intra-corporate
dispute.
b. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with the provisions of this Code;
e. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal
the same in accordance with this Code;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code;
and to admit members to the corporation if it be a non-stock corporation;
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;
h. To enter into merger or consolidation with other corporations as provided in this Code;
i. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;

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j.

To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
k. To exercise such other powers as may be essential or necessary to carry out its purpose
or purposes as stated in the articles of incorporation.
Theory of general capacity - The Corporation is said to hold such powers as are not
prohibited or withheld from it by general laws.
Note: A corporation cannot enter into a partnership contract but may engage in a joint
venture with the other. (Aurbach vs. Sanitary Wares Manufacturing Corp., G.R. No. 75875
[Dec. 1989])
2. Specific Powers, Theory of Specific Capacity
Theory of specific capacity - No corporation under the Corporation Code shall possess or
exercise any corporate powers, except those conferred by law, its articles of incorporation,
those implied from express powers, and those as are necessary or incidental to the exercise
of the powers so conferred.
(a) Power to extend or shorten corporate term (Sec. 37, CCP)

a.
b.
c.
d.

e.
f.
g.
h.
i.

Requirements and Procedure:


Approval by the majority vote of the board of directors or trustees.
Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or
2/3 of the members in case of non-stock corporation.
The ratification must be at a meeting duly called for the purpose.
Prior written notice of the proposal to extend or shorten corporate term must be made stating
the time and place of meeting addressed to each stock holder or member at his place of
residence, either by mail or personal service;
In case of extension, the same cannot be made earlier than 5 years prior to the original or
subsequent expiry date unless there are justifiable reasons for an earlier extension.
In case of extension, the same must be made during the lifetime of corporation.
Any dissenting stockholder may exercise his appraisal right;
Submission of amended AOI with SEC.
Approval thereof by SEC.
(b) Power to increase or decrease capital stock or incur, create, increase bonded
indebtedness
1. Power to increase or decrease capital stock
Methods of Increasing the Capital stock
Increasing the par value of the existing number of shares without increasing the
number of shares;
b.
Increasing the number of existing shares without increasing the par value;
a.

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c.

Increasing the number of existing shares and at the same time increasing the par value
of the shares.
Valid Reasons for Increasing the Capital Stock
To generate more working capital.
To issue shares to sell to acquire assets.
To have extra shares to meet the requirement for declaration of stock dividend. (Bar
Review Materials in Commercial Law, Jorge Miravide, 2002);
Valid Reasons for Decreasing the Capital Stock
To reduce or wipe out existing deficit where no creditors would thereby be affected.
When the capital is more than what is necessary to procreate the business or reduction
of capital surplus
To write down the value of its fixed assets to reflect their present actual value in case
where there is a decline in the value of the fixed assets of the corporation. (The
Corporation Code of the Philippines Annotated, Ruben C. Ladia, 2007)

a.
b.
c.

d.
e.
f.
g.
h.

Requirements:
Approval by the majority vote of the board of directors.
Ratification by the stockholders holding or representing at least 2/3 of the outstanding
capital stock at a meeting duly called for that purpose.
Prior written notice of the proposed increase or decrease of the capital stock indicating
the time and place of meeting addressed to each stockholder must made either by mail
or personal service.
A certificate in duplicate must be signed by a majority of the directors, countersigned by
the chairman and the secretary of the stockholders meeting.
In case of increase in capital stock, 25% of such capital must be subscribed and at least
25% of the amount must be paid either in cash or property.
In case of decrease in capital stock, the same must not prejudice the right of creditors.
Filing of the certificate of increase and amended articles with SEC.
Approval thereof by the SEC.

2. Power to Incur, Create or Increase Bonded Indebtedness


The weight of authority is to the effect that in the course of corporate dealings, the
corporation may need additional funds to carry the purpose of its organization such that it
may source its funding requirements by borrowing them evidenced by bonds, notes or
debentures.
Bonded Indebtedness - a long term indebtedness secured by real or personal property
(corporate assets).
Note: Not all borrowings made by a corporation needs the approval of the stockholders.
Only bonded indebtedness requires such approval.
Requirements:
Same with the power to increase or decrease capital stock.

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(c) Power to deny pre-emptive rights


(Sec. 39, CC)
Pre-Emptive Right - is the preferential right of shareholders to subscribe to all issues or
dispositions of shares of any class, in proportion to their respective shareholdings, unless
such right is denied by the AOI or any amendment thereof.
The purpose of pre-emptive right is to enable the shareholder to retain his proportionate
control in the corporation and retain his equity in the surplus.
Pre-Emptive Rights Shall Not Extend to Shares:
To be issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public; or
To be issued in good faith with the approval of the stockholders representing 2/3 of the
outstanding capital stock:
In exchange for property needed for corporate purposes; or
In payment of a previously contracted debt.
In case the right is denied in the articles of incorporation.
Note: These exemptions will not apply to close corporations.
(d) Power to sell or dispose of corporate assets (Sec. 41, CC)
GR: Where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for debts and liabilities of the transferor.

1.
2.
3.

XPNs:
Where the purchaser expressly or impliedly agrees to assume such debts;
Where the transaction amounts to a consolidation or merger of the corporation;
Where the purchasing corporation is merely a continuation of the selling corporation;
Where the transaction is entered into fraudulently in order to escape liability for such
debts. (Edward J. Nell Co. vs. Pacific Farms, Inc., L-20850 [November 1965])

Condition for Valid Exercise of this Power


Resolution by the majority vote of the board of directors/trustees
Authorization from stockholders representing at least 2/3 of the outstanding capital
stock or 2/3 of the members.
c.
The ratification of the stockholders or members must be made at meeting duly called for
that purpose.
d.
Prior written notice of the proposed action and of the time and place of meeting must be
made addressed to all stockholders of record, either by mail or personal service.
e.
The sale of the assets shall be subject to the provisions of existing laws on illegal
combinations and monopolies.
f.
Any dissenting stockholder shall have the option to exercise his appraisal right.
a.
b.

14

(e) Power to acquire own shares (Sec. 41, CC)


A stock corporation shall have the power to purchase or acquire its own shares for
legitimate corporate purposes, provided that the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased/ acquired.
Instances:
a. To redeem redeemable shares.
b. To acquire treasury shares
c. To pay dissenting or withdrawing stockholders entitled to payment for their shares in
the exercise of appraisal right.
d. To effect a decrease of capital stock;
e. To collect or compromise an indebtedness to the corporation arising out of unpaid
subscription.
f. In close corporations, when there is a deadlock in the management of the business.
g. To eliminate fractional shares arising out of stock dividends.
Note: Corporation cannot use its capital stock to purchase its own shares, that is,
corporate assets below the Legal or Stated Capital but only Surplus Profits.
Exception:
a. In the redemption of redeemable shares.
b. In case of a close corporation, the stockholders can exercise their right to compel the
corporation to purchase their share for any reason, provided the corporation has
sufficient assets in its book to cover its debts and liabilities.
(f) Power to invest corporate funds in another corporation or business
(Sec. 42, CC)
Requirements and Steps to be followed for valid investment:
Resolution by the majority of the board of directors or trustees.
Ratification by the stockholders representing at least 2/3 of the outstanding capital
stock or 2/3 of the members in case of non-stock corporations.
c.
The ratification must be made in a meeting duly called for that purpose.
d.
Prior written notice of the proposed investment and the time and place of the meeting
shall be made, addressed to each stockholder or member by mail or by personal service.
e.
Any dissenting stockholder shall have the option to exercise his appraisal right.
a.
b.

(g) Power to declare dividends (Sec. 43, CC)


Dividends Part or portion of the profits of the enterprise which the corporation sets apart
for ratable distribution among the holders of the capital stock. The board of directors may
declare dividends only out of the unrestricted retained earnings with approval of the
stockholders representing not less than 2/3 of the outstanding capital stock dividends.
Unrestricted Retained Earnings undistributed earnings of the corporation which have
not been allocated for any managerial, contractual or legal purposes and which are free for
distribution to the stockholders as dividends.

15

GR: Stock corporations are prohibited from retaining surplus profits in excess of 100% of
their paid-up capital stock.
XPNs: [CPR]
a.
When justified by definite Corporate expansion projects or programs approved by the
board of directors;
b.
When the corporation is Prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or
c.
Retention is necessary under special circumstances obtaining in the corporation, such
as when there is a need for special reserve for probable contingencies.
(h) Power to enter into management contract (Sec. 44, CC)
Management Contract - One entered into between two corporations whereby one
corporation undertakes to manage all or substantially all of the business of the other
corporation for a certain period of time.
Note: Section 44 of the Corporation Code refers only to a management contract with
another corporation. Hence, it applies only to contracts for management of all or
substantially all of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise.
Requirements:
1. Resolution of the Board of Directors/Trustees; and
2. Majority vote of the outstanding capital stock or members, as the case may be, in a meeting
duly called for the purpose.
Except: 2/3 votes shall be necessary if:
a. The stockholder(s) represent(s) the interests of both corporations and who owns 1/3 of
outstanding capital stocks of the managing corporation.
b. Majority of the members of the board of managing corporation composes also majority of the
members of the board of the managed corporation.
Note: The action undertaken must be voted upon at a duly constituted meeting.
Period of Management Contract
GR: Not longer than 5 years for any 1 term
XPN: Contracts which relate to the exploration, development exploitation, or utilization of
natural resources that may be entered into for such periods as may be provided by
pertinent laws or regulations.

16

A management contract cannot delegate entire supervision and control over the officers and
business of a corporation to another as this will contravene. (Sec. 23)
(I) Ultra vires acts Sec. 45, CC Pertains to acts that cannot be executed or performed by a
corporation because they are not within its express, inherent or implied powers as defined
by its charter or articles of incorporation.
i.) Applicability of ultra vires doctrine
(a)
Acts done beyond the powers of the corporation as provided in the law or its articles of
incorporation;
(b)
Acts or contracts entered into in behalf of a corporation by persons who have no
corporate authority (Note: This is technically ultra vires acts of officers and not of the
corporation.)
(c)
Acts or contracts, which are per se illegal as being contrary to law.
ii.) Consequences of ultra vires acts
(a)
On the corporation The franchise or certificate of incorporation may be
suspended or revoked, after proper notice and hearing, for serious misrepresentation as
to what the corporation can do or is doing to the great damage or prejudice of the
general public
(b) On the rights of stockholders Stockholders may bring either an individual or
derivative suit to enjoin a threatened ultra vires act or contract. If the act or contract
has already been performed, a derivative suit for damages against the directors may be
filed, but their liability will depend on whether they acted in good faith and with
reasonable diligence in entering into the contract
(c) On the immediate parties

If the contract is fully executed on both sides, the contract is effective and the
courts will not interfere to deprive either party of what has been acquired under it

If the contract is executor on both sides, as a rule, neither party can maintain an
action for its non-performance
(3) Where the contract is executor on one side only, and has been fully performed on the
other, the courts differ as to whether an action will lie on the contract against the party
who has received benefits of performance under it. The party who has received benefits
from the performance is estopped to set up that the contract is ultra vires to defeat an
action on the contract.
(j) Doctrine of individuality of subscription Subscription to shares of stock are deemed
indivisible and no certificate of stock can be issued unless and until the full amount of the
subscription including interest and expenses, if any, is paid.
(k) Doctrine of equality of shares - Where the Articles of Incorporation do not provide for any
distinction of the shares of stock, all shares issued by the corporation are presumed to be
equal and enjoy the same rights and privileges and are also subject to the same liabilities.
Sec. 6 par. 5 provides:

17

Except as otherwise provided in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other share.
(3) How exercised:
(a) By the shareholders by exercising their right to vote in the following:
(1) Election or removal of directors/trustees
(2) Management contract
(3) Adoption, amendment or repeal of by-laws
(4) Fixing the issued price of no-par value shares, if BOD is not authorized by the articles
of incorporation
(5) Amendment of articles of incorporation
(6) Ratification of certain acts of directors
(7) Extension or shortening of corporate term
(8) Increase or decrease of capital stock
(9) Incur, create or increase bonded indebtedness
(10)
Denial of pre-emptive right
(11)
Sale, lease, exchange, mortgage, pledge or disposal of all or substantially all of
corporate assets
(12)
Investment of corporate funds in another corporation or business or for any
other purpose other than the primary purpose
(13)
Issuance of stock dividends
(14)
Merger or consolidation
(b) By the Board of Directors The Board of Directors exercises the powers of the corporation.
Generally, the Board alone, without the concurrence of the stockholders, may exercise the
powers. The stockholders cannot overrule the directors in its exercise of the corporate
powers.
(c) By the Officers In some cases, corporate officers like the President can also bind the
corporation. The authority of such individuals to bind the corporation is generally derived
from:
(1)
Law
(2)
Corporate by-laws
(3)
Authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business
A corporate officer or agent may represent and bind the corporation in transactions with third
persons to the extent that the authority to do so has been conferred upon him, and these
include:
(1.) Powers that, in the usual course of the particular business, are incidental to those
expressly provided
(2.) Powers that may be implied from the powers intentionally conferred
(3.) Powers added by custom and usage, as usually pertaining to the particular officer or
agent
(4.) Such apparent powers as the corporation has caused person dealing with the officer or
agent to believe that it has conferred

18

An officer may also bind the corporation if he has apparent authority.


Note: The following officials or employees of the company can sign the verification and
certification without need of a board resolution: 1) the Chairperson of the Board of Directors,
(2) the President of a corporation, (3) the General Manager or Acting General Manager, (4)
Personnel Officer, and (5) an Employment Specialist in a labor case. (Cagayan Valley Drug
Corporation vs. CIR, G.R. No. 151413
[Feb. 2008])
(4) Trust fund doctrine - The capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate creditors. The subscribed
capital stock of the corporation is a trust fund for the payment of debts of the corporation
which the creditors have the right to look up to satisfy their credits. Corporation may not
dissipate this and the creditors may sue stockholders directly for the unpaid subscription.
(CIR vs. CA, G.R. No. 108576 [Jan. 1999])
G. Board of Directors and Trustees
1. Doctrine of Centralized Management
As can be gleaned from Sec. 23 of Corporation Code It is the board of directors or trustees
which exercises almost all the corporate powers in a corporation. (Spouses Firme vs. Bukal
Enterprises and Devs. Corp., G.R. No. 146608 [Oct. 2003])
The exercise of the corporate powers of the corporation rest in the Board of Directors save
in those instances where the Corporation Code requires stockholders approval for certain
specific acts. (Great Asian Sales Center Corp. vs. Court of Appeals, G.R. No. 105774 [April
2002])
2. Business Judgment Rule
Contracts intra vires entered into by the board of directors are binding upon the
corporation Courts will not interfere in the decisions made by the BOD as regards the
internal affairs of the corporation. (Yong vs. Tiu, G.R. No. 144476 [April 2003])
XPN: Unless such contracts are so unconscionable and oppressive as to amount to a
wanton destruction of rights of the minority. (Ingersoll vs. Malabon Sugar Co., G.R. No. L
16977 [Apr. 1922])
Note: The consequences of business judgment rule are:
1. Resolutions and transactions entered into by the Board within the powers of the
corporation cannot be reversed by the courts not even on the behest of the
stockholders.
2. Directors and officers acting within such business judgment cannot be he held
personally liable for such acts.
Note: A board resolution authorizing a corporate officer to obtain a loan includes the
authority to assign the receivables to secure the loan if the resolution also empowers the
officer to agree to the terms and conditions of the loan and sign the implementing
documents. The officer who signed the deed of assignment is however, not personally liable

19

if he indicated in the deed that he was signing in behalf of the corporation. (Divina 2010, p.
79)
(5) Intra Corporate Dispute
Not all conflicts between the stockholders and the corporation are classified as intracorporate. Other factors such as the status or relationship of the parties and the nature of
the question that is the subject of the controversy must be considered in determining
whether the dispute involves corporate matters so as to regard them as intra-corporate
controversies. (Marc II Marketing, Inc. vs. Joson, GR. 171993 [Dec., 2011])
The dismissal of a corporate officer is always regarded as a corporate and/or an intracorporate controversy; Intra-corporate controversies also includes controversies in the
election or appointments of directors, trustees, officers or managers of such corporations,
partnerships, or associations. (Marc II Marketing, Inc. vs. Joson, GR. 171993 [Dec., 2011])
The fact that the parties involved in the controversy are all stockholders or that the parties
involved are the stockholders and the corporation does not necessarily place the dispute
within the ambit of the jurisdiction of the SEC (now the Regional Trial Court). (Real vs.
Sangu Philippines, Inc., GR.168757 [Jan., 2011])
3. Tenure, Qualifications and Disqualifications of Directors or Trustees
GR: Directors or trustees shall hold office for 1 year.
XPN: If no election is held, the directors and officers shall hold position under a holdover
capacity until their successors are elected and qualified. (SEC Opinion, Dec. 15, 1989).
Note: hold-over situation arises only when no successors are elected due to valid and
justifiable reasons (SEC-OGC Opinion No. 07-08, April 2007)
Qualifications of a director
1. Must own at least 1 share of the capital stock;
Note: Ownership of stock shall stand in his name on the books of the corporation.
A person who does not own a stock at the time of his election or appointment does not
disqualify him as director if he becomes a shareholder before assuming the duties of his
office. (SEC Opinions, Novs. 9, 1987 & April 5, 1990)
2. Must be a natural person;
Note: What is material is the legal title, not beneficial ownership of the stock as appearing
on the books of the corporation.
Grounds for disqualification of a director
1. Conviction by final judgment of an offense punishable by imprisonment exceeding 6 years
2. Violation of the Corporation Code committed within 5 years prior to his election or
appointment (Sec 27)

20

4. Elections
a. Cumulative Voting/Straight Voting
1. Straight voting every stockholder may vote such number of shares for as many
persons as there are directors to be elected.
2. Cumulative voting for one candidate a stockholder is allowed to concentrate his
votes and give one candidate, as many votes as the number of directors to be elected
multiplied by the number of his shares shall equal.
3. Cumulative voting by distribution a stockholder may cumulate his shares by
multiplying the number of his shares by the number of directors to be elected and
distribute the same among as many candidates as he shall see fit. (De Leon, 2010, p.
249)
Note: Cumulative voting in case of nonstock corporations only if it is provided in the AOI.
b. Quorum
A majority of the number of directors or trustees as fixed in the articles of incorporation
shall constitute a quorum for the transaction of corporate business. (Sec. 25, CC)
Note: A director who is disqualified by reason of personal interest in the matter before a
directors meeting, loses, pro hac vice, his capacity as a director and he cannot be counted
for the purpose of making a quorum, nor can the vote of such director be counted for the
purpose of determining whether the corporate act was (sic) passed by a majority vote. (SEC
Opinion, July 1994)
5. Removal
The power to remove directors or trustees belongs exclusively to the stockholders.
Requisites:
1. It must take place either at a regular meeting or special meeting of the stockholders
or members called for the purpose
2. Previous notice to the stockholders or members of the intention to remove a director
3. A vote of the stockholders representing 2/3
of
outstanding
capital
stock
or
2/3 of members
4. Generally, removal may be with or without cause
Note: If the director to be removed was elected by the minority, there must be cause for
removal because the minority may not be deprived of the right to representation to which
they may be entitled under Sec. 24 of the Code. (Sec. 28)
6. Filling of Vacancies
Stockholders or members may fill the vacancy, if it is due to:
l. If the vacancy may be filled by the remaining directors or trustees but the board
refers the matter to stockholders or members; or
m. Expiration of term
n. Removal

21

o. Increase in the number of directors


p. Grounds other than removal or expiration of term, e.g. death, resignation,
abandonment, or disqualification where the remaining directors do not constitute a
quorum for the purpose of filling the vacancy

Any vacancy occurring in the BOD/T other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least majority of the
remaining directors or trustees, if still constituting a quorum. (Sec. 29, CC)

7. Compensation
GR: Directors, in their capacity as such, are not entitled to receive any compensation except
for reasonable per diems.
XPNs:
1. Compensation is fixed in the bylaws
2. Granted by vote of stockholders representing at least a majority of the outstanding
capital stock at a regular or special meeting
3. When they are also officers of the corporation
Note: In no case shall the total yearly compensation of directors, as such directors, exceed
ten percent (10%) of the net income before income tax of the corporation during the
preceding year.
8. Fiduciaries Duties and Liability Rules
Directors are considered in equity as bearing a fiduciary relation to the corporation
and its stockholders. Directors are expected and are obliged to act with utmost candor
and fair dealing for the interest of the corporation and without taint of selfish motives.
(Ladia 2007, p. 194 citing Fletcher)
Doctrine of Corporate Opportunity Under this rule, Corporate Directors are personally
liable if guilty of gross negligence or bad faith in directing affairs of the corporation,
which results in damage or injury to the corporation, its stockholders and other
persons. (Sanchez vs. Republic, G.R. 172885 [October 2009]
There is disloyalty when:
o A director or trustee acquires any personal or pecuniary interest in conflict with (his)
duty as such director or trustee
o He attempts to acquire or acquires, in violation of his duty, any interest adverse to the
corporation in respect to any matter which has been resposed in him in confidence.
o He, by virtue of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profit to the prejudice of such corporation.
(Ladia 2007, p. 195)
Note: The above enumerations are the grounds by which a director may be held liable
for damages and thus, the veil of corporate fiction may be pierced. (De Leon 2010, p.
305)

Personal liability may also attach when the director:

22

o
o
o

Assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders or other persons.
Consents to the issuance of watered stocks or who, having knowledge thereof, does not
file with the corporate secretary his written objection thereto (Sec. 65, CC)
Is made personally liable by specific provision of law (Sec. 144, CC)
Agrees to hold himself personally and solitarily liable with the corporation (Tramat
Mercantile Inc., vs. CA, G.R. No. 111008 [Nov. 1994])

9. Responsibility for Crimes


A director or officer may be held criminally liable when the corporation was directly
required by law to do an act in a given manner, and the same law makes the person who
fails to perform the act in the prescribed manner expressly liable criminally.
Ratio: The performance of the act is an obligation directly imposed by the law on the
corporation. Since it is a responsible officer or officers of the corporation who actually
perform the act for the corporation, they must of necessity be the ones to assume the
criminal liability; otherwise this liability as created by the law would be illusory, and the
deterrent effect of the law, negated. (Sia vs. People, G.R. No. L-30896 [April 1983]
10. Inside Information
Information not known to the public that one has obtained by virtue of being an
insider like a director (Miriam Webster Dictionary, 2006).
11. Contracts
(a) By self-dealing directors with the corporation (Sec. 32, CC) - A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the
option of such corporation, unless all of the following conditions are present:
1.
That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2.
That the vote of such director or trustee was not necessary for the approval of the
contract;
3.
That the contract is fair and reasonable under the circumstances; and
4.
That in case of an officer, the contract has been previously authorized by the board
of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified, provided:
1. The contract is ratified by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members
2. Such ratification is made at a meeting called for that purpose;
3. Full disclosure of the adverse interest of the directors or trustees involved is made; and
4. The contract is fair and reasonable under the circumstances.
(b) Between corporations with interlocking directors (Sec. 33, CC) - Except in cases of fraud,
and provided the contract is fair and reasonable under the circumstances, a contract
between two or more corporations having interlocking directors shall not be invalidated

23

on that ground alone: Provided, That if the interest of the interlocking director in one
corporation is substantial and his interest in the other corporation or corporations is
merely nominal, he shall be subject to the provisions of the preceding section insofar as
the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.

c. Management Contracts
It is a contract whereby a corporation undertakes to manage or operate all or substantially
all of the business of another corporation, whether such contracts are called service
contracts, operating agreements or otherwise. (Sec. 44)
16. Executive Committee
(1.) Creation - The by-laws of a corporation may create an executive committee, composed of not
less than three members of the board, to be appointed by the board.
(2.) Limitations on its powers - The committee may act, by majority vote of all its members, on
such specific matters within the competence of the board, as may be delegated to it in the
by-laws or on a majority vote of the board, except with respect to:
Approval of any action for which shareholders' approval is also required;
The filing of vacancies in the board;
The amendment or repeal of by-laws or the adoption of new by-laws;
The amendment or repeal of any resolution of the board which by its express terms is
not so amendable or repealable; and
A distribution of cash dividends to the shareholders.
Note: In case there is an absence of authority in the by-laws allowing the creation of an
executive committee, the principle on de facto officers may be applied insofar as third
persons are concerned and as to the corporation, the unauthorized act of appointment may
be subject to Sec. 144, CC. (De Leon 2010, p. 316-317)
17. Meetings
(a) Regular or special
(i) When and where

Regular - monthly, unless the by-laws provide otherwise (Sec. 53, CC)

Special - at any time upon the call of the president or as provided in the by-laws
(Sec. 53, CC)

Meetings of directors or trustees of corporations may be held anywhere in or outside


of the Philippines, unless the by-laws provide otherwise. (Sec. 53, CC)

Teleconference: BOD may conduct their meeting through teleconferencing or


Videoconferencing provided (SEC Memorandum Circular No.15, 2001 in rel. to
Electronic Commerce Act and Sec. 25, CC):
1.
The secretary shall safeguard the integrity of the meeting and to record and safe
keep the same.
2.
Notice to directors in accordance with by-laws
3.
Consent of the director
4.
Roll call shall be made by the Secretary.

24

5.
6.

All participants shall identify themselves for the record, before speaking and
must clearly hear and/or see each other in the course of the meeting
Signature of the directors who attended the meeting on the minutes of the
meeting.

(ii) Notice:
Notice of regular or special meetings stating the date, time and place of the meeting
must be sent to every director or trustee at least one (1) day prior to the scheduled
meeting, unless otherwise provided by the by-laws. (Sec. 53, CC) b) Who presides - The
president shall preside at the meeting, unless the by-laws provide otherwise. (Sec. 54,
CC)
c) Quorum (Sec. 25, CC)
General Rule: 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.
Exception: unless the articles of incorporation or the by-laws provide for a greater majority.
Note: Quorum is based on the totality of the shares which have been subscribed and
issued, whether it be founders shares or common shares. (Lanuza vs. CA, G.R. No. 131394
[Mar. 2005])
(3.) Rule on abstention
An abstention represents a shareholders affirmative choice to decline to vote on a proposal.
Abstained shares are considered to be "present" and "entitled to vote" at the meeting and
are therefore included in quorum calculations. In most cases, however, abstentions are not
considered "votes cast." Therefore, where a majority of "votes cast" is required for passage,
abstentions will have no effect, but where a proposal requires a majority of the shares
"present" at the meeting or "present and entitled to vote on the subject matter," abstentions
will have the effect of votes cast "against".
H. Stockholders and Members
A person may become a stockholder in a corporation by:
(1.) A contract of subscription with the corporation
(2.) Purchase of treasury shares from the corporation
(3.) Purchase or acquisition of shares from existing stockholders (Ladia 2007, p. 338 citing
Ballantine)
1. Rights of a Stockholder and Members
a. Participation in the management of the corporate affairs by exercising their right to vote
and be voted upon either personally or by proxy
b. Right to enter into a voting trust agreement
c. Right to receive dividends and to compel their declaration if warranted
d. Right to transfer shares of stock subject only to reasonable restrictions such as options
and preferences as may be allowed by law inclusive of the right of the transferee to
compel the registration of the transfer in the books of the corporation
e. Right to be issued a certificate of stock for fully paid-up shares
f. Pre-emptive rights

25

g.
h.
i.
j.
k.
l.
m.
n.
o.

Appraisal right
Right to institute derivative suit
Right to recover shares of stock unlawfully sold for delinquency as may be allowed
Right to inspect the books of the corporation, subject to limitations
Right to be furnished by the most recent financial statements
Right to be issued a new stock certificate in lieu of the lost or destroyed one
Right to have the corporation dissolved
Right to participate in the distribution of the assets of the corporation upon dissolution
Right to petition the SEC to arbitrate in the event of a deadlock, in case of a close
corporation
p. Right to withdraw from a closed corporation for any reason, and compel the corporation
to purchase his shares (Ladia 2007, p. 405)
Note: A stockholder may compel the corporation to declare dividends when the
corporations paid up capital exceeds 100%. (Sec. 43, CC)
a. Doctrine of Equality of Shares - Where the Articles of Incorporation do not provide for
any distinction of the shares of stock, all shares issued by the corporation are presumed to
be equal and enjoy the same rights and privileges and are also subject to the same
liabilities (Sec. 6, CC)
2. Participation in Management
(a) Proxy (Sec. 58, CC)

Stockholders and members may vote in person or by proxy in all meetings of


stockholders or members.

Proxies shall in writing, signed by the stockholder or member and filed before the
scheduled meeting with the corporate secretary.

It shall be valid only for the meeting for which it is intended, 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.
(b) Voting trust An agreement whereby one or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or trustees the right to
vote and other rights pertaining to the shares for a period not exceeding 5 years at any one
time.
Voting Trust Agreement vs. Proxy
VOTING TRUST
Trustee votes as an owner rather a mere
agent.
The trustee may vote in person or by
proxy unless the agreement provides
otherwise.
Trustee acquires legal title to the share/s
of the transferring stockholder.

PROXY
Proxy holder votes as an agent.
Proxy must vote in person.

Proxy has no legal title to the share/s of the


principal.

26

VOTING TRUST
The agreement is irrevocable.
A trustee can vote and exercise all the
rights of a stockholder even when the
latter is present.
Trustee is not limited to act at any
particular meeting
Agreement must be notarized.
The agreement must not exceed 5 years
at any one time, except when the same is
made a condition of a loan.
The voting right is divorced from the
ownership of stocks

PROXY
Revocable at any time except when coupled with
interest
A proxy can only vote in the absence of the owner
of the stock.
A proxy can only act at a specified stockholders
meeting (if not continuing)
Proxy need not be notarized.
Unless otherwise provided in the proxy, it shall
be valid for the meeting for which it was intended
but it cannot exceed 5 years at any one time
The right to vote is inherent in or inseparable
from the right to ownership of stock.

c. Cases When Stockholders Action is Required

Limitations on the Voting Trust


Cannot be entered into for a period exceeding 5 years at any 1 time except when it is a
condition in a loan agreement but said contract shall automatically expire upon full
payment of the loan.
The agreement must not be used for the purpose of fraud.
It must be in writing and notarized and specify the terms and conditions thereof.
A certified copy of the agreement must be filed with the corporation and with the SEC.
The agreement shall be subject to examination by any stockholder of the corporation.
Unless expressly renewed, all rights granted in the agreement shall automatically expire
at the end of the agreed period.

A corporation cannot enforce the voting trust agreement executed by the stockholder
and trustees. Voting is personal in nature for those who are qualified and willing to vote.
The voting trust is personal to the stockholder and trustees. (NIDC vs. Aquino 163
SCRA 153 [1988])

Powers or Rights of Voting Trustees


Shall posses the right to vote and other rights pertaining to the shares so transferred
and registered in his or their names subject to the terms and conditions of and for the
period specified in the agreement.
May vote in person or by proxy unless the agreement provides otherwise.
The trustee may exercise the rights of inspection of all corporate books and records.
The trustee is the legal title holder or owner of the shares so transferred under the
agreement. He is therefore qualified to be a director.

(c) Cases when stockholders action is required


i.
By a majority vote
1. Election of directors/trustees (Sec. 24, CC)
2. Management contract (Sec. 44, CC)
3. Adoption of by-laws (Sec. 46, CC)

27

4. Amendment or repeal of by-laws (Sec. 48, CC)


5. Fixing the issued price of no-par value shares, if BOD is not authorized by the
articles of incorporation (Sec. 62, CC)

ii. By a two-thirds vote


a. Amendment of articles of incorporation
b. Removal of directors/trustees (Sec. 28, CC)
c. Ratification of a contract of self-dealing directors (Sec. 32, CC)
d. Ratification of an act of a disloyal director (Sec. 34, CC)
e. Extension or shortening of corporate term (Sec. 37, CC)
f. Increase or decrease of capital stock (Sec. 38, CC)
g. Incur, create or increase bonded indebtedness (Sec. 38, CC)
h. Denial of pre-emptive right (Sec. 39, CC)
i. Sale, lease, exchange, mortgage, pledge or disposal of all or substantially all of
corporate assets (Sec. 40, CC)
j. Investment of corporate funds in another corporation or business or for any other
purpose other than the primary purpose (Sec. 42, CC)
k. Issuance of stock dividends (Sec. 43, CC)
l. Managed corporation in a management contract:
i. where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third
(1/3) of the total outstanding capital stock entitled to vote of the managing
corporation; or
ii. where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of directors of
the managed corporation (Sec. 44, CC)
m.
n.
o.
p.

Delegation of the power to amend, repeal or adopt new by-laws to BOD (Sec. 48, CC)
Merger or consolidation (Sec. 77, CC)
Adoption of plan or distribution of assets of non-stock corporation (Sec. 95, CC)
Dissolution (Sec. 118 & 199, CC)

iii. By cumulative voting (Sec. 32, CC)


Where the presence of a director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting, and the vote
of such director or trustee was not necessary for the approval of the contract, such
contract with a director or trustee may be ratified, provided:
a. The contract is ratified by the vote of the stockholders representing at least twothirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the
members
b. Such ratification is made at a meeting called for that purpose;
c. Full disclosure of the adverse interest of the directors or trustees involved is made;
and
d. The contract is fair and reasonable under the circumstances.
3. Proprietary Rights

28

a. Right to Dividends the right of the stockholder to demand payment of dividends after
board declaration. Stockholders are entitled to dividends pro rata based on the total
number of shares that they own and not on the amount paid for the shares.
b. Right of Appraisal Right to withdraw from the corporation and demand payment of the
fair value of his shares after dissenting from certain corporate acts involving
fundamental changes in corporate structure.
c. Right to Inspect the right of a director, trustee, stockholder or member of the
corporation to inspect records of all business transactions and minutes of any meetings
of the corporation provided the following requisites are present:
(1)
It must be exercised at reasonable hours on business days;
(2)
The stockholder inspecting has not improperly used any information he has secured
through any prior examination of the records of such corporation or any other
corporation
(3)
Must act in good faith or for a legitimate purpose in making his demand
Distinction of the right of inspection of a stockholder and that of a director
STOCKHOLDER/MEMBER
May inspect and examine the books and
records as provided in Sections 74 and 75
but may not gain access to highly
sensitive and confidential information.

DIRECTOR
Absolute and unqualified and without
regard to motive

d. Pre-Emptive Right the preferential right granted to all stockholders of a corporation to


subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings. (Sec. 39, CC)
e. Right to Vote
Note: Preferred, redeemable and common shares may be denied the right to vote.
f.

Right of First Refusal the right granted to stockholders of existing corporations to buy
the shares of stock of another stockholder at a fixed price and only valid if made on
reasonable terms and consideration.

4. Remedial Rights
(a)
Individual suit a suit instituted by a shareholder for his own behalf against the
corporation;
(b)
Representative suit a suit filed by a shareholder in his behalf and in behalf likewise of
other stockholders similarly situated and with a common cause against the corporation;
and
(c)
Derivative suit a suit filed in behalf of the corporation by its shareholders (not
creditors whose remedies are merely subsidiary such as accion subrogatoria and accion
pauliana) upon a cause of action belonging to the corporation, but not duly pursued by
it, against any person or against the directors, officers and/or controlling shareholders
of the corporation.
Requisites:

29

(1.) The party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;
(2.) He has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board
of directors for the appropriate relief but the latter has failed or refused to heed his plea;
and
(3.) The cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.
5. Obligation of a Stockholder
A stockholder has the following obligations
(a)
Liability for failure to create corporation
(b)
Liability for watered stock;
(c)
Liability for dividends unlawfully paid;
(d)
To pay the corporation for unpaid subscription including interest, when se required by
the by laws;
(e)
To pay the creditors of the corporation for unpaid subscription;
6. Meetings
(a) Regular or special
i. When and where
(a)
Regular - annually on a date fixed in the by-laws, or if not so fixed, on any date
in April of every year as determined by the board of directors or trustees. (Sec.
50, CC)
(b)
Special - any time deemed necessary or as provided in the by-laws. (Sec. 50, CC)
Stockholders' or members' meetings, whether regular or special, shall be
held in the city or municipality where the principal office of the corporation
is located, and if practicable in the principal office of the corporation.
Metro Manila is considered a city or municipality.
A non-stock corporation may provide in its by-laws for any place within the
Philippines (Sec. 51, CC)
ii. Notice written notice must be sent to stockholders of members
(a)
Regular - at least two (2) weeks prior to the meeting, unless a different period is
required by the by-laws.
(b)
Special - at least 1 week written notice shall be sent to all stockholders or
members, unless otherwise provided in the by-laws.
Note: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or
member.
(b)

Who calls the meetings - It must be called by the proper party. The following persons
who may call the meeting:
1.
The person or persons authorized under the by-laws;
2.
Absent of any provision in the by-laws, the president;
3.
Under Sec. 28 (removal of director), by the secretary on order of the president or on
written demand of the stockholder representing or holding at least a majority of the

30

4.

outstanding capital stock or majority of the members entitled to vote in a non-stock


corporation, or the stockholder or member making the demand if there is no
secretary or he refuses to do so; and
On order of the proper forum under Sec. 50, CC.
Note: A stockholder may only petition the SEC to issue an order directing the petitioner
to call a meeting when there is no person authorized to call a meeting. Otherwise, the
remedy is to file a petition for mandamus.

(c)

Quorum (Sec. 52, CC)


General Rule: Quorum consists of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations.
Exception: unless otherwise provided for in this Code or in the by-laws

(d)

Minutes of meetings (Sec. 74, CC) The minutes of all meetings must set forth in detail
the following:
time and place of holding the meeting
how authorized
the notice given
whether the meeting was regular or special; if special, its object
those present and absent
every act done or ordered done at the meeting

1.
2.
3.
4.
5.
6.

Upon demand of any director, trustee, stockholder or member, the following must be
noted in the minutes:
7.
time when any director, trustee, stockholder or member entered or left the meeting
8.
yeas and nays
9.
protest on any action or proposed action
Minutes of meetings are subject to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and a copy of excerpts
of said records may be demanded.
I. Capital Structure
1. Subscription Agreements
Any contract for the acquisition of unissued stocks in an existing corporation or a
corporation still to be formed. (CIR vs. First Express Pawnshop, Inc., G.R. Nos. 17204546 [June 2009])
2. Consideration for Stocks
Stocks may be issued for the following considerations:
1. Actual cash paid to the corporation
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;

31

5. Amounts transferred from unrestricted retained earnings to stated capital;


6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
3. Shares of Stock
a. Nature of Stock
The ownership of share of stock confers no immediate legal right or title to any of the
property of the corporation. Each share merely represents a distinct undivided share or
interest in the common property of the corporation. (De Leon 2010, p. 80)
Incorporeal in nature, the shares are personal property of the stockholder (except
treasury shares in the treasury of the corporation).
They do not constitute an indebtedness of the corporation.
b. Subscription Agreements
c. Consideration for Shares of Stock
(a)
Actual cash paid to the corporation;
(b)
Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
(c)
Labor performed for or services actually rendered to the corporation;
(d)
Previously incurred indebtedness of the corporation;
(e)
Amounts transferred from unrestricted retained earnings to stated capital; and
(f)
Outstanding shares exchanged for stocks in the event of reclassification or conversion.

Stocks shall not be issued for a consideration less than the par or issued price
thereof
Where the consideration is other than actual cash, or consists of intangible property
such as patents of copyrights, the valuation thereof shall initially be determined by
the incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future
service.

d. Watered Stock
(a)
Definition those issued for a consideration less than par or issued value or those
issued not in exchange for its equivalent either in cash, property, share, stock
dividends, or services. These include stocks:
i. Issued without consideration (Bonus Share);
i. Issued as fully paid when the corporation has received less sum of money than its
par or issued value (Discounted Shares);
ii. Issued for consideration other than actual cash (property or service), the fair
valuation of which is less than its par or issued value;
iii. Issued as stock dividends when there are no sufficient retained earnings or surplus
to justify it.
(b)

Liability of directors for watered stocks - Any director or officer of a corporation


consenting to the issuance of stocks for a consideration less than its par or issued value
or for a consideration in any form other than cash, valued in excess of its fair value, or

32

who, having knowledge thereof, does not forthwith express his objection in writing and
file the same with the corporate secretary, shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued value of the same.
(Sec. 65, CC)
Note: The solidary liability of the directors emanates from the fiduciary character of the
position of director or corporate officer.
(c)

Trust fund doctrine for liability for watered stocks Capital stock, inclusive of unpaid
subscription, is a trust fund which the creditors have the right to look up to for the
satisfaction of their claims.

e. Situs of shares of stock - The property in the shares may be deemed to be situated in the
province in which the corporation has its principal office or place of business. (Guan vs.
Samahang Magsasaka, G.R. No. L-42091 [November 1935])
f. Classes of Shares of Stock
1.
Common Stock - represents the residual ownership interest in the corporation. It is a
basic class of stock ordinarily and usually issued without extraordinary rights or
privileges and entitles the shareholder to a pro rata division of profits. It usually carries
with it the right to vote, and frequently, the exclusive the right to do so.
2.

Preferred Stocks - are those which entitle the shareholder to some priority on dividends
and asset distribution.
The amount of preference is stated in the contract of
subscription and is usually on a fixed percentage or by a specified amount indicated
therein.
i. Participating - the holder is still given a right to participate with the common stocks
holder dividends beyond the stated preference.
ii. Non-participating - where there is no such participation.
iii. Cumulative - those that entitle the owner to payment or not only of current dividend
but also back dividends not previously paid whether or not during the past years,
dividends were declared or paid. In order that a preferred stock may be considered
cumulative, the same must be provided for and specified in the contract of
subscription.
iv. Non-Cumulative - those which grants the holder of such share only to the payment
of current dividends when dividends are paid, to the extent agreed upon before any
other stockholders are paid the same.
1. Discretionary Dividend Type - gives the holder such share the right to have
dividends paid in a particular years depending on the judgment and discretion
of the board.
2. Mandatory Type - impose a positive duty on directors to declare dividends every
year when profits are earned.
3. Earned Cumulative or Dividend Credit Type - the holder the right to arrears in
dividends every year when profits are earned during the previous year but
dividends were not declared. The right to receive dividends is merely postponed
to a later date.

33

3.

4.

Founders Shares - issued to the founders of the corporation and may be given certain
rights and privileges not enjoyed by the owners of other stocks. Where, however, the
exclusive right to vote and be voted for in the election of directors is granted, said right
cannot exceed five years, subject to SEC approval and counted from the date of said
approval. (Sec. 7, CC)
Treasury Shares - shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption, or
donation or through some other lawful means. Such shares may again be disposed of
for a reasonable price fixed by the Board (Sec. 9, CC).

5.

Redeemable Shares those which may be issued by the corporation when expressly so
provided in the articles of incorporation, and which may be purchased or taken up by
the corporation upon the expiration of a fixed period, regardless of the existence of
unrestricted retained. (Sec. 8, CC).

6.

Voting Shares - gives the holder thereof the right to vote and participate in the
management of the corporation through the exercise of such right.
Note: The term capital in Section 11, Article XII of the Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the present case
only to common shares, and not to the total outstanding capital stock comprising both
common and non-voting preferred shares. (Gamboa vs. Teves, GR. 176579 [Jun, 2011])

7.

Non-Voting Shares - those which do not grant the holder thereof voting rights.

8.

Street Certificate stock certificate indorsed by the registered holder in blank and the
transferee can command its transfer to his name from the issuing corporation.

9.

Share in Escrow share is subject to an agreement that the same must be deposited by
the grantor or his agent with a third person to be delivered to a stockholder or his
assign after complying with certain conditions, usually payment of the subscription
price. This arrangement is similar to an express trust in Article 1440 of the Civil Code.

10.

Convertible Share - a share that is changeable by the stockholder from one class to
another at a certain price and with a certain period.

11.

Par Value Shares - those whose values are fixed in the articles of incorporation and are
indicated in the certificate of stock, the primary function of which is to fix a minimum
subscription or original issue price of the shares.

12.

No Par Value Shares - those whose issued price are not stated in the certificate of stock,
but which may be fixed in the articles of incorporation, or by the board of directors
when so authorized by said articles or by-laws, or in the absence thereof, by the
stockholders themselves.

13.

Over-Issued/Spurious Stock stock issued in excess of the authorized capital stock and
its issuance are thus void.

34

14.

Watered Stock those issued for a consideration less than par or issued value or those
issued not in exchange for its equivalent either in cash, property, share, stock
dividends, or services. These include stocks:
Issued without consideration (Bonus Share);
Issued as fully paid when the corporation has received less sum of money than its
par or issued value (Discounted Shares);
Issued for consideration other than actual cash (property or service), the fair
valuation of which is less than its par or issued value;
Issued as stock dividends when there are no sufficient retained earnings or surplus
to justify it.

4. Payment of Balance of Subscription


GR: The unpaid subscriptions are not due and payable until a call is made by the
corporation for payment.
XPN:
1. when the corporation has become insolvent
2. if the contract of subscription provides the date or dates when payment is due
(a) Call by board of directors The BOD, by a formal Resolution, declares the whole or any
percentage of unpaid subscriptions to be due and payable on a specified date. However,
if the contract of subscription provides the date or dates when payment is due, no call
or declaration by the Board is necessary.
(b) Notice requirement The stockholders concerned are given notice of the Resolution by
the corporation either personally or by registered mail. Publication of the notice of call
is not required unless the by-laws provide otherwise. Notice is likewise not necessary if
the contract of subscription stipulates a specific date when any unpaid portion is due
and payable.
Note: To make out a prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its debts by making good
unpaid balances upon their subscriptions, it is only necessary to establish that the
stockholders have not in good faith paid the par value of the stocks of the corporation.
(Halley vs. Printwell, Inc., GR. 157549 [May, 2011])
(c) Sale of Delinquent Shares
i. Effect of delinquency No delinquent stock shall be voted for be entitled to vote or to
representation at any stockholder's meeting, nor shall the holder thereof be entitled
to any of the rights of a stockholder except the right to dividends in accordance with
the provisions of this Code, until and unless he pays the amount due on his
subscription with accrued interest, and the costs and expenses of advertisement, if
any. (Sec. 71, CC)
ii. Call by resolution of the board of directors - The board of directors may, by
resolution, order the sale of delinquent stock and shall specifically state the amount
due on each subscription plus all accrued interest, and the date, time and place of

35

the sale which shall not be less than thirty (30) days nor more than sixty (60) days
from the date the stocks become delinquent. (Sec. 68, CC)
iii. Notice of sale - Notice of said sale, with a copy of the resolution, shall be sent to
every delinquent stockholder either personally or by registered mail. The same shall
furthermore be published once a week for two (2) consecutive weeks in a newspaper
of general circulation in the province or city where the principal office of the
corporation is located. (Sec. 68, CC)
iv. Auction sale - Unless the delinquent stockholder pays to the corporation, on or
before the date specified for the sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of advertisement and expenses of sale, or
unless the board of directors otherwise orders, said delinquent stock shall be sold at
public auction to such bidder who shall offer to pay the full amount of the balance
on the subscription together with accrued interest, costs of advertisement and
expenses of sale, for the smallest number of shares or fraction of a share. The stock
so purchased shall be transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. The remaining shares, if
any, shall be credited in favor of the delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock covering such shares.
v. Should there be no bidder at the public auction who offers to pay the full amount of
the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or fraction of
a share, the corporation may, subject to the provisions of this Code, bid for the
same, and the total amount due shall be credited as paid in full in the books of the
corporation. Title to all the shares of stock covered by the subscription shall be
vested in the corporation as treasury shares and may be disposed of by said
corporation in accordance with the provisions of this Code. (Sec. 68, CC)
5. Certificate of Stock
The document or instrument evidencing the interest of a stockholder in a corporation
(Ladia 2007)
(a) Nature of the certificate personal property (Sec. 63, CC)
(b) Uncertificated shares The issuance of a stock certificate is not a condition sine qua
non to consider a subscriber as a stockholder. The moment his subscription becomes
effective, he becomes a stockholder for all intents and purposes, except only that he
cannot be entitled to be issued a certificate of stock until the full amount of his
subscription is paid. The only other instance when he may not be able to exercise his
rights as such stockholder is when his shares have been declared delinquent. (The
Corporation Code of the Philippines, Ladia)
(c) Negotiability Stock certificate is not negotiable because transferee takes it without
prejudice to defenses of the true owner, except when estoppel applies. (The Corporation
Code of the Philippines, Ladia)
Note: A stock certificate is quasi-negotiable, because it is transferable by endorsement and
delivery.

36

(i) Requirements for valid transfer of stocks


1.
There must be delivery of the stock certificate
2.
The certificate must be endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer
3.
To be valid against third parties, the transfer must be recorded in the books of the
corporation. (Rural Bank of Lipa, Inc. vs. CA, G.R. No. 124535 [September 2001])
(d)

Issuance transaction by which a person becomes the owner of shares and by which
new share contracts are created (The Corporation Code of the Philippines, Ladia)
i.
Full payment - No certificate of stock shall be issued to a subscriber until the full
amount of his subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid. (Sec. 64, CC)
ii.
Payment pro-rata Subscriptions to shares of stock are indivisible, such that a
subscriber to such shares will not be entitled to the issuance of a stock certificate
until he has paid the full amount of his subscription (The Corporation Code of the
Philippines, Ladia)
(e) Lost or destroyed certificates - The following procedure shall be followed for the issuance
by a corporation of new certificates of stock in lieu of those which have been lost, stolen
or destroyed:
i.
File affidavit of circumstances The registered owner of a certificate of stock or his
legal representative shall file with the corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to how the certificate was lost, stolen or
destroyed, the number of shares represented by such certificate, the serial number
of the certificate and the name of the corporation which issued the same. He shall
also submit such other information and evidence which he may deem necessary;
ii.

Verification and Publication After verifying the affidavit and other information and
evidence with the books of the corporation, said corporation shall publish a notice
in a newspaper of general circulation published in the place where the corporation
has its principal office, once a week for three (3) consecutive weeks at the expense of
the registered owner of the certificate of stock which has been lost, stolen or
destroyed. The notice shall state the name of said corporation, the name of the
registered owner and the serial number of said certificate, and the number of shares
represented by such certificate

iii.

Cancellation and Issuance After the expiration of one (1) year from the date of the
last publication, if no contest has been presented to said corporation regarding said
certificate of stock, the right to make such contest shall be barred and said
corporation shall cancel in its books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new certificate of stock

iv.

Early Issuance If the registered owner files a bond or other security effective for a
period of one (1) year, a new certificate may be issued even before the expiration of
the one (1) year period

e) Stock and transfer book

37

(i) Contents
(a)
All stocks in the names of the stockholders alphabetically arranged;
(b)
Installments paid and unpaid on all stock for which subscription has been made,
and the date of payment of any installment
(c)
Statement of every alienation, sale or transfer of stock made, the date thereof, and
by and to whom made;
(d)
Other entries as the by-laws may prescribe. (Sec. 74, CC)
(ii) Who may make valid entries:
(1.)
Employee so authorized
(2.)
Stock and transfer agent
7. Disposition and Encumbrance of Shares
(a) Allowable restrictions on the sale of shares - No transfer of stock or interest which shall
reduce the ownership of Filipino citizens to less than the required percentage of the
capital stock as provided by existing laws shall be allowed or permitted to recorded in
the proper books of the corporation and this restriction shall be indicated in all stock
certificates issued by the corporation. (Sec. 15, CC)
(b) Sale of partially paid shares - Shares whose full par value has not been paid by their
holders. Issuing firm has to make a 'call' for collecting the remaining amount
(c) Sale of a portion of shares not fully paid
(d) Sale of all of shares not fully paid
(e) Sale of fully paid shares - shares issued in which no more money is required to be paid
to the company by shareholders on the value of the shares. When a company issues
shares upon incorporation or through an issuance, either initial or secondary,
shareholders are required to pay a set amount for those shares. Once the company has
received the full amount from shareholders, the shares become fully paid shares.
(f) Requisites of a valid transfer:
1. There must be delivery of the stock certificate;
2. The certificate must be endorsed by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer;
3. To be valid against third parties, the transfer must be recorded in the books of the
corporation. (Rural Bank of Lipa, Inc. vs. CA, .R. No. 124535 [September 2001])
(g) Involuntary dealings - It refers to transactions affecting shares of stocks in which the
consent or cooperation of the registered owner is not needed
J. Dissolution and Liquidation
1. Modes of Dissolution
(a)
Voluntary
i. Where no creditors are affected (Sec. 118, CC)
Procedure:
1. Publication - 3 consecutive weeks publication of the notice of time, place and
object of the meeting in a newspaper published in the place where the principal
office of said corporation is located; and if no newspaper is published in such
place, then in a newspaper of general circulation in the Philippines, after
sending such notice to each stockholder or member either by registered mail or
by personal delivery at least 30 days prior to said meeting
2. Board Resolution - majority vote of the board of directors or trustees

38

3. Stockholders or members approval -affirmative vote of the stockholders owning


at least 2/3 of the outstanding capital stock or of at least 2/3 of the members of
a meeting to be held upon call of the directors or trustees
4. Certification - a copy of the resolution shall be certified by a majority of the
board of directors or trustees and countersigned by the secretary of the
corporation
5. Issuance of certificate of Dissolution - the SEC shall thereupon issue the
certificate
ii. Where creditors are affected - Petition for dissolution (Sec. 119, CC)
Formalities:
a.
signed by a majority of its board of directors or trustees or other officers having
the management of its affairs
b.
verified by its president or secretary or one of its directors or trustees
c.
affirmative vote of the stockholders representing at least 2/3 of the outstanding
capital stock or by at least 2/3 of the members at a meeting of its stockholders
or members called for the purpose
Contents - set forth all claims and demands against it
Where filed - with SEC
Procedure by the SEC:
1. by order reciting the purpose of the petition, fix a date on or before which
objections thereto may be filed by any person, which date shall not be less
than 30 days nor more than 60 days after the entry of the order
2. a copy of the order shall be published at least once a week for 3 consecutive weeks in a
newspaper of general circulation published in the municipality or city where the
principal office of the corporation is situated, or if there be no such newspaper, then in
a newspaper of general circulation in the Philippines, and a similar copy shall be posted
for 3 consecutive weeks in 3 public places in such municipality or city
3. upon 5 days notice, given after the date on which the right to file objections as fixed in
the order has expired, the Commission shall proceed to hear the petition and try any
issue made by the objections filed; and if no such objection is sufficient, and the
material allegations of the petition are true, it shall render judgment dissolving the
corporation and directing such disposition of its assets as justice requires, and may
appoint a receiver to collect such assets and pay the debts of the corporation.
iii.

(b)

By shortening of corporate term - A voluntary dissolution may be effected by


amending the articles of incorporation to shorten the corporate term. A copy of the
amended articles of incorporation shall be submitted to the Securities and
Exchange Commission in accordance with the Code. Upon approval of the amended
articles of incorporation of the expiration of the shortened term, as the case may be,
the corporation shall be deemed dissolved without any further proceedings, subject
to the provisions of the Code on liquidation. (Sec. 120, CC)
Involuntary
i. By expiration of corporate term A corporation registered under the Corporation
Code, except a religious corporation, is required to indicate its term of existence in

39

the articles of incorporation. It ceases to exist and is deemed automatically


dissolved upon the expiration of the term indicated thereat without the need of any
formal proceeding.
ii. Failure to organize and commence business within 2 years from incorporation - If a
corporation does not formally organize and commence the transaction of its
business or the construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall be deemed
dissolved. (Sec. 22, CC)
iii. Legislative dissolution - If a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a period of at least
five (5) years, the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation. (Sec. 22, CC)
iv. Dissolution by the SEC on grounds under existing laws

3.
4.
5.
6.

Under Sec. 6(i) of P.D. 902 (SEC Reorganization Act)


1. Fraud in procuring its certificate of registration
2. Serious misrepresentation as to what the corporation can do or is doing to the great
prejudice of or damage to the general public
Refusal to comply or defiance of any lawful order of the Commission restraining
commission of acts which would amount to a grave violation of its franchise
Continuous inoperation for a period of at least 5 years
Failure to file by-laws within the required period
Failure to file required reports in appropriate forms as determined by the
Commission within the prescribed period

Grounds under the Corporation Code


1. Violation of any of the provisions of the Code (Sec. 144)
2. Deadlock in a close corporation (Sec. 105)
3. In a close corporation, any act of directors, officers or those in control of the corporation
which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the
corporation or any stockholder or whenever corporate assets are being misapplied or
wasted (Sec. 105)
2. Methods of Liquidation
(a)
By the corporation itself
The power of the board to manage the corporate affairs is broad enough to cover a situation
where the corporation affairs are to be liquidated. If this method is resorted to, the board
will only have a period of 3 years to finish its task of liquidation. Claims for or against the
corporation not filed within the period become unenforceable as there exists no corporate
entity against which they can be enforced. Actions pending for or against the corporation
when the 3-year period expires are abated since after that period, the corporation ceases
for all intents and purposes and is no longer capable of suing or being sued. (The
Corporation Code of the Philippines, Ladia)
(b)

Conveyance to a trustee within a 3-year period

40

If this method is used, the 3-year period limitation imposed will not apply provided the
designation of the trustee is made within that period. Should the corporation find it
difficult to finish its liquidation, it may, at any time during the 3-year period, convey all its
assets and receivables to a trustee to prosecute and defend suits by or against the
corporation begun before the expiration of said period. During the period of liquidation, but
before completion thereof, a corporation, as represented by its trustee, can sue and be sued
even beyond the 3-year period fixed by law. (The Corporation Code of the Philippines, Ladia)
(c)

By management committee or rehabilitation receiver


A receiver may be appointed by the proper forum on petition or motu proprio upon the
dissolution of the corporation. Appointment of a receiver is permissive and may be granted
only upon special circumstances. If a receiver is appointed, the 3-year period fixed by law
within which to complete the task of liquidation will not likewise apply because the
dissolved corporation is substituted by the receiver who may sue or be sued even after that
period. However, mere appointment of a receiver without anything more does not result in
the dissolution of a corporation. (The Corporation Code of the Philippines, Ladia)

(d)

Corporate rehabilitation connotes the restoration of the debtor to a position of


successful operation and solvency. There is no reason why criminal proceedings should
be suspended during corporate rehabilitation. (Panilio vs. Regioonal Trial Court, GR.
173846, [Feb., 2011])

Rehabilitation does not restrict the power of the corporation to sue (Umale vs. ASB
Realty Corp., GR. 181126, [Jun., 2011])

Asking to participate in the rehabilitation proceedings does not later on amount to


estoppel estoppel that would bar it from questioning the rehabilitation courts
jurisdiction. (Asiatrust Development Bank vs. First Aikka Development, Inc., GR. 179558,
[Jun., 2011])

Rehabilitation proceedings are summary and non-adversarial in nature, and do not


contemplate adjudication of claims that must be threshed out in ordinary court
proceedings. (Advent Capital and Finance Corporation vs. Alcantara, 664 SCRA 224 [Jan
2012])
Liquidation after three years

If the 3-year extended life has expired without a trustee or receiver having been expressly
designated by the corporation within that period, the board of directors (or trustees) itself
may be permitted to so continue as trustees by legal implication to complete the corporate
liquidation. Still in the absence of board of directors or trustees, those having pecuniary
interest in the assets, including not only the shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make proper representation with SEC.
(Clemente vs. CA)
K. Other Corporations

41

1. Close corporations
A close corporation, within the meaning of this Code, is one whose articles of incorporation
provide that:

All the corporation's issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding twenty
(20);

All the issued stock of all classes shall be subject to one or more specified restrictions
on transfer permitted by this Title; and

The corporation shall not list in any stock exchange or make any public offering of any
of its stock of any class. Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation.
(Sec. 96, CC)
a) Characteristics of a close corporation
i.
The number of stockholders cannot exceed 20.
ii.
To the extent that all stockholders can be deemed directors, the number of directors
can effectively be more than 15.
iii.
Shares of stock are subject to specified restrictions.
iv.
Shares of stock are prohibited from being listed in the stock exchange or offered for
sale to the public.
v.
Stockholders may take an active part in the corporate management by vesting
management to them rather than the BOD.
vi.
Those active in management are personally liable for corporate torts unless the
corporation has obtained adequate liability insurance.
vii.
Directors can validly act even without a meeting.
viii.
Agreements between stockholders regarding the operations of the business can
validly be made.
ix.
To the extent that directors may be classified into one or more classes and be voted
solely by a particular class of stock, cumulative voting may, in effect, be restricted.
x.
The articles of incorporation may provide that all officers shall be elected or
appointed by the stockholders.
xi.
It may provide for greater quorum and voting requirements in meetings of
stockholders and directors.
xii.
Restriction on transfer of shares should be indicated in the articles of
incorporation/by-laws, and stock certificates.
xiii.
Pre-emptive right of stockholders is broader as it includes all issues without
exception.
xiv.
A stockholder may withdraw and compel the corporation to purchase his share for
any reason with the limitation only that the corporation has sufficient assets to
cover its liabilities exclusive of capital stock.
xv.
Any stockholder may petition SEC for corporate dissolution on grounds, among
others, provided for in Sec. 105. (The Corporation Code of the Philippines, Ladia)
b) Validity of restrictions on transfer of shares - Restrictions on the right to transfer shares
must appear in the articles of incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be binding on any purchaser thereof
in good faith. Said restrictions shall not be more onerous than granting the existing

42

stockholders or the corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated therein. If upon the
expiration of said period, the existing stockholders or the corporation fails to exercise
the option to purchase, the transferring stockholder may sell his shares to any third
person. (Sec. 98, CC)

c) Issuance or transfer of stock in breach of qualifying conditions


i.
If stock of a close corporation is issued or transferred to any person who is not
entitled under any provision of the articles of incorporation to be a holder of record
of its stock, and if the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record thereof, such person is
conclusively presumed to have notice of the fact of his ineligibility to be a
stockholder.
ii.
If the articles of incorporation of a close corporation states the number of persons,
not exceeding twenty (20), who are entitled to be holders of record of its stock, and if
the certificate for such stock conspicuously states such number, and if the issuance
or transfer of stock to any person would cause the stock to be held by more than
such number of persons, the person to whom such stock is issued or transferred is
conclusively presumed to have notice of this fact.
iii.
If a stock certificate of any close corporation conspicuously shows a restriction on
transfer of stock of the corporation, the transferee of the stock is conclusively
presumed to have notice of the fact that he has acquired stock in violation of the
restriction, if such acquisition violates the restriction.
iv.
Whenever any person to whom stock of a close corporation has been issued or
transferred has, or is conclusively presumed under this section to have, notice
either (a) that he is a person not eligible to be a holder of stock of the corporation, or
(b) that transfer of stock to him would cause the stock of the corporation to be held
by more than the number of persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the transfer of stock is in violation of a
restriction on transfer of stock, the corporation may, at its option, refuse to register
the transfer of stock in the name of the transferee.
v.
The provisions of subsection (4) shall not applicable if the transfer of stock, though
contrary to subsections (1), (2) of (3), has been consented to by all the stockholders
of the close corporation, or if the close corporation has amended its articles of
incorporation.
vi.
The term "transfer", as used in this section, is not limited to a transfer for value.
vii.
The provisions of this section shall not impair any right which the transferee may
have to rescind the transfer or to recover under any applicable warranty, express or
implied. (Sec. 99, CC)
d) When board meeting is unnecessary or improperly held -Unless the by-laws provide
otherwise, any action by the directors of a close corporation without a meeting shall
nevertheless be deemed valid if:
i.
Before or after such action is taken, written consent thereto is signed by all the
directors; or
ii.
All the stockholders have actual or implied knowledge of the action and make no
prompt objection thereto in writing; or

43

iii.
iv.

The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders; or
All the directors have express or implied knowledge of the action in question and
none of them makes prompt objection thereto in writing. (Sec. 101, CC)
Note: If a director's meeting is held without proper call or notice, an action taken
therein within the corporate powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection with the secretary of the
corporation after having knowledge thereof.

e) Preemptive right - The pre-emptive right of stockholders in close corporations shall


extend to all stock to be issued, including reissuance of treasury shares, whether for
money, property or personal services, or in payment of corporate debts, unless the
articles of incorporation provide otherwise. (Sec 102, CC)
f)

Amendment of articles of incorporation - Any amendment to the articles of


incorporation which seeks to delete or remove any provision required by this Title to be
contained in the articles of incorporation or to reduce a quorum or voting requirement
stated in said articles of incorporation shall not be valid or effective unless approved by
the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether
with or without voting rights, or of such greater proportion of shares as may be
specifically provided in the articles of incorporation for amending, deleting or removing
any of the aforesaid provisions, at a meeting duly called for the purpose. (Sec 103, CC)

g) Deadlocks - Notwithstanding any contrary provision in the articles of incorporation or


by-laws or agreement of stockholders of a close corporation, if the directors or
stockholders are so divided respecting the management of the corporation's business
and affairs that the votes required for any corporate action cannot be obtained, with the
consequence that the business and affairs of the corporation can no longer be
conducted to the advantage of the stockholders generally, the Securities and Exchange
Commission, upon written petition by any stockholder, shall have the power to arbitrate
the dispute. In the exercise of such power, the Commission shall have authority to make
such order as it deems appropriate, including an order: (1) canceling or altering any
provision contained in the articles of incorporation, by-laws, or any stockholder's
agreement; (2) canceling, altering or enjoining any resolution or act of the corporation
or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of
the corporation or its board of directors, stockholders, officers, or other persons party to
the action; (4) requiring the purchase at their fair value of shares of any stockholder,
either by the corporation regardless of the availability of unrestricted retained earnings
in its books, or by the other stockholders; (5) appointing a provisional director; (6)
dissolving the corporation; or (7) granting such other relief as the circumstances may
warrant.
A provisional director shall be an impartial person who is neither a stockholder nor a
creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose
further qualifications, if any, may be determined by the Commission. A provisional
director is not a receiver of the corporation and does not have the title and powers of a
custodian or receiver. A provisional director shall have all the rights and powers of a

44

duly elected director of the corporation, including the right to notice of and to vote at
meetings of directors, until such time as he shall be removed by order of the
Commission or by all the stockholders. His compensation shall be determined by
agreement between him and the corporation subject to approval of the Commission,
which may fix his compensation in the absence of agreement or in the event of
disagreement between the provisional director and the corporation. (Sec. 104, CC)
2. Non-stock corporations
(a) Definition - one where no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions of the Corporation Code on
dissolution (Sec. 87, CC)
(b) Purposes - Non-stock corporations may be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary, scientific, social, civic service, or
similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof, subject to the special provisions governing particular classes of
non-stock corporations. (Sec. 88, CC)
(c) Treatment of profits - Any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was organized (Sec.
87, CC)
(d) Distribution of assets upon dissolution - In case dissolution of a non-stock corporation
in accordance with the provisions of this Code, its assets shall be applied and
distributed as follows:
i.
All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefore;
ii.
Assets held by the corporation upon a condition requiring return, transfer or
conveyance, and which condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with such requirements;
iii.
Assets received and held by the corporation subject to limitations permitting their
use only for charitable, religious, benevolent, educational or similar purposes, but
not held upon a condition requiring return, transfer or conveyance by reason of the
dissolution, shall be transferred or conveyed to one or more corporations, societies
or organizations engaged in activities in the Philippines substantially similar to
those of the dissolving corporation according to a plan of distribution;
iv.
Assets other than those mentioned in the preceding paragraphs, if any, shall be
distributed in accordance with the provisions of the articles of incorporation or the
by-laws, to the extent that the articles of incorporation or the by-laws, determine the
distributive rights of members, or any class or classes of members, or provide for
distribution; and
v.
In any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for profit, as may be
specified in a plan of distribution. (Sec. 94, CC)
3. Religious corporations (exclude)
4. Foreign corporations

45

One formed, organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or
state (Sec. 123, CC)
a) Bases of authority over foreign corporations
(i) Consent
(ii) Doctrine of doing business (relate to definition under the Foreign Investments Act,
RA 7042)
The test of doing business is whether the foreign corporation is continuing the body or
substance of the business or enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another. The term implies a continuity
of commercial dealings and arrangements, and contemplates to that extent the
performance of acts or works or the exercise of some of the functions normally incident
to, and in progressive prosecution of, the purpose and object of its organization.
(Mentholatum Co., Inc. vs. Mangaliman)

(a)
(b)
(c)
(d)

Doing business under the Foreign Investments Act includes:


Soliciting orders, service contracts, opening offices, whether liaison or branch;
Appointing representatives domiciled in the country for 180 days or more;
Participating in the management, supervision and control of any domestic business;
Any other acts that imply continuity of commercial dealings or arrangements

b) Necessity of a license to do business


The object of the statute was not to prevent the foreign corporation from performing
single acts, but to prevent it from acquiring a domicile for the purpose of business
without taking the steps necessary to render it amenable to suit in the local courts.
(Marshall-Wells vs. Elser, G.R. No. 22015 [September 1924])
Note: For banking institutions, a certificate of authority from the Board of
Investment is no longer required under Foreign Investments Act of 1991 (R.A. 7042).
Said certificate of authority is necessary only for the purpose of availing of the
incentives granted and allowed under the Omnibus Investment Code. (Ladia 2007,
p. 529)
i. Requisites for issuance of a license: - A foreign corporation applying for a license to
transact business in the Philippines shall submit to the Securities and Exchange
Commission a copy of its articles of incorporation and by-laws, certified in accordance
with law, and their translation to an official language of the Philippines, if necessary.
The application shall be under oath and, unless already stated in its articles of
incorporation, shall specifically set forth the following:
(a) The date and term of incorporation;
(b) The address, including the street number, of the principal office of the corporation in
the country or state of incorporation;
(c) The name and address of its resident agent authorized to accept summons and process
in all legal proceedings and, pending the establishment of a local office, all notices
affecting the corporation;
(d) The place in the Philippines where the corporation intends to operate;

46

(e) The specific purpose or purposes which the corporation intends to pursue in the
transaction of its business in the Philippines: Provided, That said purpose or purposes
are those specifically stated in the certificate of authority issued by the appropriate
government agency;
(f) The names and addresses of the present directors and officers of the corporation;
(g) A statement of its authorized capital stock and the aggregate number of shares which
the corporation has authority to issue, itemized by classes, par value of shares, shares
without par value, and series, if any;
(h) A statement of its outstanding capital stock and the aggregate number of shares which
the corporation has issued, itemized by classes, par value of shares, shares without par
value, and series, if any;
(i) A statement of the amount actually paid in; and
(j) Such additional information as may be necessary or appropriate in order to enable the
Securities and Exchange Commission to determine whether such corporation is entitled
to a license to transact business in the Philippines, and to determine and assess the
fees payable.
Attached to the application for license shall be a duly executed certificate under oath by
the authorized official or officials of the jurisdiction of its incorporation, attesting to the
fact that the laws of the country or state of the applicant allow Filipino citizens and
corporations to do business therein, and that the applicant is an existing corporation in
good standing. If such certificate is in a foreign language, a translation thereof in
English under oath of the translator shall be attached thereto.
The application for a license to transact business in the Philippines shall likewise be
accompanied by a statement under oath of the president or any other person authorized
by the corporation, showing to the satisfaction of the Securities and Exchange
Commission and other governmental agency in the proper cases that the applicant is
solvent and in sound financial condition, and setting forth the assets and liabilities of
the corporation as of the date not exceeding one (1) year immediately prior to the filing
of the application.
Foreign banking, financial and insurance corporations shall, in addition to the above
requirements, comply with the provisions of existing laws applicable to them. In the
case of all other foreign corporations, no application for license to transact business in
the Philippines shall be accepted by the Securities and Exchange Commission without
previous authority from the appropriate government agency, whenever required by law.
(Sec. 125, CC)
ii. Resident agent
1. Purpose:

The resident agent shall be authorized to accept summons and processes in all
legal proceedings

Pending the establishment of a local office, he shall receive all notices affecting
corporation
2. A resident agent can be:

47

An Individual who must residing in the Philippines and of good moral character
and of sound financial standing.
A domestic corporation lawfully transacting business in the Philippines

Note: A resident agent is not necessarily authorized to execute the requisite


certification against forum shopping. This is because while a resident agent may be
aware of actions filed against his principal (a foreign corporation doing business in
the Philippines), such resident may not be aware of actions initiated by its principal,
whether in the Philippines against a domestic corporation or private individual, or in
the country where such corporation was organized and registered, against a
Philippine registered corporation or a Filipino citizen. (Expertravel vs. CA, G.R. No.
152392 [May 2005])
c) Personality to sue
(1)
A foreign corporation transacting or doing business in the Philippines with a
license can sue before Philippine courts.
(2)
Subject to certain exceptions, a foreign corporation doing business in the
country without a license cannot sue in Philippine courts.
(3)
If it is not transacting business in the Philippines, even without a license, it can
sue before Philippine courts. (The Corporation Code of the Philippines, Ladia)
d) Suability of foreign corporations
(a) A foreign corporation transacting business in the Philippines with the requisite
license can be sued in Philippine courts.
(b) A foreign corporation transacting business in the Philippines without a license
can be sued in Philippine courts.
(c) If it is not doing business in the Philippines, it cannot be sued in Philippine
courts for lack of jurisdiction. (Ladia)
e) Instances when unlicensed foreign corporations may be allowed to sue - Isolated
transactions
(a) If the act or transaction involved is an isolated transaction or the corporation is
not seeking to enforce any legal or contractual rights arising from, or growing
out of, any business which it has transacted in the Philippines;
(b) If the purpose of the suit is to protect its trademark, tradename, corporate
name, reputation or goodwill;
(c) Where it is based on violation of the Revised Penal Code;
(d) If it is merely defending a suit filed against it;
(e) Where the party is stopped to challenge the personality of the corporation by
entering into a contract with it.
f) Grounds for revocation of license
(a)
Failure to file its annual report or pay any fees as required by this Code;
(b)
Failure to appoint and maintain a resident agent in the Philippines as required
by this Title;
(c)
Failure, after change of its resident agent or of his address, to submit to the
Securities and Exchange Commission a statement of such change as required by
this Title;

48

(d)

(e)
(f)

(g)
(h)

(i)
(j)

Failure to submit to the Securities and Exchange Commission an authenticated


copy of any amendment to its articles of incorporation or by-laws or of any
articles of merger or consolidation within the time prescribed by this Title;
A misrepresentation of any material matter in any application, report, affidavit
or other document submitted by such corporation pursuant to this Title;
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 or purposes for
which such corporation is authorized under its license;
Transacting business in the Philippines as agent of or acting for and in behalf of
any foreign corporation or entity not duly licensed to do business in the
Philippines; or
Any other ground as would render it unfit to transact business in the
Philippines.
Other grounds that may be provided by special laws

L. Mergers and Consolidations


1. Definition and concept
Two or more corporations may merge into a single corporation which shall be one of the
constituent corporations or may consolidate into a new single corporation which shall be
the consolidated corporation. (Sec. 76, CC)
MERGER
uniting of two or more corporations by the
transfer of property to one of them which
continue in existence, the other or the others
being dissolved and merged therein
There is no new corporation created

CONSOLIDATION
uniting or amalgamation of two or more
existing corporations to form a new
corporation

The other constituent corporations are


dissolved except the surviving corporation

All corporations are dissolved, but a new


one is created.

A single new corporation is created

2. Constituent vs. consolidated corporation


CONSTITUENT CORPORATION
a corporation which is merged with or into
one or more other corporations or one or more
other business entities and includes a
surviving corporation

CONSOLIDATED CORPORATION
the united concern resulting from the
union of two or more constituent
corporations

Contents of Plan of merger or consolidation:


(a) The names of the corporations proposing to merge or consolidate
(b) The terms and mode of carrying out the merger or consolidation;
(c) A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, with respect to the consolidated corporation in case of

49

consolidation, all the statements required to be set forth in the articles of incorporation for
corporations organized under this Code; and
(d) Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable. (Sec. 76, CC)
3. Articles of merger or consolidation
After the approval by the stockholders or members as required by the preceding section,
articles of merger or articles of consolidation shall be executed by each of the constituent
corporations, to be signed by the president or vice-president and certified by the secretary
or assistant secretary of each corporation setting forth:
i. The plan of the merger or the plan of consolidation;
ii. As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members; and
iii. As to each corporation, the number of shares or members voting for and against such
plan, respectively. (Sec. 78, CC)
4. Procedure
(a) Approval of merger or consolidation plan by BOD/T of each constituent corporations,
setting forth the matters required in Sec. 76.
(b) Approval of the plan by stockholders representing 2/3 of the outstanding capital stock,
or 2/3 of the members in non-stock corporations, of each of such corporations at
separate corporate meetings called for the purpose.
(c) Prior notice of such meeting, with a copy or summary of the plan of merger or
consolidation, shall be given to all stockholders or members at least 2 weeks prior to the
scheduled meeting, either personally of by registered mail, stating the purpose thereof.
(d) Execution of the articles of merger or consolidation by each constituent corporation to
be signed by the president or vice-president and certified by the corporate secretary or
assistant secretary, setting forth the matters required in Sec. 78.
(e) Submission of the articles of merger or consolidation in quadruplicate to sec, subject to
the requirement of sec. 79, that if it involves corporations under the direct supervision
of any other government agency or governed by special laws, the favorable
recommendation of the government agency concerned shall first be secured.
(f) Issuance of the certificate of merger or consolidation by the sec at which time the
merger or consolidation shall be effective.
5. Effectivity
The articles of merger or of consolidation, signed and certified as herein above required,
shall be submitted to the Securities and Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger or consolidation of banks or banking
institutions, building and loan associations, trust companies, insurance companies, public
utilities, educational institutions and other special corporations governed by special laws,
the favorable recommendation of the appropriate government agency shall first be obtained.
If the Commission is satisfied that the merger or consolidation of the corporations
concerned is not inconsistent with the provisions of this Code and existing laws, it shall
issue a certificate of merger or of consolidation, at which time the merger or consolidation
shall be effective. (Sec. 79, CC)

50

6. Limitations - If, upon investigation, the Securities and Exchange Commission has reason
to believe that the proposed merger or consolidation is contrary to or inconsistent with the
provisions of this Code or existing laws, it shall set a hearing to give the corporations
concerned the opportunity to be heard. Written notice of the date, time and place of hearing
shall be given to each constituent corporation at least two (2) weeks before said hearing.
The Commission shall thereafter proceed as provided in this Code. (Sec. 79, CC)
7. Effects:
(a) The constituent corporations shall become a single corporation which, in case of merger,
shall be the surviving corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;
Note: Although there is a dissolution of the absorbed corporations, there is no winding up
of their affairs or liquidation of their assets, because the surviving corporation
automatically acquires all their rights, privileges and powers, as well as their liabilities.
(Associated Bank vs. CA, G.R. No. 123793 [June 1998])
(b) The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;
(c) The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a corporation
organized under this Code;
GR: Where one corporation that sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor
XPN:
1) Purchaser expressly or impliedly agrees to assume such debts;
2) Fraudulent transaction to escape liability for debts;
3) Transaction amounts to a consolidation or merger of the corporations;
4) Purchasing corporation is merely a continuation of the selling corporation;
(Edward J. Nell Company vs. Pacific Farms Inc., G.R. No. L-20850 [November 1965])
(d)

The surviving or the consolidated corporation shall thereupon and thereafter possess
all the rights, privileges, immunities and franchises of each of the constituent corporations;
and all property, real or personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further act or deed; and
Note: A bank which merged with another bank can sue a debtor of the absorbed bank
because it acquired the rights of the latter. Novation (because of the change of creditor) is
not a valid defense because it is settled that in a merger of two existing corporations, one of
the corporations survives and continues the business, while the other is dissolved and all
its assets, rights, properties and liabilities are acquired by the surviving corporation.
(Divina 2010, p. 110 on Babst vs. CA, G.R. No. 99398 [January 2001])

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(e) The surviving or consolidated corporation shall be responsible and liable for all the liabilities
and obligations of each of the constituent corporations in the same manner as if such
surviving or consolidated corporation had itself incurred such liabilities or obligations; and
any pending claim, action or proceeding brought by or against any of such constituent
corporations may be prosecuted by or against the surviving or consolidated corporation.
The rights of creditors or liens upon the property of any of such constituent corporations
shall not be impaired by such merger or consolidation.
Note: The surviving or consolidated corporation assumes automatically the liabilities of the
dissolved corporations, regardless of whether the creditors have consented or not to such
merger or consolidation. (Mcleod vs. NLRC, G.R. No. 146667 [Jan. 2007])

SECURITIES REGULATION CODE

A.

State policy (purpose)

The State shall establish a socially conscious, free market that regulates itself, encourage the
widest participation of ownership in enterprises, enhance the democratization of wealth,
promote the development of the capital market, protect investors, ensure full and fair disclosure
about securities, minimize if not totally eliminate insider trading and other fraudulent or
manipulative devices and practices which create distortions in the free market. (Sec. 2, SRC)
B.Powers and functions of the SEC
1.

Regulatory
(a) Have jurisdiction and supervision over all corporations, partnerships or associations
who are the grantees of primary franchises and/or a license or permit issued by the
Government;
(b) Formulate policies and recommendations on issues concerning the securities market,
advise Congress and other government agencies on all aspects of the securities market
and propose legislation and amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and
registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies
and other SROs;
(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued
pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions
and provide guidance on and supervise compliance with such rules, regulations and
orders;
(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the
Government, civil or military as well as any private institution, corporation, firm,

52

association or person in the implementation of its powers and functions under this
Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for contempt of the Commission, both direct and indirect, in accordance with
the pertinent provisions of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of
stockholders or members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the examination, search and seizure of all
documents, papers, files and records, tax returns, and books of accounts of any entity
or person under investigation as may be necessary for the proper disposition of the
cases before it, subject to the provisions of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of
registration of corporations, partnerships or associations, upon any of the grounds
provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be
implied from, or which are necessary or incidental to the carrying out of, the express
powers granted the Commission to achieve the objectives and purposes of these laws.
(Sec. 5, SRC)
2. Adjudicative
The Commissions jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, that the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that shall exercise jurisdiction
over these cases. The Commission shall retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final resolution which should be resolved within one
(1) year from the enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally
disposed. (Sec. 5, SRC)
C.

Securities required to be registered

Securities shall not be sold or offered for sale or distribution within the Philippines, without a
registration statement duly filed with and approved by the Commission. Prior to such sale,
information on the securities, in such form and with such substance as the Commission may
prescribe, shall be made available to each prospective purchaser. (Sec. 8, SRC)
1. Exempt securities
(a) Any security issued or guaranteed by the Government of the Philippines, or by any
political subdivision or agency thereof, or by any person controlled or supervised by,
and acting as an instrumentality of said Government.
(b) Any security issued or guaranteed by the government of any country with which the
Philippines maintains diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided, That the Commission may
require compliance with the form and content of disclosures the Commission may
prescribe.

53

(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the


proper adjudicatory body.
(d) Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau of Internal Revenue.
(e) Any security issued by a bank except its own shares of stock. (Sec. 9, SRC)
2. Exempt transactions
(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or
trustee in insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or mortgagee or any other similar lien holder
selling or offering for sale or delivery in the ordinary course of business and not for the
purpose of avoiding the provisions of this Code, to liquidate a bona fide debt, a security
pledged in good faith as security for such debt.
(c) An isolated transaction in which any security is sold, offered for sale, subscription or
delivery by the owner thereof, or by his representative for the owners account, such
sale or offer for sale, subscription or delivery not being made in the course of repeated
and successive transactions of a like character by such owner, or on his account by
such representative and such owner or representative not being the underwriter of such
security.
(d) The distribution by a corporation, actively engaged in the business authorized by its
articles of incorporation, of securities to its stockholders or other security holders as a
stock dividend or other distribution out of surplus.
(e) The sale of capital stock of a corporation to its own stockholders exclusively, where no
commission or other remuneration is paid or given directly or indirectly in connection
with the sale of such capital stock.
(f) The issuance of bonds or notes secured by mortgage upon real estate or tangible
personal property, where the entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a single sale.
(g) The issue and delivery of any security in exchange for any other security of the same
issuer pursuant to a right of conversion entitling the holder of the security surrendered
in exchange to make such conversion: Provided, That the security so surrendered has
been registered under this Code or was, when sold, exempt from the provisions of this
Code, and that the security issued and delivered in exchange, if sold at the conversion
price, would at the time of such conversion fall within the class of securities entitled to
registration under this Code. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at which the securities issued
and delivered in such exchange are sold.
(h) Brokers transactions, executed upon customers orders, on any registered Exchange or
other trading market.
(i) Subscriptions for shares of the capital stock of a corporation prior to the incorporation
thereof or in pursuance of an increase in its authorized capital stock under
the Corporation Code, when no expense is incurred, or no commission, compensation
or remuneration is paid or given in connection with the sale or disposition of such
securities, and only when the purpose for soliciting, giving or taking of such
subscriptions is to comply with the requirements of such law as to the percentage of the
capital stock of a corporation which should be subscribed before it can be registered
and duly incorporated, or its authorized capital increased.

54

(j) The exchange of securities by the issuer with its existing security holders exclusively,
where no commission or other remuneration is paid or given directly or indirectly for
soliciting such exchange.
(k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines
during any twelve-month period.
(l) The sale of securities to any number of the following qualified buyers:
i. Bank;
ii. Registered investment house;
iii. Insurance company;
iv. Pension fund or retirement plan maintained by the Government of the Philippines or
any political subdivision thereof or managed by a bank or other persons authorized by
the Bangko Sentral to engage in trust functions;
v. Investment company; or
vi. Such other person as the Commission may by rule determine as qualified buyers, on
the basis of such factors as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of assets under management.
D.

Procedure for registration of securities


(a) All securities required to be registered shall be registered through the filing by the
issuer in the main office of the Commission, of a sworn registration statement with
respect to such securities, in such form and containing such information and
documents as the Commission shall prescribe.
(b) In promulgating rules governing the content of any registration statement (including
any prospectus made a part thereof or annexed thereto), the Commission may require
the registration statement to contain such information or documents as it may, by rule,
prescribe. It may dispense with any such requirement, or may require additional
information or documents, including written information from an expert, depending on
the necessity thereof or their applicability to the class of securities sought to be
registered.
(c) The information required for the registration of any kind, and all securities, shall
include, among others, the effect of the securities issue on ownership, on the mix of
ownership, especially foreign and local ownership.
(d) The registration statement shall be signed by the issuers executive officer, its principal
operating officer, its principal financial officer, its comptroller, principal accounting
officer, its corporate secretary or persons performing similar functions accompanied by
a duly verified resolution of the board of directors of the issuer corporation. The written
consent of the expert named as having certified any part of the registration statement or
any document used in connection therewith shall also be filed. Where the registration
statement includes shares to be sold by selling shareholders, a written certification by
such selling shareholders as to the accuracy of any part of the registration statement
contributed to by such selling shareholders shall also be filed.
(e) Upon filing of the registration statement, the issuer shall pay to the Commission a fee of
not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price
at which such securities are proposed to be offered. The Commission shall prescribe by

55

rule diminishing fees in inverse proportion to the value of the aggregate price of the
offering.
(f) Notice of the filing of the registration statement shall be immediately published by the
issuer, at its own expense, in two (2) newspapers of general circulation in the
Philippines, once a week for two (2) consecutive weeks, or in such other manner as the
Commission by rule shall prescribe, reciting that a registration statement for the sale of
such security has been filed, and that the aforesaid registration statement, as well as
the papers attached thereto are open to inspection at the Commission during business
hours, and copies thereof, photostatic or otherwise, shall be furnished to interested
parties at such reasonable charge as the Commission may prescribe.
(g) Within forty-five (45) days after the date of filing of the registration statement, or by
such later date to which the issuer has consented, the Commission shall declare the
registration statement effective or rejected, unless the applicant is allowed to amend the
registration statement as provided in Section 14 hereof. The Commission shall enter an
order declaring the registration statement to be effective if it finds that the registration
statement together with all the other papers and documents attached thereto, is on its
face complete and that the requirements have been complied with. The Commission
may impose such terms and conditions as may be necessary or appropriate for the
protection of the investors.
(h) Upon effectivity of the registration statement, the issuer shall state under oath in every
prospectus that all registration requirements have been met and that all information are
true and correct as represented by the issuer or the one making the statement. Any
untrue statement of fact or omission to state a material fact required to be stated
therein or necessary to make the statement therein not misleading shall constitute
fraud.
E.Prohibitions on fraud, manipulation and insider trading
1.

Manipulation of security prices


It shall be unlawful for any person acting for himself or through a dealer or broker, directly
or indirectly:
(a) To create a false or misleading appearance of active trading in any listed security traded in
an Exchange or any other trading market (hereafter referred to purposes of this Chapter
as Exchange):
(1) By effecting any transaction in such security which involves no change in the beneficial
ownership thereof;
(2) By entering an order or orders for the purchase or sale of such security with the
knowledge that a simultaneous order or orders of substantially the same size, time and
price, for the sale or purchase of any such security, has or will be entered by or for the
same or different parties; or
(3) By performing similar act where there is no change in beneficial ownership.
(b) To effect, alone or with others, a series of transactions in securities that:

56

(1) Raises their price to induce the purchase of a security, whether of the same or a
different class of the same issuer or of a controlling, controlled, or commonly controlled
company by others;
(2) Depresses their price to induce the sale of a security, whether of the same or a different
class, of the same issuer or of a controlling, controlled, or commonly controlled
company by others; or
(3) Creates active trading to induce such a purchase or sale through manipulative devices
such as marking the close, painting the tape, squeezing the float, hype and dump,
boiler room operations and such other similar devices.
(c) To circulate or disseminate information that the price of any security listed in an Exchange
will or is likely to rise or fall because of manipulative market operations of any one or more
persons conducted for the purpose of raising or depressing the price of the security for the
purpose of inducing the purchase or sale of such security.
(d) To make false or misleading statement with respect to any material fact, which he knew or
had reasonable ground to believe was so false or misleading, for the purpose of inducing
the purchase or sale of any security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase and/or sale of
any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the
price of such security, unless otherwise allowed by this Code or by rules of the
Commission. (Sec. 24, SRC)
2.

Short sales
No person shall use or employ, in connection with the purchase or sale of any security any
manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor
any stop-loss order be executed in connection with the purchase or sale of any security
except in accordance with such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the protection of investors. (Sec. 24,
SRC)
In a short sale, the seller sells a security or commodity which he does not own, expecting to
make a profit when the market price declines.

3.

Fraudulent transactions
It shall be unlawful for any person, directly or indirectly, in connection with the purchase or
sale of any securities to:
(a) Employ any device, scheme, or artifice to defraud;
(b) Obtain money or property by means of any untrue statement of a material fact of any
omission to state a material fact necessary in order to make the statements made, in
the light of the circumstances under which they were made, not misleading; or
(c) Engage in any act, transaction, practice or course of business which operates or would
operate as a fraud or deceit upon any person. (Sec. 26, SRC)

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4. Insider trading
It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession
of material information with respect to the issuer or the security that is not generally
available to the public, unless:
(a) The insider proves that the information was not gained from such relationship; or
(b) If the other party selling to or buying from the insider (or his agent) is identified, the
insider proves:
(c) that he disclosed the information to the other party, or
(d) that he had reason to believe that the other party otherwise is also in possession of the
information.
A purchase or sale of a security of the issuer made by an insider, or such insiders spouse
or relatives by affinity or consanguinity within the second degree, legitimate or commonlaw, shall be presumed to have been effected while in possession of material non-public
information if transacted after such information came into existence but prior to
dissemination of such information to the public and the lapse of a reasonable time for the
market to absorb such information: Provided, however, That this presumption shall be
rebutted upon a showing by the purchaser or seller that he was not aware of the material
non-public information at the time of the purchase or sale.
Information is material non-public if:
(a) It has not been generally disclosed to the public and would likely affect the market price
of the security after being disseminated to the public and the lapse of a reasonable time
for the market to absorb the information; or
(b) Would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.
It shall be unlawful for any insider to communicate material non-public information about
the issuer or the security to any person who, by virtue of the communication, becomes an
insider as defined in Subsection 3.8, where the insider communicating the information
knows or has reason to believe that such person will likely buy or sell a security of the
issuer while in possession of such information.
It shall be unlawful where a tender offer has commenced or is about to commence for:
(a) Any person (other than the tender offeror) who is in possession of material non-public
information relating to such tender offer, to buy or sell the securities of the issuer that
are sought or to be sought by such tender offer if such person knows or has reason to
believe that the information is non-public and has been acquired directly or indirectly
from the tender offeror, those acting on its behalf, the issuer of the securities sought or
to be sought by such tender offer, or any insider of such issuer; and
(b) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be
sought by such tender offer, and any insider of such issuer to communicate material
non-public information relating to the tender offer to any other person where such
communication is likely to result in a violation of Subsection 27.4 (a)(i).

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For purposes of this subsection the term securities of the issuer sought or to be sought by
such tender offer shall include any securities convertible or exchangeable into such
securities or any options or rights in any of the foregoing securities.
F. Protection of investors
1. Tender offer rule
Any person or group of persons acting in concert who intends to acquire at least fifteen per
cent (15%) of any class of any equity security of a listed corporation or of any class of any
equity security of a corporation with assets of at least Fifty Million Pesos (P50,000,000.00)
and having two hundred (200) or more stockholders with at least one hundred (100) shares
each or who intends to acquire at least thirty per cent (30%) of such equity over a period of
twelve (12) months shall make a tender offer to stockholders by filing with the Commission
a declaration to that effect; and furnish the issuer, a statement containing such of the
information required in Section 17 of this Code as the Commission may prescribe. (Sec. 19,
SRC)
2. Rules on proxy solicitation
(1) Proxies must be issued and proxy solicitation must be made in accordance with rules
and regulations to be issued by the Commission;
(2) Proxies must be in writing, signed by the stockholder or his duly authorized
representative and filed before the scheduled meeting with the corporate secretary.
(3) Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it
is intended. No proxy shall be valid and effective for a period longer than five (5) years at
one time.
(4) No broker or dealer shall give any proxy, consent or authorization, in respect of any
security carried for the account of a customer, to a person other than the customer,
without the express written authorization of such customer.
(5) A broker or dealer who holds or acquires the proxy for at least ten per centum (10%) or
such percentage as the Commission may prescribe of the outstanding share of the
issuer, shall submit a report identifying the beneficial owner within ten (10) days after
such acquisition, for its own account or customer, to the issuer of the security, to the
Exchange where the security is traded and to the Commission.
3. Disclosure Rule
All information filed with the Commission in compliance with the requirements of this Code
shall be made available to any member of the general public, upon request, in the premises
and during regular office hours of the Commission, except as set forth in this Section.
Nothing in this Code shall be construed to require, or to authorize the Commission to
require, the revealing of trade secrets or processes in any application, report, or document
filed with the Commission.
Any person filing any such application, report or document may make written objection to
the public disclosure of information contained therein, stating the grounds for such
objection, and the Commission may hear objections as it deems necessary. The
Commission may, in such cases, make available to the public the information contained in
any such application, report, or document only when a disclosure of such information is

59

required in the public interest or for the protection of investors; and copies of information
so made available may be furnished to any person having a legitimate interest therein at
such reasonable charge and under such reasonable limitations as the Commission may
prescribe.
It shall be unlawful for any member, officer, or employee of the Commission to disclose to
any person other than a member, officer or employee of the Commission or to use for
personal benefit, any information contained in any application, report, or document filed
with the Commission which is not made available to the public pursuant to Subsection
66.3. (Sec. 66, SRC)
G.

Civil liability

(a) Civil Liabilities on Account of False Registration Statement - Any person acquiring a
security, the registration statement of which or any part thereof contains on its effectivity
an untrue statement of a material fact or omits to state a material fact required to be stated
therein or necessary to make such statements not misleading, and who suffers damage,
may sue and recover damages from the following enumerated persons, unless it is proved
that at the time of such acquisition he knew of such untrue statement or omission:
(1) The issuer and every person who signed the registration statement;
(2) Every person who was a director of, or any other person performing similar functions,
or a partner in, the issuer at the time of the filing of the registration statement or any
part, supplement or amendment thereof with respect to which his liability is asserted;
(3) Every person who is named in the registration statement as being or about to become a
director of, or a person performing similar functions, or a partner in, the issuer and
whose written consent thereto is filed with the registration statement;
(4) Every auditor or auditing firm named as having certified any financial statements used
in connection with the registration statement or prospectus.
(5) Every person who, with his written consent, which shall be filed with the registration
statement, has been named as having prepared or certified any part of the registration
statement, or as having prepared or certified any report or valuation which is used in
connection with the registration statement, with respect to the statement, report, or
valuation, which purports to have been prepared or certified by him.
(6) Every selling shareholder who contributed to and certified as to the accuracy of a
portion of the registration statement, with respect to that portion of the registration
statement which purports to have been contributed by him.
(7) Every underwriter with respect to such security.
If the person who acquired the security did so after the issuer has made generally
available to its security holders an income statement covering a period of at least twelve
months beginning from the effective date of the registration statement, then the right of
recovery under this subsection shall be conditioned on proof that such person acquired
the security relying upon such untrue statement in the registration statement or relying
upon the registration statement and not knowing of such income statement, but such
reliance may be established without proof of the reading of the registration statement by
such person. (Sec. 56, SRC)

60

(b) Civil Liabilities Arising in Connection With Prospectus, Communications and Reports
- Any person who:
(1) Offers to sell or sells a security in violation of Chapter III; or
(2) Offers to sell or sells a security, whether or not exempted by the provisions of this Code,
by the use of any means or instruments of transportation or communication, by means
of a prospectus or other written or oral communication, which includes an untrue
statement of a material fact or omits to state a material fact necessary in order to make
the statements, in the light of the circumstances under which they were made, not
misleading (the purchaser not knowing of such untruth or omission), and who shall fail
in the burden of proof that he did not know, and in the exercise of reasonable care
could not have known, of such untruth or omission, shall be liable to the person
purchasing such security from him, who may sue to recover the consideration paid for
such security with interest thereon, less the amount of any income received thereon,
upon the tender of such security, or for damages if he no longer owns the security.
Any person who shall make or cause to be made any statement in any report, or
document filed pursuant to this Code or any rule or regulation thereunder, which
statement was at the time and in the light of the circumstances under which it was
made false or misleading with respect to any material fact, shall be liable to any person
who, not knowing that such statement was false or misleading, and relying upon such
statements shall have purchased or sold a security at a price which was affected by
such statement, for damages caused by such reliance, unless the person sued shall
prove that he acted in good faith and had no knowledge that such statement was false
or misleading. (Sec. 57, SRC)
(c) Civil Liability for Fraud in Connection With Securities Transactions. - Any person who
engages in any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or
regulation of the Commission thereunder, shall be liable to any other person who
purchases or sells any security, grants or refuses to grant any proxy, consent or
authorization, or accepts or declines an invitation for tender of a security, as the case may
be, for the damages sustained by such other person as a result of such act or transaction.
(Sec. 58, SRC)
(d) Civil Liability for Manipulation of Security Prices. - Any person who willfully
participates in any act or transaction in violation of Section 24 shall be liable to any person
who shall purchase or sell any security at a price which was affected by such act or
transaction, and the person so injured may sue to recover the damages sustained as a
result of such act or transaction. (Sec. 59, SRC)
(e) Civil Liability With Respect to Commodity Futures Contracts and Pre-need Plans. Any person who engages in any act or transaction in willful violation of any rule or
regulation promulgated by the Commission under Section 11 or 16, which the Commission
denominates at the time of issuance as intended to prohibit fraud in the offer and sale of
pre-need plans or to prohibit fraud, manipulation, fictitious transactions, undue
speculation, or other unfair or abusive practices with respect to commodity future

61

contracts, shall be liable to any other person sustaining damage as a result of such act or
transaction. (Sec. 60, SRC)
(f) Civil Liability on Account of Insider Trading. - Any insider who violates Subsection 27.1
and any person in the case of a tender offer who violates Subsection 27.4 (a)(i), or any rule
or regulation thereunder, by purchasing or selling a security while in possession of material
information not generally available to the public, shall be liable in a suit brought by any
investor who, contemporaneously with the purchase or sale of securities that is the subject
of the violation, purchased or sold securities of the same class unless such insider, or such
person in the case of a tender offer, proves that such investor knew the information or
would have purchased or sold at the same price regardless of disclosure of the information
to him.
An insider who violates Subsection 27.3 or any person in the case of a tender offer who
violates Subsection 27.4 (a), or any rule or regulation thereunder, by communicating
material non-public information, shall be jointly and severally liable under Subsection 61.1
with, and to the same extent as, the insider, or person in the case of a tender offer, to whom
the communication was directed and who is liable under Subsection 61.1 by reason of his
purchase or sale of a security. (Sec. 61, SRC)

62