HLP2009-3B

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CORPORATION LAW
FINALS 09

Govt of Phils. V. El Hogar

The by-laws provision which empowers the board to cancel shares and return to the owner the balance resulting

from the liquidation by a vote of absolute majority of the members is an ABSOLUTE NULLITY. This is in direct conflict
A.

By-laws

with the Corporation Law which declares that the board shall not have the powers to force the surrender and withdrawal
of unmatured stock except in case of liquidation or forfeiture of stock.

The practice of the directorate filling-up the vacancies by the action of the directors themselves is valid.

The Corporation Law does not undertake to prescribe the rate of compensation for the directors of the corporation.

1.

Definition of by-laws

These are regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal

The power to fix compensation is left to the corporation itself to be determined in the by-laws. Hence, the distribution to

governance. By laws define the rights and obligations of various officers, persons or groups within the corporate

directors of El Hogar of 5% net profit in proportion to their attendance at board meetings is valid.

structure and provide rules for routine matters such as calling meetings.

Every corporation under this code shall have the power and capacity: (5) to adopt by-laws not contrary to law,

is in the hands of the SHs who have the power at any lawful meeting to change the rule.

morals, or public policy, and to amend or repeal the same in accordance with this code (Sec 36)

If a mistake has been made or the rule adopted in the by-laws has been found to work harmful results, the remedy

The provisions in the by-laws which require that the persons elected to the board be holders of shares with paid-up

value of P5K and that directors who loan from the association waive their rights as SHs are VALID. The Code specifically
2.

When to adopt by-laws (Section 46)

gives the power to the corporation to provide in its by-laws for the qualifications of directors, and the requirement of

Every corporation formed under this code must within 1 month after receipt of official notice of the issuance of its

practice. The Code also has safeguards on directors from making loans to themselves, designed to prevent the

certificate of incorporation by the SEC adopt a code of by-laws for its government not inconsistent with this code.

possibility of looting of the corporation.

security from them for the proper discharge of the duties of their office is highly prudent and in conformity with good

(Sec 46)

May be adopted and filed prior to incorporation, in such case, shall be approved and signed by all incorporators

3.

How filed

Must be approved by the affirmative vote of the Stockholders representing the majority of the outstanding capital

submitted to SEC together with AI (Sec 46)

Loyola Grand Villas Homeowners Ass v. CA

stock or majority of members (Sec 46)

The Supreme Court held that although the Corporation Code requires the filing of by-laws within one month after

Must be signed by the stockholders or members voting for it (Sec 46)

the issuance of the Certificate of Incorporation, it does not expressly provide for the consequences of non-filing

Must be filed with the SEC certified by the majority of directors/trustees and countersigned by the secretary of the

within the said period.

corporations for failure to file the by-laws within the required period but only after proper notice or hearing.

corporation which shall be attached to original AI (Sec 46)

It should be noted, however, that under Section 6 of PD 902-A, the SEC can revoke the certificate of registration of
4.

Where kept

Must be kept in the principal office of the corporation; subject to inspection of stockholder or member during office

There is no automatic dissolution for failure to file by-laws within the required period.

Fleischer v. Botica Nolasco

hours (Sec 46)

The by-laws of the Corporation which effectively gives the corporation preferential right of the shares in question is

in direct conflict with the Corporation Law. The owner of the shares, which are personal property, has the uncontrollable

5.

Effectivity of by-laws

Effective only from the issuance of SEC of certification that bylaw are not inconsistent with the Code (Sec 46)

Cannot bind stockholders / corporation pending approval

right to alienate them which attaches to the ownership of any other species of property.

The right to impose restrictions on transfer of shares must be conferred upon the corporation by a governing

statute or by the AOI. It cannot be done by a by-law without statutory or charter authority.

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By laws, like AI are contracts of adhesion. They will bind the corporation and stockholders including those who

Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the

vote against as well as those who became members after approval

original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate

Contracts entered into without strict compliance with by-laws may be binding on the corporation due to long

secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission

acquiescence and usage

the same to be attached to the original articles of incorporation and original by-laws.

By laws are mere internal rules among stockholders and cannot affect or prejudice 3

rd

persons who deal with the

The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange

corporation unless they have knowledge of the same

Commission of a certification that the same are not inconsistent with this Code.

6.

Contents (Section 47)

B.

Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a

Non-use of Charter / Continuous Inoperation

1.

Non-user for 2 years (non-use of charter)- when the corporation does not formally organize and commence the
transaction of its business or the construction of its works within 2 years from the date of its incorporation. Its

private corporation may provide in its by-laws for:

corporate powers cease and the corporation shall be deemed dissolved (automatic)

a)

The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;

Formal organization Not only means adoption of by-laws but also the organization of the Board. This may consist

b)

The time and manner of calling and conducting regular or special meetings of the stockholders or members;

c)

The required quorum in meetings of stockholders or members and the manner of voting therein;

d)

The form for proxies of stockholders and members and the manner of voting them;

qualified. This interim board can perform the functions of a regular board until the date of the election of directors.

e)

The qualifications, duties and compensation of directors or trustees, officers and employees;

Once elected, the directors must complete the organization of the corporation by electing the officers.

f)

The time for holding the annual election of directors of trustees and the mode or manner of giving notice

in the election of new board of directors or trustees and corporate officer

The AOI names the initial members of the Board who are to act until the 1 st set of directors are duly elected and

Commencement of business This is after the approval of the by-laws and the election of directors and officers

thereof;

elected. This may take the form of contracting for lease or sale of properties to be used as business site of the

g)

The manner of election or appointment and the term of office of all officers other than directors or trustees;

corporation and other preparatory acts geared towards fulfillment of the purpose for which the corporation was

h)

The penalties for violation of the by-laws;

established

i)

In the case of stock corporations, the manner of issuing stock certificates; and

j)

Such other matters as may be necessary for the proper or convenient transaction of its corporate business

business but subsequently becomes continuously inoperative for a period of at least 5 years. The same shall be a

and affairs.

ground for the suspension or revocation of its corporate franchise or Certificate of Incorporation (not automatic).

2.

Non-user for 5 years (continuous inoperation)- when the corporation has commenced the transaction of its

Notice and hearing is required.

7.

Procedure for amendment of by-laws (Section 48)

3.

Exception: cause or non-use or operation was due to causes beyond the control of the corporation as determined
by SEC (ex. Mineral lands to be developed by the corporation as per its purpose are the object of court litigation

Voting Requirement: board of directors or trustees by a majority vote

and the owners of at least a majority of the

and a court injunction against the corporate activities has been issued)

outstanding capital stock, or majority of the members of a non-stock corporation, at a regular or special meeting
duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws

POWERS

OF

CORPORATIONS

Delegation of power to amend to the BOD: The owners of two-thirds (2/3) of the outstanding capital stock or twothirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the

Primary Rule: All corporate powers shall be exercised and all corporate businesses shall be conducted by the board of directors

power to amend or repeal any by-laws or adopt new by-laws

of the corporation (Sec. 23)

Revocation of the delegation of power to amend: Any power delegated to the board of directors or trustees to

Exception: Specific instances when the Code requires the consent and ratification of the SHs, particularly where the underlying

amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning

contractual relationship between the parties: The corporation, the SHs/members, and the State is being amended or alterd

or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations,
shall so vote at a regular or special meeting

How is consent expressed by the parties?

Corporation: Through the Board

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State: Through act of the regulatory body (SEC)

SHs: Through majority or 2/3 vote where applicable (Note: Dissenting SHs in certain instances are given the

AI. A corporation is presumed to act within its powers and when a contract is not on its face necessarily beyond its

option to withdraw from the relationship through the exercise of appraisal right)

authority, it will in the absence of proof to the contrary presumed valid

A.

Sec 38 par 11 grants such power as are essential or necessary to carry out its purpose or purposes as stated in the

In general (Section 36)

2 general restrictions on the power of the corporation to acquire and hold properties:
o

that the property must be reasonably and necessarily required by the transactions of its lawful business

that the power shall be subject to the limitations prescribed by other special laws and the constitution

1.

To sue and be sued in its corporate name;

(corporation may not acquire more than 30% of voting stocks of a bank; corporations are restricted from

2.

Succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of

acquiring public lands except by lease of not more than 1000 hectares)

incorporation;
3.

To adopt and use a corporate seal;

4.

To amend its articles of incorporation in accordance with the provisions of this Code;

Extend or shorten the corporate term

5.

To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance

Increase or decrease capital stock

with this Code;

Incur, create or increase bonded indebtedness

In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell

Deny preemptive right

treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a

Sell or otherwise dispose of substantially all its assets

non-stock corporation;

Acquire its own shares

To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real

Invest in another corporation or business

and personal property, including securities and bonds of other corporations, as the transaction of the lawful

Declare dividends

business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law

Enter into management contracts

6.

7.

B.

Specific Powers

and the Constitution;

8.

To enter into merger or consolidation with other corporations as provided in this Code;

9.

To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific,

C.

civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any

To extend or shorten corporate term (Section 37)

1.

political party or candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees;

Approval and Voting and Notice Requirement:

a)

Approved by a majority vote of the board of directors or trustees and

b)

Ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital

and

stock or by at least two-thirds (2/3) of the members in case of non-stock corporations.

11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in

c)

the articles of incorporation. (in the purpose clause)

Written notice of the proposed action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served personally.

Sources of power
o

Section 36

Purpose clause (Sec. 88-Non stock Corporations): charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agriculture and like

2.

Appraisal right In case of extension of corporate term, any dissenting stockholder may exercise his appraisal
right under the conditions provided in this code.

D.

To increase or decrease capital stock; To incur, create, increase, bonded indebtedness (Section 38)

chambers or any combination thereof. Recreational is omitted.

1.

Approval and Voting and Notice Requirement:

a)

Approved by a majority vote of the board of directors

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b)

c)

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Two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or

percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the

the incurring, creating or increasing of any bonded indebtedness in a meeting duly called for the purpose

amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the

Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or

corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription

increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any bonded

prejudice the rights of corporate creditors

indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown

Non-stock corporations: May incur or create bonded indebtedness, or increase the same, with the approval by a

on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or

majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for

served personally

the purpose.

2.

Decrease of capital stock: No decrease of the capital stock shall be approved by the Commission if its effect shall

Certificate of Filing: A certificate in duplicate must be signed by a majority of the directors of the corporation and

Commission, which shall have the authority to determine the sufficiency of the terms thereof.

countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
a)

That the requirements of this section have been complied with;

b)

The amount of the increase or diminution of the capital stock;

c)

If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof

Registration of bonds- Bonds issued by a corporation shall be registered with the Securities and Exchange

No appraisal right here, a dissenting SH can simply sell his shares. A grant of appraisal right would defeat the
purpose which is to raise funds.

actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital
stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash

E.

To deny pre-emptive rights (Section 39)

or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if
such increase is for the purpose of making effective stock dividend therefor authorized;

1.

d)

Any bonded indebtedness to be incurred, created or increased;

to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right

e)

The actual indebtedness of the corporation on the day of the meeting;

is denied by the articles of incorporation or an amendment thereto

f)

The amount of stock represented at the meeting; and

This is to prevent dilution in shareholding

g)

The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of

If you increase common stock and some of the stockholders do not want to subscribe, get from them a waiver of

any bonded indebtedness.

3.

Approval of SEC: Any increase or decrease in the capital stock or the incurring, creating or increasing of any

pre-emptive right (There are authorities saying that the right is applicable when there is reduction of shares)

Basis of right; common law rule

Preemptive right: option privilege of an existing SH to subscribe to a proportionate part of shares subsequently

bonded indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed

issued by the corporation before the same can be disposed in favor of others

with the Securities and Exchange Commission and attached to the original articles of incorporation.

Effectivity:

From and after approval by the Securities and Exchange Commission and the issuance by the

Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring,

Economic aspect: right to invest capitalthe right becomes valuable when the enterprise has demonstrated that
it will earn a higher rate of return on the capital than the SH could get were he to invest it in the open market

creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare

Limited to shares issued in pursuance of an increase in the authorized capital stock; does not apply to additional
issues of originally authorized shares forming part of the existing capital stock

5.

Common-law right granted to SHs of a corporation to be granted the first option to subscribe to any opening of the
unissued capital stock, or to any increase from the authorized capital stock

4.

Definition of pre-emptive rights All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe

Treasurer Affidavit: Provided, That the Securities and Exchange Commission shall not accept for filing any

An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of
the whole number of authorized shares

certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the

When unsubscribed shares are later reoffered, the SH cannot claim that his interest would be diluted

corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%)

Preemptive rights are not statutory rights, but common law rights

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Preemptive rights are personal rights of the SH

Need not be stipulated in the AOI or by-laws

to outsiders. As distinguished to RIGHT OF FIRST REFUSAL, the latter is contractual, while PRE-EMPTIVE RIGHT

May be removed, denied, or altered only through specific provisions in the AOI or amendment thereto

exists even if not stated in AOI, thats why there is a need to expressly deny it. Furthermore, the right must be

SEC: vote by majority of SHs to waive the right is NULL and VOID; such waiver must be given individually by the

exercised within 30 days, hence not indefinite. While exercise of pre-emptive right is usually fixed by a resolution.

Right of First Refusal refers to the offering of the shares first to the other stockholders before it is sold/transferred

SHs concerned

But unanimous vote of all will bind them

In close corporations: Balance of power in close corporations may be disturbed by an indiscriminate issuance of
new shares without regard to preemptive right of SHs. In a close corp, exceptions in Sec 39 are not applicable

2.

F.

To sell or dispose of corporate assets (Section 40)

1.

Restrictions: Subject to the provisions of existing laws on illegal combinations and monopolies

2.

Scope of power: To sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its

Limitation to exercise of pre-emptive right:

property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may

a)

be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its

Such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public;

b)

Not extend to shares to be issued in good faith with the approval of the stockholders representing two-thirds

board of directors or trustees may deem expedient

(2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment

Meaning of disposition of substantially all of the corporate property and assets- if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

of a previously contracted debt

c)

Shall not take effect if denied in the Articles of Incorporation or an amendment thereto.

3.

Preemptive right option privilege of an existing stockholder to subscribe to a proportionate part of shares

Approval, voting and notice requirement:

a)

Majority vote of its board of directors or trustees,

b)

Authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital

subsequently issued by the corp before same can be disposed of in favor of the others; includes all issues and

stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a

disposition of shares of any class

stockholder's or member's meeting duly called for the purpose.

Includes not only new shares in pursuance of an increase of capital stock but would cover the issue of previously

c)

Written notice of the proposed action and of the time and place of the meeting shall be addressed to each

unissued shares which form part of the existing capital stock as well as treasury shares (Sec. 9 used the phrase,

stockholder or member at his place of residence as shown on the books of the corporation and deposited to

disposition of shares of any class, furthermore since the funds used in reacquiring T/S come from surplus profits

the addressee in the post office with postage prepaid, or served personally

which could have been declared instead as dividends, it is desirable policy to recognize the pre-emptive rights of

SHs)

Where the shares are issued in exchange for property needed for corporate purposes or for debt previously
granted, SH cannot demand his pre-emptive right for right may prejudice corporate interest

When SH approval not necessary - If disposition is necessary in the usual and regular course of business of said corporation or if the proceeds of
the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business.

In joint ventures, you can expand pre-emptive rights even in instances under Sec 39

In non-stock corporations where there are no members with voting rights - the vote of at least a majority of the
trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this
section.

3.

Remedies in case of unwarranted denial:

a)

Injunction

b)

Mandamus

4.

Appraisal right: That any dissenting stockholder may exercise his appraisal right under the conditions provided in
this Code

in any case, the suit should be individual and not derivative because the wrong done is to the stockholders
individually

5.

Abandonment of the sale, lease - After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage,

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pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating

3.

Appraisal right - any dissenting stockholder shall have appraisal right as provided in this Code

4.

When SH approval not necessary- where the investment by the corporation is reasonably necessary to accomplish

thereto, without further action or approval by the stockholders or members.

its primary purpose as stated in the articles of incorporation

G.

To acquire own shares (Section 41)

5.

A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose
or purposes (treasury shares) provided, that the corporation has unrestricted retained earnings in its books to

fund without the consent of the stockholders. What is required is only the vote of the majority of the BOD. No

Trust Fund doctrine the requirement of unrestricted retained earnings is because subscription to the capital of a

appraisal right

a)

To eliminate fractional shares arising out of stock dividends;

b)

To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a

To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this
Code.

A corporation must have unrestricted retained earnings in acquiring own shares except:
a)

shares are acquired in the redemption of redeemable shares

b)

shares are re-acquired to effect a decrease in capital stock approved by the SEC

c)

shares are reacquired by a close corporation pursuant to the order of the SEC acting to arbitrate a deadlock

To invest corporate funds in another corporation or business (Section 42)

1.

b)

Legitimate purpose includes:

delinquency sale, and to purchase delinquent shares sold during said sale; and

H.

Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or

To buy the shares of another corporation (36) provided:

a.
Reasonably necessary for its lawful business
b.
The other corporation must be engaged in an allied business or not alien to the purposes of the purchasing
corporation (42)

This means a corporation can enter into a joint venture with another person, partnership or another
corporation

But a corporation cannot enter into a partnership contract

Power to enter into a partnership

I.

b)

ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at

c)

The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them.

Majority of the board of directors or trustees and

GR: corporation cannot enter into partnerships with other corporations or with individuals
Exception: expressly allowed by statute or charter
o
Joint ventures
o
Limited partnerships (US Law)

To declare dividends (Section 43)

Approval, voting and notice requirement

a)

If the investment is in another corporation of different business or purpose, the affirmative vote of majority of
the board consented by 2/3 OS capital stock is required

business or for any purpose other than the primary purpose for which it was organized

2.

If it is the same purpose or incidental or related to its primary purpose, the board can invest the corporate

cover the shares to be purchased or acquired

c)

Rules in case a corporation will invest its funds in another corporation

a)

corporation constitute a fund to which creditors have a right to look for the satisfaction of their claims

To avoid SH approval, include other business undertakings in the secondary purpose

Any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid

Approval & voting requirement:

least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's

a)

Approval of BOD

meeting duly called for the purpose.

b)

In case of stock dividend: It shall be not be issued without the approval of stockholders representing not less

Written notice of the proposed investment and the time and place of the meeting shall be addressed to each

than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the

stockholder or member at his place of residence as shown on the books of the corporation and deposited to

purpose.

the addressee in the post office with postage prepaid, or served personally

Limitation on retention of surplus profits- Stock corporations are prohibited from retaining surplus profits in excess
of one hundred (100%) percent of their paid-in capital stock, except:

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a)

when justified by definite corporate expansion projects or programs approved by the board of directors; or

b)

when the corporation is prohibited under any loan agreement with any financial institution or creditor,

majority of the members of both the managing and the managed corporation

Note: if managing other corporations is the primary purpose, ratificatory vote is not required

whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been
secured; or
c)

when it can be clearly shown that such retention is necessary under special circumstances obtaining in the

2/3 vote required when: (SPECIAL RULE)

a.

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

corporation, such as when there is need for special reserve for probable contingencies.

the managing corporation; or

Stock dividends: distribution to stockholders of companys own stock. Corporate profits or earnings are transferred
b.

to capital stock and shares of stock representing the increase in capitalization are distributed. May be issued out of

Rationale for special rule: entering into a management contract is a deviation from the General Rule that

Limitation on the issue of stock dividends:

there must be unissued shares of the corporation

there must be unrestricted retained earnings

the board manages the corporation and that the board of the managing company should devote its affairs to its
own corporation

cannot be issued to non-stockholders even for services rendered

when tainted with bad faith

when tainted with fraud

when tainted with gross negligence

when profits accumulated are in excess of 100% of the corporations paid-in capital stock unless exempted

operating agreements or otherwise

Service contracts or operating agreements which relate to the exploration, development, exploitation or utilization
of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations.

When right to Dividends Vests:

Management contract any contract whereby a corporation undertake to manage or operate all or substantially all
of the business of another corporation

General rule: as soon as the same have been lawfully declared by the BOD, becomes a debt owing to the SH.

No revocation can be made

o

These provisions shall apply to any 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,

Term of management contract: No management contract shall be entered into for a period longer than five years
for any one term.

Whether or not there should be a distribution of dividends in whatever form, such matters are always subject
to the business judgment of the BOD and the courts will not interfere with the formers discretion except:

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

premium surplus.
o

Approval by stockholders owning at least the majority of the outstanding capital stock, or by at least a

If managing a partnership or individual not a corporation, not covered

Exceptions:

not yet announced or communicated to the public, revocable before announcement to shareholders

when stock dividends are declared since these are not distributions but merely represent changes in the

K.

Ultravires acts (Section 45)

capital structure, may be revoked prior to actual issuance

Rights of transferee to dividends Right to dividends vests upon declaration so whoever owns the stock at time or
stockholders of record also owns the dividend.

are not based

Subsequent transfer of stock would not carry with it right to

on the powers conferred by its AOI or by the Corporation Code on corporations in general, or

because they are not necessary or incidental to the exercise of the powers so conferred.

dividends

Definition of ultravires acts These are acts which a corporation is not empowered to do or perform because they

Record date The date on which a stockholder must be registered on a corporations stock and transfer book in

Rule on Ultravires acts of corporations No Corporation under this Code shall possess or exercise any corporate
powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or

order to be entitled to a dividend or voting rights.

incidental to the exercise of the powers so conferred.

J.

To enter into management contract (Section 44)

Based on two (2) principles:

1. Corporation is a creature of law and has only such powers and privileges as are granted by the State 1

Approval and Voting Requirement:

o

Approval by the board of directors, and

Corporations are now more of a product of the agreement of the incorporating parties rather than a mere
creature of the State:

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2. The doctrine upholds the duty of trust and obedience owed by the corporations directors and officers to the SHs

ii. Ultra- Vires Acts which are not per se illegal are merely voidable hence can be ratified by SHs. (Pirovano

a. Defense of ultra vires rests on the violation of trust or duty towards SHs, and should not be entertained where

case)

its allowance will do greater wrong to innocent 3rd parties

There are 3 types of ULTRA-VIRES acts:

the corporation of the proceeds of the insurance is an ultra-vires act, SC held that such donation is not

a.

Acts beyond the powers of the corporation as stipulated in law or AOI

ultra-vires. SC said that it comes within the broad power under the AOI that the Corporation may invest

b.

Acts or contracts entered in behalf of the corporation by persons w/o corporate authority

and deal with moneys of the company not immediately required. The word deal is broad enough to

GR: In the absence of an authority from the board, no person , not even the officers can validly bind the

include any manner of disposition.

corporation

In the case of Pirovano v. Dela Rama, which involves the issue of whether or not the donation by

Furthermore, assuming that it was ultra-vires, there was ratification by the SHs. Finally, the

Exception: Doctrine of apparent Authority; In dealing with corporations, the public at large is bound to rely

donation was already consummated. The defense of ultra-vires cannot be set-up against completed or

upon outward appearances, and relying on such, if it be found that the directors permitted the agent to hold

consummated transactions.

himself out as having authority to bind or acquiesced in the contract and accepted the benefits therefrom,
the corporation will be bound. (Ramirez v. Orientalist)

c.

Acts or contracts which are per se illegal.

Form of Ratification:
a. Express act of SH(if act is by the Board) or Board(if act is by the officers)

i. This cannot be given legal effect and are void

b. Implied through acceptance of benefits

BUT in Harden v. Benguet, SC upheld a patently void contract as between the contracting parties. SC

c. Through estoppel on the part of Board or the officers

said that public policy is controlling in the grant of mining rights. The violation of the prohibition against
mining corporations from owning stock of another corporation though illegal did not in any way affect
the contract. This violation can only be proceeded upon by way of a criminal prosecution or by quo

Effect/s of Ratification:

warranto which can be maintained only by the State. Insofar as the parties are concerned, no civil wrong

Cures the infirmity and makes it perfectly valid and enforceable, PROVIDED that it prejudices no

had been committed between them, and if public wrong had been committed, then the directors of both

creditors and if it has been partially executed and not merely executory

Balatoc and Harden were the active inducers of that wrong. Thus, since the contract has been performed
on both sides and there is no possibility of undoing what has been done, and though the corporate

Atrium v. CA

contracts are illegal per se, when only the public or government policy or interests are at stake and no

Atrium Management Corporation filed with RTC action for collection of the 4 postdated checks issued by the Hi-

private wrong is committed, the courts will leave the parties as they are, in accordance with their

cement Corporation, though its signatories de Leon, treasurer, and de las Alas, chairman of the corporation to a

original contractual stipulations.

certain ET Henry and Co which the latter endorsed to Atrium for rediscounting.

The act of issuing was well within the ambit of a valid corporate act, for it was for securing a loan to finance the
activities of the corporation, hence, not an ultravires act.

Sec 10 allows 5 or more persons to form a private corporation for any lawful purpose/s
Sec 36 par 11 allows every corporation the power to exercise such other powers as may be essential
or necessary to carry out the purpose/s in the AOI
The corporations powers depends on its purpose in the AOI
Since parties are entirely free to insert any number of purposes in its AOI, it follows that the extent
of the corporations powers depends largely on their agreement, and not merely on a direct grant
from the State, unless of course the purposes are illegal.
Instances where an act can or cannot be reasonably implied from the purposes due to poor
draftsmanship or lack of foresight of the drafters, the purpose clause may be reasonably stretched
to accommodate the new and unexpected situations, otherwise, a proper amendment of the AOI
would be necessary.

An ultravires act is distinguished from illegal act, the former being voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be validated. SC however, held de Leon
negligent.

Republic of the Philippines vs. Acoje Mining Co.

The company is estopped from denying liability on the ground that the board resolution is ultravires. Assuming
arguendo that the resolution is an ultra vires act, the same is not void for it was approved not in contravention of

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law, customs, public order and public policy. [In this case, even if the setting up of a post office in the mining camp
is outside the express powers, it is necessary to promote the interest and welfare of the corporation]

The term ultravires should be distinguished from an illegal act for the former is merely voidable which may be
enforced while the latter is void and cannot be validated.

General consequences of ultravires acts are as follows:

a)

Corporation may be dissolved under a quo warranto proceeding but in most cases, the court merely enjoins
the corporation from commission of the ultra vires acts

b)

Certificate of Registration may be suspended or revoked by SEC

c)

Parties to the ultravires contract if executory on both sides neither party can ask for specific performance. Will
be left as they are if the contract has been fully executed on both sides. If one party has performed his part,
the contract will be enforced provided it is not illegal

d)

Contract proceeding from an ultra-vires act is voidable

e)

Any stockholder may bring either an individual or derivative suit to enjoin a threatened ultravires act or
contract. If act or contract has already been performed, a derivative suit for damages may be filed against
the directors, but their liability will depend on whether they acted in good faith and with reasonable diligence
in entering into contracts. When based on tort, cannot set-up the defense of ultravires against injured party
who had no knowledge that such was ultravires

f)

May become binding by the ratification of all stockholders unless third parties are prejudice thereby or unless
the acts is illegal

Legal Consequences of Ultra-Vires Acts (Classified)

1.

On the Corporation
If the act is ILLEGAL, involuntary dissolution under a quo warranto proceeding by the SolGen
Revocation or suspension of the certificate of registration by SEC

2.

On the parties to the ultra-vires contract

Parties are left as they are and no rescission would lie
Where there has been partial performance by one party and the other has not, the latter having benefited
from the performance, is estopped from claiming ultra-vires

3.

On the rights of Stockholders

A SH can file an individual or derivative suit to enjoin a threatened ultra vires act or contract or a derivative
suit for damages if the contract has been performed
Liability would depend on whether the contracting parties acted in GF and with reasonable diligence; an
honest mistake would not give rise to liability
If action is based on tort, the SHs cannot set up the defense of ultra vires against the injured party who had
no knowledge that the corporation was engaging in an act not included expressly or impliedly in its purpose
clause

Napocor v. Vera
The issue in this case is whether or not the act of NPC in taking over Sea Lions stevedoring services is an
ultra-vires act.
SC held that it is not ultra-vires. NPC is empowered by its charter to undertake such services, it being
reasonably necessary to the operation and maintenance of the power plant. The ruling in Acoje Mining was
upheld, where the company is not restricted by its express powers as long as the act will promote the
interests and welfare of the corporation.

Government of P.I. v. El Hogar

1. W/N el Hogar is illegally owning and holding a business lot in excess of the reasonable requirements and in
contravention of the Corpo law that every corporation has the power to purchase hold lease real property as reasonable
and necessary required for the transaction of the lawful business
H: The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them
to carry out the purposes for which they were created; and we are of the opinion that the owning of a business lot upon
which to construct and maintain its offices is reasonably necessary to a building and loan association such as the
respondent was at the time this property was acquired. A different ruling on this point would compel important
enterprises to conduct their business exclusively in leased offices a result which could serve no useful end but would
retard industrial growth and be inimical to the best interests of society. We are furthermore of the opinion that,
inasmuch as the lot referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof.
No legitimate principle can discovered which would deny to one owner the right to enjoy his (or its) property to the
same extent that is conceded to any other owner.
2. W/N el Hogar has engaged in activities foreign to the purposes for which the corporation was created and not
reasonably necessary to its legitimate ends, specifically: (1) the administration of the offices in the El Hogar building not
used by the respondent itself and the renting of such offices to the public; (2) the administration and management of
properties belonging to delinquent shareholders of the association; (3) the management of some parcels of improved
real estate situated in Manila not under mortgage to it, but owned by shareholders, and has held itself out by
advertisement as prepared to do so
H: (1) The activities here criticized clearly fall within the legitimate powers of the respondent, as shown in what we
have said above relative to the second cause of action. This matter will therefore no longer detain us. If the respondent
had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided, the beneficial
administration by it of such parts of the building as are let to others must necessarily be lawful.
(2) The case for the government supposes that the only remedy which the respondent has in case of default on the part
of its shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in section 185 of
the Corporation Law. It will be noted, however, that, according to said section, the association may treat the whole
indebtedness as due, "at the option of the board of directors," and this remedy is not made exclusive. We see no reason
to doubt the validity of the clause giving the association the right to take over the property which constitutes the
security for the delinquent debt and to manage it with a view to the satisfaction of the obligations due to the debtor
than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be taken
appears to us to be not open to doubt.
(3) The practice described in the passage above quoted from the agreed facts is in our opinion unauthorized by law. The
administration of property in the manner described is more befitting to the business of a real estate agent or trust
company than to the business of a building and loan association. The practice to which this criticism is directed relates
of course solely to the management and administration of properties which are not mortgaged to the association. The
circumstance that the owner of the property may have been required to subscribe to one or more shares of the
association with a view to qualifying him to receive this service is of no significance. It is a general rule of law that
corporations possess only such express powers. The management and administration of the property of the
shareholders of the corporation is not expressly authorized by law, and we are unable to see that, upon any fair
construction of the law, these activities are necessary to the exercise of any of the granted powers. The corporation,
upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it
does not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of
this sort.
3. W/N the royalty paid to the founder of el Hogar, Antonio Melian, as compensation for his services rendered by him
during the early stages of the organization of the corporation, is unconscionable, excessive, and thus necessitates
dissolution
H: No possible doubt exists as to the power of a corporation to contract for services rendered and to be rendered by a
promoter in connection with organizing and maintaining the corporation. It is true that contracts with promoters must
be characterized by good faith; but could it be said with certainty, in the light of facts existing at the time this contract
was made, that the compensation therein provided was excessive? If the amount of the compensation now appears to
be a subject of legitimate criticism, this must be due to the extraordinary development of the association in recent
years. If the Melian contract had been clearly ultra vires which is not charged and is certainly untrue its continued
performance might conceivably be enjoined in such a proceeding as this; but if the defect from which it suffers is mere
matter for an action because Melian is not a party. It is rudimentary in law that an action to annul a contract cannot be
maintained without joining both the contracting parties as defendants. Moreover, the proper party to bring such an
action is either the corporation itself, or some shareholder who has an interest to protect.
4. W/N el Hogar had abused its franchise in issuing special shares, which is alleged to be illegal and inconsistent with
the plan and purposes of building and loan associations,and that these are held by well-to-do people purely for
investment purposes and not by wage-earners for savings

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H: The ground for supposing the issuance of the "special" shares to be unlawful is that special shares are not mentioned
in the Corporation Law as one of the forms of security which may be issued by the association. Upon examination of the
nature of the special shares in the light of American usage, it will be found that said shares are precisely the same kind
of shares that, in some American jurisdictions, are generally known as advance payment shares; in if close attention be
paid to the language used in the last sentence of section 178 of the Corporation Law, it will be found that special shares
where evidently created for the purpose of meeting the condition cause by the prepayment of dues that is there
permitted. The language of this provision is as follow "payment of dues or interest may be made in advance, but the
corporation shall not allow interest on such advance payment at a greater rate than six per centum per annum nor for a
longer period than one year." In one sort of special shares the dues are prepaid to the extent of P160 per share; in the
other sort prepayment is made in the amount of P10 per share, and the subscribers assume the obligation to pay P10
monthly until P160 shall have been paid.
It will escape notice that the provision quoted say that interest shall not be allowed on the advance payments at a
greater rate than six per centum per annum nor for a longer period than one year. The word "interest " as there used
must be taken in its true sense of compensation for the used of money loaned, and it not must not be confused with the
dues upon which it is contemplated that the interest may be paid. Now, in the absence of any showing to the contrary,
we infer that no interest is ever paid by the association in any amount for the advance payments made on these shares;
and the reason is to be found in the fact that the participation of the special shares in the earnings of the corporation, in
accordance with section 188 of the Corporation Law, sufficiently compensates the shareholder for the advance
payments made by him; and no other incentive is necessary to induce inventors to purchase the stock.
It will be observed that the final 20 per centum of the par value of each special share is not paid for by the shareholder
with funds out of the pocket. The amount is satisfied by applying a portion of the shareholder's participation in the
annual earnings. But as the right of every shareholder to such participation in the earnings is undeniable, the portion
thus annually applied is as much the property of the shareholder as if it were in fact taken out of his pocket. It follows
that the mission of the special shares does not involve any violation of the principle that the shares must be sold at par.
From what has been said it will be seen that there is express authority, even in the very letter of the law, for the
emission of advance-payment or "special" shares, and the argument that these shares are invalid is seen to be
baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming
that the statute has not expressly authorized such shares, yet the association has implied authority to issue them. The
complaint consequently fails also as regards the stated in the ninth cause of action.
5. W/n El Hogar is pursuing illegally a policy of depreciating, at an excessive rate at the discretion of its Board, the
value of real properties acquired by it at its sales, thereby frustrating the right of SHs to participate annually and
equally in the earnings.
H: This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in
determining the internal policy of a business corporation. If the criticism contained in the brief of the Attorney-General
upon the practice of the respondent association with respect to depreciation be well founded, the Legislature should
supply the remedy by defining the extent to which depreciation may be allowed by building and loan associations.
Certainly this court cannot undertake to control the discretion of the board of directors of the association about an
administrative matter as to which they have legitimate power of action. The tenth cause of action is therefore not well
founded.
6. W/n el Hogars charter should be revoked because it illegally maintains excessive reserve funds and because it
pursues a policy, allegedly unlawful, of paying a straight annual dividend of 10% regardless of losses suffered and
profits made by the corporation and in violation of the requirement s of the corpo code.
H: It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is unnecessary in the case of
building and loan associations, and at any rate the keeping of reserves is inconsistent with section 188 of the
Corporation Law. Upon careful consideration of the questions involved we find no reason to doubt the right of the
respondent to maintain these reserves. It is true that the corporation law does not expressly grant this power, but we
think it is to be implied. It is a fact of common observation that all commercial enterprises encounter periods when
earnings fall below the average, and the prudent manager makes provision for such contingencies. To regard all surplus
as profit is to neglect one of the primary canons of good business practice. Building and loan associations, though
among the most solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate
are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends, continued over long
periods, supplies the surest foundations of public confidence.
Moreover, it is said that the practice of the association in declaring regularly a 10 per cent dividend is in effect a
guaranty by the association of a fixed dividend which is contrary to the intention of the statute. The government insists
upon an interpretation of section 188 of the Corporation Law that is altogether too strict and literal. From the fact that
the statute provides that profits and losses shall be annually apportioned among the shareholders it is argued that all

earnings should be distributed without carrying anything to the reserve. But it will be noted that it is provided in the
same section that the profits and losses shall be determined by the board of directors: and this means that they shall
exercise the usual discretion of good businessmen in allocating a portion of the annual profits to purposes needful to
the welfare of the association. The law contemplates the distribution of earnings and losses after other legitimate
obligations have been met. Our conclusion is that the respondent has the power to maintain the reserves criticized in
the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves referred to have
become excessive, the remedy is in the hands of the Legislature. It is no proper function of the court to arrogate to itself
the control of administrative matters which have been confided to the discretion of the board of directors. The causes of
action under discussion must be pronounced to be without merit.
7. W/n el Hogar illegally departed from its charter because it has made loans which were intended to be used by the
borrowers for other purposes than the building of homes. There is no statute here expressly declaring that loans may be
made by these associations solely for the purpose of building homes. On the contrary, the building of homes is
mentioned in section 171 of the Corporation Law as only one among several ends which building and loan associations
are designed to promote. Furthermore, section 181 of the Corporation Law expressly authorities the Board of directors
of the association from time to time to fix the premium to be charged. In the brief of the plaintiff a number of excerpts
from textbooks and decisions have been collated in which the idea is developed that the primary design of building and
loan associations should be to help poor people to procure homes of their own. This beneficent end is undoubtedly
served by these associations, and it is not to be denied that they have been generally fostered with this end in view. But
in this jurisdiction at least the lawmaker has taken care not to limit the activities of building and loan associations in an
exclusive manner, and the exercise of the broader powers must in the end approve itself to the business community.
8. W/n the el Hogar charter may be revoked because various loans now outstanding have been made by the
respondent to corporations and partnerships, and that these entities have in some instances subscribed to shares in the
respondent for the sole purpose of obtaining such loans, and that some of these juridical entities became shareholders
merely for the purpose of qualifying themselves to take loans from the association.
H: the Corporation Law declares that "any person" may become a stockholder in building and loan associations. The
word "person" appears to be here used in its general sense, and there is nothing in the context to indicate that the
expression is used in the restricted sense of both natural and artificial persons, as indicated in section 2 of the
Administrative Code. We would not say that the word "person" or persons," is to be taken in this broad sense in every
part of the Corporation Law. For instance, it would seem reasonable to say that the incorporators of a corporation ought
to be natural persons, although in section 6 it is said that five or more "persons", although in section 6 it is said that five
or more "persons," not exceeding fifteen, may form a private corporation. But the context there, as well as the common
sense of the situation, suggests that natural persons are meant. When it is said, however, in section 173, that "any
person" may become a stockholder in a building and loan association, no reason is seen why the phrase may not be
taken in its proper broad sense of either a natural or artificial person. At any rate the question whether these loans and
the attendant subscriptions were properly made involves a consideration of the power of the subscribing corporations
and partnerships to own the stock and take the loans; and it is not alleged in the complaint that they were without
power in the premises. Of course the mere motive with which subscriptions are made, whether to qualify the
stockholders to take a loan or for some other reason, is of no moment in determining whether the subscribers were
competent to make the contracts. The result is that we find nothing in the allegations of the sixteenth cause of action,
or in the facts developed in connection therewith, that would justify us in granting the relief.
9. W/n el Hogar, in disposing of real estate purchased in the collection of defaulted loans, on credit at first and then sold
and mortgaged to el Hogar to secure payment of the purchase price, had incurred several outstanding loans, and that
that the persons and entities to which said properties are sold under the condition charged are not members or
shareholders nor are they made members or shareholders of the defendant.
H: This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the
discussion is the provision of the Corporation Law requiring loans to be stockholders only and on the security of real
estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the respondent sells
property acquired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of
the purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real estate which it acquires in
connection with the collection of its loans within five years after receiving title to the same, the law does not prescribe
that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such sales can
of course be made upon terms and conditions approved by the parties; and when the association takes a mortgage to
secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising out of a loan. Nor
does the fact that it is carried as a loan on the books of the respondent make it a loan on the books of the respondent
make it a loan in law. The contention of the Government under this head is untenable.
Implied or Necessary Powers
GR: all acts other than those specified in Sec 36-44 and in other special provisions would be ultra vires

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Exception: those which are:

necessary or incidental to the exercise of the powers so conferred (45), or

essential or necessary to carry out its purpose or purposes as stated in the AOI. (38)
Presumption that a corporation can act within its powers and when a contract is not on its face necessarily beyond its authority, it
will, in the absence of proof to the contrary, presumed to be valid.

Sec 36(11): corporations have the power and capacity to exercise such other powers as may be essential or
necessary to carry out its purpose(s) as provided for in the AOI
o
Restated: the management of a corporation has discretionary authority, in the absence of explicit restrictions,
to enter into contracts or transactions deemed reasonably necessary or incidental to its business purposes.

Incidental/Inherent Powers

Sec 2: powers, attributes, and properties expressly authorized by law or incident to its existence
Incidental powers: those that attach to a corporation at the moment of its creation without regard to its
express powers or particular primary purpose, and is inherent in it as a legal entity
Examples:
i. To sue and be sued
ii. To grant and receive in the corporate name
iii. To purchase hold and convey real and personal property for its purposes
iv. To have a corporate seal
v. To adopt and amend by-laws for its government
vi.
To disenfranchise or remove members
Powers that go into the very nature and extent of a corporations juridical entity cannot be presumed to be
incidental or inherent powers

BOARD

A.

OF

DIRECTORS

Authority; Repository of corporate powers (Section 23)

The board of directors or trustees are responsible for corporate policies and general management of the business
affairs of the corporation

Unless otherwise provided in the Corporation Code, the Board of Directors control and exercise:
o

the corporate powers of corporation

all business conducted,

all property of such corporation

The board exercises almost all corporate powers, lays down all business policies and is responsible for the
efficiency of management. The stockholders have no right to interfere with the boards exercise of its powers and
functions except where the law expressly gives them the final say, like in cases of removal of a director,
amendment of articles of incorporation, and other major changes. Their resolutions on matters other than the
exceptions are legally not effective nor binding and may be treated as merely advisory or may be totally

CONTROL AND MANAGEMENT

Three levels of control:
(1) board of directors or trustees= formulate the corporate policies
(2) corporate officers= execute the policies
(3) stockholders or members= have residual powers over fundamental corporate changes
Rationale of centralized management

one of the advantageous features of the corporationacting through centralized management

the congruence of authority and responsibility in the same person, committee, or board always promote efficiency
Who exercises corporate powers?
1.

board of directors (for stock corporations) or trustees (for non-stock corporations)

governing body
sole authority to determine the policy and conduct the ordinary business of the corporation within the scope of the charter
so long as the board acts honestly, in GF, and not in defraud of creditors or abusive of the rights of minority SHs
GR: in the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly
bind the corporation
Exception: with respect to 3rd persons, actions of the corporation even without formal board approval may still bind! (ex.
Proof of usage, acquiescence of the board despite knowledge of the act, receipt of benefits, implied ratification, estoppel

Primary objective of the Board

primary obligation of directors is to seek the maximum amount of profits for the corporation, and characterized the position
as a position of trust
o
in case directors interest conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and
benefit
o
fiduciary or trust relationship is not a matter of statutory or technical law, but springs from the control and guidance of
corporate affairs and property and hence the property interest of the SHs

disregarded.

Unless Otherwise Provided may pertain to instances where a management contract is entered hence corporate
posers are exercised by the managing company and not the board

The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. Contracts
entered into without a formal board resolution does not bind the corporation except when majority of the board
has knowledge of the contract and the contract benefited the corporation.

Directors owe their duties to corporation as a whole rather than to individual shareholders of classes of
shareholders

Ramirez v Orientalist Co & Fernandez

Orientalist Co engaged in the theater business, desired to be the exclusive agent of Ramirez, who is based in Paris, for two film
outfitsclair Films and Milano films. Through the active involvement and negotiations of Ramon El Presidente Fernandez, a
director of Orientalist and also its treasurer, with Ramirez, Orientalist was able to secure an offer, the terms of which were
acceptable to the Board as well as to the stockholders. It appears that this acceptance of the terms of the offer was decided
during an informal meeting of the board, and conveyed to Ramirez in two letters signed only by Fernandez, both in his individual
and his capacity as treasurer of Orientalist. It turns out that the company was not financially capable to comply with the
obligations set forth in the agency contract, and about this time films had already been delivered to the company. Two
stockholders meetings were organized, the first adopted a resolution approving the action of the board on the offer, the second

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raising the contingency of the lack of funds and the proviso that the four officers involved, including Fernandez would continue

the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives

importing the films using their own funds. Ramirez sues Orientalist and Fernandez for what is due on the contract. TC ruled

or agents, called the directors, making by-laws, and exercising special powers defined by law. Thus contracts between a

Oriental as the principal debtor while Fernandez is subsidiarily liable.

corporation and third persons must be made by the directors and not by the stockholders. The corporation is represented by the
directors and not the stockholders. Third persons can have little or no information as to what occurs in corporate meetings, and

H: (1) it was incumbent upon the corporation if it desired to question the authority of Fernandez to bind it, to deny the due

must necessarily rely on external manifestations of corporate consent. The integrity of commercial transactions can only be

execution of the contract made by him. In pleading lack of authority of an officer of a corporation to bind the latter through a

maintained by holding the corporation strictly to the liability fixed upon in by its agents in accordance with law. If a corporation

contract executed by the former is a special defense which should be specially pleaded and the answer setting up this defense

knowingly permits one of its officers or any other person to do acts within the scope of an apparent authority, and thus hold him

must be verified under oath. The denial shall be specific, and a mere attack on the instrument in general terms is insufficient,

out to the public as possessing the power to do these acts, the corporation will be estopped from denying such authority as

even though under oath. In dealing with corporations the public at large is bound to rely to a large extent upon outward

against anyone who has dealt with the corporation in GF.

appearances. If a man is found acting for a corporation with the external indicia of authority, any person not having notice of want
of authority, may usually rely upon those appearances, and if it be found that the directors had permitted the agent to exercise
that authority and thereby held him out as a competent person to bind the corporation, or had acquiesced in a contract and
retained the benefit supposed to have conferred by it, the corporation will be bound, notwithstanding the actual authority may
never have been granted. The public is not supposed nor required to know the transactions which happen around the table where
the corporate board of directors or the stockholders are from time to time convoked. It is therefore reasonable, in a case where an
officer of a corporation has made a contract in its name, that the corporation should be required, is it denies his authority, to state
such defense in his answer. This failure of Orientalist to make any issue in its answer with regard to the authority of Ramon
Fernandez to bind it and its failure to deny specifically under oath the genuineness of the due execution of the contracts sued
upon, have the effect of eliminating the question of his authority from the case.

(2) Fernandez had no authority to bind the corporation. Corporate powers is exercised by the board of directors, and is recognized
in the bylaws of Orientalist. The fact that the power to make contracts is thus vested in the borad does not always signify that a
formal vote of the board must always be taken before contractual liability can be fixed; the board can create liability, like an
individual, by other means than by formal expression of its will. It may be established without reference to official records of the
proceedings of the board, by proof of the usage to which the company had permitted to grow up in the business, and of the
acquiescence of the board charged with the duty of supervising and controlling the companys business. Fernandez was the most
active in the effort to secure the films. The negotiations were conducted by him with the knowledge and consent of the other
members of the board. The board, before the financial inability of the corporation was revealed, had already recognized the
contracts as being in existence and had proceeded to take the steps necessary to utilize the films, particularly the publication of
announcements in the papers. In light of this, the contracts in question were thus inferentially approved by the board and that the
company is bound unless the subsequent failure of the stockholders to approve the same had the effect of abrogating the liability
created.

(3) the action of the stockholders, whatever its character, must be ignored. Stockholders or members resolutions dealing with
matters other than the exceptions are not legally effective nor binding on the board, and may be treated as merely advisory or
may even be completely disregarded. The functions of the stockholders of a corporation are, of a limited nature. The theory is that

Expertravel & Tours v CA and Korean Airlines.

F: Korean Airlines, through Atty. Aguinaldo, filed a Complaint against Expertravel with the RTC for the collection of the principal
amount of P260,150.00, plus attorneys fees and exemplary damages. The verification and certification against forum shopping
was signed by Atty. Aguinaldo, who indicated therein that he was the resident agent and legal counsel of KAL and had caused the
preparation of the complaint. Expertravel filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not
authorized to execute the verification and certificate of non-forum shopping as required by the Rules of Court. KAL opposed the
motion, contending that Atty. Aguinaldo was its resident agent and was registered as such with the Securities and Exchange
Commission (SEC) as required by the CorpoCode, and was further alleged that Atty. Aguinaldo was also the corporate secretary of
KAL. Atty. Aguinaldo also claimed that he had been authorized to file the complaint through a resolution of the KAL Board of
Directors approved during a special meeting held on June 25, 1999, wherein the board of directors conducted a special
teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was also averred that in that same teleconference,
the board of directors approved a resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping and to
file the complaint. Suk Kyoo Kim also alleged, however, that the corporation had no written copy of the aforesaid resolution. TC
denies MTD, CA affirms.
H: It is settled that the requirement to file a certificate of non-forum shopping is mandatory and that the failure to comply with this
requirement cannot be excused. The certification is a peculiar and personal responsibility of the party, an assurance given to the
court or other tribunal that there are no other pending cases involving basically the same parties, issues and causes of action.
Hence, the certification must be accomplished by the party himself because he has actual knowledge of whether or not he has
initiated similar actions or proceedings in different courts or tribunals. Even his counsel may be unaware of such facts. Hence, the
requisite certification executed by the plaintiffs counsel will not suffice.
In a case where the plaintiff is a private corporation, the certification may be signed, for and on behalf of the said corporation, by
a specifically authorized person, including its retained counsel, who has personal knowledge of the facts required to be
established by the documents. The corporation, such as the petitioner, has no powers except those expressly conferred on it by
the Corporation Code and those that are implied by or are incidental to its existence. In turn, a corporation exercises said powers
through its board of directors and/or its duly-authorized officers and agents. Physical acts, like the signing of documents, can be
performed only by natural persons duly-authorized for the purpose by corporate by-laws or by specific act of the board of
directors.
The respondents allegation that its board of directors conducted a teleconference on June 25, 1999 and approved the said
resolution (with Atty. Aguinaldo in attendance) is incredible, given the additional fact that no such allegation was made in the
complaint. If the resolution had indeed been approved on June 25, 1999, long before the complaint was filed, the respondent
should have incorporated it in its complaint, or at least appended a copy thereof. The respondent failed to do so. It was only on
January 28, 2000 that the respondent claimed, for the first time, that there was such a meeting of the Board of Directors held on
June 25, 1999; it even represented to the Court that a copy of its resolution was with its main office in Korea, only to allege later
that no written copy existed. It was only on March 6, 2000 that the respondent alleged, for the first time, that the meeting of the
Board of Directors where the resolution was approved was held via teleconference.
Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a Secretarys/Resident Agents Certificate
alleging that the board of directors held a teleconference on June 25, 1999. No such certificate was appended to the complaint,
which was filed on September 6, 1999. More importantly, the respondent did not explain why the said certificate was signed by
Atty. Aguinaldo as early as January 9, 1999, and yet was notarized one year later (on January 10, 2000); it also did not explain its
failure to append the said certificate to the complaint, as well as to its Compliance dated March 6, 2000. It was only on January
26, 2001 when the respondent filed its comment in the CA that it submitted the Secretarys/Resident Agents Certificate [30] dated

HLP2009-3B

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January 10, 2000.

The Court is, thus, more inclined to believe that the alleged teleconference on June 25, 1999 never took place, and that the
resolution allegedly approved by the respondents Board of Directors during the said teleconference was a mere concoction
purposefully foisted on the RTC, the CA and this Court, to avert the dismissal of its complaint against the petitioner.
Citibank NA v Chua.
Velez deposited his unfunded personal checks with his current account with the petitioner. But prior to depositing said checks, he
would present his personal checks to a bank officer asking the latter to have his personal checks immediately credited as if it were
a cash deposit and at the same time assuring the bank officer that his personal checks were fully funded. Having already gained
the trust and confidence of the officers of the bank because of his past transactions, the bank's officer would always
accommodate his request. After his requests are granted which is done by way of the bank officer affixing his signature on the
personal checks, private respondent Cresencio Velez would then deposit his priorly approved personal checks to his current
account and at the same time withdraw sums of money from said current account by way of petitioner bank's manager's check.
Private respondent would then deposit petitioner bank's manager's check to his various current accounts in other commercial
banks to cover his previously deposited unfunded personal checks with petitioner bank. Naturally, petitioner bank and its officers
never discovered that his personal check deposits were unfunded. On the contrary, it gave the petitioner bank the false
impression that private respondent's construction business was doing very well and that he was one big client who could be
trusted. This deceptive and criminal scheme he did every banking day without fail from September 4, 1985 up to March 11, 1986.
The amounts that he was depositing and withdrawing during this period (September 4, 1985 to March 11, 1986) progressively
became bigger. It started at P46,000.00 on September 4, 1985 and on March 11, 1986 the amount of deposit and withdrawal
already reached over P3,000,000.00. At this point in time (March 11, 1986), the private respondent Cresencio Velez presumably
already feeling that sooner or later he would be caught and that he already wanted to cash in on his evil scheme, decided to run
away with petitioner's money. On March 11, 1986, he deposited various unfunded personal checks totaling P3,095,000.00 and
requested a bank officer that the same be credited as cash and after securing the approval of said bank officer, deposited his
various personal checks in the amount of P3,095,000.00 with his current account and at the same time withdrew the sum of
P3,244,000.00 in the form of petitioner's manager's check. Instead of using the proceeds of his withdrawals to cover his unfunded
personal checks, he ran away with petitioner bank's money. Thus, private respondent Cresencio Velez's personal checks deposited
with petitioner bank on March 11, 1986 in the total aggregate amount of P3,095,000.00 bounced. The checks bounced after said
personal checks were made the substantial basis of his withdrawing the sum of P3,244,000.00 from his current account with
petitioner bank. Citibank sues on the grounds of violation of BP 22. Before pre-trial conference, and in pursuance of the authority
granted to him by petitioner bank's by-laws, its Executing Officer appointed William W. Ferguson, a resident alien, as its Attorneyin-Fact empowering the latter, among other things, to represent Citibank in court cases such as the present case. In turn, William
W. Ferguson executed a power of attorney in favor of J.P. Garcia & Associates (petitioner bank's counsel) to represent petitioner
bank in the pre-trial conference before the lower court.
I: There are thus two issues in this case. First, whether a resolution of the board of directors of a corporation is always necessary
for granting authority to an agent to represent the corporation in court cases.
H: In the corporate hierarchy, there are three levels of control: (1) the board of directors, which is responsible for corporate
policies and the general management of the business affairs of the corporation; (2) the officers, who in theory execute the policies
laid down by the board, but in practice often have wide latitude in determining the course of business operations; and (3) the
stockholders who have the residual power over fundamental corporate changes, like amendments of the articles of incorporation.
However, just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual officers or agents appointed by it.
It is clear that corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of
incorporation, the by-laws or by resolution or other act of the board of directors. In addition, an officer who is not a director may
also appoint other agents when so authorized by the by-laws or by the board of directors. Such are referred to as express powers.
There are also powers incidental to express powers conferred. It is a fundamental principle in the law of agency that every
delegation of authority, whether general or special, carries with it, unless the contrary be express, implied authority to do all of
those acts, naturally and ordinarily done in such cases, which are reasonably necessary and proper to be done in order to carry
into effect the main authority conferred.

I: The second issue is whether the by-laws of the petitioner foreign corporation which has previously been granted a license to do
business in the Philippines, are effective in this jurisdiction. If the by-laws are valid and a board resolution is not necessary as
petitioner bank claims, then the declaration of default would have no basis.
H: A careful reading of the Sec 46 of Corpo Code would show that a corporation can submit its by-laws, prior to incorporation, or
within one month after receipt of official notice of the issuance of its certificate of incorporation by the SEC. When the third
paragraph of the above provision mentions "in all cases", it can only refer to these two options; i.e., whether adopted prior to
incorporation or within one month after incorporation, the by-laws shall be effective only upon the approval of the SEC. But even
more important, said provision starts with the phrase "Every corporation formed under this Code", which can only refer to
corporations incorporated in the Philippines. Hence, Section 46, in so far as it refers to the effectivity of corporate by-laws, applies
only to domestic corporations and not to foreign corporations. On the other hand, Section 125 of the same Code requires that a
foreign corporation applying for a license to transact business in the Philippines must submit, among other documents, to the
SEC, a copy of its articles of incorporation and by-laws, certified in accordance with law. Unless these documents are submitted,
the application cannot be acted upon by the SEC. Since under Sec 126 of Corpo Code the SEC will grant a license only when the
foreign corporation has complied with all the requirements of law, it follows that when it decides to issue such license, it is
satisfied that the applicant's by-laws, among the other documents, meet the legal requirements. This, in effect, is an approval of
the foreign corporation's by-laws. It may not have been made in express terms, still it is clearly an approval. Therefore, petitioner
bank's by-laws, though originating from a foreign jurisdiction, are valid and effective in the Philippines.

Boyer-Roxas v CA. (Hidden Valley Apocalypse Now case).

The corporation, Heirs of Eugenia Roxas Inc, was established to engage in agriculture to develop the properties inherited from
Eugenia Roxas and Eufroncio Roxas, which includes the land upon which the Hidden Valley Springs Resort was put up, including
various improvements thereon, using corporate funds (used as site for filming Apocalypse Now). The AOI of Heirs Inc was
amended for this purpose. Heirs Inc claims that Boyer-Roxas and Guillermo Roxas had been in possession of the various properties
and improvements in the resort and only upon the tolerance of the corporation. It was alleged that they committed acts that
impeded the corporations expansion and normal operation of the resort. They also did not comply with court and regulatory
orders, and thus the corporation adopted a resolution authorizing the ejectment of the defendants. TC grants. CA affirms. Boyer
and Roxas contend that, being SHs, their possession of the properties of the corporation must be respected in view of their
ownership of an aliquot portion of all properties of the corporation.
H: Regarding properties owned by the corporation, the SH of Guanzon case says that properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal
property, they do not represent property of the corporation. A share of stock only typifies an aliquot part of the corporations
property, or the right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the
owner of any part of the capital of the corporation, nor is he entitled to the possession of any definite portion of its property or
assets. The SH is not a co-owner or tenant in common of the corporate property.
The corporation has a personality distinct and separate from its members and transacts business only through its officers or
agents. Whatever authority these officers or agents may have derived from the board or other governing body, unless conferred
by the charter of the corporation itself. In this case the elder Roxas who then controlled the management of the corporation, being
the majority SH, consented to the petitioners use and stay within the properties. The Board did not object and were allowed to
stay until it adopted a resolution to the effect of authorizing moves to eject them. Since their stay was merely by tolerance, in
deference to the wishes of the majority SH who controlled the corporation, when Roxas died his actions cannot bind the company
forever. There is no provision in the by-laws or any other resolution authorizing their continued stay.

Peculiar Agency Role of the board

Since the by-laws are a source of authority for corporate officers and agents of the corporation, a resolution of the Board of
Directors of Citibank appointing an attorney in fact to represent and bind it during the pre-trial conference of the case at bar is not
necessary because its by-laws allow its officers, the Executing Officer and the Secretary Pro-Tem, * to execute a power of attorney
to a designated bank officer, William W. Ferguson in this case, clothing him with authority to direct and manage corporate affairs.
Since paragraph XXI (of the by-laws) specifically allows Ferguson to delegate his powers in whole or in part, there can be no doubt
that the special power of attorney in favor, first, of J.P. Garcia & Associates and later, of the bank's employees, constitutes a valid
delegation of Ferguson's express power (under paragraph XVII above) to represent petitioner bank in the pre-trial conference in
the lower court.

in a manner of speaking, the board acts as an agent of the corporation, and is bound by the rules applying to agency
relationship
o
although the board is an agent of the corporation, since the principal is a mere juridical concept, it realistically is not in
a position to countermand the decisions of its agent
o
unlike in an ordinary principal-agent relationship, the corporate principal does not really have its own mind to allow it to
decide matters for itself
o
the board stands both as an agent of the corporation, and the very personification of the corporation in the commercial
and legal world

HLP2009-3B

Page 14

board has sole power to decide whether a corporation could sue, purchase or sell property, enter into a contract, or perform
any other act
SH resolutions on matters other than the exceptions= not legally effective nor binding on the board; may be treated as
merely advisory (Ramirez case)
GR: to the SH go the profits, to the board goes the management
for educational institutions:

Requirements/Disqualifications:
o

Residence (Section 23) - a majority of the directors or trustees of all corporations organized under this Code
must be residents of the Philippines

Nationality no requirement for citizenship of a director or trustee so even an alien may be elected as such
excepts in business activities totally closed to aliens

B.

Requirements

Disqualification of directors, trustees or officers (Section 27):

years, or

Qualifying share (Section 23)- Every director must own at least one (1) share of the capital stock of the corporation
of which he is a director, which share shall stand in his name on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director

Violation of this Code committed within five (5) years prior to the date of his election or appointment

By laws may provide for additional qualifications/disqualifications as long as such additional

qualifications/disqualifications shall not modify requirements as prescribed in the corporation code or be

shall thereby cease to be a director.

in conflict with such prescribed requirements

Lee v CA
Summons was served upon Lee and Lacdao, president and vice president of ALFA

The two, however contended that they are no longer corporate officers of the corporation because of the voting
trust agreement executed to DBP hence not authorized to receive summons. Summons must be served upon DBP

DBP however refused to receive the alias summons claiming it was not authorized because it has not yet taken
over ALFA

Motion for Declaration of proper service of summons filed by Sacoba

Voting trust results from the separation of voting rights of a stockholder from his other rights such as rights to

Criteria for a valid voting trust:

o

Voting rights of the stock separate from other attributes of ownership

Voting rights granted are intended to be irrevocable for a definite period of time

Principal purpose is to acquire voting control of the corporation

C.

How elected (Section 24)

The change from the old code to the new code with respect to qualifying shares of directors is the omission of the
phrase in his own right pertaining to beneficial ownership of shares.

In the new corpo code, persons may be directors if they are stockholders although not in their own right hence
includes trustees

There is clear indication that to be a director, what is material is legal title and not beneficial ownership

With the execution of the voting trust agreement, Lee and Lacdao were divested of their legal title to their shares
hence can no longer be directors and are no longer corporate officers.

Because of this, they are not authorized to receive summons

Manner of election:
o

There must be present in person or by representative majority of the outstanding capital stock / member

In any form; or must be by ballot when requested by any voting stock holder or member

Voting may be in person or by proxy

At all elections of directors or trustees, there must be present owners of a majority of the outstanding capital
stock, or if there be no capital stock, a majority of the members entitled to vote.

Every stockholder entitled to vote shall have the right to vote the number of shares of stock standing, at the time
fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the

Execution of a voting trust creates a dichotomy between equitable or beneficial ownership of the
corporate shares of a stock holder and legal title thereto

Directors shall hold office for 1 year. However, incumbent directors shall continue to be directors/trustees
as long as their successors have not been elected and qualified (Section 23)

receive dividends or inspect books of corporation

Term:
o

Convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6)

time of the election

Time to determine voting right

o

As per share standing in ones name at the time fixed by the By-Laws

Where By-laws silent, at time of election

HLP2009-3B

Page 15

Cumulative voting A system of voting designed to increase he voting power of minority stockholders in the
election of corporate directors when more than one director is to be elected.
o

A stockholder shall have as many votes as he has number of shares times the number of directors up for election

Cumulative voting is allowed for election of members of the Board in a stock corporation. Members of the Board in a Non-stock

E.

Any vacancy occurring in the Board of Directors or Trustees other than by removal by the stockholders or members

Corporation shall not be voted cumulatively unless specifically provided for in the By-laws.

or by expiration of terms may be filled:

The total number of votes cast by a stockholder shall not exceed the number of shares owned by him as

If still constituting quorum, by the vote of at least a majority of the remaining directors or trustees

shown in the books of the corporation multiplied by the whole number of directors to be elected

Otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that

Gives the minority an opportunity to elect a representative to the board of directors. Cannot itself give the

purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his

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

predecessor in office.

By-laws cannot provide against cumulative voting since this right is mandated in Sec 24

No delinquent stock shall be voted

F.

Report of election of directors, trustees, & officers (Section 26)

Non-stock corporation:
o

How vacancy filled (Section 29)

Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which

Within 30 days after the election of the directors, trustees, and officers of the corporation; the Secretary or any
other officer of the corporation shall submit to the SEC, the names, nationalities, and residences of the directors,

have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than

trustees, and officers elected.

one vote for one candidate.

Should a director, trustee, or officer die, resign, or in any manner cease to hold office, his heirs in case of his

Candidates receiving the highest number of votes shall be declared elected.

death, the secretary or any other officer of the corporation, or the

Any meeting of the stockholders or members called for an election may adjourn from day to day or from time

immediately report such fact to the SEC.

director, trustee, or officer himself, shall

to time but not sine die or indefinitely if:

For any reason, no election is held, or

If there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the member entitled to vote.

G.

How compensated (Section 30)

Since the provision requires presence, meeting of stockholders is required

compensation, except for reasonable per diems.

D.

How removed (Section 28)

Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or

Any such compensation (other than per diems) may be granted to the directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a regular or special stockholders meeting.

In the absence of any provision in the By-laws fixing their compensation, the directors shall not receive any

Limit: In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net
income before income tax of the corporation during the preceding year.

representing 2/3 of the outstanding capital stock, or if the corporation be a Non-stock Corporation, by a vote of 2/3
of the members entitled to vote (with or without cause).

Note: Such removal shall take place either at a regular meeting or at a special meeting call for the purpose of

Barretto v La Previsora Filipina. F: Suit by the resigned directors of a building and loan association to recover 1% of the profits

removal of Directors or Trustees, with previous notice of the time and place of such meeting, as well as the

to each complainant in accordance with an amendment to the by-laws, which stipulate that they are entitled

intention to propose such removal. If the officers refuse to call a meeting to consider the removal of the Director,

to a lifetime annuity from the profits of the corporation.

it may be called at the instance of any stockholder or member, but with due notice.

A director elected because of the vote of minority stockholders who united in cumulative voting cannot be
removed without cause

The board cannot remove a director or trustee as member of the board

H: The amended by-laws does create any obligation to pay to the persons name therein such a life gratuity or pension out of the
profits. A by-law of this nature must be clearly regarded as beyond the lawful powers of a mutual building and

HLP2009-3B

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loan association and is thus ultra vires. As it were, the by-law cannot be held to establish a contractual

I.

Liability of Board of Directors

relation between the parties.

1.

In General (Section 31)

Directors or trustees shall be liable solidarily for all damages resulting therefrom suffered by the corporation, its

The authority conferred upon corporations in the code refers to providing compensation for future services of directors, officers,

stockholders, or members and other persons when:

and employees after the adoption of the by-law and cannot in any sense be held to authorize the giving of

continuous compensation to particular directors after their employment has terminated for past services

of gross negligence or bad faith in directing the affairs of the corporation.

rendered gratuitously by the them to the corporation. To permit the transaction would be to create an
obligation unknown to the law, and to countenance a misapplication of funds of the building and loan

association to the prejudice of SHs.

Contracts between a corporation and third persons must be made by or under authority of its board and not by the SHs. The
action of the SHs is only advisory and is not binding on the corporation.

Western Institute of Technology v Salas

In a meeting of the Board of Trustees of Western Institute of Technology, Resolution was passed granting monthly
compensation to officers respondents who are members of the Board valid?

Respondents are entitled to compensation because they are not just directors but officers as well. The prohibition
under Sec 30 does not apply to them

H.

Matters requiring Board of Directors action (vote by majority of the board)

1.

Amendment of AI

2.

Extending and Shortening Corporate Term

3.

Increasing / Decreasing capital stock / bonded indebtedness

4.

Sale or disposition of all, substantially all of corporate assets

5.

Investment of corporate funds in another corporation or for a purpose other than main purpose

6.

Issuance of stock dividends

7.

Corporate mergers or consolidation

8.

Voluntary dissolution of the corporation whether or not creditors are prejudiced

9.

Approval of management contract

10. Amendment to by-laws, repeal of by-laws, adoption of new by-laws

11. Declare cash dividends

They willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty

They acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.

Three fold duty of directors to the corporation:

o

Diligence

Loyalty

Obedience

What are required and expected of directors:

o

To posses at least ordinary knowledge and skill to enable them to make sound business decision

To attend directors meetings with reasonable regularity

To exercise reasonable care in the management of the corporation

To keep themselves sufficiently informed about the general condition of the business

Causes of directors liability:

o

Knowing authorization of wrongful acts

Negligence

Conflict of interest

Extent of Liability: All damages resulting from knowing authorization of wrongful acts, negligence and conflict of
interest suffered by the corporation, its stockholders, and other persons

The degree of care and diligence required is usually that which men prompted by self-interest, generally exercise
in their own affairs. In determining whether reasonable diligence has been exercised, the particular circumstances
of each case must be considered. The nature of the business is an important factor.

2.

Business judgment rule

Board of Directors has authority to modify the proposed terms of the contracts of the corporation for the purpose
of making the terms more acceptable to the other contracting partiesThe test to be applied is whether the act in
question is the direct and immediate furtherance of the corporations business, fairly incidental to the express

HLP2009-3B

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powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise not.
[Montelibano v. Bacolod Murcia Milling Co.]

3.

Self-dealing director (Section 32)

4.

Contracts between the corporations with interlocking directors (Section 33)

A contract between two or more corporations having interlocking directors shall not be invalidated on that ground

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 the following conditions are present:
o

increase in the price of cement. The contracts were only for two years at a time, even if the dealership was good for 5. He was
attempting to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the dealership
agreement. Thus the same was not valid and he cannot be allowed to reap the fruits of his disloyalty.

alone, except cases of fraud.

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;

The contract is fair and reasonable under the circumstances.

That the vote of such director or trustee was nor necessary for the approval of the contract;

If the interest of the interlocking director in one corporation is substantial and his interest in the other corporation

That the contract is fair and reasonable under the circumstances; and

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

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.

a director or trustee, such contract may be 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 in a meeting called for the
purpose

Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting

The contract is voidable whether the corporation suffered damages or not

The burden of proving fairness is on the director

Prime White Cement v IAC.

Prime White Cement entered into a dealership agreement with one of its directors, Alejandro Te, for the latter to be the exclusive
distributor of 20,000 bags of Prime White cement per month @ P9.70 per bag for the entire Mindanao area for 5 years, and that a
letter of credit be opened to secure payment. Te advertised his dealership and was able to obtain possible clients, and entered
into agreements with several hardware stores for the purchase of the cement. Te then informed Prime White of the orders, but the
latter imposed additional conditions, which effectively delayed the delivery of the cement, lowered the number of bags to be
delivered, and increased the price per bag. It also made the prices subject to change unilaterally and additional conditions on the
manner of payment. Te refused to comply and Prime White cancelled the dealership agreement. Te sued for specific performance
and damages. TC ruled ifo Te.
I: W/N the dealership agreement is a valid and enforceable contract binding on the Corporation.
H: No. it is not valid and enforceable. All corporate powers are exercised by the Board. It may also delegate specific powers to its
President or other officers. In the absence of express delegation, a contract entered into by the President in behalf of the
corporation, may still bind the latter if the board should ratify expressly or impliedly. In the absence of express or implied
ratification, the President may as a general rule bind the corporation through a contract in the ordinary course of business,
provided the same is reasonable under the circumstances. These rules are applicable where the President or other officer acting
for the corporation is dealing with a third person.
The situation is different where a director or officer is dealing with his own corporation. Te was not an ordinary stockholder; he was
a member of the Board and Auditor of the corporation. He is what is often called a self-dealing director. As a director, he holds a
position of trust and owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. The trust relationship springs from the control and guidance of the corporate
affairs and property interests of the stockholders. A directors contract with his corporation is not in all instances void or voidable.
If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of
his adverse interest is made. The contract in this case is neither fair nor reasonable. At the time of the contract, the corporation
had not yet even started producing the cement. Prices of cement, just like any other commodity, are not stable and expected to
rise. Within a period of six years from the date of dealership agreement the prices were certain to rise, and yet the contract
pegged the rate to P9.70 per bag. This according to the Court was not fair and reasonable at all, and unduly prejudiced the
corporation. The contracts he entered into after the dealership agreement were such as to completely shield him from any

Requisites of a valid contract between the corporation and one or more of its directors, trustees or officers:
o

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

That the vote of such director or trustee was not necessary for the approval of the contract

That the contract is fair and reasonable under the circumstances

That in case of an officer, the contract with the officer has been previously authorized by the Board of
Directors

5.

Disloyalty (Section 34)

Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all
such profits by refunding the same

UNLESS

his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the

outstanding capital stock.

This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture.

Doctrine of corporate opportunity - When a director, trustee or officer attempts to acquire or acquires, in violation
of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a liability upon him to deal in his own behalf, he shall be liable as a trustee
for the corporation and must account for the profits which otherwise would have accrued to the corporation.

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The last paragraph of Section 31 and Section 34 contain the doctrine of corporate opportunity. In case of such
conflict of interests, and the director acts against the good of the corporation, he shall be accountable for the
profits he obtained, even if he had risked his own funds.

6.

Use of inside information

The fiduciary position of insiders, directors, and officers prohibits them from using confidential information relating
to the business of the corporation to benefit themselves or any competitor corporation in which they may have a
mere substantial interest.

The liability of a director or officer guilty of using inside information is to the corporation and not to any individual
stockholder

Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action
as long as there is unfair use of inside information

It is inside information if it is not generally available to others and is acquired because of the close relationship of
the director or officer of the corporation

General rule: (Majority view) Directors owe no fiduciary duty to stockholders but they may deal with them at arms
length. No duty to disclose facts known to the director or officer

H: In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of
Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section
22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws
were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and Distellery,
a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders'
annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified by the
stockholders.
I: Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of Directors
of SMC are valid and reasonable
H: Gokongwei claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority
and prevent them from having representation in the Board, at the same time depriving petitioner of his "vested right" to be voted
for and to vote for a person of his choice as director. Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and
San Miguel Corporation content that the exclusion of a competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation; that it is essentially a
preventive measure to assure stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-interest
of those charged with the promotion of the corporate enterprise.
Under US corporate law, corporations have the power to make by-laws declaring a person employed in the service of a rival
company to be ineligible for the corporation's Board of Directors. ... [A]n amendment which renders ineligible, or if elected,
subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to
the other corporation is valid." This is based upon the principle that where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation
and is good." In the Philippines, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the
qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition
with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established
law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of
the corporation of which he is an officer or director.

Special facts doctrine Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless
hold that where special circumstances or facts are present which make it inequitable for the director to withhold
information from the stockholder, the duty to disclose arises and concealment is fraud.

Gokongwei v SEC.
This involves two actions in the SEC filed by John Gokongwei, a San Miguel Corporation stockholder by himself and through the
URC and CFC, who sued the majority of the SMC BoD (Soriano, Zobel, Roxas, Ortigas, Prieto et al) and SMC itself to declare null
and void the amended by-laws and a cancellation of the certificate of filing the amended by-laws. He alleges the following:

SMCBOD acted without authority in amending the by-laws without the prescribed 2/3 vote of stockholders holding
subscribed and paid-up capital stock

Some members of the SMCBOD amended the by-laws which state that in determining whether or not a person is
engaged in competitive business, the Board may look into factors such as competitive business and family
relationship, thus purposely providing for Gokongweis disqualification as director, and effectively disqualified him
from being elected as director
Gokongwei also files an action in the SEC to compel SMC to allow him to inspect the records of the corporation, including the
minutes of the last stockholders meeting, copy of the management contract with ANSCOR, latest financial statements among
others, including the authority of the stockholders to invest corporate funds in San Miguel International Inc.
The Sorianos counter by alleging that Gokongwei as president and majority stockholder of URC and CFC, conducted bad publicity
against the SMC to generate support from the stockholders in his effort to secure a seat in the board. They add the fact
Gokongwei was rejected by the stockholders because he was engaged in competitive business and securing a seat would have
subjected SMC to grave disadvantages. SEC grants Gokongwei motion but denies the motion to inspect the financial statements
and records of San Miguel International as he is not a stockholder thereof. SEC also allowed him to run as director but cannot sit
as long as the validity of the by-laws has been settled. Meanwhile the SMCBOD submitted the amended by-laws to the
stockholders, who ratified the same.
I: were the amended by-laws valid and reasonable

It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their
private interests." In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign
firm's products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm
for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and,
therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of
his principal.
I: W/N Gokongwei, as SH of SMC, has a vested right to be voted as director in the corporation.
H: It is further argued by SMC that there is no vested right of any stockholder under Philippine Law to be voted as director of a
corporation. Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or
written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation If the
amendment changes, diminishes or restricts the rights of the existing shareholders then the dissenting minority has only one
right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law, the owners of the
majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that
petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was
acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and
modification.
Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any
doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents
entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation,
and in this sense the relation is one of trust." The ordinary trust relationship of directors of a corporation and stockholders",
according to Ashaman v. Miller," is not a matter of statutory or technical law. It springs from the fact that directors have the
control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes
that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof.
I: Whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a competitor from
nomination and election to its Board of Directors.

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H: It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him,
control over the following shareholdings in San Miguel Corporation. According to respondent SMC, in 1976, the areas of
competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of
SMC. The CFC-Robina group was in direct competition on product lines which, for SMC, represented sales amounting to more than
P478 million.
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties
and compensation of directors, officers and employees ... " This must necessarily refer to a qualification in addition to that
specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the
capital stock of the stock corporation of which he is a director ... " Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by
law." To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate
the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the
majority of his fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between the
corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority..."
It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly
confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c)
research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer
or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his
individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment
of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if
not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place
the performance of his corporation duties above his personal concerns.
Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of
loyalty may well require that he disclose this information to a competitive arrival. These dangers are enhanced considerably
where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the
corporate plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel
Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by
the competitor of the strategies for the development of existing or new markets of existing or new products could enable said
competitor to utilize such knowledge to his advantage.
Globe Woolen Co v Utica Gas & Electric. F: Globe Woolen needed electric power to run its mills. Its president and majority SH,
Maynard, was able to get a contract with the electric company Utica Gas which was ratified by the executive committee of Globes
board. Maynard was a nominal SH in the electric company also, and did not vote in the meeting. Globe desires to enforce the
contract.
H: Contracts are voidable at the instance of Utica Gas. Globe argues that by refusing to vote, Maynard shifted responsibility to his
associates, and may reap a profit from their errors. One does not divest oneself so readily of ones duties as trustee. The refusal to
vote, has indeed this importance: it gives to the transaction the form and presumption of propriety, and requires one who would
invalidate it to prove beneath the surface. The trustee or director holds a duty of constant and unqualified fidelity. He cannot rid
himself of the duty to warn and to denounce, if there is improvidence or oppression, either apparent on the surface, or lurking
beneath it.
There was an influence in this case which was exerted by Mr Maynard the president of Globe Woolen. From beginning to end he
dealt with a subordinate, who was alert to serve at his pleasure. The unfairness in the contract is startling and the consequences
could be disastrous. No matter how large the business, or how great the increase in prices of labor or fuel, or there be extensions
to the plant, the electric company had pledged that for 10 years there will be saving of $600/month, $300 for each mill,
$7200/year. As a result of that pledge it has supplied the plaintiff with electric current for practically nothing, and even owes it
some money thereafter. Mr Maynard knew the unfairness of the contract, and he cannot have failed to know that he held a onesided contract which left the defendant at his mercy. Thus his refusal to vote does not nullify, as of course an influence and
predominance exerted without a vote. A constant duty rests on a trustee to seek no harsh advantage to the detriment of his trust,

but rather to protect and renounce he gains what is unfair.

Duty of DILIGENCE CASES
Benguet Electric Cooperative v NLRC. Cosalan, GM of the Benguet Electric Cooperative, was informed by COA that cash
advances received by officers and employees of Benguet Electric had been virtually written off the books, that per diems and
allowances showed substantial inconsistencies with the directives of the National Electricifcation Administration, and that several
irregularities in the utilization of funds released by NEA to Benguet. Cosalan then implemented the remedial measures
recommended by COA. Board members of Benguet responded by abolishing the housing allowance of Cosalan, reduced his salary,
representation and other allowances, and directed him to hold in abeyance all disciplinary actions, and struck his name out as
principal signatory of Benguet Electric. The Board adopted another series of resolutions which resulted in te ouster of Cosalan as
GM. Cosalan nonetheless continued to work as GM, contending that only the NEA can suspend and remove him. The Board then
refused to act on Cosalan request to release compensation due him. Cosalan files a complaint with the NLRC against the Board of
Benguet Electric, and impleaded Benguet Electric itself as well as the individual members of the board in their official and private
capacities. Labor Arbitrer rules ifo Cosalan, holding both the company and the board solidarily liable to Cosalan. NLRC modifies
award to Cosalan by declaring Bengeut alone, and not the Board members, was liable to Cosalan. Benguet appeals.
H: the Board members and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful
scope of their authority in so acting, and act in GF, do no become liable, civilly or otherwise, for the consequences of their acts.
Those acts are properly attributed to the corporation alone and no personal liability is incurred. In this case, the board members
obviously wanted to get rid of Cosalan and acted with indecent haste in removing him from his GM position. This shows strong
indications that the members of the board had illegally suspended and dismissed him precisely because he was trying the rectify
the financial irregularities.
The Board members are also liable for damages under Sec 31 of the Corpo Code, which by virtue of Sec 4 thereof, makes it
applicable in a supplementary manner to all corporations, including those with special or individual charters so long as these are
not inconsistent therewith.
The Board members are also guilty of gross negligence and BF in directing the affairs of the corporation in enacting the said
resolutions, and in doing so, acted beyond the scope of their authority.

Otis & Co. v Pennsylvania Railroad Co. F: Otis & Co is a SH in and among the wholly-owned subsidiaries of the Pennsylvania
Railroad Co (PRR), which included Pennsylvania Ohio 7 Detroit Railroads (POD). One of its subsidiaries had an outstanding bond
issuance of $28.4M. The parent then negotiated with a third party, Kuhn, Loeb and Co, to refinance the bonds. The directors of
POD approved a resolution authorizing the sale of the new Series D bonds at a best obtainable price. Bonds were then sold to
Kuhn and Loeb. Another buyer was willing to purchase the bonds at a better price but the directors declined. The Interstate
Commerce Commission found that the corporation was not able to get the best price for the sale and that other options were not
explored, that negotiations were only with one investment house and were at arms-length dealing, and that it was possible to
have greater savings.
I: W/N the directors are liable for failing to exercise ordinary care and judgment in the issuance and sale of $28M in bonds, which
resulted in alleged losses suffered by the corporation.
H: Business judgment rule: courts will not interfere in matters of business judgment, in which it is presumed that judgment
reasonable diligencehas in fact been exercised. A director cannot close his eyes to what is going on about him in the conduct of
business judgment. Courts have given directors wide latitude in the management of the affairs of the corporation provided that
the judgment is unbiased, honest and reasonably exercised. Negligence must be determined as of the time of transaction.
Mistakes or errors in the exercise of honest business judgment do not subject the officers and directors to liability for negligence in
the discharge of their appointed duties. Directors are entrusted with the management of the affairs of the corporation. If in the
course of management they arrive at a decision for which there is a reasonable basis, and they acted in GF as the result of their
independent judgment, and uninfluenced by any other consideration than what they honestly felt was in the best interests of the
corporation. In the present case, the SC found that the officers and directors of the corporations acted honestly in GF and sought
to exercise their best judgment for the best interests of their corporation. No fraud was present, but only a faint suggestion of BF.
The directors had the right to negotiate privately with Kuhn and Loeb. In contracting with the latter, the directors were not
contracting with another firm in which they were interested, nor did the directorship or officership positions interlock. There is no
contention that fraud existed and fraudulent acts will not be presumed.
Montelibano et al v. Bacolod-Murcia Milling Co Inc. Montelibano et al are sugar planters adhered to the Milling Companys
sugar central mill under identical contracts. The contracts would be in force for 30 years and provide that the resulting product

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should be divided in the ratio of 45% for the mill and 55% for the planters. It was proposed to execute the milling contracts,
increasing the planters shares to 60% of the manufactured sugar and molasses and extending the period from 30 to 45 years.
The Board of the Milling company then adopted a resolution granting further concessions to the planters over and above the
amended contract. 17 years later, Montelibano sues the Milling company, contending that the 3 sugar centrals with a total annual
production exceeding 1/3 of the production of all sugar millis in Negros, had already granted 62.5% participation to their planters,
and in accordance with Para 9 of the resolution, it had become obligated to grant similar concessions to them.
H: When a resolution is passed in GF by the board, it is valid and binding, and whether or not it will cause losses or decrease the
profits of the central, the court has no authority to review them. Questions of policy or management are left solely to the honest
decision of officers and directors of a corporation, and the court is without authority to substitute its judgment for that of the
board; the board is the business manager of the corporation and so long as it acts in GF its orders are not reviewable by the
courts
Litwin v Allen et al. H: The officers are liable for the transaction because the entire arrangement was so improvident, risky, and
unusual and contrary to fundamental concepts of prudent banking practice. A bank director when appointed takes oath that he
will diligently and honestly administer the affairs of the bank or trust company. Honesty alone would not suffice; there must be
more than honestythere must be diligence, and that means care and prudence as well. What sound reason is there for a bank,
desiring to make an investment, to buy securities under an arrangement whereby any appreciation will insure to the benefit of the
seller and any loss will be borne by the bank. There is here more than a question of business judgment. The directors plainly failed
to bestow the care which the situation demanded.
A director, however, is not liable for loss or damage other than what was proximately caused by his own acts or omissions in
breach of his duty. The directors in this case are liable only for the loss attributable to the improper transaction itself, and not after
the option on the improper transaction had expired.
Walker v Man et al. F/H: Corporation was engaged in real estate and advanced a loan to a third person taking as security his PN.
The loan was not authorized by the board and was not for the benefit of the corporation nor was it in aid of its business. No effort
was done to collect on the loan, which became due and demandable. The corporation went bankrupt, and the receiver sues the
directors to collect on the amount due the insolvent corporation and for damages. Court held that the director was negligent.
Steinberg v Velasco. F: The board of the corporation authorized the purchase of 330 shares of capital stock of the corporation
and the declaration of dividends at a time when the corporation was indebted and in such a bad financial condition. The directors
relied on the face value on the books of its A/R, which had little or no value. Furthermore it appears that two of the directors were
permitted to resign so that they could sell their stock to the corporation. The corporation became insolvent, and the receiver
Steinberg sues the directors.
H: The corporation did not have a bona fide surplus with which dividends could be declared and paid out. The directors did not act
in GF and were grossly ignorant of their duties. Directors were held personally liable for causing the corporation to purchase their
own shares and declaring dividends, which because of such failure to take into consideration of worthless receivables, worked to
the detriment of the creditors. The directors did not act with diligence in taking the word of their chairman and not making an
informed decision based on the facts then available to them and on not relying on other documents available to them.
Creditors have the right to assume that so long as there are outstanding debts and liabilities, the board will not use the corporate
assets to purchase its own stock, and that it will not declare dividends to SHs when the corporation is insolvent
Barnes v Andrews. F: Corporation manufactures starters for Ford motor vehicles and airplanes. Director Andrews, the largest
SH, who was induced by the President to become director, held only 2 board meetings. During his term, the company business
was mismanaged. Barnes was then appointed receiver after the corporation had gone under, and was found that the company
had no funds. He alleged that Andrews failed to give adequate attention to the affairs of the company, which had been conducted
incompetently and without regard to the wastage in salaries. Work had languished from incompetence and extravagance and
quarrels between the factory manager and the other personnel affected production.
H: First liability must rest upon the directors general inattention to his duties. He cannot be charged with neglect in attending
director meetings, since there had been only 2. But his liability must depend upon his failure in general to keep advised of the
conduct of the corporate affairs. While directors are collectively managers of the company, they are not expected to interfere
individually in the actual conduct of its affairs. To do so would disturb the authority of the officers and destroy their individual
responsibility, without which no proper discipline is possible. Having accepted a post of confidence, Andrews was charged with an
active duty to learn whether the company was moving to production, and why it was not, and to consider what could be done to

avoid the conflicts among personnel or correct their incompetence, which was slowly bleeding the business to death. He must go
further to show that he should have been more active, as the cause of action against him by the receiver rests upon a tort of
omission as though it had rested on a positive act on his part.
When a business fails from general mismanagement or business incapacity, could the blame be placed upon a single director and
could he have saved the company if he had tried? A director could have least fulfilled his duties to the company and to the SHs to
have made the company prosper, or at least to show that he had done his duty enough to have broken the fall of the company.
This Andrews failed to do. x
True, Andrews was not well-suited by experience for the job he had undertaken. Directors are not specialists, but they must have
good sense, and must have acquainted themselves with the corporate affairs, but they need not have any technical talent. They
are the general advisers of the business, and if they faithfully give such ability as they have, it would not be lawful to hold them
liable. Must a director guarantee that his judgment is good? Can SHs call him to account for deficiencies which their votes assured
him did not disqualify him for office?
Bates v Dresser. F: Bank employee was able to embezzle cash from the branch operations for a considerable period of time,
unbeknown to the bank officers, who relied to heavily and trusted the employee. He was able to swindle money by concealing his
withdrawals through entries in the records of the bank, and matched it with the correct statements which were relied upon by the
cashier.
H: Under the circumstances of this case, the directors did not neglect their duty in accepting the statement of the cashier and
failing to inspect the depositors ledger. They should not be held answerable for taking the cashiers statement to be as correct as
the statement of assets always was. The statement of assets were always correct. A committee was appointed to examine the
operations of the bank. The bank itself was in sound financial condition. Their confidence seemed warranted by the semi-annual
examinations by the government examiner and they were encouraged in their belief that all was well by the president. They were
not bound by virtue of the office gratuitously assumed by them to call in the passbooks and compare them with the ledger, and
until the event showed the possibility they hardly could have seen that their failure to look at the ledger opened a way to fraud.
The position of the president, however, is different. Practically he was the master of the situation. He was at the bank daily for
hours, had the ledger in his hands at time. He had hints and warnings of the unexplained shortages and rapid decline in deposits.
He knew the errant employee had been living at a fast pace and had been dabbling in stocks. He had been put on his guard, and
had they been heeded by the President, it would have led to an examination of the ledgers and would have prevented future
thefts. In accepting the presidency Dresser must be taken to have contemplated responsibility for losses to the bank.

SEIZING CORPORATE OPPORTUNITY CASES

Singer et al v Carlisle. F: Singer et al are SHs of the United Corporation which owns all capital stock of its subsidiary, NY United
Corp, both of which are engaged in the business of underwriting securities. Carlisle et al are directors of the two corporations.
Other defendants are investment houses JP Morgan, Drexel & Co, and Morgan Stanley. United Corp acquired substantial voting
stock of various holding and operating companies/utilities, which were all publicly listed and obtained their funds through the
public sale of their securities. JP Morgan et al were able to obtain large profits from the underwriting of such securities to the
exclusion of United and NY United. Plaintiff Singer charge that the defendant bankers and investment houses and the directors of
the two corporations fraudulently caused the latter corporations to use their influence and control over the subsidiaries in order to
induce them to award the underwriting business to the defendant bankers. Having eliminated United Corp and NY United as their
competitors for the underwriting business of the subsidiaries, the defendants allegedly proceeded to utilize their control and
influence to obtain the business for themselves. Singer et al also claimed that the directors of the corporation, as fiduciaries,
eliminated their cestui as a competitor in the underwriting profits.
H: United and NY United were also engaged in underwriting as do the defendant banks. It was the duty of their directors and
officers to make every effort consonant with good, honest judgment to obtain for those corporations as much of the underwriting
business as possible, and to make this business as profitable as possible. This does not mean, however, that the directors and
controlling SHs of United and NY United were required to do anything detrimental to the affairs of other corporations of which they
were officers and directors, and to the affairs of United and NY United. One in control of a majority of the stock and of the board of
a corporation occupies a fiduciary relation towards the minority, and is charged with the duty of exercising a high degree of GF,
care, and diligence for the protection of the same. Every act in its own interest to the detriment of the minority interests becomes
a breach of duty and of trust, and entitled them to plenary relied. So strict is the rule of undivided loyalty to the beneficiary that
the mere fact that a trustee has an interest inconsistent with the interest of his cestui, casts upon him that burden of justification.

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Where this duty exists, the duty of the trustee is to manage the property and affairs of the corporation with an eye single to the
advantage of the corporation itself. It is not proper for the fiduciary to take those opportunities unto itself, while at the same time
it stayed the processes of its subsidiary directed towards the same business ends. It is not only a case of a fiduciary seizing
business opportunities of the cestui. The trustee at the same time kept its dominant hand over the cestui, suppressing any
attempt by the cestui to go out and compete with the trustee.
Where a fiduciary is engaged in a business in competition with his corporation, he cannot actively use his position and power over
his corporation so as to prevent the corporation from seeking certain businesses in competition with himself. It is charged that the
directors here not only failed and refused any attempt to obtain certain business for their own corporation, but that they
affirmatively prevent the corporation from competing with them for that business. This they may not do. Directorship in two
competing corporation does not in and of itself constitute a wrong. It is only when a business opportunity arises which places the
director in a position of serving two masters, and when dominated by one, he neglects his duty to the other, that a wrong has
been done.
Irving Trust Co v Deutsch et al. F: Irving is the trustee of the insolvent company Sonora Acoustic. Acoustic desired the patents
of the De Forest company and wanted gain at least minority stake to have a voice in the management of its patents and products,
which goes to Acoustics corporate purpose. Reynolds & Co, receiver of the insolvent De Forest, offered to give Acoustic 1/3
participation in the purchase of 600,000 shares of De Forest stock. It also stipulated that Acoustics nominees should hold 4 of 9
seats in the board and that it should have the right to enter into a contract to handle the managing and selling of De Forest
products. This offer was presented to the board of Acoustic and a resolution was passed authorizing its president, Deutsch, to
obtain sufficient funds to enable Acoustic to carry out its obligations in case it accepts the offer. No funds were obtained but
Biddle and Deutsch et al, agreed to put up the money and accept the certificates of De Forest stock issued when date of payment
came under the offer. Reynolds agreed and issued the certificates. The deal was consummated on the purchase of De Forest
stock. It was then traded in the exchange and Biddle, Deutsch et al were able to reap huge profits in selling their shares. Acoustic
declares bankruptcy and sues the Biddle group, three of whom were directors of De Forest, appropriated to themselves Acoustics
right under its contract, when as fiduciaries they were obligated to preserve those rights for Acoustic and were forbidden to take
position where personal interest would conflict with the interest of their principal.

and they even incurred a definite risk which at the time was totally eliminated from the cestuis position in the same stock. In
other words, the profit of the cestui was assured; that of the directors were still at hazard.
Duty of Controlling Interests
Insuranshares Corporation v Northern Fiscal Corp. F: The Management group (composed of Philadelphia banks) transferred
control over the Insuranshares Corporation, an investment trust specializing in shares of small life insurance companies, to the
Boston Group, none of whom ever had any interest of any in it. With the control went plenary power under the by-laws to sell or
transfer all the securities in the companys portfolio. Such acquisition of control was the first step of a grand scheme, planned by
the Boston Group with the connivance of brokers, to strip the corporation of its valuable assets, leaving a mere shell to the
remaining SHs.
H: This case involves more than just a question of liability in the sale of corporate stock: it is the sale of control by a minoritybut
controllinginterest.
Those who control a corporation either by the majority or minority stock ownership owe some duty to the corporation in respect of
the transfer of the control to outsiders. Owners of control in a corporation are under a duty not to transfer ownership to outsiders
if the circumstances surrounding the proposed transfer are such as to awaken suspicion and put a prudent man on his guard. In
this case the evidence shows that the Boston group were acquiring control over the corporation by improper means and for an
improper purpose.

In order to constitute a corporate opportunity that was deprived by the directors, it was necessary to prove the ff:

The shares purchase were in contemplation of equity offered to the cestui

That the cestui had some legitimate right or expectancy in these shares
The question to ask is, have the directors profited at the expense of their corporation; have they gained because of disloyalty to
its interest and welfare? In this case, the opportunity was a routine piece of business wholly lacking in the unique and special
quality which distinguished other corporate opportunity cases. The interest of the directors in the stock was purely speculative,

Liability of directors for watered stocks: Shall be solidarily liable with the stockholder concerned to the corporation

or issued value of the same.

8.

Seizing corporate opportunity

A director has a duty to refrain from usurping a business opportunity rightly belonging to the corporation. In case
of breach of this obligation, he has a duty to account to the corporation all profits received by him (Section 34)

The facts of the present case militate strongly against the directors since in this case, they absolutely bound Acoustic by contract
to make payments to Reynolds and exposing it to risk of a suit for damages for nonperformance, without committing themselves
to it to relieve it of this obligation if necessary when time for payment arrives. Directors of a solvent corporation are forbidden to
take over for their own profit a corporate contract on the plea of the corporations financial inability to perform. If the directors are
uncertain whether the corporation can make the necessary outlays, they need not embark upon the venture. If they do, they
cannot substitute themselves for the corporation any place along the line and divert possible benefits into their own pockets.

H: A director of a corporation is in a position of fiduciary. He will not be permitted to improperly profit at the expense of the
corporation. Undivided loyalty will ever be insisted upon. Personal gain will be denied to a director when it comes because he has
taken a position adverse to or in conflict with the best interests of the corporation. The fiduciary relationship imposes a duty to act
in accordance with the highest standard. There is thus no basis for holding that in acquiring stock through JP Morgan at $20, any
of the defendants were guilty of a breach of fiduciary duty. The CS purchased did not represent in any case a business opportunity
for the Guaranty Corporation. Having fulfilled their duty to the corporation in accordance to their best judgment, the directors
were not precluded from a transaction for their own account and risk.

Issuance of watered stock (Section 65)

and its creditors for the difference between the fair value received at the time of issuance of the stock and the par

H: The theory of the suit is that a fiduciary may make no profit for himself out of a violation of duty of the cestui, even though he
risked his own funds in the venture, and that any one who assists in the fiduciarys dereliction is likewise liable to account for the
profit so made. It is clear that there is no contract between Acoustic and Reynolds because the offer did not run to Acoustic but to
the Biddle group as individuals. The management contract, once entered into, would enable access to the patents, stock
ownership in De Forest as a going concern after receivership was lifted, and were all concededly legitimate corporate purposes.
Thus the proposed purchase is not ultra vires.

Litwin v Allen et al. F: JP Morgan, in disposing of 1,250,000 shares of CS of Alleghany corporation, offered 500,000 to Guaranty
Corporation to be sold on a commission at $24/share. Before the public offering, Morgan also offered the other 750,000 to friends
at $20. Among those receiving the shares were some directors of Guaranty Corp, who received 40,000 shares. The market opened
at a premium and the directors were able to dispose of their stock at a substantial profit.

7.

UNLESS, his act has been ratified by a vote of the stockholders owning or representing at least 2/3 of the
outstanding capital stock

J.

Officers can be held liable under (Section 31)

Remedies in case of mismanagement

Receivership

Injunction if the act has not been done

Dissolution if the abuse amounts to a ground for quo warranto but the Solicitor General refuses to act

Derivative suit a complaint filed with the SEC

Uichico, et al. vs. NLRC:

The petitioners, who are officers and directors of Crispa, Inc., assailed the decision of the NLRC holding them
solidarily liable with Crispa for the payment of separation pay and backwages to the private respondents. It was

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the contention of the petitioners that the award of separation pay and backwages is a corporate obligation and
must therefore be assumed by Crispa alone.

OFFICERS

While the general rule is that obligations incurred by a corporation, acting through its directors, officers and
employees, are its sole liabilities, there are times when solidary liabilities may be incurred such as in this case

A.

Corporate officers

where it is undisputed that petitioners had a direct hand in the illegal dismissal of respondent employees. They
were the ones, who as high-ranking officers and directors of Crispa, signed he Board resolution retrenching the

private respondents on the feigned ground of serious business losses that had no basis apart from an unsigned

The officers execute the polices laid down by the board but in practice have wide latitude in determining the
course of business operations

and unaudited profit and loss statement which had no evidentiary value whatsoever. This is indicative of bad faith
on the part of petitioners for which they can be held jointly and severally liable with Crispa for all the money claims

1.

Minimum set of officers and Qualification (Section 25)

Immediately after their election, the directors of a corporation must formally organize the election of:

of the illegally terminated respondent employees.

Tramat Mercantile, Inc. vs. CA:

a.

A president, who shall be a director

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation

b.

A treasurer who may or may not be a director

may so validly attach, as a rule, only when:

c.

A secretary who shall be a resident and citizen of the Philippines, and

d.

Such other officers as may be provided for in the By-laws

He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its
affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;

He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the

Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time.

corporate secretary his written objection thereto;

K.

He agrees to hold himself personally and soidarily liable with the corporation; or

He is made, by a specific provision of law, to personally answer for his corporate action.

2.

Disqualifications (Section 27)

No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6)

Executive committee (Section 35)

years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment,
shall qualify as a director, trustee or officer of any corporation.

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.

3.

Liability in general (Section 31)

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to

Said 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:
o

approval of any action for which shareholders' approval is also required;

the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes

the filing of vacancies in the board;

a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account

the amendment or repeal of by-laws or the adoption of new by-laws;

for the profits which otherwise would have accrued to the corporation.

the amendment or repeal of any resolution of the board which by its express terms is not so amendable or
repealable; and

4.

Dealings with corporation (Section 32)

A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of

a distribution of cash dividends to the shareholders.

Cannot go as far as to render the bond powerless and free from all responsibilities imposed on it by law

Must be provided in the by laws, composed of not less than 3 members of the board

Essential the executive committee acts by majority vote of all the members

such corporation, unless all the following conditions are present:

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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;

Powers are limited; cannot bind the corporation unless authorized.

That the vote of such director or trustee was nor necessary for the approval of the contract;

That the contract is fair and reasonable under the circumstances; and

policies laid down by the board and perform such acts and enter into such contracts which are within the usual

That in case of an officer, the contract has been previously authorized by the board of directors.

course of business unless the board has given a broader authority. Even if act is not within the usual course of
business, if the board hd acquiesced in the past to similar acts, his subsequent acts must be deemed within his

a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds

implied authority. A third person has the right to presume that GM had authority to perform acts in ordinary course

(2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the

of business

Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting:

Coverage of corporate officer

Ongkingco v. NLRC - where the By-laws of the condominium corporation specifically includes the position of
Superintendent/Administrator in a roster of corporate officers, then such position is clearly a corporate officer
position and issues of reinstatement would be within the jurisdiction of the SEC and not the NLRC.

Tabaug v. NLRC - When the By-laws of the corporation provide that one of the powers of the BoTrustees is to
appoint a Medical Director, Comptroller/Administration, Chief of Services, and such other officers as it may deem
necessary and prescribe their powers and duties then such specifically designated positions should be considered
corporate officers positions.

C.

The authority of corporate officers to bind the corporation is usually not considered inherent in their office but is
derived from law, the corporate by-laws or by delegation from the board either expressly or impliedly by habit,
custom, or acquiescence in the general course of business

Gen rule: A person dealing with a corporate officer is put on inquiry as to the scope of the latters authority but an
innocent person cannot be prejudiced if he had the right to presume under the circumstances the authority of the
acting officers.

President no inherent powers by virtue of his office but acts done in the ordinary course of business is
presumably within the scope of his authority unless the contrary is proven. In many instances, he is impliedly
vested with corporate powers through long acquiescence.

Other agent the corporation may employ such other persons as may be necessary to carry on the business

Yu Chuck v Kong Li Po. Kong Li Po is a corporation engaged in the publication of a Chinese newspaper. Its AOI provide for a
president who shall sign all contracts and other instruments of writing, but does not provide for a business or general manager. CC
Chen or TC Chen was appointed general business manager of the paper. He then entered into an agreement with Yu Chuck for the
printing of the newspaper for P580 per month. Yu Chuck worked for a year until they were discharged by the new manager Tan
Tian Hong because CC Chen had left for China. Yu Chuck sues the paper, claiming the the contract was for a period of 3 years, and
that discharge without just cause before the expiration of this term entitles them to receive full pay for the remainder of the term.
Kong Li Po counters that CC Chen was not authorized to enter into the contract with Yu Chuck. TC ruled ifo of Yu Chuck, concluding
that the contract had been impliedly ratified by Kong Li Po and that although he had no express authority to enter into the
contract, since he was general business manager in charge of the printing of the paper and thus had implied authority to employ
the petitioners
I: W/N CC Chen had the power to bind the corporation through the contract mentioned.
H: GR: The power to bind a corporation by contract lies with its board of directors or trustees, but this power may either be
expressly or impliedly delegated to other officers or agents of the corporation. EXCEPTION: An officer or agent who has general
control and management of the corporations business or a specific part thereof, may bind the corporation by the employment of
such agents and employees as are usual and necessary in the conduct of such business. Exception to exception: Where the
authority is vested expressly in the BOD.
As to the term of employment, a manager has authority to hire an employee for such a period as is customary or proper under the
circumstances, but unless he is expressly authorized or held out to have such authority, he cannot make a contract of
employment for a long future period, such as for 3 years. There can be no doubt that CC Chen as general manager of the Kong Li
Po, had implied authority to bind the defendant corporation by a reasonable and usual contract of employment with the plaintiffs.
But the term of employment is unusually long, and the conditions are otherwise so onerous to the defendant corporation that the
possibility of the corporation being thrown into insolvency thereby is expressly contemplated in the same contract.

Authority of corporate officers

General manager takes care of the day to day affairs of the corporation. Powers are limited to implementing the

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with

Provided, however, That the contract is fair and reasonable under the circumstances.

B.

purpose

Treasurer entrusted with authority to receive and keep funds and to disburse them as he may be authorized.

His acts may be subsequently ratified and the

corporation may be bound. He cannot be secretary and treasurer at the same time

Vice President no inherent power. Takes over when the president is absent

Secretary duties are ministerial. Cannot bind the corporation unless authorized or named manager

The corporation also did not impliedly ratify the contract, just because the president of Kong Li Po saw the plaintiffs work as
printers in the office one day. Before a contract can be ratified, knowledge of its existence must, of course, be brought home to
the parties who have authority to ratify it or circumstances must be shown from which such knowledge may be presumed. No
such knowledge or circumstances indicating knowledge is shown or proven in the case. Moreover, a ratification by him would have
been to no avail; in order to validate a contract, a ratification by the BOD was necessary. The fact that the president was
authorized by the by-laws to sign documents evidencing contracts doesnt mean that he had power to make the contracts.
Woodchild Holdings Inc v Roxas Electric and Construction Co. The respondent posits that Roxas was not so authorized
under the May 17, 1991 Resolution of its Board of Directors to impose a burden or to grant a right of way in favor of the petitioner
on Lot No. 491-A-3-B-1, much less convey a portion thereof to the petitioner. Hence, the respondent was not bound by such
provisions contained in the deed of absolute sale.
H: Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However, under
Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind the corporation
unless it has ratified such acts expressly or tacitly, or is estopped from denying them. Thus, contracts entered into by corporate
officers beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation.
Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor of the petitioner on a
portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof. The authority of Roxas, under the resolution,
to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the adjacent lot, Lot No. 491A-3-B-1, or to create or convey real rights thereon. Neither may such authority be implied from the authority granted to Roxas to

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Page 24

sell Lot No. 491-A-3-B-2 to the petitioner on such terms and conditions which he deems most reasonable and advantageous. The
general rule is that the power of attorney must be pursued within legal strictures, and the agent can neither go beyond it; nor
beside it. The act done must be legally identical with that authorized to be done. In sum, then, the consent of the respondent to
the assailed provisions in the deed of absolute sale was not obtained; hence, the assailed provisions are not binding on it.
It bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the principal may knowingly
permit the agent to so hold himself out as having such authority, and in this way, the principal becomes estopped to claim that
the agent does not have such authority; second, the principal may so clothe the agent with the indicia of authority as to lead a
reasonably prudent person to believe that he actually has such authority. There can be no apparent authority of an agent without
acts or conduct on the part of the principal and such acts or conduct of the principal must have been known and relied upon in
good faith and as a result of the exercise of reasonable prudence by a third person as claimant and such must have produced a
change of position to its detriment. The apparent power of an agent is to be determined by the acts of the principal and not by
the acts of the agent.
It bears stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the latter had taken possession of the
property. As such, the respondent had the right to retain the P5,000,000, the purchase price of the property it had sold to the
petitioner. For an act of the principal to be considered as an implied ratification of an unauthorized act of an agent, such act must
be inconsistent with any other hypothesis than that he approved and intended to adopt what had been done in his name.
Ratification is based on waiver the intentional relinquishment of a known right. Ratification cannot be inferred from acts that a
principal has a right to do independently of the unauthorized act of the agent. Moreover, if a writing is required to grant an
authority to do a particular act, ratification of that act must also be in writing. Since the respondent had not ratified the
unauthorized acts of Roxas, the same are unenforceable. Hence, by the respondents retention of the amount, it cannot thereby
be implied that it had ratified the unauthorized acts of its agent, Roberto Roxas.
Board of Liquidators v Kalaw. Maximo Kalaw is chairman of the board and general manager of the National Coconut
Corporation (NACOCO), a non-profit GOCC empowered by its charter to buy sell barter export and deal in coconut, copra, and
dessicated coconut. Bocar, Garcia and Moll were directors. It entered into contracts for the trading and delivery of copra. Nature
intervened4 typhoons devastated agriculture and copra production. NACOCO was on the verge of sustaining losses and could
not be able to make good on the contracts. Sensing this, Kalaw submitted the contracts to the board for approval and made a full
disclosure of the situation. No action was taken, and no vote was taken on the matter. On 20 Jan 1947 the board met again with
Kalaw, Bocar, Garcia, and Moll in attendance, and approved the contracts. NACOCO however only partially performed the
contracts. One of the contracts concerns the Louis Drayfus & Co., which sued NACOCO. NACOCO settled out-of-court and paid
Drayfus P567,024.52 representing 70% of total claims. The total settlements sum up to P1.3M. NACOCO sues Kalaw, and his
directors Bocar, Moll and Garcia to recover this sum, alleging negligence and BF and breach of trust in approving the contracts, by
not having them approved by the board. TC dismisses complaint. NACOCO claims that the by-laws provide that prior Board
approval is required before the GM can perform or execute in behalf of NACOCO all contracts necessary to accomplish its purpose.
I: W/N the Kalaw contracts are valid despite its lack of prior board approval as required by the NACOCO by-laws
H: The contracts in question are forward sales contractsa sales agreement entered into, even though the goods are not yet in
the hands of the seller. Given the peculiar nature of copra trading, ie copra must be disposed of asap else it would lose weight and
would decrease its value, it necessitates a quick turnover and execution of the contract on short notice (w/in 24 hours). It would
be difficult if not impractical to call a formal meeting of the board each time a contract is to be executed.
NACOCO board met the difficulties attendant to forward sales by leaving the adoption of the means to the sound discretion of
Kalaw. Long before the contracts came into being, Kalaw already contract by himself alone some 60 such contracts, and NACOCO
reaped a gross profit. These contracts were contracted without prior authority from the Board and were known to all the members,
but nothing was said by them. Also contracts entered into by Kalaw had been submitted to the board after execution, not before
as required by the by-laws. The Board has knowledge of this and did not object to the same. Thus the practice of the corporation
has been to allow its GM to negotiate and execute contracts in behalf of NACOCO without prior Board approval, and by its acts and
through acquiescence practically laid aside the requirement in the by-law. The contracts are therefore valid.
Ratification by a corporation of an unauthorized act or contract by its officers relates back to the time of the act or contract
ratified and is equivalent to original authority. The theory of corporate ratfication is predicated upon the right of a corporation to
contract, and any ratification or adoption is equivalent to a grant of prior authority. Ratification cleanses the contract from all its
defects from the moment it was constituted. By corporate confirmation of the contracts in dispute on 20 Jan, the Kalaw contracts
are thus purged of whatever vice or defects they may have. Thus even in the face of an express by-law requirement of prior
approval, the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations.
There was no BF or breach of trust on the part of Kalaw. The board knew, and Kalaw had so informed it, that the contracts would
cause heavy losses. The Court found no trace of any dishonest purpose or moral obliquity or ill will that partakes of the nature of
fraud which would consitute BF on the part of Kalaw. The Board did not eventhink of raising their voice in protest against past
contracts which brought enormous profits to NACOCO. The ratification was an act of simple justice and fairness to the GM and to

the best interest of the corporation whose prestige would have been seriously impaired by a rejection of the board of those
contracts which proved disadvantageous.

MEETINGS OF STOCKHOLDERS

A.

DIRECTORS

Kinds (Section 49)

B.

AND

Meetings of directors, trustees, stockholders, or members may be

o

regular

special

When and where held? (Sections 50, 51, and 53)

Meetings of Stockholders (Section 50)

o

Stockholders action is needed in major changes in the corporation which would affect their contract with the
corporation and although such action is usually initiated by the board, it is not sufficient to give them effect.
Stockholders or members approval expressed in a meeting duly called and held for the purpose is still
necessary. Exceptions:

Sec 16 any corporation may amend its AI by majority vote of BOD or written assent of 2/3 of the
stockholders

Corporations may be bound by unanimous agreement of its stockholders although expressed elsewhere
than at a meeting

Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not
so fixed, on any date in April of every year as determined by the board of directors or trustees

When there is no person authorized to call a meeting, the Secretaries and Exchange Commission, upon
petition of a stockholder or member on a showing of good cause therefor, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice
required by this Code or by the by-laws.

The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or
members present have been chosen one of their number as presiding officer.

Place and time of meetings of stockholders of members - Stockholder's or member's meetings, whether
regular or special, shall be held in the city or municipality where the principal office of the corporation is
located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for
purposes of this section, be considered a city or municipality.

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Members of non-stock corporations may provide in by-laws that meetings may be held any place even
outside the place where the principal office is located provided proper notice is sent and that it is within the

D.

Quorum required (Section 25 and 52)

Philippines
o

All proceedings had and any business transacted at any meeting of the stockholders or members, if within
the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called,

Meeting of directors or trustees and officers (Section 25)

o

Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of

provided all the stockholders or members of the corporation are present or duly represented at the meeting.

directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of

(Sec 51)

corporate business, and every decision of at least a majority of the directors or trustees present at a meeting
at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall

Meetings of Directors or trustees (Section 51)

o

Regular meetings of directors or trustees shall be held monthly, unless the by-laws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time upon the call of the president

require the vote of a majority of all the members of the board.

or as provided in the by-laws.

o

Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders

Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless

representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock

the by-laws provide otherwise.

corporations.

Requisites of board meetings

Bylaws may provide for a greater or lesser quorum

Where quorum is present at the start of a lawful meeting, stockholders present cannot without justifiable

Meeting of the Board duly assembled

Existence of quorum (majority of the board members) and

cause break the quorum by walking out from said meeting so as to defeat the validity of any act proposed

Decision of the majority of the quorum duly assembled

and approved by the majority

Note: Directors in Board meetings cannot be represented or voted by proxies.

E.

C.

Meeting of stockholders (Section 52)

Who presides (Section 54)

Noticed required (Section 50 and 53)

The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members,

When there is no person authorized to call a meeting, the Secretaries and Exchange Commission, upon petition of

Meetings of Stockholders/Members
o

unless the by-laws provide otherwise.

Written notice of regular meetings shall be sent to all stockholders or members of record at least two (2)
weeks prior to the meeting, unless a different period is required by the by-laws

a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder

Written notice of special meetings shall be sent at least one (1) week prior to the meeting, unless otherwise

or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by

provided in the by-laws.

o

Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member

Failure to give notice would render a meeting voidable.

Attendance to a meeting despite want of notice will be deemed implied waiver

the by-laws.

members present have been chosen one of their number as presiding officer.

F.

The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or

Who could attend and vote? (Section 25 and 58)

Meetings of Directors or trustees (Section 51)

o

Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every

Stockholder in person

director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-

Proxies:

laws.
o

A director or trustee may waive this requirement, either expressly or impliedly

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

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Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the
corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it
is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time.

G.

DEVICES AFFECTING CONTROL

1. Proxies

Directors or trustees cannot attend or vote by proxy at board meetings.

Required attendance at meeting for election

Stock corporation - majority of outstanding capital stock

Non-stock corporation - majority of members entitled to vote

Johnston v Johnston. Logan, Irene, and Felisa Johnston, and Louis and Rosario Johnston, and Elizabeth Araneta are the majority
shareholders of a family stock corporation known as Johnston Lumber Co Inc. A stockholders meeting was scheduled to elect a
new set of directors who would in turn choose the new officers of the corporation. Logan presented a proxy by his mother, Felisa,
and another proxy by his wife, Irene, which all-in-all represented 1,242 of the 2,462 shares of the corporation. He also requested
that the duly endorsed shares of JB Solis be listed in the books for voting purposes. Minority SH Louis Johnston, as Chairman of the
board, denied the request. Logan quickly sent for the original owners so that they could vote in his favor. Louis also disallowed
Logan from voting the 307 shares of the elder Johnston which he had been voting in his capacity as administrator of the estate
because the estate proceedings were already terminated. Thereafter, and before the existence of a quorum could be declared,
Logan et al walked out of the SH meeting and refused to recognize the validity of the meeting. Louis group, the minority carried
on and elected themselves directors and officers. Another SH meeting was called by Louis at the instance of Logan, which will
cover matters not taken up or not finished during the regular SH meeting. During the meeting Logan moved for the election of a
new board, claiming that there was no quorum in the last meeting and thus was not validly held. Louis denied the motion. Logan,
who represented majority of the stocks, then nominated his own set of directors, and his group cast their votes in favor of the
nominees, which were elected the new members of the board. This action was overruled again by Louis as Chair. Logan Irene and
Felisa filed a quo warranto suit alleging that they were the duly elected members of the BOD of Johnston Lumber Co, and were
also elected as the corporate officers thereof and praying for the ouster of Louis, Araneta and Rosario Johnston.

I: (1) Which of the two factions, the Logan group or the Louis group, was validly elected as directors and officers of the corporation
H: The SHs who remained after the group representing the majority walked out without a quorum being declared represented the
minority and did no constitute a quorum, and it is clear that they could not have validly transacted further business much less
have elected a new set of directors. It follows that if the election of the directors after the withdrawal of Logan was null and void,
then the subsequent meeting of the board at which the Louis group was elected was likewise null and void.
If the purpose in bolting the meeting was to deliberately defeat the existence of a quorum, the absence of a quorum, then it
would produce the effect of nullifying the proceedings that follows. It is to be noted that a SH can, for justifiable reasons, break the
quorum by w/drawing from the meeting. Logan walked out because Louis persistently and with reason overruled Logan on his
requests to vote the shares of the Silos family, which he validly purchased. That Logan did everything possible to register the
stocks in order to vote them was substantial compliance with the charter and the by-laws. The denial by Louis to vote the shares
of the minor children of Albert Johnston was likewise unreasonable. The withdrawal of Logan, although it actually defeated the
existence of a quorum, was neither unreasonable nor unjustifiable.
The second meeting of SH was properly convened. All parties were present. The roll was called and a quorum was declared. The
contention of Louis that the 2nd meeting did not amount to an election cannot be sustained. It must be remembered that the
Logan group held the majority of stocks when they cast their votes ifo the nominees. The inaction of the Louis faction, did not
have the effect of defeating or invalidating the election. It is the essence of all elections that the will of the majority, properly
expressed, shall govern. A majority of votes cast will decide, although some SHs who are present may refuse to vote, and thus the
majority of the votes cast may be less than a majority of the persons or stocks present or represented.
Neither may the second election be assailed on the ground that notice did not specifically include the election of the new board on
the agenda. The notice provided that matters not taken up or finished during the first meeting will be part of the agenda,
therefore the SHs knew that Logan would press for the new board and they were prepared for it, having attended the first
meeting. Furthermore, all SHs were present either in person or by proxy during the 1st meeting and whatever defect in the notice
was cured b their presence and acquiescence.

two meanings of proxy:

o
person duly authorized by the stockholder to vote in his behalf at a stockholders meeting

is actually an agent for a special purpose

rules on agency apply to the relationship

o
the actual document evidencing this authority
types of proxy:
o
general proxygives the power to vote for directors and on all ordinary matters which may be properly be
taken in an SH meeting

does not include the power to vote for an amendment to the AOI or other unusual transactions
o
limited proxyrestricts the authority to vote to specified matters only and may direct the vote to be case in a
certain way
Nature of proxy: a special form of agency governed by the laws on agency
o
Strictly fiduciary relation, and therefore as a GR, revocable in nature despite contrary stipulations
o
Exception: coupled with an interest

Includes where the proxy has parted with the value or incurred liability at the SHs request

which would mean to it is NOT the giving of onerous consideration that makes a proxy one that is
coupled with an interest, but that the proxy is an integral part of the security by which a loan is to
be paid
requisites for valid proxy (58)
o
in writing
o
signed by SH or member
o
filed before the scheduled meeting
term of proxy:
o
proxy may fix the period it may be used, but cannot exceed 5 years, renewable for not more than 5 years per
renewal
o
no period specified: expires after the meeting for which it was given and cannot be used for another meeting
unless it is renewed
who may be appointed proxy?
o
Stock: no limitation, and BL restrictions on SH right to appoint a proxy will be VOID
o
Non-stock: 89: AOI or BL may restrict right to appoint proxy
revocability:
o
GR revocable even before the period has expired and even if it expressly provides for irrevocability
o
Exception: coupled with an interest

Irrevocable for the period fixed

Upon expiry, proxy automatically ceases to be effective unless renewed

What constitutes sufficient interest? Depends from case to case

Procedure/practice:
o
management usually sends a proxy form with notice of the annual stockholders meeting
o
persons suggested as proxies have been selected by the incumbent directors and are sometimes referred to
as the proxy committee
o
the existing management who may own only a small portion of the corporations shares can retain its control
over corporate affairs for as long as they can obtain the necessary number of proxies from absentee
stockholders
o
proxies may not be appointed orally and the written proxy should be filed with the corporate secretary before
the meeting

failure to comply will render the proxy void and ineffective

vote or presence counted on the basis of a void proxy may result in the invalidation of any action,
unless the number of shares required for quorum or voting is present
o
when a group of SH feel dissatisfied with management, they may seek control to correct such
mismanagement by soliciting proxies for the next election of directors
o
each block of SH will seek proxies of absentee SHs
o
since management has the right to defend its present policies, it can as a rule, use corporate funds and
facilities in solicitation, as long as:

it acts in GF,

the expenses are reasonable under the circumstances and

the proxy war is not a personal one

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Page 27

GR: when the right to vote by proxy is given by statute, a stockholder cannot be deprived of it by any by-law
Exception: non-stock corpsCode allows for a waiver of the right provided this is made in the AOI or by-laws
By-laws may also impose reasonable conditions as to the form and manner of voting by proxy

In re Giant Portland Cement. H: Stock transferred on the books of the corporation within 20 days prior to a stockholders
meeting, for the election of directors, is temporarily disenfranchised, and cannot be voted either by the transferor or by the
transferee. The persons on whose proxies the SH meeting were the SH of record within the provision of the statute, although they
were not real beneficial or equitable owners of the stock. The right to vote shares of corporate stock, having voting powers, has
always been incident to its legal ownership. Whatever the rights of the mere unrecorded assignee of the stock certificate might be
in the absence of a by-law or other contract provision requiring all transfers of shares to be recorded on the books of the
corporation, it is not contended that such a provision is not authorized or is not binding as between SHs and the corporation. As
between the transferor and the unrecorded transferee to the stock certificate, the legal title passes to the latter. A very different
rule applies between the corporation and the mere unrecorded assignee of the certificate of stock. That is because limited
contract restrictions relating to stock transfers, are for the benefit of the corporation, and to enable it to ascertain from its records
who its members of SHs are. So far as the corporation is concerned, until such a by-law is complied with, the record owner must
therefore be regarded as the real owner of the stock, with the consequent general right to vote it by proxy or otherwise. When
considered from a legal standpoint, there is no privity of contract between the mere holder of the certificate and the corporation,
and he is not a real member of that organization until the transfer is recorded. Until that time, the possible legal rights of the
holder of the certificate are of an inchoate nature. In other words, a real novation, whereby a new contract between the mere
holder of the certificate and the corporation is substituted for the prior contract of the record owner, can only be brought about by
complying with the corporate regulation relating to transfers of stock. The record owner may, therefore, be the mere nominal
owner, or technically a trustee for the holder of the certificate, but legally he is still a stockholder in the corporation, and so far as
the corporation is concerned, like the usual trustee, ordinarily has the right to vote the stock standing in his name. In cases of this
nature, when nothing more than a mere dry trust is involved the owners of the certificates can usually protect their rights by
recording the transfers and having the new certificates issued; but even though that could not be done in this case because the
corporate transfer books were closed at the time of the assignments, they could have compelled the record owners to give them
proxies to vote the stock standing in their names. A mere nominal owner naturally owes some duties to the real beneficial owner
or equitable owner of the stock, and even if the right to demand a proxy is not exercised, if the vendor exercises his legal right to
vote in such a manner as to materially and injuriously affect the rights of the vendee, he is perhaps answerable in damages in
some cases. It can hardly be contended that the actual consent of the holder of the certificate is ordinarily essential to the right of
the record owners to vote stock standing in their names.
When the right and power of a mere record owner to vote is questioned, some ultra vires, negligent, or improper willful act or
omission on the part of the corporation or its agents is relied upon and must appear. In some cases the court may also reject
votes cast by the record owners, which are regarded as improper, solely because of some peculiar inequitable circumstances
affecting the relation between such apparent owners and the transferee of the certificates. Conceding that as between a
transferor who has parted will all the beneficial interest in stock and his transferee, the board equities are all in favor of the latter
in the matter of its voting.

It is clear from the proxy agreement that the parties agreed that Paine Mitchell stock should be used in conjunction with the stock
owned by Engle so that the policies of the respondent should be thus controlled. In this situation Engle was more than a mere
agent. In voting stock he served purposes of his own in maintaining control of the corporation by his choice of directors and the
determination of policies and business affairs of the corporation. This voting of the stock for these purposes was the subject
matter of the agency. Engle acquired an interest in the subject matter of the power given to him and this interest was coupled
with such power. The power to vote the stock was necessary in order to make Engles control of the corporation secure. The
mutual agreement as a whole created something like a community of interest in the stockholdings of the parties having for its
purpose the use of their stock as a unit and the effect of which was to give both parties an interest in the voting of the stock,
although the power to vote was to be exercised by Engle after the death of Jordan or by Paine-Mitchell after the death of Engle.
This power was couple with an interest and by the entire agreement between the parties the power was intended to be and
became a security to effectuate the main purpose of the agency. The parties did no more than promise to give each other an
option to purchase in the even either had a proposal to buy his or its stock; but the option agreement must be considered with the
proxy agreement in determining the intention of the parties and whether Engle had an irrevocable proxy. The conclusion is that
Engle had a power coupled with an interest and that the authority was given to him as part of a security and was necessary to
effectuate such security and therefore the proxy was not revocable by the appellant.
A proxy in favor of the pledgee of the shares subject of the proxy is sufficient interest to render the proxy irrevocable
voting trust agreement

Defn: a trust agreement whereby a stockholder transfers his shares to a trustee who will exercise his voting rights.
Under this arrangement, the stockholder remains the beneficial or equitable owner of the shares, but legal ownership is
transferred to the trustee.
Essence of voting trust: real ownership is separated from the voting rights
Involves the complete surrender by the SH of his voting rights to a trustee or trustees
Voting trustee is only a share owner vested with colorable and fictitious title for the sole purpose of voting upon stocks
that he does not own
Transferring SH ceases to become SH of record but retains the right of inspection of corporate books
During the period of the agreement, it is irrevocable for as long as the trustee has not violated the trust by his
misconduct or fraud.
Conditions for the use of voting trustsSec 59:

State ex rel Everett Trust v Pacific Wax. I: W/N the proxy to vote the stock owned by Paine-Mitchell and Jordan was revocable
H: The rules against perpetuities is usually stated as prohibiting the creation of future interest or estates, which by possibility may
not become vested within a life or lives in being and 21 years the rule however applies only to the vesting of future estates and
does not apply to vested estates. The option agreement did not create a future estate or interest to become vested at some
future time. It was a promise by an owner of stock in a corporation that if at any time during the next 20 years he desired to sell
his stock he would give the promissee the first opportunity for a period of 15 days to purchase it a such price and upon such
terms and conditions as the promisor offered. It was in effect a promise to give an option in the even the promisor desired to sell
his stock.
GR: a proxy given by a SH to vote his corporate stock at a meeting of the SHs of a corporation is revocable by him even though
the proxy by its terms is expressly made irrevocable.
Exceptions:
(1) where authority or power is coupled with an interesta power coupled with an interest is a power or authority to do an act,
accompanied by or connected with an interest in the subject or thing itself upon which the power is to be exercised, the power
and interest being united in the same person. The interest is not limited to the thing itself upon which the power is to be
exercised, but is also included the subject upon which the power is to be exercised. It is however sufficient that the proxy holder
have an interest in the subject matter upon which the power is to be exercised. The thing itself may refer to tangible shares or
certificates of stock, but the subject matter may refer to the intangible voting right and the incidental control of the corporation.
(2) where authority is given as part of a security or is necessary to effectuate a securityin such a case the interest of an agent is
something more than an interest in being permitted to exercise the power, yet something less than an estate in the subject
matter or thing upon which the power is to be exercised.

2.

Requisites of a valid voting trust: (59)

o
In writing and notarized
o
Certified copy filed with the corporation and the SEC
o
Period not longer than 5 years, but renewable each time for not more than 5 years

Exception: where the voting trust is a condition of a loan agreement, in which case it may be for a longer
period but not beyond the time when the loan is fully paid
o
Certificates of stock is to be cancelled, and new ones issued to the trustee stating that it is issued in pursuance of a
voting trust agreement
o
Transfer must be entered in the corporate books
o
Trustee should issue voting trust certificates in favor of transferring SHs
o
Not for an illegal purpose, or for the benefit only of the trustee without any obligation to perform any useful service for
the protection of the stockholders or creditors of the corporation

it must have a legitimate business purpose to promote the best interest of the corporation or even to protect
the legitimate interests of others in the corporation
creation of voting trust:
o
transferring SHs receive transferable voting trust certificates as evidence of their rights

rights other than voting rights may also be transferred to the trustee
o
but the SH ceases to be a SH and his rights are now against the trustee in accordance with the agreement
o
SH has the express right to inspect corporate books and records
o
Trustee is also qualified to become a director, since he is the registered owner of the shares and fulfills the qualifications
of the Code that at least one share is owned to become qualified as director
o
No voting trust agreement may be kept secret among the parties thereto; it must be open to examination
o
No voting trust agreement may be exclusive, since the law gives a SH the right to transfer his shares to the trustee
upon the same terms and conditions in the agreement

Everett v Asia Banking. Teal & Company is indebted to HW Peabody & Co. for P300K for tractors, plows, and parts delivered, of
which it has paid P150K. Asia Banking Corp held drafts accepted by Teal under the HW Peabodys guarantee. Tractors were

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Page 28

returned to HW Peabody due to its being unsellable due to financial and agricultural depression in the RP. Teal ordered another lot
of tractors from Smith Kirkpatrick, but shipment was delayed until the rescission of the credit of Teal with Asia Bank. Yet Smith still
delivered the order, and Teal at the request and advice of the Bank accepted the drafts and stored the same. Asia bank persuaded
Teal, Peabody, and Smith Kirkpatrick to enter into a creditors agreement wherein it was mutually agreed that neither of the
parties should take action to collect its debts from Teal for 2 years. Teal soon became indebted to Asia Bank for P750,000, secured
by mortgage. The Bank then suggested that, for the mutual protection of Teal and itself, it was advisable that the Bank should
temporarily obtain control of the management and affairs of the company. To this end, it was necessary for the SHs to place their
shares in a voting trust to be held by the Bank, then the Bank would finance Teal under its own supervision. The Teal SHs were
thus induced to enter into the Voting Trust Agreement, with the purpose that the agreement will be intended for the protection of
all parties from outside creditors. Shortly after the execution and delivery of the voting trust and the MOA, Mullen as GM of the
Bank, caused the displacement and removal SH representatives in the Board and the substitution in their place of the Banks
employees or representatives. The new Board, who have not purchased any share of stock of Teal, proceeded to remove the Corp
Secretary, discharge all the old managers and displace them with creatures of their own choosing whose interest consisted wholly
in pleasing themselves and the Bank, and who were wholly foreign to the stockholders.

Right of transferring SHs to set aside the trust agreement when their rights are trampled upon by the trustee. Corpo Code
now provides that no VTA will be used for purposes of fraud.

Mackin v Nicollete Hotel. Dixon was the owner of a leasehold interest in a tract of land in Minneapolis upon which stood what
was known as the Nicollet Hotel. Nicollet Hotel Inc was organized for the purpose of adding to the hotel accommodation of that
city. Arrangements were made to have Dixon take 2500 shares for his lease and to erect an new Nicollet Hotel upon this property.
Cost was $3M, to be raised by the sale of $1M mortgage bonds and $1.25M of preferred stock. The Minnesota Loan and Trust Co
approved the loan application of Nicollet for $1.8M secured by the said mortgaged bond. The loan agreement stipulates that a
voting trust agreement is entered covering the common stock of Nicollet. The State Securities Commission approved Nicollets
application for the license to sell its preferred stock, provided that the common stock is to be trusted with three trustees for 10
years for the protection of preferred SHs. Thereafter a voting trust agreement was entered with Dixon et al as voting trustees.
Mackin is the owner of a trust certificate representing 80 shares of common stock, alleging that the voting trust is void and that
the trustees and directors appointed have mismanaged the company and have caused large losses. The agreement also allegedly
denied them the right to inspect the books, and they ask the court to declare the same null and void and appoint a receiver until
the beneficial owners can elect a new set of directors.

expiration of the agreement, NIDC should turn over the assets to Batjak. What was assigned to NIDC was the power to vote the
shares of stock representing 60% of SHs, who are signatories to the agreement. Nowhere in the agreement is mention made of
any transfer or assignment to NIDC of Batjaks assets operations and management. NIDC was constituted as trustee only of the
voting rights of 60% of outstanding shares. What was to be returned by NIDC as trustee to Batjaks SHs upon termination of the
agreement, was the certificates of stock, not the properties or assets which were never delivered to NIDC in the first place. The
acquisition of PNB and NIDC of the properties was not in its capacity as trustee but as a creditor in accordance with the financing
agreement.

VTA

H: Batjak premises its right to possession through the receivership of the 3 oil mills in the voting trust agreement, claiming that
under said agreement, NIDC was constituted as trustee of the assets, management, and operations of Batjak, and that due to

as part of Loan Agreement

VTA as part of loan agreement can exceed 5 years as an exception to the rule that VTAs cannot be for more than 5 years
VTA as part of loan agreement ensures that the lending institution would have a controlling interest in corporate votes
Constitutes further security to the lending institution
In reality, the lending institution would have very little interest in the operations of the corporation as to require a voting
trust
3.

pooling and voting agreements

Definition: an agreement between two or more SHs to vote their shares the same way.
Through this kind of agreement, SHs who individually own only a minority of the shares but together represent the
majority, can obtain control of the management of the corporation.
Usually relates to the election of directors, which may either specify the name of the nominees to be voted for, or the
number shares to be voted as a unit
In case of disagreement: arbitration
Since pooling agreements personal obligations to do, then although valid it cannot be enforced by action for specific
performance
These agreements have been upheld as valid provided they do not limit the discretion of the board or work fraud
against the other SHs
o
Ex. An agreement that directors once elected must vote for certain persons as officers would be void, since the
choice of officers is vested in law in the board
Voting agreement vs. voting trust: VA does not involve a transfer of stocks but is merely a private agreement between
and among SHs to vote the same way. Breach would therefore give rise to liability for damages.
In close corporations: Sec 100:

4.

cumulative voting

the system of cumulative voting gives the minority an opportunity to elect a representative to the board
it is vital to both the majority and the minority to cumulate their votes so that they can get as many seats as possible

5.

classification of shares (Sec 6)

device of classification of shares can be used to achieve the allocation of control desired by the parties
if shares are classified into common voting and preferred non-voting shares, the management of corporate affairs will
be controlled by whoever owns the majority of the common voting, even though it may only be a minority of the total
number of shares (voting and non-voting)
control would depend not on the amount of investment, but on the number of voting shares acquired
if non-voting shares are non-redeemable, the prospect that the investor may get back his investment at some future
time before dissolution would be a compensating factor
SEC: to prevent abuses, it requires where no dividends are declared for 3 consecutive years despite available profits,
that preferred stocks be given the right to vote for directors until dividends are declared

I: W/N the voting trust is valid

H: Voting trusts are not illegal per se. In the instances where the voting trust has been held void, there existed invalidating
circumstances such as want of consideration, voting power not coupled with an interest, fraud, illegal purpose, and so on. In this
case there was no charge of illegality or fraud, nor of any invalidating circumstance. The voting power of the three trustees is
coupled with an interest because of one of the trustees is a substantial owner of the common stock, and all are charged with the
duty of protecting and conserving property for the benefit of those who became purchasers of preferred stock and bonds. The
whole purpose of the agreement is legitimate and wholesome. It was a matter of civic pride and to make this possible, it involved
the invitation of combinations of capital in substantial amounts, which could only be secured by having those who invested their
money assured of the fact that there would be a continuity of management during a period of years until such time that the new
enterprise would have an opportunity to justify a successful financial future. It would be a manifest injustice to the large number
of holders of bonds and preferred stocks, not to the parties to the suit, to adjudge and hold illegal a trust agreement upon the
strength of which they had invested their money in the enterprise. It also appears that Mackin purchase the certificates of trust
after the creation of the trust agreement and are presumed to have full knowledge of the limitation of their rights.
NIDC v Aquino. Batjak, a manufacturer of coco oil and copra cake for export, is on the brink of bankruptcy. It entered in to a
Financial Agreement with PNB for additional operating capital for its 3 processing mills and to pay its other debts to other banks.
Under the agreement with PNB, NIDC, a wholly-owned subsidiary of PNB, would invest P6.7M worth of preferred shares convertible
within 5 years into common stock to pay off the other debts and the balance to pay off its own due with PNB. PNB also granted
various credit accommodations. Batjak as part of the deal, mortgaged all its properties in the province. A 5-year voting trust
agreement was executed ifo NIDC by the SHs representing 60% outstanding stock of Batjak. Years later, PNB instituted foreclosure
proceedings against the mortgaged properties due to Batjaks insolvency, and soon became owner of the properties. Batjak failed
to exercise its right to redeem within the period allowed and PNB transferred ownership of the 2 oil mills to NIDC. 3 years later,
Batjak represented by majority SHs, inquired with NIDC if it was still interested in negotiating the renewal of the voting trust
agreement. NIDC replied that its was no longer interested and requested turn-over of all Batjak assets and properties. Batjak
demanded an accounting of all assets and properties and operations but NIDC refused to comply. Batjak then filed an action for
mandamus. CFI Judge Aquino issued a TRO prohibiting NIDC from removing any record, report, or document or disposing all of the
properties of Batjak, and allowed Batjak to inspect the same. Batjak then moved for the appointment of a receiver. NIDC and PNB
opposes, but overruled by CFI. MRs denied.

SC failed to appreciate the fact that the voting trust was obtained from the SHs of the borrowing corporation precisely to
allow PNB-NIDC to have management and undertake control in the operations of the borrowing corporation
In this case, the VTA was part and parcel of the loan arrangement, and should have been considered by the Court as a means
by which the lending institution obtains control over the management or operation of the borrowing corporation, and not
merely as a transfer only of voting or other rights pertaining to the shares

In a close corporation, it is allowed to classify its directors into one or more classes, each of whom may be voted for and
elected solely by a particular class of stock
6.

restriction on transfer of shares (Sec. 98)

HLP2009-3B

7.

Page 29

common example: a restriction which gives a first option to other SHs and/or the corporation to acquire the shares of a SH
who wishes to sell
o
peculiar to close corps
prescribing qualifications for directors; (Sec. 47 par.5) founders shares (Sec. 7)

definition of the qualifications of directors or trustees may be provided in the by-laws

examples:
o
a by-law provision that only SHs with a stated minimum number of shares fully paid up may be elected as directors is
valid (Govt v El Hogar)
o
a by-law that disqualify a SH who is competing with the corporation, as the corporation has the right to protect itself
from persons who may use inside information to its prejudice (Gokongwei v SEC)
o
a by-law that only holders of founders shares may qualify for directorship (Sec 7)

exception to Sec 6 that non-voting shares shall be limited to preferred and redeemable shares

5 year period non-extendible

SEC approval

8.
management contracts (Sec. 44)
BOD may decide to enter into mgt contracts with another corporation
The managing corporation will then perform all the managerial functions usually pertaining to a GM
BOD must still retain control of the basic corporate policies and power to recall the contract where the corporations interest
would greatly suffer from its continuance
Not an exception to Sec 23 which lays down the fundamental principle that all corporate powers shall be exercised by the
BOD
BOD cannot abdicate its responsibility to act as a governing body by giving absolute powers to offices or others by way of
management contracts
The management contract is therefore a mere contract to manage the day-to-day affairs of the corporation just like a GM
It is one for lease of services and is not of agency

Sherman & Ellis v Indiana Mutual Casualty Co.

F: Indiana Mutual Casualty Co was organized to take over the business of an unincorporated association engaged in writing
policies covering risks created by the Indiana Workmens Compensation Law. It ratified an agreement with Sherman & Ellis by
which the management of the casualty company was conferred upon Sherman Ellis for 20 years. Indiana Mutual terminated its
contract after some difficulties arose between Sherman Ellis and the Indiana state department in which the latter tried to appoint
a receiver for Indiana Mutual. Sherman sues for specific performance to enforce the contract.
H: the contract provides that the underwriting and executive management for Indiana Mutual will be performed by Ellis, president
of Sherman Ellis, and may appoint another officer to be the chief executive head and underwriting manager of the company. It
also provides that the managing company (Sherman Ellis) shall have general supervision and charge of underwriting affairs and
shall be entitled to 10% of the net earned premiums collected from all policyholders. The grant of corporate power by a state is
upon the hypothesis that these powers shall be exercised by the corporations officers, annually elected by the SHs and not by the
officers of another corporation. Although generally corporations may for a limited period delegate to a stranger certain duties
performed by the officers, there are duties the performance of which may not be delegated to outsiders. In this case the period of
control of the managing corporation is 20 years. Nothing of importance was left for the BOD but the mere ministerial duties. The
agreement contemplated the substitution of Sherman Ells for the officers of Indiana Mutual. The principal business of Indiana was
write casualty insurance, which is now solely exercised by Sherman Ellis. No other conclusion can be drawn other than that
Indiana Mutual was to be an instrumentality through which Sherman Ellis was to conduct a casualty business in the state of
Indiana.
9. unusual voting and quorum requirements (Sec. 97)

a device which in effect increases the veto power of the minority

usually involves the formation of a corporation which has clearly efined majority and minority blocks.

o
In exchange for the numerical majority in the board, the minority might bargain for a provision in the AOI giving them
strong veto power in mjor corporate decisions

In close corps, a requirement in the AOI that unanimous vote of all SHs is necessary would only have the effect of
maintaining the status quo.
Benintendi v Kenton Hotel. 2 men owned in equal amounts all the stock of a domestic business corporation, made an
agreement to vote for and adopt the by-laws of the corporation, providing that no action should be taken by the SHs except by
unanimous vote of the SH present in person or by proxy should be sufficient, that the directors of the corporation should be the 3
person receiving the unanimous vote of all SHs, that no action shall be taken by the directors except by unanimous vote of all

directors. The minority SHs sued to have the by-laws adjudged valid and to enjoin the majority from doing anything inconsistent
therewith.
H: the device is intrinsically unlawful because it contravenes an essential part of State policy. But a requirement, that there shall
be no election of directors unless every single vote be cast for the same nominees is in direct opposition to the rule that the
receipt of plurality of votes entitles a nominee to election.
The by-law which requires unanimous action of SHs to pass any resolution or take action of any kind, is equally obnoxious to the
statutory scheme of stock corporation management. The whole concept of a representative government in a corporation, with
voting conducted conformably to statute, and with the power of decision lodged in certain fractions of the stock, is destroyed
when the SHs by agreement or by-law or AOI provision as to unanimous action, give the minority interest an absolute, permanent
and all-inclusive power of veto.
The last by-law makes it impossible for the directors to act on any matter except by unanimous vote of all of them. Such a by-law
is almost unworkable and unenforceable because, prima facie in all acts done by a corporation, the major number must bind the
lesser, or else differences could never be determined. Every corporation is given the privilege of enacting a by-law fixing its own
quorum requirement at a fraction not less than that mandated by law. But the very idea of a quorum is that when that required
number of persons goes into session as a body, the votes of a majority thereof are sufficient of binding action.
Dissent: While the 2 by-laws are indeed invalid because it is violative of the statutes, the courts should nonetheless enforce
against either SH the agreement made by both of them which finds expression in those by-laws.
Devices affecting controlcommon denominator is the contractual obligation

SHs NOT of record: CANNOT vote, CANNOT be vote for

Once voting rights are exercised by another, voting rights of the owner of shares are already impaired

Proxies: proxy holder is an agent

o
Does it affect ownership rights? No. Registration of shares? No
o
Why do I need them?

No distinct and clear majority to collate enough votes to form majority

Biggest SHs; Shares are so widely held/dispersed

o
5-year term of proxies only applies to revocable proxies
o
voting trusts and proxies coupled with an interest (security for obligations)
o
deemed to have sufficient interest

pledgor-pledgee: interest of pledgee in ensuring that the value of stock used as security may not be impaired,
and may be sold at a premium to 3rd parties at public auction in case obligors/debtors default

Voting trust: beneficial owner is SH; legal ownership is trustee

o
Registration with SEC and corporation of stock certificate (effect is constructive notice to 3rd parties)
o
All stock certificates issued in name of participating SHs are presented for cancellation and issuance of new ones;
voting trust certificates are issued by the trustee
o
Orig SHs are delisted; replaced by trustees with notation that it holds stocks of orig SHs
o
The corp has no concern with the relation of SH and trustee
o
SH still has naked title; he can still sell the shares by selling the VTC. But trustee is now SH of record!
o
Total divorce of voting rights

Voting rights: trustee; Economic rights: SH

o
VTA is binding on participants even if there is disposition of the VTC

Can trustee sell shares? NO! it holds it in trust

Can transferee of VTC vote the shares? NO! only the trustee
o
Only binding arrangement would be the fiduciary arrangement

In proxies without an interest and pooing agreements, NO fiduciary nature!

o
Key to determining w/n VTAs exist:

trustee exercises DISCRETION as to the vote, but it may also be consensual, i.e. trustees can agree among
themselves who to vote

There is also delegation of authority; It is not the corporation constituting the VTA, it is the SHs!

Pooling agreements: reciprocal arrangement of those who reach a consensus to exercise right to vote separately, but shares
remain with SHs

Consideration for voting devices

o
sufficient consideration: In Clark, IPR, services, secret formula; In Harkert, loan/investment; In Ringling, RFR; in
Avalon, PS with econ rights
o
So long as consideration is in place, obligation satisfactorily performed, voting agreement is justified, enforceability
should be there!

Management contracts: Is the manager/managing corp a trustee? NO covered by contract

HLP2009-3B

Page 30

Effect of higher quorum or voting requirements

o
Controlling interest of the corporation can be vetoed by the minority
o
Would affect disposition of corporate assets
o
Controlling interest has the authority to formulate the policies
o
Anarchy/tyranny of the majority

Fua Cun then sued, contending that by virtue of payment of the subscription price of the shares, Chua Soco in effect became
the owner of 250 shares and sought to have his lien on the shares be declared to hold priority over the claim of the bank. China
Bank argued that the interest of Chua Soco was merely an equity which cannot be made the subject of a CM. TC ruled ifo Fua Cun.

SHARES

As to the CM, the CM would not prevail over liens of third persons without notice; an equity in shares is of such an intangible
character that is somewhat difficult to see how it can be treated as chattel and mortgaged in the same manner that the recording
of the same will furnish constructive notice to third parties.
There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties
and as to person to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of
securing a debt. As against the rights of fua cun, the bank had no lien unless by virtue of the attachment, but the attachment was
levied after the bank had received notice of the assignment of Chua Socos interest to fua Cun and was therefore subject to the
rights of the latter.

OF STOCKS

Stockholders: owners of shares in a corporation which has a capital stock

Members: Corporators of a corporation which has no capital stock

Stockholders or members have residual power over fundamental corporate changes like amendment of the articles

H: TC erred in holding that Chua Soco became owner of 250 shares. Fua Cuns rights consist in an equity of 500 shares and upon
payment of the unpaid portion, he becomes entitled to the issuance of the certificate for 500 shares in his favor.

of incorporation

A.

Subscription to Shares

1.

Subscription Contract

Any contract for the acquisition of unissued stock in an existing or a corporation still to be formed shall be deemed
a subscription contract, notwithstanding the fact that the parties may refer to it as a purchase or some other
contract. (sec 60)

Transfer for consideration of treasury shares is a sale by the corporation (not subscription). A transfer of fully paid
shares by a stockholder to a third person is a sale. But it seems that assignment by a subscriber of his unpaid
subscription would require that the requisites for valid release from subscription must be complied with

Shareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of
compensation or set-off has no application

Not necessarily required to be in writing

Baltazar v Lingayen Gulf Electric. F: Baltazar and Rose were incorporators of the Lingayen Gulf Electric Power Co. and
subscribed to:
Baltazar = 600 shares (paid 535 shares after transfers, owned 341 shares w/ cert. plus 65 shares w/o certificate)
Rose = 400 shares (paid 375 shares w/ certs)
leaving unpaid a certain portion thereof. It is the company practice to issue certificates of stock to its individual subscribers for
unpaid shares of stock. Defendants Ungson et al are small SHs ( <100 shares) of the corporation, and are the majority of the
board. Co-defendant Acena is the largest single SH with 600 shares and was responsible for election to the board of two of the 4
majority board members (Ungson Group). Baltazar was responsible for the election of the other 2 (Baltazar Group).
Ungson Group which controlled the corporation passed 3 resolutions which threatened to expel the plaintiffs and prevent them
from exercising their voting rights: (1) declaring watered stocks issued to Acena, Baltazar, Rose and Jubenville of no value and
cancelled the same; (2) all unpaid subscriptions to bear interest, and all payments to be credited to interest first, capital debt
second, and ; (3) all stock declared delinquent on the accrued interest are incapacitated to avail of voting power.
Baltazar and Rose sought to allow them to vote their fully paid-up shares and to declare the resolutions invalid. A compromise
deal was executed, but enforcement by the TC was enjoined by the Ungon Group and asked for amendment. TC amended but was
opposed by Baltazar. The Court then reversed the amending decision, ruling that all shares of the capital stock of the corporation
covered by fully paid shares are entitled to vote in all meetings.
Baltazar claims that once a SH has subscribed to a certain number of shares, although he has made partial payments, but is
issued a certificate for the paid-up shares, he is entitled to vote the whole number of shares subscribed, whether paid or not. The
corporation counters that under the doctrine in the Fua Cun case, a partial payment of a subscription does not entitle the SH to a
certificate for the total number of shares subscribed by him, and his right consists only in equity to a certificate of the total
number of shares subscribed for, upon payment of the remaining portion of the subscription price.
I: W/N a SH with a balance of unpaid shares subscribed is entitled to vote the latter

2.

Pre-incorporation subscription (Section 61)

Pre-incorporation subscription is a subscription for shares of stock of a corporation still to be formed.

It shall be irrevocable for a period of at least six (6) months from the date of subscription.

It can only be revoked, when:

o

when all of the other subscribers consent to the revocation, or

when the incorporation of the corporation fails to materialize within six (6) months or within a longer period
as my be stipulated in the contract of subscription.

After the submission of the articles of incorporation to the SEC, no pre-incorporation subscription may be revoked.

Fua Cun v Summers. F: Chua Soco subscribed for 500 shares (P100 par) of China Banking Corporation, paying and leaving a
balance of P25,000.
He issued a PN ifo Fua Cun for the balance, securing the note with a CM on the shares of stock, and endorsing the receipt of the
stock purchase). Chua Soco was also indebted to China Bank (P37,731.68), and upon default his interest in the 500 shareas was
attached and the receipt seized by the sheriff. The attachment was levied after the bank knew of the fact that the receipt had
been endorsed to Fua Cun.

H: YES> The present case does not come under the principle in Fua Cun because it was the practice of the company since its
inception, to issue certificates of stock even for unpaid shares and gave voting power to stocks fully paid. The present law
requires as a condition before a SH can vote that his full subscription be paid in the case of no par value shares, and with respect
to par value shares, the SH can vote the shares full paid, irrespective of the unpaid delinquent shares. A corporation may now, in
the absence of provisions in their by-laws to the contrary, apply payments made by subscribers either as full payment for the
corresponding number of stock or as payment pro-rata to each and all the entire number of shares subscribed. In this case,
corporation chose to apply payments by the SHs to definite shares of stock and had full paid-up shares certificates for the
payments. Its call for payments of unpaid subscription and its declaration of delinquency only affecting the remaining number of
shares.
Here the corporation applied the payments made to the full par value of shares subscribed, instead of the accrued interest. This
being the case, the application of payments must be deemed to have been agreed upon by the corporation and the SHs and
cannot now be changed without the consent of the SHs concerned. It would therefore result that a corporation may, upon the
request of an interested SH, apply payments by them to the full par value of subscribed capital stock.

Since it was the practice of the corporation to issue stock certificates to not fully paid subscribers, it may not take away the
right to vote granted by the certificate
Stock certificates may be issued for less than the number of shares subscribed for
o
Provided the par value of each represented by the certificate has been paid
o
And it is not prohibited by the by-laws

HLP2009-3B

Page 31

Nava v Peers Marketing Corp. F: --Po was an incorporator of Peers Marketing and subscribed to 80 shares (P100 p.v.) paying
25% of the amount of subscription. No certificate of stock was issued.
--Po sold to Nava 20 of the shares. In the deed of sale Po represented that he was the absolute and registered owner of the 20
shares sold.
-- Nava requested the corporation to register the sale, but was denied because Po had not fully paid the amount of subscription.
(was informed that Po was delinquent in payment of his subscription and that corp had the claim to his entire subscription of 80
shares). Nava filed a mandamus action to compel the corporation to register the shares in the books. TC dismissed petition.
--Nava contends the ruling in Fua Cun is not applicable in affirming corporations refusal to register in the books the sale to him of
20 shares. Nava relies on the ruling in Baltazar v Lingayen Gulf Electric, which held that the corpo law requires as a condition
before a SH can vote his shares that his full subscription be paid in the case of no par stock; but in par value stocks, the SH can
vote his shares fully paid by him, only, irrespective of the unpaid delinquent shares.

b)

and lawful purposes at a fair valuation equal to the par or issued value of the stock issued
o

Securities and Exchange Commission.

H: NO>> The Nava transfer is not the alienation sale or transfer of stock contemplated in the old Law. As a rule, shares which
may be alienated are those which are covered by certificates of stock.
As prescribed in the corpo law, shares of stock may be transferred by delivery to the transferee of the certificate properly
indorsed. However, that cannot be followed in the instant case because the 20 shares are not covered by any stock certificate in
Pos name. Moreover, a corporation has a claim on the said shares for the unpaid balance of the subscription.
A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his
subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less contestable. A
corporation cannot release an original subscriber from paying for his shares without valuable consideration, without the
unanimous consent of the SHs.

Stocks shall not be issued for a consideration less than the par or issued price thereof.

Consideration for the issuance of stock may be any or a combination of any two or more of the following:
a)

Actual cash paid 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.

Prohibited consideration: Shares of stock shall not be issued in exchange for promissory notes or future service

Same consideration applies for the issuance of bonds by the corporation.

Fixing of issued price of no-par value shares: The issued price of no-par value shares may be fixed:
a)

in the articles of incorporation or

b)

by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the bylaws, or

c)

in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock
at a meeting duly called for the purpose.

The value of the consideration received must be equal to the issue price of the shares of stocks which in no case
shall be less than par

Watered stock shares issued as fully paid-up when in fact the consideration agreed to and accepted by the
directors of the corporation was something known to be much less than the par value or issued value of the
shares.

Water in stock refers to the difference between the fair market value at the time of the issuance and the par or
issued value of said stock. Subsequent increase in the value of the property used in paying the stock does not do
away with the water in the stock. The existence of such water is determined at the time of issuance of the stock.

C.

Liability for watered stocks (Sec 65)

Consideration for stocks (Sec 62)

Labor performed for or services actually rendered to the corporation;

Fair valuation is appraisal made in good faith

B.

c)

There is no clear duty here on the part of the officers of Peers to register the 20 shares in Navas name. The court also ruled that
there is no parallelism between Nava and the Baltazar case. In the latter, the SH-incorporator was the holder of a stock certificate,
and the issue was whether the said shares had voting rights although the incorporator had not fully paid the subscription, which is
not the issue in this case. There is no stock certificate issued to Po, and without itwhich is the evidence of ownership of the
stockthe assignment of corporate shares is effective only between the parties to the transaction. The delivery of the stock
certificate is essential for the protection of both the corporation and its SHs.
Fua Cun, Lingayen Gulf and Nava cases were all decided before the Code
Fua Cun: a contract of subscription is INDIVISIBLE, unless the contrary is provided
o
Partial payment DOES NOT entitle the SH to the issuance of a certificate covering shares corresponding to the amount
paid
o
Payment is in effect PRO-RATED among all the shares, so that no one share is fully paid
Lingayen Gulf: shares may be deemed fully paid for the amount paid that corresponds thereto
o
It was the practice of the corporation in Lingayen to issue certificates for stocks it considered to be fully paid, although
the subscription has not been paid
SEC: in interpreting the two cases, a corporation has two (2) alternatives in applying payment for subscriptions:
o
Either apply the amount paid as full payment for the corresponding shares, (Lingayen) or

Certificate of stock would then be issued

o
as payment pro-rata on each of the entire number of shares subscribed for (Fua Cun and Nava)

no certificate of stock may be issued until the subscription is full paid

64: no corporation can issue a certificate of stock until the subscriber has paid his subscription in full
o
applies to par and no-par shares
o
Lingayen gulf case no longer applies
o
Speaks of only of subscription

Valuation of consideration other than actual cash, or consists of intangible property such as patents of
copyrights- initially be determined by the incorporators or the board of directors, subject to approval by the

I: W/N the corporation can be compelled to enter in its books the sale made by Po to Nava of 20 shares

Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use

Any director or officer of a corporation consenting to the issuance of stocks

o

for a consideration less than its par or issued value or

for a consideration in any form other than cash, valued in excess of its fair value,

or who, having 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.

HLP2009-3B
D.

Page 32

Certificate of Stock and transfer of shares

1.

Issuance of stock certificates

Definition Certificate of stock:

It is the document issued to stockholders evidence of their ownership of such

d)

cannot prevail over rights of a subsequent attaching creditor

e)

not entitled to dividends

f)

stockholder on record has the right to participate in meetings.

Unauthorized transfers:
a)

certificates indorsed in blank where the stockholder indorses his certificate in blank in such a manner as to

number of shares in the corporation that issued the certificate.

clothe whoever may be in possession of it with apparent authority to deal with the shares as the latters own,

No certificate of stock shall be issued to a subscriber until the full amount of his subscription, together with the

he will be estopped from claiming the shares as against a bonafide purchaser. This is called the theory of

interest and expenses (in case of delinquent shares) if any is due, has been paid. (Sec 64)

quasi-negotiability

How issued: The capital stock of stock corporations shall be divided into shares for which certificates signed by the

b)

forged transfers if the corporation should issue a new certificate pursuant to a forged transfer, it incurs no

president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the

liability to the person in whose favor it issued it and may demand its return for cancellation. It is the duty of

corporation shall be issued in accordance with the by-laws. (Sec 63)

the purchaser to determine that the indorsement was genuine. But with respect to a subsequent purchaser in

Shares are personal property Shares of stock so issued are personal property and may be transferred (Sec 63)

good faith and for value, the corporation is estopped from denying the validity of the newly issued certificate

2.

Transfer of shares

corporation. Except where recognition of the original and new subscriber will result to an overissue of shares.

Shares of stock may be transferred as follows (Sec 63):

The new SH would now have right to damages against the corporation and the latter against those who made

a)

indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer

false representations.

b)

delivery of the certificate or certificates

c)

To be binding against third persons, transfer of shares should be recorded in the books of the corporation

because by issuing such, it has represented that the person named therein is a stockholder of the

A capital gains tax return must be presented / doc stamps paid to corporate secretary before transfer is effected in
the books of the corporation.

showing therein the ff.:

names of the parties to the transaction,

the date of the transfer,

the number of the certificate or certificates and

the number of shares transferred.

Bitong v. CA

A certificate of stock cannot be considered issued in contemplation of law unless signed by the president or vice
president and countersigned by the secretary or assistant secretary.

The rule is that the endorsement of the certificate of the stock by the owner or his attorney in fact or any other

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the

person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is

corporation (Sec 63).

coupled with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of

Transfer of shares not tainted with any irregularity shall be valid as between the parties.

transfer of shares from the lawful owner to the new transferee. Thus, for a valid transfer of stocks, the

Purpose of registration

requirements are as follows:

a)

enable the transferee to exercise all the rights of a stockholder

a)

There must be delivery of the stock certificate;

b)

to inform the corporation of any change in share ownership so that it can ascertain the persons (a) entitled to

b)

The certificate must be endorsed by the owner or his attorney-in-fact or other person legally authorized to

the rights (b) subject to the liabilities of a SH

c)

until registration is accomplished, the transfer, though valid between the parties, cannot be effective against

make the transfer; and

c)

To be valid against third parties, the transfer must be recorded in the books of the corporation.

the corporation

Effect of lack of registration:

a)

transferee cannot vote

b)

transferee cannot be voted for

c)

an outsider

Sunset View Condominium Corp v Campos

HLP2009-3B

Page 33

Sunset View Condominium corporation filed suit against Aguilar-Bernares Realty and Lim Siu Leng for collection of

a)

assessments levied on their respective condominium units which they bought on installments and had not yet fully

transfer

paid

Issue on pre-emptive right is between stockholders, I.e., Bragas pre-emptive right and Abejos right to

b)

Respondents not shareholders of condominium corporation because they are not yet fully paid

Virginias street certificate is within special competence and jurisdiction of the SEC dealing with free
transferability of corporate shares

a)

Sec 5 Condominium Act shareholding in a condominium corporation will be conveyed only in a proper case

c)

There is no requirement that stockholder must be registered in order that SEC may take cognizance

b)

Sec 4 of Condominium Act leaves to Master Deed the determination of when shareholding will be transferred

d)

Mandamus is proper

to purchaser of a unit

e)

Registration of the valid transfer of shares of stock involves a ministerial duty on the part of the corporate

c)

Master Deed provides that only owner of unit is a shareholder and that ownership of unit is acquired by

secretary

purchaser subject to conditions and terms of the instrument conveying the unit to such purchaser.
d)

Deed of Conveyance provide that ownership is conveyed only upon full payment of purchase price

e)

Sec 10 Condominium Act Membership in Condominium corporation shall not be transferable separately from

f)

The issue is not the ownership of shares but the non-performance of the Corporate Secretary of a ministerial
duty

condominium unit of which it is an appurtenance

Tan v SEC

Rivera v Florendo

Alfonso Tan is owner of 400 shares in Visayan Educational Supply Corp evidenced by certificate No. 2

Alfonso transferred 50 shares to Angel

Certificate No. 2 was cancelled and Certificate No. 6 was issued to Angel and Certificate No. 8 was issued to

Akasako, allegedly the real owner of the shares of stock in the name of Rivera sold shares to Tsuchiya

Other stockholders sold shares to them as well

Thereafter, Rivera refused to make indorsement

Corporation refused to register the stock certificates

Action for mandamus to cause registration of stock certificates

Certificate No. 8 was later on cancelled due to above

This is not intra-corporate, Tsuchiya is an outsider and not yet owner of shares unless and until registered

After several years, Alfonso Tan filed a case with Cebu SEC questioning the cancellation of his stock certificates

Dispute cannot be the subject of mandamus. Corporate Secretary cannot be compelled to register the transfer
a)

Shares of stock in question (Rivera shares) are not even indorsed by registered owner. Tsuchiya and Jureidini

Alfonso. However, Alfonso did not make the proper endorsement and did not make delivery of cerificate no. 2

trade

despite non-endorsement and lack of delivery

has no clear legal right.

b)

Even the shares of stock purchased from other incorporators cannot be subject of mandamus on the strength

These issues will have to be threshed out in an ordinary action

Delivery and endorsement under S 63 of the corporation code is not mandatory because of the use of the word
may

of mere indorsement of supposed owners without express instructions from them.

c)

Later on, Alfonso Tan elected to withdraw from the corporation. In exchange for his shares, he received stocks in

Delivery is not essential where it appears that the persons sought to be held as stockholders are officers of the
corporation and have custody of the stock book as in this case

To hold that cancellation of certificate of stock of Alfonso is null and void because of lack of delivery and
endorsement of mother certificate of stock no. 2 which was deliberately withheld is to prescribe restrictions on the
transfer of stock in violation of corporation law

Abejo v dela Cruz

Teletronics purchased shares of Pocketbell from the Abejo spouses and Virginia Braga, the latter being indorsed in
blank

Razon v IAC

Corporate secretary refused to register the transfer due to alleged failure to respect pre-emtive rights

Chudian was issued 1,500 shares at E Razon Inc with the corresponding stock certificate no 3

Action for mandamus by Abejo and Teletronics to compel corporate secretary to register the transfer

Said stock certificates was delivered to Enrique Razon allegedly because it was the latter who paid for all the

This is an intra-corporate dispute

subscription on the shares of stock in defendant corporation with the understanding that has was the owner of said

HLP2009-3B
shares

of

Page 34
stock

and

was

to

have

possession

until

such

time

as

he

was paid

by

other

nominal

incorporators/stockholders

Later on, parties delivered it for deposit with bank under the joint custody of the parties

Administrator of the estate of Chudian filed a complaint against Enrique Razon et al praying that the said stock

Majority stockholders attended hence meeting

continued despite a postponement notice. The Potencianos were re-elected

The Bitangas, however, refused to relinquish management contending the stockholders meeting was void because
it was Michael Potenciano himself who requested postponement and there was no quorum because BMB Holdings

certificates be delivered to estate of Chudian along with all cash and stock dividends and pre-emptive rights

The next stockholders meeting was set on May 19, 1998.

representing 50.26% of BLTB shares were not present

accruing thereto.

Meeting and Election valid

Chudian is still owner

Transfer of shares is not valid unless recorded in the books of the corporation

a)

Shares of stock is transferred by delivery and endorsement of the stock certificate

The transfer of shares from the Potenciano group to the Bitanga group has not yet been recorded in the books of

b)

Such mode of transfer is not complied with in this case

c)

In the books of the corporation, Chudian is still the owner of the stocks. He was even elected member of the

the corporation

board which proves that he is a stockholder

d)

stockholders meeting

One who claims ownership should show that the same was trasferred to him in accord with the valid mode of
transfer. This petitioner failed to show

e)

It is the Potenciano group, in whose name the shares still stand were the ones entitled to attend and vote at the

Until registration is accomplished, the transfer, though valid between the parties cannot be effective against the
corporation.

Endorsement is a mandatory requirement of law for an effective transfer

The unrecorded transferee cannot vote nor be voted for

Rural Bank of Salinas v CA

Rural Bank of Lipa v CA

Guerrero, President of Rural Bank of Salinas and owner of shares in said corporation executed a Special Power of
Attorney to his wife Melania giving her full power to sell or otherwise dispose of shares of stock of the Bank

Villanueva executed a Deed of Assignment of his shares in Rural Bank of Lipa in favor of stockholders of the Bank
represented by its directors Bautista, custodio and Katigbak

Before death of Clemente, Melania, pursuant to said SPA, executed deed of Assignment of formers shares

After death of Clemente, Melania presented to bank deed of assignment for registration which the bank refused

Mandamus filed by Melania to compel bank to register the transfer

Villanueva failed to settle obligation. Bank converted their shares to treasury stocks

Transfer before death valid, stock not yet part of estate

Stockholders of Bank met, Villanuevas were not notified

Shares of stock are personal property and may be transferred by delivery. Registration in corporate books is not

Villanueva filed a petition for annulment of stockholders meeting and election of directors and officers

Sometime thereafter, he executed an Agreement recognizing indebtedness to said Bank, assured the board that
they will pay the debt otherwise Bank would be entitled to liquidate their shareholdings

necessary

Meeting Invalid

The transfer effected in this case is valid

Corporation Code specifically provides under Sec 63that to effect a valid transfer, there should be delivery of stock

The corporation may not impose any restriction on such transfer

certificate endorsed by the owner

The right of transferee/assignee to have stocks transferred to his name is inherent right, duty of the corporation to

a)

Assignment of the shares in the case at bar was not coupled with delivery, this is a fatal defect

register the transfer is ministerial

b)

Title may be vested in the transferee only by delivery of duly endorsed certificate of stock

c)

There must be strict compliance with mode of transfer prescribed by law

d)

Deed of Conveyance provide that ownership is conveyed only upon full payment of purchase price

Batangas Laguna Tayabas Bus Co. v Bitanga

Transfer could be valid between the parties but this does not necessarily make transfer effective

Petitioners as mere assignees cannot enjoy the status of stockholders

Dolores, Max, Mercedelin Potenciano, Delfin Yoro and Maya industries entered into Sale and Purchase Agreement of
their shares at Batangas Laguna Tayabas Bus Company with BMB Property Holdings represented by Bitanga.

A month after, Bitanga and Lim were elected board of directors

Stockholders meeting on Nov 28, 1997 elected Bitanga as Chairman of the Board and Lim as CEO

E.

Pledge of shares of stock

HLP2009-3B

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Lim Tay v CA

Unpaid Subscriptions

Sy Guiok and Sy Lim pledged their shares in Go Fay and Co to Lim Tay. They endorsed their respective share in
blank and delivered the same to Lim Tay

G.

1.

Effects:

Unpaid:

Sy Guiok and Sy Lim failed to pay hence Lim Tay went to the corporate secretary to ask the registration of the
shares in his name.

Corporate secretary refused

Lim Tay instituted an action for mandamus at SEC to compel corporate secretary to register

Corporates secretary cannot be compelled to record transfer

The duty of a corporate secretary to record transfers of stocks is ministerial

o

a)

(Sec 72)
b)

However, he cannot be compelled to do so when the transferees title to said shares has no prima facie

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

d)

Mandamus will not issue to establish a right but only to enforce one already established. Lim Tay failed to establish

No registration/transfer of unpaid shares does not necessarily mean that there is a previous call. As long as
a portion of the subscription price remains unpaid, shares are not transferable on the books of the corporation

a legal right to have the shares registered in his name.

o

No certificate of stock shall be issued to a subscriber until the full amount of his subscription, together with
the interest and expenses (in case of delinquent shares) if any is due, has been paid. (Sec 64)

c)

validity or is uncertain

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

Lim Tay failed to establish a legal right. He is not owner of the shares without foreclosure and purchase at
auction. He is merely a pledgee.

F.

Attachment of shares

Delinquent
a)

unpaid subscription is fully paid. (Sec 43)

In a case for a collection of a sum of money, spouses Atinon obtained a judgement against Dico.
When judgement became final and executory, sheriff Jomouad proceeded with the execution and attached shares
of Dico in Cebu Country Club.

Said shares was levied and public auction thereof scheduled

Garcia filed action for injuction on the following grounds:

a)

that Garcia is the actual owner of the shares and merely lent the shares to Dico as manager of his auto
supply to assist him in entertaining clients

b)

when Dico resigned, he returned to Garcia the stock certificate.

c)

Dico executed a deed of Transfer covering said stock certificate but this was not recorded

d)

The attachment prevails over the unrecorded transfer (from Dico to Garcia)

Unrecorded transfers are valid only as between parties to such transfer.

All transfer of shares not so entered are invalid as to attaching or execution creditors of the assignors as well as to
the corporation and to subsequent purchasers in good faith regardless of whether the attaching creditor had
knowledge of the transfer or not

b)

No delinquent stock shall be:

voted for or

be entitled to vote or to

representation at any stockholder's meeting, nor shall the holder thereof be entitled

to any of the rights of a stockholder

c)

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)

Dico resigned as proprietary member of the club and such was accepted by the BOD of the club

Any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his

Garcia v Jomouad

d)

Note that the provision on dividends pertain to delinquent stock hence a call must have been made

e)

Stock dividends on delinquent shares are not applied but are included in delinquency sale wherein it is
liquidated

2.

Interest on unpaid subscriptions

HLP2009-3B

Page 36

Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription,

each subscription plus accrued interest, and the date, time and place of the sale which shall not be less than

if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such

30 days nor more than 60 days from the date the stocks become delinquent.

rate shall be deemed to be the legal rate. (Sec 66)

3.

How to collect unpaid subscriptions (Section 67 and 70)

e)

The amount due in the notice must include all expenses: publication, legal, etc.

Note: the notices are jurisdictional.

f)

In the public auction, the highest bidder is one who is willing to pay the balance of the subscription for the
least number of shares. The corporation will give the highest bidder the certificate of stock in the number of

When call is necessary: board of directors of any stock corporation may at any time declare due and payable to the

his bid; the remaining number will be issued a certificate of stock in favor of the subscriber as fully paid. If

corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in

there are no bidders, the corporation must bid for the whole number of shares regardless of how much the

either case with accrued interest, if any, as it may deem necessary. (Sec 67)

stockholder has paid. Such stocks will pertain to the corporation as fully paid treasury stocks.

Court action to recover unpaid subscription: Nothing in this Code shall prevent the corporation from collecting by
action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and

6.

When sale may be questioned (Section 69)

No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice

expenses. (Sec 70)

4.

How do shares become delinquent (Section 67)

of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at

Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be

the legal rate; and

made on the date specified in the contract of subscription or on the date stated in the call made by the board.

Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable

the date of sale.

for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws,

No such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from

Issuance of Certificate Once full payment for the stocks have been tendered to the corporation in any of the valid

computed from such date until full payment.

forms of consideration for the issuance of stocks, the purchaser or the subscribers entitled to be issued the

If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall

corresponding certificate of stock which evidences their ownership of shares in a particular corporation

thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors
orders otherwise.
Apocada v NLRC

Despite the fact that the subscription is partially paid, the entire subscription becomes delinquent

Apocada was employed in Intans Phil wherein he subscribed to 1500 shares

5.

Procedure for delinquency sale (Section 68)

He subsequently resigned and instituted a complaint with NLRC against corporation for payment of unpaid wages,

a)

The Board of Directors must make a call by resolution demanding the payment of the balance of the

Corporation applied what is due to Apocada the balance of his unpaid subscription

subscription. This is called the "notice of call."

Set-off is not proper

cola, balance of gasoline and representation expenses, bonus

b)

The notice of call shall be served on each stockholder either personally or by registered mail. At this point,

there is no need for publication.

c)

unpaid subscriptions are not yet due and payable. They become due and payable when a call is made by the
corporation. There is no such call yet

If the stockholder does not pay the amount on the date designated in the notice, the Board shall issue, by

set-off against wages not valid under labor code

resolution, a "notice of delinquency."

d)

Notice of delinquency shall be served on the non-paying subscriber either personally or by registered mail,
PLUS publication in a newspaper of general circulation in the province or city where the principal office of the
corporation is located, once a week for two (2) consecutive weeks. The notice shall state the amount due on

H.

Lost or destroyed certificates (Section 73)

HLP2009-3B

Page 37

Procedure for re-issuance in case of loss, stolen or destroyed certificates

1.

The registered owner of certificates of stock or his legal representative shall file with the corporation an affidavit

B.

Matters requiring vote of Stockholders

setting forth, if possible:

2.

3.

4.

a)

the circumstances as to how the certificates were lost, stolen or destroyed;

1.

b)

the number of shares represented by each certificate, the serial numbers of the certificates;

a)

Amendment of AI

c)

the name of the corporation which issued the same;

b)

Extending and Shortening Corporate Term

d)

such other information and evidence which he may deem necessary.

c)

Increasing / Decreasing capital stock / bonded indebtedness

The corporation shall publish a notice in a newspaper of general circulation published in the place where the

d)

Sale or disposition of all, substantially all of corporate assets

corporation has its principal office, once a week for 3 consecutive weeks at the expense of the owner.

e)

Investment of corporate funds in another corporation or for a purpose other than main purpose

After the expiration of one (1) year from the date of the last publication and if no contest has been presented, the

f)

Issuance of stock dividends

corporation cancel in its books the certificate of stock and issue in lieu thereof new certificates of stock. The right

g)

Corporate mergers or consolidation

to make such contest shall be barred after the expiration of the one-year period.

h)

Voluntary dissolution of the corporation whether or not creditors are prejudiced

Even before the one year period expires, the new certificates may be issued if the registered owner files a bond or

2.

2/3 of outstanding stocks

other security, running for a period of one (1) year for a sum and in such form and with such sureties as may be

a)

Removal of directors

satisfactory to the Board of Directors. Provided, that if there is a pending contest regarding the ownership of said

b)

Ratification of contract with director or officer where first two requisites of sec 32 are lacking

certificates, the issuance of new certificates shall be suspended until the final decision of the court.

c)

Where stockholders of managed corporation own more than 1/3 of outstanding capital stock entitled to vote

Note: Except in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no

of the managing corporation are also the majority of the board of managed corporation, such 2/3 vote is

action may be brought against the corporation which shall have issued certificates of stock in lieu of those

required to approve management contract

lost, stolen or destroyed pursuant to the above procedure.

d)
3.

4.

STOCKHOLDERS
5.
A.

2/3 of Outstanding Stock along with majority of the board:

Fundamental Rights of a Stockholder in a Corporation

1.

To have an evidence of ownership of stock issued to him

2.

To vote at meetings of stockholders in a corporation

3.

To receive profits (dividends) from the corporation

4.

To participate in the distribution of corporate assets upon dissolution

5.

In certain cases, appraisal right

6.

To transfer his shares of stock

Delegation to the board to amend, repeal by-laws or adopt new by-laws

Majority of Outstanding stocks with majority of the board

a)

Approval of management contract

b)

Amendment to by-laws, repeal of by-laws, adoption of new by-laws

Majority of outstanding stock

a)

For quorum in electing members of the board by cumulative voting

b)

Grant of compensation to members of the board

c)

Adoption of original by-laws

d)

Revocation of delegated authority to the board of directors to amend or repeal or adopt new by-laws

The right to vote of non-voting stockholders may be limited or broadened to the extent specified in the AI or bylaws, however, they may still vote in instances specified in the code.

C.

Voting

The right to vote is significant because it is the only way that a stockholder can have a voice in the management
of corporate affairs

1.

Pledgors, mortagors, executors, receivers and administrators (Section 55)

HLP2009-3B

Page 38

In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to

Revocation may be made orally, in writing or implied:

attend and vote at meetings of stockholders

a)

appearance of the stockholder at the meeting will terminate the proxy

UNLESS,

b)

death of the stockholder will also terminate the proxy

the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is

recorded on the appropriate corporate books.

Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and

5.

Voting trust (Section 59)

vote in behalf of the stockholders or members without need of any written proxy.

Definition: An arrangement created by one or more stockholders for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any

2.

Joint owner of stocks (Section 56)

The consent of all the co-owners shall be necessary in order to vote, U NLESS there is a written proxy, signed by all

time. The arrangement is embodied in a document called a voting trust agreement (VTA)

the co-owners, authorizing one or some of them or any other person to vote such share or shares P ROVIDED, That
when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote

A voting trust which is specifically required as a condition in a loan agreement may be for a period exceeding five
(5) years but shall automatically expire upon full payment of the loan.

said shares or appoint a proxy therefor.

Requirements of a VTA:
a)

in writing

b)

notarized

3.

Treasury shares (Section 9 and Section 57)

c)

shall specify the terms and conditions thereof

These are shares of stock which have been issued and fully paid for but subsequently re-acquired by the issuing

d)

certified copy of such agreement shall be filed with the corporation and with the SEC

corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be

OTHERWISE,

disposed of for a reasonable price fixed by the BOD.

said agreement is ineffective and unenforceable

Procedure:

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

a)

4.

Proxies (Section 58)

b)

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

Requirements of proxies:

The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement.

a)

in writing (oral proxies are not valid)

b)

signed by the stockholder or member

c)

filed before the scheduled meeting with the corporate secretary

made pursuant to said voting trust agreement.

c)

a)

may exercise the right of inspection of all corporate books and records in accordance with the provisions of this
Code.

Person duly authorized by stockholder or member to vote in his behalf in a stockholders or members meeting.
Proxy is an agent for a special purpose thus the general rules of agency would normally apply to the

c)

Formal authority given by the holder of the stock who has the right to vote it to another to exercise the voting

Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions
stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement.

relationship created by proxy

b)

Right to inspect VTA: The voting trust agreement filed with the corporation shall be subject to examination by any
stockholder in the same manner as any other corporate book or record. The transferor and the trustee or trustees

Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall

Meaning of proxy:

The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be
transferable in the same manner and with the same effect as certificates of stock.

be valid and effective for a period longer than five (5) years at any one time (continuing proxy).

In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is

Restriction: No voting trust agreement shall be entered into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used for purposes of fraud.

Automatic expiration of rights under the VTA: Unless expressly renewed, all rights granted in a voting trust

rights of the former

agreement shall automatically expire at the end of the agreed period. The voting trust certificates as well as the

Instrument or document which evidences the authority of the agent

certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates

Failure to comply with requirements will render proxy void and ineffective.

Proxy is revocable even when it is expressly provided to be irrevocable unless it is coupled with an interest

of stock shall be reissued in the name of the transferors.

The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.

HLP2009-3B

Page 39

Purpose to make possible a unified control of the affairs of the corporation and consistent policy; to make

Distinction between proxy and voting trust

possible for a majority group of shareholders to dispose of a beneficial interest in a large proportion of their shares

Proxy

VTA
Acquires legal title

and still retain control of the corporation through the voting trustee

Legal title

No legal title

Requirements for a valid voting trust agreement:

Revocability

Revocable

unless

coupled

with

Irrevocable if validly executed

a)

in writing and notarized

b)

certified copy must be filed with the corporation as well as with SEC

c)

must not be for a period longer than 5 years although may be renewed each time for not more than 5 years

d)

certificates of stock must be cancelled, new ones issued to trustee stating therein that they were issued

When to vote

Absence of the owner

Even when owner is present

pursuance of the voting trust agreement

Duration

Usually shorter but cant exceed 5

Usually longer but cant exceed 5 years

years

except in loan agreements

e)

entered on the corporate books with a similar statement

f)

should not be for an illegal purpose

interest
Extent of power

Can

only

act

at

specified

Not limited to any particular meeting

stockholders or members meeting

Status of transferee and transferor:

6.

Pooling agreement (Section 100)

a)

voting trustee is only a share owner vested with apparent legal title for the sole purpose of voting upon

Agreement between 2 or more stockholders to vote their shares in the same way

stocks that he does not own

Usually relate to election of directors

transferring stockholder retains the right of inspection of corporate books which he can exercise concurrently

Parties often provide for arbitration in case of disagreement

with the voting trustee

Valid as long as they do not limit the discretion of the BOD in the management of corporate affairs or work any

b)

fraud against stockholders not party to the contract

Powers and rights of voting trustees:

Does not involve a transfer of stocks but is merely a private agreement

a)

Agreements by stockholders (Sec 100):

right to vote and other rights pertaining to the shares in their names subject to terms and conditions of and
for the period specified in the agreement

Agreements by and among stockholders executed before the formation and organization of a close

b)

vote in person or by proxy unless agreement provides otherwise

corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue

c)

rights of inspection of corporate books and records

to be valid and binding between and among such stockholders, if such be their intent, to the extent that such

d)

legal title holder qualified to be a director

agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such

Limitations on voting trust agreements:

a)

should not exceed 5 years except if a condition in a loan agreement, shall automatically expire upon full

agreements are contained, except those required by this Title to be embodied in said articles of incorporation.
o

payment of the loan

b)

that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they

must not be for purposes of circumventing the law against monopolies and illegal combinations in restraint of
trade

An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide

may agree, or as determined in accordance with a procedure agreed upon by them.

o

No provision in any written agreement signed by the stockholders, relating to any phase of the corporate

c)

must not be used for purposes of fraud

affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners

d)

must be in writing, notarized, specify the terms and conditions thereof

among themselves.

e)

certified copy must be filed with corporation and SEC otherwise unenforceable

f)

agreement is subject to examination by stockholder

the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or

g)

shall automatically expire at the end of the agreed period

interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose

h)

vote in person or by proxy unless agreement provides otherwise

on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on

i)

rights of inspection of corporate books and records

directors.

A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on

HLP2009-3B
o

Page 40

To the extent that the stockholders are actively engaged in the management or operation of the business and

d)

extending or shortening the term of corporate existence

affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among

e)

In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of

themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has

the corporate property and assets as provided in the Code; and

obtained reasonably adequate liability insurance.

7.

Non-voting shares (Section 6 )

No other shares may be deprived the right to vote except preferred or redeemable shares

Sec usually requires preferred stocks to be given the right to vote if dividends were not declared for 3 consecutive
years

f)

In case of merger or consolidation

g)

Extension or shortening of the term of the corporation (Section 37)

h)

In case of investment of corporate funds in another corporation or business or for any other purpose (Section
42)

3.

What are the requirements for the successful exercise of appraisal right? (Section 82 and 86)

By making a written demand on the corporation within thirty (30) days after the date on which the vote was taken

Shares which has, generally, no voting rights; except in the following circumstances:
a)

Amendment of the AOI

b)

Adoption and amendment of by-laws

c)

Sale, lease, exchange, other disposition of all or substantially all of the corporate property

d)

Incurring, creating or increasing bonded indebtedness

e)

Increase or decrease of capital stock

prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such

f)

Merger and consolidation

corporate action.

g)

Investment of corporate funds in another corporation or business

h)

Dissolution of the corporation

for payment of the fair value of his shares

o

Failure to make the demand within such period shall be deemed a waiver of the appraisal right.

By surrendering the certificate or certificates of stock, the corporation shall pay the fair value thereof as of the day

If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the
withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined
and appraised by three (3) disinterested persons

8.

ITF shares in trust for

9.

And/or shares (Section 56)

That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can

vote said shares or appoint a proxy therefor.

One of whom shall be named by the stockholder, another by the corporation, and the third by the two thus
chosen

The findings of the majority of the appraisers shall be final

The award shall be paid by the corporation within thirty (30) days after such award is made
No payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings
in its books to cover such payment

D.

Appraisal right

Upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his
shares to the corporation.

1.

Definition (Section 81)

This is a remedy available to a stockholder who dissented and voted against certain extraordinary matters to
withdraw or get out of the corporation by demanding payment of the value of his shares

4.

Effect of demand and termination of right (Section 83)

From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of
the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such

2.

Instances of appraisal right (Section 81)

shares, including voting and dividend rights, shall be suspended, EXCEPT the right of such stockholder to receive

a)

In case any amendment to the articles of incorporation which has the effect of:

payment of the fair value thereof, PROVIDED, if the dissenting stockholder is not paid the value of his shares within

b)

changing or restricting the rights of any stockholder or class of shares, or

30 days after the award, his voting and dividend rights shall immediately be restored.

c)

authorizing preferences in any respect superior to those of outstanding shares of any class, or

HLP2009-3B
5.

When right to payment ceases (Section 84)

No demand for payment may be withdrawn unless the corporation consents thereto.

Instances when right to payment ceases:

Page 41

It is fraudulent for a stockholder to buy from another stockholder without disclosing his identity

Principal stockholders are likewise prohibited from using inside information in the purchase and sale of equity
security

a)

If such demand for payment is withdrawn with the consent of the corporation

b)

If the proposed corporate action is abandoned or rescinded by the corporation

F.

Derivative suits

c)

If the proposed corporate action disapproved by the SEC where such approval is necessary,

derivative suit suits of stockholders based on wrongful or fraudulent acts of directors or other persons

d)

If the SEC determines that such stockholder is not entitled to the appraisal right

Nature and basis/distinguish from other suits:

In such instances, his status as a stockholder shall thereupon be restored, and all dividend distributions which

a)

individual suit if wrong done is personal to SH

would have accrued on his shares shall be paid to him.

b)

class suit if wrong done is to a group of SH

c)

derivative suit if wrong done is to the corporation itself

6.

Who bears costs of appraisal (Section 85)

Generally, it shall be borne by the corporation

Exception: by the stockholder, when the fair value ascertained by the appraisers is approximately the same as the

In a derivative suit, the cause of action belongs to the corporation and not the stockholders but since the directors
who are charged with mismanagement are the once who will decide who will sue then the corporation is left

without redress hence SH is given the right to sue on behalf of the corporation

Requirements:

price which the corporation may have offered to pay the stockholder,

a)

The stockholder or member bringing the suit must have exhausted his remedies within the corporation

In the case of an action to recover such fair value, all costs and expenses shall be assessed against the

b)

The stockholder or member must have been one at the time the transaction or act complained of took place,

corporation, unless the refusal of the stockholder to receive payment was unjustified.

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

7.

Notation on certificates; rights of transferee (Section 86)

Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates

c)

Any benefit recovered by the stockholder or member as a result of bringing the suit, whether by final
judgment, by judicial compromise or by extra-judicial settlement, must be accounted for to the corporation,
who is the real party in interest

of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares.

His failure to do so shall, at the option of the corporation, terminate his rights.

Effect of transfer:

d)

If the suit is successful, the plaintiff is entitled to reimbursement from the corporation for the reasonable
expenses of litigation, including attorneys fees

a)

The rights of the transferor as a dissenting stockholder shall cease;

b)

The transferee shall have all the rights of a regular stockholder; and

Evangelista v Santos

c)

All dividend distributions which would have accrued on such shares shall be paid to the transferee.

The injury complained of is thus primarily to the corporation, so that the suit for the damages claimed should be by
the corporation rather than by the stockholders

E.

Duty of controlling interest

But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of
the corporation, who are the ones called upon to protect their rights, refuse to sue, or where a demand upon them

A majority stockholder is subject to the duty of good faith when he acts by voting at a stockholders meeting with

to file the necessary suit would be futile because they are the very ones to be sued or because they hold the

respect to a matter in which he has a personal interest

controlling interest in the corporation, then in that case any of the stockholders is allowed to bring suit. But in that

Controlling stockholders may dispose of their shares at any time and at such price as they choose provided they

case, the corporation is the real party in interest.

do not pervert these prerogatives by transferring office to persons who are known as intending to raid the
corporate treasury or otherwise improperly benefit themselves.

HLP2009-3B

Page 42

Bitong v CA

An action to enforce a pre-emptive right is being enforced on behalf and for the benefit of the shareholder and not

Bitong, allegedly for the benefit of Mr. & Ms. Co., Inc., filed a derivative suit to hold Eugenia and Jose Apostol liable

the corporation hence is not a derivative suit

for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest, and mismanagement of the

a)

share holdings. She was therefore not acting for the corporation but only in her own behalf out of the desire

corporation committed from 1983 to 1987

to protect and preserve her preemptive right.

Bitong alleged that she had been Treasurer and Member of Board of Directors, and owner of 1000 shares of stock
b)

of the corporation, presenting the stock and transfer book reflecting that JAKA shares were transferred to her in

Bitong cannot file derivative suit.

She is not the owner of the shares of stock during the time when the acts

subject of the suit were committed (1983-1987) because Certificate no 008, proof of said ownership, was signed by
the president only in 1989
a)

Certificate of stock can be issued only upon compliance with certain requisites: (1) must be signed by
president or vice, countersigned by secretary or assistant secretary, sealed with seal of corporation, (2) there
must be delivery and indorsement, (3) must be fully paid, (4) original certificate must be surrendered

b)

A formal certificate of stock cannot be considered issued unless signed by president or vice-president and
countersigned by secretary or assistant secretary

The requirement under Sec 63 of the Corporation code must be mandatorily complied with.

Presumption of

regularity cannot apply.

a)

regularity and validity of transfer must be proved. There must be a valid delivery, endorsement, recording in
the corporations books.

b)

Records are unclear on how Bitong acquired the shares of stock

c)

Even the records on the stock and transfer book is highly doubtful, it being in the possession of Bitong, the
original being lost, and a possibility that even the original was not registered at all with the SEC.

Gilda Lim v Patricia Lim-Yu

A SH in a banking corporation has a right to maintain a suit for an in behalf of the corporation, but the extent of such right
depends upon when and for what purpose he acquired the shares of stock of which he is the owner.
On the issue that the relators controverted the right to question the appointment and selection of Cuaderno and Dizon, which they
contend to be the resilt of corporate acts with which the plaintiff as SH, cannot intervere, the SC held that an individual SH is
permitted to institute a derivative suit in behalf of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever the official of the corporation refuses to sue, or are to ones to be sued.
San Miguel Corporation v Kahn. H: Requisites for a proper derivative suit:
(a)
(b)
(c)

BOOKS

party bringing suit should be a SH as of the time of the act or transaction complained of and at the time of filing of the
suit. Number of shareholdings immaterial. A bona fide ownership by a SH in his own right suffices to invest him with
standing to bring a derivative action in behalf of the corporation
party has tried to exhausted intra-corporate remedies (made demand on the board to sue in behalf of the corporation,
but the latter failed or refused)
cause of action actually devolves on the corporation, the wrongdoing or harm having been or being caused to the
corporation itself and not to the suing SH

AND

RECORDS

A.

What books and records must a corporation keep? (Section 74)

Every corporation shall keep and carefully preserve at its principal office:

Gilda et al opposed on the ground of Patricias lack of capacity to file a derivative suit by reason of the ff:

Record of all business transactions

a)

a petition for guardianship filed by Gilda praying for the issuance of letters of guardianship over Patricia

Minutes of all meetings of stockholders or members, or of the board of directors or trustees which state the:

b)

in said action, a Temporary Restraining Order was issued by the court enjoining Patricia from entering into

Time and place of holding the meeting

actions, contracts or documents representing her family or the corporation, particularly LIMPAN Investments

How authorized

because of said TRO, Gilda contend that Patricia cant file a derivative suit because a derivative suit is being

Notice given

filed in behalf of the corporation and such action cant be done by Patricia

Whether the meeting was regular or special, if special its object,

Those present and absent

c)

H: Such a suit need not be authorized by the corporation where its objective is to nullify the action taken by its manager and the
board, in which case any demand for intra-corporate remedy would be futile, and thus necessitating the court to intervene by
granting the petition for a derivative suit.

Patricia Lim-Yu filed an alleged derivative suit against the Board for the latters alleged violation of her pre-emptive
right to the shares

Republic Bank v Cuaderno. F: A derivative suit was brought against the officers and the board. Complaint alleged that the
directors approved a resolution granting excessive compensation to the corporate officers. Suit was filed in order to prevent
dissipation of the corporate funds for the payment of salaries of the said officers. Board claims the action cannot prosper for
failure to compel the board to file the suit for and in behalf of the corporation.

The Board of LIMPAN approved a resolution making a partial payment to Gilda Lim for the latters legal services to
be paid in shares of stock of the corporation. Gilda ended up owning 62.5% of the corporations shares of stock

A TRO enjoining her to file any action for the corporation does not affect the present action which is only for
and in her behalf

1983 and Certificate No. 008 in her name

Patricia was merely praying that she be allowed to subscribe to additional shares of stock in proportion to her

Patricia may validly file derivative suit

HLP2009-3B

Page 43

Every act done or ordered done at the meeting

Time when any director, trustee, stockholder or member entered or left the meeting must be noted in

legitimate owners of shares of stock and transfer to them violated minority stockholders right of pre-emption and it

the minutes;

Yeas and nays must be taken on any motion or proposition

Protest of any director, trustee, stockholder or member on any action or proposed action must be

was not registered by the corporate secretary

Stock and transfer book

Recording in stock and transfer book not valid

Corporate Secretary is the custodian of corporate records, keeps the stock and transfer book and make entries

Names of the stockholders alphabetically arranged

Installments paid and unpaid on all stock for which subscription has been made

Stock and transfer book of Tormil, however, was not kept by Corporate Secretary but by respondent Judge Torres

Date of payment of any installment

Stock Transfer book was not kept at principal office but at the residence of Judge Torres in contravention with

Statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom

B.

therein.

provisions

made

Such other entries as the by-laws may prescribe

book of inventories

journal

ledger

book for copies of letters and telegrams

fianancial statements

ITRs

vouchers & receipts

contracts

VTAs

Torres et al v CA

These assigned shares were in the nature of qualifying shares so the latter would be eligible to be

directors of the Corporation

C.

Right of Inspection (Section 74)

Basis of right

Inherent in ownership of stocks

SHs do not directly participate in the management of the business and have little knowledge, if at all, of how the
corporate affairs are being run by the directors and officers
As beneficial owners, SHs have the right to know only the financial condition but also how the corporate affairs are
being run by their elected directors and the appointed officers
Law grants them the right to inspect the records of the corporation to obtain information they need
Significant for minority SHs

The records of all business transactions of the corporation and the minutes of any meetings shall be open to

inspection by any director, trustee, stockholder or member of the corporation

The five were elected directors of the corporation

At reasonable hours on business days

He may demand, writing, for a copy of excerpts from said records or minutes, at his expense

The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock

hours on business days.

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of
the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this

At the back of the stock certificates, it is stated that; the present certificate, conformably to the purpose and

the same as mere Trustee of Judge Torres and for the sole purpose of qualifying me as director

transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable

Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty

intention of the deed of assignment is not held by me under any claim of ownership and I acknowledge that I hold

Pabalan and Co. cannot be considered

stockholders

Judge Torres, majority stockholder of Tomil, assigned one share each to Tobias, Jocson, Jurisprudencia, Azura and
Pabalan.

Because of the above, entries made by Judge Torres are not valid.

Record of all business transactions include:

Custody of Books and records

Petitioners claim that transfer is valid because Judge Torres himself recorded such in the stock and transfer book
of the corporation

recorded in full on his demand

o

Respondents complained with SEC praying that election of 5 petitioners be annulled because they are not

of an offense which shall be punishable under Section 144 of this Code (Penalties for violation of the Code).

If such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this
section for such action shall be imposed upon the directors or trustees who voted for such refusal

HLP2009-3B

Page 44

It shall be a defense to any action that the person demanding to examine and copy has improperly used any

year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and

information secured through any prior examination of the records, or is not acting in good faith or for a legitimate

the result of its operations

purpose in making his demand

At the regular meeting of stockholders or members, the board of directors or trustees shall present to such

Inspection should be made in a manner so as not to impede the efficient operations of a corporation. SH cannot

stockholders or members a financial report of the operations of the corporation for the preceding year, which shall

demand that he be allowed to take corporate books out of the corporations principal office of inspection.

include financial statements, duly signed and certified by an independent certified public accountant. However, if

Stockholders purpose for inspecting the books is material:

the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath

His purpose is presumed to be a proper one

The burden of proving that the purpose is improper or illegal is thus on the corporation and its officers

A legitimate purpose is described as one which is germane to the in interests of the stockholder as such and

by the treasurer or any responsible officer of the corporation.

F.

Who may exercise right?

is not contrary to the interests of the corporation

o

Purpose must not be inimical to corporations interest and the info is desired for the purpose of crippling the

Director, trustee, stockholder, member, personally or through an agent

corporation for the benefit of a business rival, must be denied

Stockholders of a parent corporation with respect to subsidiary:

Remedies:

Injunction

because of gross management of subsidiary by the parents directors who are also directors of subsidiary,

Action for damages

there can be inspection

File an action to impose a penal offense by fine and/or imprisonment

The right to inspection is preventive as well as remedial:

o

Preventive because it may to a limited extent serve as deterrent to an ill-intentioned management

Remedial because a dissatisfied stockholder may resort to right of inspection as a preliminary step to seeking

No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a
stock corporation shall be allowed to operate in the Philippines unless he secures a license from the SEC and pays
a fee as may be fixed by the Commission, which shall be renewable annually

Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which
case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein
provided, shall be applicable.

E.

Right to financial statements

If they are practically one and the same in so far as management and control and inspection is demanded

Who is a stock transfer agent (Section 74)

If two are legally separate and independent entity, no right of inspection

Mandamus

more direct remedies against abuses committed by management

D.

Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish
to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable

Pardo v Hercules Lumber. F: Corporate secretary of Hercules Lumber refused to permit Pardo, a SH, or his agent to inspect the
records and business transactions of the company at the times desired by Pardo. Basis of the refusal was the provision in the
companys by-laws which stipulated that every SH may examine the books of the company and other documents upon the days
which the board annually fixes.
H: The resolution of the board limiting the rights of SHs to inspect its records to a period of 10 days prior to the annual SH meeting
is an unreasonable restriction in accordance with the Corpo Code, which provides that the right to inspect can be exercised at
reasonable hours. The right of inspection was interpreted to mean that the right may be exercised at reasonable hours on
business days throughout the year, and not merely during an arbitrary period of a few days chosen by the directors.
Gonzales v PNB. H: The Code has prescribed limitations to the right of inspection, requiring as a condition for examination that
the person requesting must not have been guilty of using improperly any information secured through a prior examination, and
that the person asking for such must be acting in GF and for a legitimate purpose. It is the SH seeking to exercise the right of
inspection to set forth the reasons and purposes for which he desires such inspection. SC held that the purpose of Gonzales, which
was to arm himself with evidence which he can use against the bank for acts done by the latter when he was still a total stranger
(i.e. not a SH), were not deemed proper motives and his request was denied.
Veraguth v Isabela Sugar Co. F: Directors have the unqualified right to inspect the books and records of a corporation at all
reasonable times. Pretexts may not be put forward by the officers to keep a director or SH from inspecting the books and minutes
of the corporation, and the right to inspect cannot be denied on the grounds that the director or SHs are on unfriendly terms with
the officers. A director or SH has no absolute right to secure certified copies of the minutes until these minutes have been written
up and approved by the directors.
Gokongwei v. SEC. F: Gokongwei, a major SH of San Miguel Corporation, sought to exercise his right to inspect the books and
records of SMC Intl, a foreign subsidiary wholly-owned and controlled by SMC. Since he was not a SH of the subsidiary, SMC
denied his request to inspect its books.
H: Where the right to inspect is granted by statute to the SH, it is given to him as such and must be exercised by him with respect
to his interest as a SH and for some purpose germane thereto or in the interest of the corporation. The inspection has to be
germane to the petitioners interest as a SH and has to be proper and lawful in character and not inimical to the interest of the
corporation.

HLP2009-3B

Page 45

The SHs right to inspect is based on his ownership of the assets and property of the corporation. It is therefore an incident of
ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, beneficial ownership,
or quasi-ownership, and is predicated upon the necessity of self-protection.

1.

of merger or consolidation.

On application for mandamus to enforce the right, it is proper for the court to inquire into and consider the SHs GF and his
purpose and motives in seeking inspection. But the impropriety of purpose such as will defeat enforcement must be set up by the
corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from
the SH the burden of showing the propriety of purpose and place upon the corporation the burden of showing impropriety of
purpose or motive.

2.

AND

The affirmative vote of stockholders

corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary
for the approval of such plan
3.

Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two
(2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the
purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation.

CONSOLIDATION
4.

A.

Approval by the stockholders or members of each of such corporations.

representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock

The foreign subsidiary is wholly-owned by SMC and therefore under its control, and would be more in accord with equity, GF, and
fair dealing to construe the statutory right of Gokongwei as SH to inspect the books of the parent as extending to the books of the
subsidiary in its control.
MERGERS

Approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan

Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code.
Provided, that if after the approval by the stockholders of such plan, the board of directors decides to abandon the

What is a constituent corporation? A consolidated corporation? (Section 76)

plan, the appraisal right shall be extinguished.

5.

Two or more corporations may merge into a single corporation which shall be one of the constituent corporations

Amendment to the plan of merger or consolidation may be made by approved of the majority vote of the
respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of

or may consolidate into a new single corporation which shall be the consolidated corporation.

stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the
B.

members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as

What is a merger / consolidation?

the agreement of merger or consolidation.

Merger
o

One of the constituent corporations remains as an existing juridical person, whereas the other corporation
shall cease to exist.

D.

Merger is the disappearance of one of the corporations with the other corporation

acquiring all the assets, rights of action, and assuming all the liabilities of the disappearing corporation.
o

What is a plan of merger or consolidation? (Sec. 76).

merger or consolidation setting forth the following:

Of course, there is an arrangement as to the shares of stocks that will be issued to the former stockholders of
the two (2) corporations which were merged.

1.

Said stockholders are now stockholders of the corporation

will be issued to the stockholders under the surviving corporation.

2.

The terms of the merger or consolidation and the mode of carrying the same into effect;

3.

A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger;
and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set

Consolidation
o

The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent
corporations;

which survives. The proportion between the two (2) corporations will be the basis of the shares of stocks that

The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of

forth in the articles of incorporation for corporations organized under this Code; and

If there is consolidation, there will be disappearance of both the constituent corporations with the emergence
4.

of a new corporate entity which shall obtain all the assets of the disappearing corporations, and likewise shall

Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.

assume all their liabilities.

o

Also, the number of shares that will be issued to each of the stockholders under the new corporation is

E.

What are articles of merger or consolidation? (Sec. 78)

determined by the ration between the assets of the two (2) corporations.

C.

After the approval by the stockholders or members, articles of merger or articles of consolidation shall be executed
by each of the constituent corporations:

What corporate approvals are required? (Sec. 77)

1.

to be signed by the president or vice-president and

2.

certified by the secretary or assistant secretary of each corporation

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The articles of merger or consolidation shall set forth:

1.

The plan of the merger or the plan of consolidation;

2.

As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number

other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation

of members; and
3.

As to each corporation, the number of shares or members voting for and against such plan, respectively.

5.

When is the effectivity of merger or consolidation?

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

Effectivity: Upon issuance by the SEC of the certificate of merger and consolidation

The articles of merger or of consolidation shall be submitted to the Securities and Exchange Commission in

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.

quadruplicate for its approval.

these shall be deemed transferred to and vested in such surviving or consolidated corporation without further act
or deed; and

F.

all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and

The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by
such merger or consolidation

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

H.

Procedure for Merger or Consolidation

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

1.

Board of each corporation shall draw up a plan of merger or consolidation, setting forth:

with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which

names of corporations involved (constituent corporations)

time the merger or consolidation shall be effective.

terms and mode of carrying it out

If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or

statement of changes, if any, in the present articles of surviving corporation; or the articles of the new corporation

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

to be formed in case of consolidation.

2.

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.

Plan for merger or consolidation shall be approved by majority vote of each board of the concerned corporations at
separate meetings.

3.

The same shall be submitted for approval by the stockholders or members of each such corporation at separate
corporate meetings duly called for the purpose. Notice should be given to all stockholders or members at least

G.

What are the effects of a merger or consolidation? (Sec. 80)

two (2) weeks prior to date of meeting, either personally or by registered mail.
4.

1.

The constituent corporations shall become a single corporation which:

In case of merger, shall be the surviving corporation designated in the plan of merger; and

In case of consolidation, shall be the consolidated corporation designated in the plan of consolidation;

2.

non-stock corporation shall be required.

5.

The separate existence of the constituent corporations

The

surviving

6.

or

the

consolidated

corporation

shall

corporation organized under this Code;

The

surviving

or

the

consolidated

thereupon and thereafter possess:

But if Board abandons the plan to merge or

Any amendment to the plan must be approved by the same votes of the board members of trustees and
stockholders or members required for the original plan.

7.

possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a

4.

Dissenting stockholders may exercise the right of appraisal.

consolidate, such right is extinguished.

shall cease, except that of the surviving or the consolidated corporation;

3.

Affirmative vote of 2/3 of the outstanding capital stock in case of stock corporations, or 2/3 of the members of a

all the rights, privileges, immunities and franchises of each of the constituent corporations; and

corporation

shall

After such approval, Articles of Merger or Articles of Consolidation shall be executed by each of the constituent
corporations, signed by president or VP and certified by secretary or assistant secretary, setting forth:

plan of merger or consolidation

in stock corporation, the number of shares outstanding; in non-stock, the number of members

as to each corporation, number of shares or members voting for and against such plan, respectively

HLP2009-3B
8.

Page 47

Four copies of the Articles of Merger or Consolidation shall be submitted to the SEC for approval.

Special

corporations like banks, insurance companies, building and loan associations, etc., need the prior approval of the
respective government agency concerned.
9.

If SEC is satisfied that the merger or consolidation is legal, it shall issue the Certificate of Merger or the Certificate
of Incorporation, as the case may be.

As to the allegation that the selling price of the assets of P10K was grossly inadequate and thus tainted with fraud, the SC held
that the sale was approved by the SEC and that it should be presumed that the price was fair and reasonable, and should be a
matter litigated in another venue.
SC: since there is neither proof nor allegation that the transferee-corporation expressly or impliedly agreed to assume the debt of
the corporation, or that the sale of either the shares or the assets to the appellee has been entered into fraudulently, in order to
escape liability for the debt of the subject corporation, there was no basis to hold the transferee liable for the debts and liabilities
of the subject corporation

10. If the SEC is not satisfied, it shall set a hearing, giving due notice to all the corporations concerned. [Secs. 76-79,
Corporation Code]

I.

Limitation on the right to merge / consolidate

1.

Should not create monopolies

2.

Should not eliminate free and healhty competition

3.

Act 3518 Sec 20 inhibits illegal combinations

Reyes v. Blouse et al. F: Minority SHs of the Laguna Tayabas Bus Co file an action to enjoin Blouse et al from executing its
resolution approved by 99 % of SHs to consolidate the properties and franchises of Laguna Tayabas with Batangas Transport.
Blouse believes it is merely an exchange of properties and not a consolidation.
I: W/n the real purpose of the resolution is merger or consolidation, and if so, whether it can be carried out under the old Corpo
Law.
H: The questioned resolution charges the board of Laguna to consolidate properties and franchises thereof with that of Batangas
Transport. Both corporations have passed similar resolutions to take steps to effect the consolidation. It is apparent that the
purpose of the resolution is not to dissolve but to merely transfer its assets to a new corporation in exchange for its shares. This
comes within the purview of the old corporation law, which provides that a corporation may sell, exchange, lease or otherwise
dispose of all its property and assets when authorized by affirmative vote of 2/3 of SHs. The phrase otherwise dispose of covers
mergers and consolidations. The transaction in this case cannot be considered, strictly speaking, as a merger or consolidation
because a merger implies the termination or cessation of the merged corporations and not merely a merger of assets and
properties. The two companies will not lose their corporate existence but will continue to exist after consolidation. What is
intended to be managed and operated by a new corporation, and not a merger.
The court added that the merger/consolidation (if any) would still be carried out under the Public Service Law. It does not impose
any qualification other that it shall be done with the approval of the PSC.
Edward Nell Company v Pacific Farms Inc. F: The Edward Nell Co secured a judgment representing the unpaid balance of the
price of a pump sold to Insular Farms. Pacific Farms then purchased all or substantially all of shares of stock as well as real and
personal property of Insular, selling the shares to certain individuals who reorganized Insular. The board of the reorganized Insular
then sold its assets to be sold to Pacific for P10000. The writ of execution was returned, stating that Insular had no leviable
property. Nell Co sued Pacific Farms, on the ground as a result of the purchase of all or substantially all assets of Insular, Pacific
became the alter ego of Insular Farms.
H: GR: where the corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the
debts and liabilities of the former.
Exception: (1) purchaser expressly or impliedly assumes such debts; (2) transaction amounts to a consolidation or merger; (3)
purchasing corporation is merely a continuation of the selling corp; (4) there is fraud to escape liability for the debts
In the present case, no proof was submitted that Pacific expressly agreed to assume the debts of Insular or that it is a continuation
of Insular, or that the transaction was tainted in fraud of creditors, or that the two parties merged or consolidated. In fact, the
sales took place, not only over 6 months before judgment, but also over a month before the filing of the case. Pacific also
purchased the shares as the highest bidder at an auction sale held at the instance of a bank to which shares have been pledged
as security by Insular. Nell Cos theory that Pacific is the alter ego of Insular negates the fact of consolidation/merger, because a
corporation cannot be its own alter ego.

NON-STOCK CORPORATIONS

A.

Distinguish non-stock corporations from stock corporations

NON-STOCK CORPORATIONS

STOCK CORPORATIONS

1.

Definition

A non-stock corporation is one where no part of its

income

is

distributable

as

dividends

to

One which has a capital stock divided into shares and is

its

authorized to distribute to the holders of such shares

members, trustees, or officers, subject to the

dividends or allotments of the surplus profits (i.e.,

provisions of this Code on dissolution.

retained earnings on the basis of the shares held (Sec.

3). It is organized for profit.

2.

Purposes (Sec. 88)

Non-stock

corporations

may

be

formed

or

Formation of corporation must be for LAWFUL purpose

Must not include those which contradict or change its

organized for charitable, religious, educational,

professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like
trade, industry, agricultural and like chambers, or
any combination thereof, subject to the special
provisions of this Title governing particular classes
of non-stock corporations.

3.

Distribution of income (Sec. 87)

nature

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Page 48

Any profit shall be used for the furtherance of the

purpose or purposes for which the corporation

other person legally authorized to make the transfer

was organized

Profits are distributed as dividends to the stockholders in

2.

Delivery of the certificate or certificates

proportion to their shareholdings

3.

To be binding against third persons, transfer of shares

should be recorded in the books of the corporation.

4.

Scope of right to vote (Sec. 89)

Each member regardless of class shall be entitled

to
to

ONE

vote unless limited, broadened, or denied

the

extent

specified

in

the

articles

No share may be deprived of voting rights, except:

Preferred

of

or

Redeemable

shares,

unless

8.

Termination of membership

Membership shall be terminated in the manner

otherwise

provided by the Code PROVIDED, there shall always be a

incorporation or the by-laws.

and for the causes provided in the articles of

Transfer of shares

incorporation or the by-laws.

Exercise of appraisal right

Board of Directors

Not less than 5 but not more than 15

Board of Directors or Trustees are elected from among

class/series of shares which have a COMPLETE VOTING

RIGHTS

Each share of stock has one vote

Termination of membership shall have the effect

of extinguishing all rights of a member in the
corporation or in its property, unless otherwise

5.

Voting by proxy (Sec. 89)

provided in the articles of incorporation or the by-

A member may vote by proxy in accordance with

laws.

Stockholders and members may vote in person or by

the provisions of this Code unless otherwise

proxy in all meetings of stockholders or members

provided in the Articles of Incorporation or By-laws

provided the requisites are complied with (in writing,

9.

Governing board (Sec. 92)

Board of Trustees

signed, etc.)

6.

Voting by mail (Sec. 89)

Voting by mail or other similar means may be

This right cannot be denied

No such provision for stock corporations, cannot be

(i) number

authorized

by

the

by-laws

of

non-stock

allowed

Unless otherwise provided in the AOI or the by-

corporations with the approval of, and under such

laws, the BOT may be more than fifteen (15) in

conditions which may be prescribed by, the SEC

number as may be fixed in their articles of

incorporation or by-laws

7.

Transferability of interest or membership (Sec. 90)

(ii) term

Membership in a non-stock corporation and all

rights arising therefrom are personal and non-

The term of office of one-third (1/3) of their

number shall expire every year; and subsequent

transferable, unless the articles of incorporation

Transferable

elections of trustees comprising one-third (1/3) of

or the by-laws otherwise provide.

Shares of stock may be transferred by:

the board of trustees shall be held annually and

1.

Endorsement by the owner or his attorney-in-fact or

trustees so elected shall have a term of three (3)

HLP2009-3B

Page 49

years.

the holders of stocks, or where there is no stock, from

among the members of the corporation who shall hold

Trustees

thereafter

elected

to

fill

vacancies

B.

Distribution of assets in case of dissolution (Sec. 94)

office for 1 year and until their successors are elected

All debts of the corporation must be paid, or adequately provided for.

term shall hold office only for the unexpired

All assets held under condition of being returned in case of dissolution should be returned.

period.

All assets held subject to specific use (e.g., for charitable, charitable, educational, scientific, etc.) must be

occurring before the expiration of a particular

and qualified.

transferred to other corporations, societies, or organizations having the same purpose as the corporation
dissolved.

10. election of officers (Sec. 92)

All other assets not included in the above, if any, shall be distributed to the members in accordance with the
stipulations in the articles of incorporation or the by-laws.

No person shall be elected as trustee unless he is

C.

Unless otherwise provided in the articles of

incorporation or the by-laws, officers of a non-

Any other remaining assets may then be distributed to such persons, societies, organizations or corporation, profit
or non-profit, as may be specified in the plan of distribution.

a member of the corporation.

Plan of distribution of assets (Section 95)

Immediately after their election, the directors of a

A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by

stock corporation may be directly elected by the

corporation must formally organize the election of: a

members.

president, who shall be a director; a treasurer who may

a non-stock corporation in the process of dissolution in the following manner:

or may not be a director; a secretary who shall be a

Officers elected by members

The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and
directing the submission thereof to a vote at a regular or special meeting of members having voting rights.

resident and citizen of the Philippines, and such other

o

officers as may be provided for in the By-laws

Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and
place of such meeting shall be given to each member entitled to vote, within the time and in the manner

provided in this Code for the giving of notice of meetings to members.

Officers elected by board

o

11. place of meetings (Sec. 93)

Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having
voting rights present or represented by proxy at such meeting.

The by-laws may provide that the members of a

non-stock corporation may hold their regular or
special meetings at any place even outside the
place where the principal office of the corporation

is located

Meetings of directors or trustees of corporations may be

held anywhere in or outside of the Philippines, unless the
by-laws provide otherwise.

CLOSE CORPORATIONS

Meetings of stockholders shall be held at the city or

A.

That the place of meeting shall be within the

Philippines

What are the requirements for the formation of the close corporations? (Sec. 96)

municipality where the principal office of the corporation

is located, and if practicable in the principal office of the
corporation

A close corporation is one whose articles of incorporation provide that:

o

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);

HLP2009-3B
o

Page 50

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

CLOSE CORPORATIONS

STOCK CORPORATIONS

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.

Distinguish close corporations from regular corporations

The corporation shall not list in any stock exchange or make any public offering of any of its stock of any
class.

C.

1.

Management / Board Authority

There can be classification of directors into one or

The provisions of this Code shall apply except insofar as this Title otherwise provides.

There are no classification of board of directors

Corporate Powers devolved upon board of directors

more classes, each of whom may be voted for and

San Juan Structural and Steel Fabricatiors vs. CA

elected solely by a particular class of stock; and

Motorich entered into agreement with San Juan for the transfer of a parcel of Land to latter.

San Juan already paid downpayment

When San Juan was ready to pay the balance, Motorich refused to sell

may provide that the business of the corporation

whose powers are executed by officers. Cannot provide

Motorich contend that Nenita Gruenbergs, treasurer of Motorich, signature is not sufficient to bind Motorich, and

shall be managed by the stockholders of the

that it be managed by stockholders

that the signature of Reynaldo Gruenberg, president of Motorich is required

corporation rather than by a board of directors. So

Nenita Gruenberg is the spouse of Reynaldo Gruenberg and both owns 99.866% of the shares of stock of the

long as this provision continues in effect:

The articles of incorporation of a close corporation

corporation

Motorich is not a close corporation

o

1.

The mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock

No meeting of stockholders need be called to

elect directors

of a corporation is not of itself sufficient ground for disregarding their separate personalities

2.

A narrow distribution of ownership does not of itself make a close corporation

the stockholders of the corporation shall be

There are exceptional cases where an action by a director who is singly is the controlling stockholder may be

deemed to be directors for the purpose of

considered as a binding corporate act and a board action is a mere formality. However, Nenita is not the sole

Unless the context clearly requires otherwise,

meeting

applying the provisions of this Code

controlling stockholder.

3.

Board of directors must be elected in a stockholders

Stockholders of a corporation are separate and distinct

from directors

The stockholders of the corporation shall be

subject to all liabilities of directors.

B.

What entities may not be organized as closed corporations? (Sec. 96)

Any corporation may be incorporated as a close corporation, except:

The articles of incorporation may likewise provide

that all officers or employees or that specified

Mining

officers or employees shall be elected or appointed

Oil companies

by the stockholders, instead of by the board of

Stock exchanges

directors.

Banks

Insurance companies

Public utilities

Educational institutions

Corporations declared to be vested with public interest in accordance with the provisions of this Code.

2.

Meetings

Unless the by-laws provide otherwise, any action by

the directors of a close corporation without a

Officers must be elected by the Board of Directors

HLP2009-3B

Page 51

meeting shall nevertheless be deemed valid if:

1.

The AOI may provide for a classification of directors

The directors or trustees shall not act individually nor

into one or more classes, each of which may be

Before or after such action is taken, written

separately but as a body in a lawful meeting. They will

voted for and elected solely by a particular class of

consent thereto is signed by all the directors;

act only after discussion and deliberation of matters

stock.

or

before them.

No share may be deprived of voting rights, except

Preferred

Contracts entered into without a formal

or

Redeemable

shares,

unless

otherwise

provided by the Code

board resolution does not bind the corporation except

2.

All the stockholders have actual or implied

when ratified or when majority of the board has

knowledge of the action and make no prompt

knowledge of the contract and the contract benefited

objection thereto in writing; or

the corporation.

There shall always be a class/series of shares which

have a COMPLETE VOTING RIGHTS

3.

The directors are accustomed to take informal

action

with

the

express

or

implied

acquiescence of all the stockholders; or

Absence of a prompt objection in writing does not ratify

EVERY OTHER SHARE, except as otherwise provided in

acts done by directors without a valid meeting. There

the AOI

must be express or implied ratification.

4.

All the directors have express or implied

knowledge of the action in question and none

The AOI may provide for a greater quorum or

Express ratification may consist of a Board Resolution to

voting requirements in meetings of stockholders or

that effect

directors than those provided in this Code.

Implied
benefits

If a director's meeting is held without proper call or

ratification
from

said

may

consist

unauthorized

of
act

acceptance

a greater majority in quorum

while

For stockholders, the AOI can provide for a different

percentage in quorum

having

knowledge of said act

4.

Pre-emptive Right

The pre-emptive right of stockholders in close

Failure to give notice would render a meeting voidable.

Attendance to a meeting despite want of notice will be

corporations shall extend to all stock to be issued,

deemed implied waiver

including reissuance of treasury shares, whether for

to attend, unless he promptly files his written

objection with the secretary of the corporation after

For Board of directors, the by-laws or AOI can provide for

of

notice, an action taken therein within the corporate

powers is deemed ratified by a director who failed

of them makes prompt objection thereto in

writing.

EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO

having knowledge thereof.

money,

property

or

personal

services,

or

in

All proceedings had and any business transacted at any

payment of corporate debts, unless the articles of

meeting of the stockholders or members, if within the

incorporation provide otherwise.

powers or authority of the corporation, shall be valid

Limitations on the exercise of pre-emptive right:

a.

Such pre-emptive right shall not extend to shares to be

even if the meeting be improperly held or called,

issued in compliance with laws requiring stock offerings

provided all the stockholders or members of the

or minimum stock ownership by the public;

corporation are present or duly represented at the

meeting. (Sec 51)

b.

Not extend to shares to be issued in good faith with the

approval of the stockholders representing two-thirds

3.

Voting / Quorum

(2/3) of the outstanding capital stock, in exchange for

property needed for corporate purposes or in payment

HLP2009-3B

Page 52
of a previously contracted debt

c.

b.

Must be for a legitimate purpose

Shall not take effect if denied in the Articles of

Incorporation or an amendement thereto.
6.

Transferability

Restrictions on the right to transfer shares must

5.

Buy-back of Shares

Restrictions on transfer of shares shall not be more

appear in the AI and in the by-laws as well as in the

onerous than granting the existing stockholders or

certificate of stock otherwise the same shall not be

the corporation the option to purchase the shares

binding on any purchaser thereof in good faith

of

the

transferring

stockholder

with

such

Restrictions on the right to transfer not allowed

Stockholders may require the corporation to buy-back

Stockholders may require the corporation to buy-back

reasonable terms, conditions or period stated

their shares under the following circumstances only

therein. If upon the expiration of said period, the

(Appraisal right):

7.

Withdrawal Right

In case any amendment to the articles of incorporation

Any stockholder of a close corporation may, for any

existing stockholders or the corporation fails to

exercise this option to purchase, the transferring

a.

stockholder may sell his shares to any person

which has the effect of:

changing

or

restricting

reason, compel the said corporation to purchase his

the

rights

of

any

shares at their fair value, which shall not be less

stockholder or class of shares, or

than

their

par

or

issued

value,

when

the

authorizing preferences in any respect superior to

corporation has sufficient assets in its books to

those of outstanding shares of any class, or

cover its debts and liabilities exclusive of capital

their shares at fair value when the Corporation has

extending or shortening the term of corporate

stock

unrestricted Retained Earnings:

existence
b.

In case of sale, lease, exchange, transfer, mortgage,

Any stockholder of a close corporation may, by

pledge or other disposition of all or substantially all of

written petition to the SEC, compel the dissolution

the corporate property and assets as provided in the

of such corporation whenever:

a.

In

Code; and
c.

In case of merger or consolidation

d.

Extension or shortening of the term of the corporation

e.

Diversion of funds of corporation from primary purpose

1.

Any of acts of the directors, officers or those in

control

of

the

corporation

is

illegal,

or

unfairly prejudicial to the corporation or any

stockholder, or

There must be unrestricted retained earnings

the

articles

of

changing

or

restricting

the

rights

of

any

authorizing preferences in any respect superior to

extending or shortening the term of corporate

b. In case of sale, lease, exchange, transfer, mortgage,

pledge or other disposition of all or substantially all of

2.

a.

to

existence

Sec. 81.

subject to the following limitations (Treasury shares):

amendment

those of outstanding shares of any class, or

fraudulent, or dishonest, or oppressive or

to secondary purpose (Section 41) Note: this is not in

The corporation may buy-back shares of stockholders

any

stockholder or class of shares, or

(Section 37)

case

incorporation which has the effect of:

Corporate assets are being misapplied or

the corporate property and assets as provided in the

wasted.

Code; and
c.

In case of merger or consolidation

d. Extension or shortening of the term of the corporation

HLP2009-3B

Page 53

(Section 37)

A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or
receiver.

e. Diversion of funds of corporation from primary purpose

to secondary purpose (Section 41) Note: this is not in

A provisional director shall have all the rights and powers of a duly elected director of the corporation, including
the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the

Sec. 81.

Commission or by all the stockholders.

D.

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

Deadlocks

between the provisional director and the corporation.

1.

Deadlocks, Defined:
E.

Validity of restrictions on transfer of shares (Section 98)

The directors or stockholders are so divided respecting the management of the corporation's business and affairs

The votes required for any corporate action cannot be obtained

The consequence is that the business and affairs of the corporation can no longer be conducted to the advantage

Articles of incorporation

of the stockholders generally

By-laws

Certificate of stock

2.

Resolution of deadlocks

The SEC, 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,

OTHERWISE,

Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to

the same shall not be binding on any purchaser in good faith.

purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated
therein.

including an order:
o

Restrictions on the right to transfer shares must appear in the:

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.

Cancelling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's
agreement;

Cancelling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders,

F.

Effects of issuance or transfer of stock in breach of qualifying conditions (Section 99)

or officers;
o

Directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other

A person is conclusively presumed to have notice of the fact of ineligibility to be a stockholder:

o

persons part to the action;

the articles of incorporation to be a holder of record of its stock, and

Requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of
o

the availability of unrestricted retained earnings in its books, or by the other stockholders;
o

Appointing a provisional director;

Dissolving the corporation; or

Granting such other relief as the circumstances may warrant.

If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of

If the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of
record thereof

A person to whom stock is issued or transferred is conclusively presumed to have notice of these facts:
o

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

3.

Provisional Director

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.

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.

HLP2009-3B

Page 54

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

managerial acts imposed by this Code on directors.

stock in violation of the restriction, if such acquisition violates the restriction.

5.

To the extent that the stockholders are actively engaged in the management or operation of the business and

Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively

affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among

presumed under this section to have, notice either

themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained

That he is a person not eligible to be a holder of stock of the corporation, or

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

reasonably adequate liability insurance.

H.

Amendment of articles of incorporation (Section 103)

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.

Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for

Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this

The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to subsections (1),

Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said

(2) or (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has

articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds

amended its articles of incorporation in accordance with this Title.

(2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares

The term "transfer", as used in this section, is not limited to a transfer for value.

as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the

The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to

aforesaid provisions, at a meeting duly called for the purpose.

recover under any applicable warranty, express or implied.

G.

Agreements by stockholders (Section 100)

1.

Agreements by and among stockholders:

Executed before the formation and organization of a close corporation,

Signed by all stockholders

Shall survive the incorporation of such corporation and shall continue to be valid and binding between and among
such stockholders, if such be their intent,

To the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the

DISSOLUTION

A.

What are the various methods of dissolving corporations? (Section 117)

1.

Voluntary

Requirements where no creditors are affected (Sec. 118)

o

provisions of such agreements are contained, except those required by this Title to be embodied in said articles of

adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital

incorporation.
2.

3.

An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that

stock or of at least two-thirds (2/3) of the members.

o

Meeting to be held upon call of the directors or trustees after publication of the notice of time, place and

in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree,

object of the meeting for three (3) consecutive weeks in a newspaper published in the place where the

or as determined in accordance with a procedure agreed upon by them.

principal office of said corporation is located; and if no newspaper is published in such place, then in a

No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs,

newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member

shall be invalidated as between the parties on the ground that its effect is to make them partners among

either by registered mail or by personal delivery at least thirty (30) days prior to said meeting.

themselves.
4.

Dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly

A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or

A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the

trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission

ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with

shall thereupon issue the certificate of dissolution.

the discretion or powers of the board of directors:

HLP2009-3B

Page 55

Requirements where Creditors are affected (Sec. 119)

o

Petition for dissolution shall be filed with the Securities and Exchange Commission.

The petition shall be signed by a majority of its board of directors or trustees or other officers having the

corporation as the only practical solution to the dispute

Quo warranto proceedings, Sec. 2, Rule 66 ROC

management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall

When it has offended against a provision of an Act for its creation and renewal

set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote

When it has forfeited its privileges and franchises by nonuser

of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-

When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or

thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose.
o

In case of a deadlock in a close corporation, and the SEC deems it proper to order the dissolution of the

franchise

If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of

the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not

When it has misused a right, privilege, or franchise conferred upon it by law or when it has exercised a right,
privilege or franchise in contravention of law

be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a
copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of

3.

Failure to organize and commence business within two years from incorporation

general circulation published in the municipality or city where the principal office of the corporation is

Failure to formally organize and commence the transaction of its business or construction of its works within two

situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a

years

similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or

city.
o

the corporation was formed

Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has

expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed;
and if no such objection is sufficient, and the material allegations of the petition are true, it shall render

Transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for which

Formally organize includes not only the adoption of the by-laws but also the establishment of the body which
will administer the affairs of the corporation and exercise its powers

judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may

Commenced transaction of its business but subsequently becomes continuously inoperative for a period of at least
fie years

appoint a receiver to collect such assets and pay the debts of the corporation

2.

Involuntary

Sec. 2 PD 902-A

4.

Expiration of the term

Shorten corporate term - by vote of 2/3 of the outstanding shares or 2/3 of the members, the articles may be
amended to shorten the term of the corporation

Fraud in procuring its certificate of registration

Serious misrepresentation as to what the corporation can 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 five 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

Sec. 144 BP 168

o

Violation by the corporation of any provision of the Corporation Code

Sec. 104 BP 168

National Abaca v Pore. F: National Abaca Corp sued Apolonia Pore to recover money advanced for the purchase of hemp for the
account of the corporation for which she failed to account therefor. Pore in defense, contends that she made an accounting of the
advances received by her. TC held her accountable and ordered to her to pay the corporation.
Pore moved to dismiss on the ground that the corporation had no legal capacity to sue, it having been abolished by EO 372.
Corporation contends that the EO also stipulates that it shall continue as a body corporate for 3 years from date of effectivity of
the EO, for the purpose of defending and prosecuting suits and enabling the Board of Liquidators to settle and close all its affairs.
TC ordered corporation to amend the complaint by including the Board of Liquidators as co-party plaintiff, otherwise case shall be
dismissed. The corporation fails to submit amended complaint, and the TC dismisses case. Corporation in seeking reconsideration,
said that it was not able to submit the amended complaint on time because of the negligence of the filing clerk, Ms Ocampo, and
that it was lost despite diligent efforts to look for it. TC denies motion.
I: W/n an action, commenced within 3 years after the abolition of the corporation, may be continued by the same after expiration
of the period. NO
W/m the TC was correct in dismissing motion. NO. should have granted the motion
H: GR: pending actions by or against a corporation are abated upon the expiration of the period allowed by law for liquidation. The
old corpo law contains no provision authorizing a corporation after 3 years from expiration of its lifetime, to continue in its
corporate name actions instituted by it within a period of 3 years. It provides that it will continue as a body corporate for 3 years

HLP2009-3B

Page 56

after the time when it would have been dissolved, for purposes of prosecuting and defending suit by or against it. During the time
which the corporation, through its officers, may conduct the liquidation of assets and sue and be sued as a corporation is limited
to 3 years from the time period of dissolution commences, but that there is no time limit within which trustees must complete a
liquidation placed in their hands. The conveyance to the trustees must be made within the 3 year period. It may be found
impossible to complete the work of liquidation within the 3 year period or to reduce dispute claims to judgment. Suits by or
against a corporate abate when it ceased to be an entity capable of suing or being sued; but trustees to whom the corporate
assets have been conveyed pursuant to the authority of the code may sue and be sued as such in all matters connected with the
liquidation. The effect of conveyance is to make the trustees legal owners of the property conveyed, subject to the beneficial
interest therein of creditors and SHs. The complete loss of Abacas corporate existence after the expiration of 3 year period is
what impelled the creation of the Board of Liquidators, to continue the management of pending matters.

B.

Liquidation (Sec. 122)

and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders,
members, creditors and others in interest, all interest which the corporation had in the property terminates,
the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.

C.

Methods of liquidation:

by the corpo itself through the board of directors the board of directors serve as trustees

conveyance of all corporate assets to trustees who will take charge of the liquidation

liquidation by a receiver who may have been appointed by the SEC upon its decreeing the dissolution of the

The winding up and turning assets of corporation into cash for distribution

corporation. 3-year period does not apply because the corporation is substituted by the receiver. However, the

A liquidation proceeding is a proceeding in rem so that all other interested persons whether known to the parties

mere appointment of a receiver, without anything more does not result in the dissolution of the corporation nor bar

or not may be bound by such proceedings

it from the existence of its corporate rights

For how long may the liquidation of a corporation be undertaken?

o

Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be
continued as a body corporate for three (3) years after the time when it would have been so dissolved

However, in case the corporate assets are conveyed to a trustee or a receiver appointed by the SEC, the
three year limitation will not apply

Although the three year period may have expired, it does not necessarily follow that a creditor who was
unable to collect his claim before three years would lose is rights. It is still possible for him to sue the trustee,
if there be one, or if the circumstances so warrant, to follow the assets in the hands of the stockholders who
nay have received the same as liquidating dividends

What could and should be done during the period of liquidation?

o

For the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing
the business for which it was established.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any
of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

What happens if an asset cannot be distributed to the person entitled to it?

o

Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member
who is unknown or cannot be found shall be escheated to the city or municipality where such assets are
located.

Who may undertake the liquidation of a corporate?

o

At any time during said three (3) years, the corporation is authorized and empowered to convey all of its
property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From

China Banking Corporation v. Michelin & Co. F: George OFarrel & Cie Inc is a domestic corporation acting as agent and
representative of the M Michelin & Cie, a foreign corporation engaged in the sale and distribution of Michelin tires. Michelin
decided to discontinue their business relations, and it was discovered that O Farrel failed to account for an amount representing
the price of tires sold by the latter. Michelin claims the money was disposed by O Farrel for its own use and benefit and without
the authority or consent of Michelin. Gaston OFarrel (the person) and Sanchez executed a mortgage on the house of OFarrel and
shares owned by both to guarantee payment of the amount to the Michelin, but left a balance which the latter seeks to recover.
The board of OFarrel filed a petition for its dissolution and sought the appointment of Gaston as receiver and liquidator, which
was granted by TC. Michelin filed its claim against OFarrel Corp with a prayer that its claim be allowed as a preferred one against
the latter. TC grants motion of Michelin. Nobody except Michelin and Gaston was notified of the order. China Bank intervened and
moved that Michelins claim be allowed as an ordinary one under the Insolvency Law and sought the nullification of the TC orders.
H: Claims against a corporation in the hands of a receiver should not be approved and paid without some formal and regular
proceeding after a reasonable opportunity is given to all parties in interest.
The SC held that the provisions of the Insolvency Law should operate. There is no reason for the corporation to resort to the court
for a decree of voluntary dissolution. If the corporation was under such a financial condition as alleged, and did not desire to
continue doing business, there is no necessity for judicial intervention in the winding up of affairs coupled with the appointment
for a receiver to deal with creditors as though they were creditors of an insolvent corporation. Under the old corpo law, with
respect to decrees of dissolution upon voluntary application, the court may appoint receivers to collect and take charge of the
assets. It is permissive and not mandatory, because in cases of voluntary dissolution there is no occasion for the appointment of a
receiver except under special circumstances. Such discretion on the part of the court to appoint must be exercised with caution. IT
does not empower the court to hear and pass upon the claims of creditors of the corporation at first hand. In such cases, the
receiver does not act as a receiver of an insolvent corporation. Since liquidation consists of collecting all that is due the
corporation, all claims must be presented for allowance to the receiver or trustees during winding up, within 3 years as provided
in Corpo Law. The rulings of the receiver are subject to judicial review by the court which appointed him.
The normal method is for directors/officers to have charge of the winding up, though there is the alternative method of assigning
property of the corporation to trustees. The law authorizing voluntary dissolutions are generally held to apply only to dissolutions
brought about by the SHs themselves.
China Banks motion was filed 13 months after the decree of dissolution was entered, thus the motion was flied on time to have its
claim reviewed by the court. The appointment of Gaston as the receiver, who was also the principal promoter of the corporation
and at one time the majority SH, president, and GM, lends itself to serious suspicion. His administration of the business left much
to be desired and that he alone ought to be blamed for the shortage claimed by Michelin, but to save himself he made the
corporation shoulder the burden of obligations in exchange for a simulated conveyance of his house and shares to the
corporation. Once delinquent, Gaston resorted to a judicial proceeding of voluntary dissolution in an attempt to settle Michelin
claim and to free himself from any liability, and allowed the claim to be a preferred claim without informing or notifying interested
parties, such as China Bank, which also had a claim.

HLP2009-3B

Page 57

Michelins claim cannot be allowed as a preferred claim, because the merchandise was no longer in the corporations possession.
The rubber tires consigned were to be sold on order, and the claim for the advance seems to be in the nature of a current account
between the two companies more than anything else.
Republic v Marsman Devt Co. F: Marsman is a lumber company. An investigation was conducted and certain taxes due from
logs produced from its timber concession granted by the government. CIR demanded payment representing three assessments
made on forest charges, deficiency sales tax and other surcharges and penalties. Counsel for the corporation requested for
reinvestigation, but was denied unless the legal requirements for such a request were complied with and payment of of total
assessments were made, and to furnish a bond to guarantee payment of the balance. The corporation repeated failed to comply
with the conditions set by the CIR, which was constrained to make extrajudicial demand for the tax liabilities. Marsman was then
extrajudicially dissolved. BIR files a complaint for its demands after more than 3 years following the corporations dissolution, and
the TC sentenced the corporation to pay the amount demanded by CIR.
H: TC did not err in holding that the period to question the tax assessments had already expired. By its own omission, the
corporation made it possible for the BIR to act on its own MR. Mere filing of a motion does not suspend the running of the period
for collection of the tax, which implies that any assessment made by the BIR is supposed to be final and executory as to the
taxpayer concerned.
I: w/n present action is barred by prescription, in light of the fact that the corporation law allows corporations to continue only for
3 years after its dissolution, for the purpose of presenting or defending suits by or against it, and to settle its affairs. no
H: Stress given by Marsman on the extinction of corporate personality by virtue of its extra-judicial dissolution is misplaced. The
assessments against the corporation were made before its dissolution and not later than 6 months after dissolution. Thus the
government became the creditor of the corporation before the completion of its dissolution. Burgess the liquidator became in law
the trustee of all its assets for the benefit of all person interested, including the government. It is immaterial that the present
action was filed after expiration of the 3 year period, because the assessment definitely established the government as a creditor
of the corporation for whom the liquidator is supposed to hold corporate assets.

D.

Effects of Dissolution, winding up and liquidation:

cannot even be a de facto corporation, hence subject to collateral attack

cannot enter into new contracts which would have the effect of continuing the business

executory contracts
No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Code or of any part thereof. (Sec 145)
o

The prevailing view is that executory contracts are not extinguished. However, some authorities make an
exception of contracts for personal services such as employment contracts of officers and employees where
the dissolution is involuntary or the result of merger or consolidation in which case the contracts are deemed
terminated.

distribution of assets after payment of debts

o

A corporation cannot distribute any of its assets or property except upon lawful dissolution and only after
payment of all its debts and liabilities, after which the remaining assets must be distributed to the
stockholders in proportion to their interest in the corporation.

Exceptions:

decrease in c/s resulting in a surplus which can then be distributed to stockholders provided no creditors
are prejudiced

The creditor of a dissolved corporation may follow its assets once they passed into the hands of a SH. The dissolution of a
corporation does not extinguish debts due or owing to it. A creditor of a dissolved corporation may follow its assets, as in the
nature of a trust fund, into the hands of the SHs. The hands of government cannot collect taxes from a defunct corporation, it
loses thereby none of its rights to assess taxes due, and to collect the taxes due from the corporation from persons who by reason
of transactions with the corporation, hold property against which the tex may be enforced. Court ruled that the net profit
remained intact and was distributed among the SHs immediately after sale of surplus. Tan Tiong et al are thus the beneficiaries of
the defunct corporation and should be held liable to pay the taxes, but only in proportion to their respective shares in the
distribution of assets.

H: Tan Tiong, as substitute parties-in-interest, cannot now be heard to complain that they were being held liable for the tax due
from the corporation whose representation they assumed and whose assets are distributed to them.

Even after the 3 year period of liquidation, corporate creditors can still pursue their claims against corporate assets against
the officers or SHs who have taken over the properties of the corporation
SC held that the State cannot insist on making tax assessments against a corporation that no longer exists and then turn
around and oppose the appeal questioning the legality of the assessment precisely on the same ground that the corporation
is non-existent
The remedy of corporate creditors after the 3-year period is to race where the corporate assets have gone, wherever they
rested, be he a SH or a non-SH. Cause of action is to file an action against that person who has control over the corporate
assets.

corporation loses its juridical personality and can no longer lawfully continue its business except for the
purpose of winding up

Code provides for a 3-year period for continuation of the corporate existence for purposes of liquidation
But there is nothing in the provision which bars an action for recovery of debts of the corporation against the liquidator
himself, after the lapse of the 3-year period

Tan Tiong Bio v CIR. F: Tan Tiong Bio et al are incorporators and directors (some are officersPresident and treasurer) of the
Central Syndicate. The company realized a net profit of close to P300K, and sale of goods was the only transaction undertaken by
it. BIR sues the Tan Tiong et al for deficiency sales taxes and surcharges on surplus goods purchased by the corporation from the
Foreign Liquidation Commission. Corporation was dissolved, and Tan Tiong and company substituted themselves as parties,
thereby becoming successors-in-interests in the corporate assets after liquidation. TC rules ifo BIR, and Tan Tiong et al appeals,
claiming that they cannot be held liable for tax liability there being no law authorizing the government to proceed against SHs of a
defunct corporation as transferees of the corporate assets upon liquidation. If they were liable, it is only to the extent of the
benefits derived by them, and that the action is barred by prescription due to the 3-year limit in the corpo Law.
I: W/n the sales tax can be enforced against the corporations successors-in-interest, even if corporation has been dissolved by
expiration of corporate existence.
--YES

loss of juridical personality

as otherwise allowed by the code:

Appraisal right

Deadlock in a close corporation

SH of a close corporation may compel corporation to buy his shares at fair value

Corporation repurchases shares for any legitimate corporate purpose

Corporation validly distributes dividend

Liquidating dividends share of SH in assets upon liquidation

Clemente vs. CA

Plaintiffs sought to be declared owners of a parcel of land owned by Sociedad Popular Calambena, a Sociedad
Anonima. Plaintiffs are stockholders of the latter corporation

HLP2009-3B

Page 58

However, there was no proof that taxes were paid by the Sociedad and neither were there efforts exerted by the
latter to consolidate title over the property. No explanation was offered as to how and when the property came

FOREIGN CORPORATION

into the possession of the defendants

Plaintiffs were not able to come up with any evidence to substantiate their claim of ownership of the assets.

If Sociedad has long been defunct, plaintiffs should have taken appropriate measures in a proper forum for a

A.

peremptory settlement of its affairs

Foreign corporation (Section 123)

The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the right and

whose laws allow Filipino citizens and corporations to do business in its own country or state.

liabilities of such entity nor those of its owners and creditors.

If the three year extended life has expired without a trustee or receiver having been expressly designated by he
corporation itself within that period, the board of directors or trustees itself may be permitted to so continue as

B.

Trustees by legal implication to compete the corporate liquidation.

Necessity of obtaining a license to do business:

Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including

such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts.

proper representations with the SEC, which has primary and sufficiently broad jurisdiction in matters of this nature,
C.

Reburiano v CA and Pepsi cola Bottling Company

Reburiano was ordered to pay Pepsi a sum of money

Pursuant to said judgment, a writ of execution was issued by Trial Court

Prior to the promulgation of the decision, Pepsi amended its Articles of Incorporation shortening the term of its

When the trial was conducted, decision rendered, and writ of execution issued, Pepsi was no longer in existence

A dissolved and non-existing corporation could still be represented by a lawyer

o

Doing business (Sec. 3(d) RA 7042)

Soliciting orders

Service contracts

Opening offices, whether called liason offices or branches

Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling 180 days or more

existence

The reason for the license is to subject the foreign corporation doing business in the Philippines to the jurisdiction
of the courts, otherwise a foreign corporation illegally doing business here may successfully though unfairly plead

not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make

for working out a final settlement of the corporate concerns.

Foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and

Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the
Philippines

S 122 Corpo code Every corporation whose charter expires by its own limitation or is annulled by forfeiture

Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that
extent, performance normally incident to , and in progressive prosecution of, commercial gain or of the purpose

or otherwise, or whose corporate existence for other purposes is terminated in any other manner shall

and object of the business organization

nevertheless be continued as a body corporate for 3 years after the time when it would have been so

dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and

It shall not include:

o

close its affairs, to dispose of and convey its property, and to distribute its assets, but not for the purpose of

and/or the exercise of such rights as such investor

continuing the business for which it was established.

o

At any time during the 3 years, corpo is empowered to convey its properties to trustees

Trustees may commence a suit which can proceed to final judgment even beyond the three-year period. No

Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business

Having a nominee director or officer to represent its interests in such corporations

Appointing a representative or distributor domiciled in the Philippines which transacts business in its own
name and for its own account

reason can be conceived why a suit already commenced by the corporation itself during its existence, not by
a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation should not

D.

Requirements for the issuance of a license

be accorded similar treatment allowed to proceed to final judgment and execution thereof
1.

Documentary requirements (Sec. 125)

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A foreign corporation applying for a license to transact business in the Philippines shall submit to the SEC:
o

Copy of its articles of incorporation and by-laws, certified in accordance with law

Their translation to an official language of the Philippines, if necessary.

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 SEC without previous authority from the appropriate government agency, whenever required

The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set

by law.

forth the following:

o

The date and term of incorporation;

The address, including the street number, of the principal office of the corporation in the country or state of
incorporation;

2.

Deposit requirements (Sec. 126)

continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state

proceedings and, pending the establishment of a local office, all notices affecting the corporation;

of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with

The place in the Philippines where the corporation intends to operate;

this Code or other special laws.

The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in

foreign banking or insurance corporation, shall deposit with the SEC for the benefit of present and future creditors

authority issued by the appropriate government agency;

of the licensee in the Philippines, securities satisfactory to the SEC, consisting of :

The names and addresses of the present directors and officers of the corporation;

A statement of its authorized capital stock and the aggregate number of shares which the corporation has

instrumentalities, or of government-owned or controlled corporations and entities,

o

Shares of stock in "registered enterprises" as this term is defined in Republic Act No. 5186,

A statement of its outstanding capital stock and the aggregate number of shares which the corporation has

Shares of stock in domestic corporations registered in the stock exchange, or

issued, itemized by classes, par value of shares, shares without par value, and series, if any;

Shares of stock in domestic insurance companies and banks, or

Any combination of these kinds of securities,

A statement of the amount actually paid in; and

Such additional information as may be necessary or appropriate in order to enable the Securities and

With an actual market value of at least one hundred thousand (P100,000.) pesos;

Exchange Commission to determine whether such corporation is entitled to a license to transact business in

Provided, however, That within six (6) months after each fiscal year of the licensee, the SEC shall require the
licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by

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:

Bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and

authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any;

the Philippines, and to determine and assess the fees payable.

Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except

the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of

Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and

The name and address of its resident agent authorized to accept summons and process in all legal

The laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein

The applicant is an existing corporation in good standing.

which the licensee's gross income for that fiscal year exceeds five million (P5,000,000.00) pesos.

The SEC shall also require deposit of additional securities if the actual market value of the securities on deposit has
decreased by at least ten (10%) percent of their actual market value at the time they were deposited.

The SEC may at its discretion release part of the additional securities deposited with it if the gross income of the

If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be

licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than

attached thereto.

ten (10%) percent of the actual market value of the securities at the time they were deposited.

The application 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 SEC and other governmental agency in the proper

The SEC may, from time to time, allow the licensee to substitute other securities for those already on deposit as
long as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities

cases that the:

deposited.

Applicant is solvent and in sound financial condition, and

In the event the licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be

Setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year

returned, upon the licensee's application therefor and upon proof to the satisfaction of the SEC that the licensee

immediately prior to the filing of the application.

has no liability to Philippine residents, including the Government of the Republic of the Philippines.

HLP2009-3B
3.

Appointment of resident agent (Sec. 128)

A resident agent may be either an:

Page 60

Either a Filipino or domestic corporation; and

Power of Attorney to SEC to receive process

Must prove that the foreign corporation's country grants reciprocal rights to Filipinos and Philippine
corporation.

Individual residing in the Philippines of good moral character and of sound financial standing

Establish an office in the Philippines

Domestic corporation lawfully transacting business in the Philippines:

Bring in its assets

The SEC shall require as a condition precedent to the issuance of the license to transact business in the Philippines

Undertaking that Filipino creditors will be preferred in the event of insolvency

by any foreign corporation that such corporation file with the SEC a written power of attorney:

Notice of six (6) months should there be desire to terminate operations

Designating some person who must be a resident of the Philippines, on whom any summons and other legal

Franchise and patents must remain in the Philippine, if this is possible

processes may be served in all actions or other legal proceedings against such corporation, and

Must file a bond of P100,000 which may be in the following form:

Consenting that service upon such resident agent shall be admitted and held as valid as if served upon the

surety bond

duly authorized officers of the foreign corporation at its home office.

government securities

Any such foreign corporation shall likewise execute and file with the SEC an agreement or stipulation, executed by

securities of political subdivisions

the proper authorities of said corporation, in form and substance as follows:

shares of stock of registered enterprises with the SEC

shares of stock of any corporation being sold at the stock exchange

"The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by
the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time

Provided, that within six (6) months after each fiscal year, the SEC shall require the deposit of additional

said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in

securities equivalent to 2% of the amount in excess of P500,000 of the gross income.

the Philippines on whom any summons or other legal processes may be served, then in any action or

Corporation Code]

[Sec. 125, 126,

proceeding arising out of any business or transaction which occurred in the Philippines, service of any
summons or other legal process may be made upon the SEC and that such service shall have the same force

E.

and effect as if made upon the duly-authorized officers of the corporation at its home office."

129)

Whenever such service of summons or other process shall be made upon the SEC, the Commission shall, within

ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its

What laws are applicable to foreign corporations licensed to transact business in the Philippines? ( Sec.

applicable to domestic corporations of the same class,

The sending of such copy by the Commission shall be necessary part of and shall complete such service. All

Creation, formation, organization or dissolution of corporations

expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the

Those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of

service is made.

EXCEPT

such only as provide for the:

corporations to each other or to the corporation.

In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the
SEC of the new address.

4.

Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations

home or principal office.

Summary: Requisites for the Issuance of License

F.

What are the consequence of doing business in the Philippines without a license? (Sec. 133)

No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall
be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the

The SEC will issue a license to the foreign corporation to do business in the Philippines, provided the following
conditions are met:

Philippines;

Such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws.

Appointment of a Resident Agent:

HLP2009-3B

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Shall not be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative
agency in the Philippines; but such corporation may be sued or proceeded against before Philippine courts or

G.

Application to existing foreign corporations (Section 129)

administrative tribunals.

In addition, Sec. 134 makes it a ground for revocation of license when a foreign corporation transacts business in

Every foreign corporation which on the date of the effectivity of this Code is authorized to do business in the

the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do

Philippines under a license issued to it, shall continue to have such authority under the terms and condition of its

business in the Philippines.

license, subject to the provisions of this Code and other special laws.

Status of Contracts entered into without the requisite license

o

The failure to obtain a license by a foreign corporation doing business in the Philippines does not affect the

H.

Amendments to articles of incorporation or by-laws of foreign corporations (Section 130)

validity of contracts entered into by such foreign corporation, but merely removes its legal standing to sue in

local tribunals. However, the defect may be cured by subsequent registration by the foreign corporation to
obtain the necessary license to do business in the Philippines.

[Home Insurance Co. v. Eastern Shipping

appropriate government agency, a duly authenticated copy of the articles of incorporation or by-laws, as

Lines, 123 SCRA 424 (1983)]

o

Within sixty (60) days after the amendment becomes effective, file with the SEC, and in the proper cases with the

amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the

Although the law does not declare as void or invalid the contracts entered into by a foreign corporation with a

authorized official or officials of the country or state of incorporation.

local corporation without the former first securing a license or certificate to do business in the Philippines, the
parties in this case cannot obtain relief on the contracts entered into because they are charged with the

The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is
authorized to transact business in the Philippines.

knowledge of the existing law at the time they entered into such contract and at the time it is to be operative.
[Top-Weld Mfg. v. ECED, S.A., 138 SCRA 118 (1985)]
o

I.

foreign corporation has engaged in business in the Philippines without a license, the dismissal of the suit

Amended license (Section 131)

However, in the case of Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992), the SC held that although the

event it :

to do business, then they are estopped from using the lack of license to avoid their obligations.

Changes its corporate name, or

Desires to pursue in the Philippines other or additional purposes

Legal standing of foreign corporations to sue on their corporate names, trade names, and trademarks
o

A foreign corporation authorized to transact business in the Philippines shall obtain an amended license in the

would not be proper on the ground that if the local investors knew that the foreign corporation had no license

A foreign corporation although not doing business in the Philippines has a personality to sue to oppose the
registration of a trademark when it is shown that its products using such trademark are being imported and

By submitting an application therefor to the SEC, favorably endorsed by the appropriate government agency in the
proper cases.

sold in the Philippines, pursuant to the terms of RA 166. [General Garments v. Director of Patents, 41 SCRA 50
(1971)]
o

J.

Merger or consolidation involving a foreign corporation licensed in the Philippines (Section 132)

A foreign corporation has a right to maintain an action in Philippine courts even if it is not licensed to do
business and is not actually doing business on its own therein to protect its corporate and trade names, since

it is a property right in rem, which it may assert to protect against all the world, in any of the courts of the

any domestic corporation or corporations if :

world--even in jurisdiction where it does not transact business--just the same as it may protect its tangible

Such is permitted under Philippine laws and by the law of its incorporation

The requirements on merger or consolidation as provided in this Code are followed

property, against trespass or conversion.

o

One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with

This is consonance with the Convention of the Union of Paris for the Protection of Industrial Property to which

Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or

the Phils. is a party. Article 8 thereof provides, "A trade name shall be protected in all the countries of the

consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation

Union without the obligation of filing or registration, whether or not it forms part of the trademark." The

shall, within sixty (60) days after such merger or consolidation becomes effective, file with the SEC, and in proper

mandate is contained in RA 166, or the Trademark Law. [Converse Rubber Corp. v. Universal Rubber Products,

cases with the appropriate government agency, a copy of the articles of merger or consolidation duly

147 SCRA 154 (1987)]

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Page 62

authenticated by the proper official or officials of the country or state under the laws of which merger or

must meet the following requirements:

Provided, however, that if the absorbed corporation is the foreign corporation doing business in the Philippines, the

All claims accrued in the Philippines must be settled

latter shall at the same time file a petition for withdrawal of its license.

All taxes must be paid

K.

Revocation of license (Section 134)

Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact
business in the Philippines may be revoked or suspended by the SEC upon any of the following grounds:
o

Failure to file its annual report or pay any fees as required by this Code;

Failure to appoint and maintain a resident agent in the Philippines as required by this Title;

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;

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

L.

Any other ground as would render it unfit to transact business in the Philippines. (n)

Issuance of certificate of revocation (Section 135)

Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchange
Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate
government agency in the proper cases.

The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines
a notice of such revocation accompanied by a copy of the certificate of revocation.

M.

If a foreign corporation duly licensed to do business desires to withdraw, it must file a petition for withdrawal, and

consolidation was effected

Withdrawal by a foreign corporation (Section 136)

Petition must be published once a week for three (3) consecutive weeks. [Sec. 136, Corporation Code]

Le Chemise Lacoste v Fernandez. F: La Chemise Lacoste is a French corporation and not doing business in the RP, and is also
the actual owner of the trademarks Lacoste and Crocodile Device. Hemandas & Co secured a registration of the trademarks in its
name from the Phil Patent Office of the trademarks owned by Le Chemise. Hemandas then assigned all its rights title and interest
in the trademark to Gobindram Hemandas. Le Chemise filed its own application for registration of the trademarks Crocodile
Device and Lacoste, and the Patent Office approved the former was but rejected the latter. Le Chemise then filed a lettercomplaint with the NBI alleging acts of unfair competition committed by Hemandas and requesting their apprehension and
prosecution. The NBI secured search warrants, but Hemandas files a MTQ the warrant alleging that his trademarks is different
from Le Chemise. Search warrants were recalled and items seized returned to Hemandas. Le Chemise questions the quashal.
I: W/n petitioner has no legal capacity to sue because it is not doing business in the Philippines and is not licensed to do so, and
that it failed to allege certain facts in its petition relative to its capacity to sue.
H: In Leviton case, which is relied on by Hemandas, it was ruled that it is not enough for a foreign corporation to merely allege
that it is a foreign corporation. Compliance with the requirements under the law or statute from which it seeks relief and upon
which the grounds of the illegal act are alleged, is necessary. It is therefore necessary for the foreign corporation to comply with
these requirements or aver why it should be exempted from them. The foreign corporation may have the right to sue before RP
courts, but our rules on pleadings require that the qualifying circumstances necessary for the assertion of that right be
affirmatively pleaded. Since the present case involves a criminal offense, the Leviton case is inapplicable. Le
Chemise may still sue even if it failed to allege material facts. A foreign corporation not doing business needs no license to sue
before RP courts for infringement of trademark and unfair competition. A foreign corporation favorable known in the Phils through
the use of its products bearing its corporate name has a legal right to maintain action in the Philippines to restrain the formation
in BF of a corporation bearing the same name as the foreign corporation; the sole purpose of its suit is to protect its reputation,
corporate name, goodwill whenever the same has established themselves. A corporate and trade name are property rights, rights
in rem, which the owner may assert and protect against the whole world, in any courts of the worldeven in jurisdictions where it
does not transact business. Since it is the trademark and not the mark that is to be protected, a trademark acknowledges no
territorial boundaries or municipalities or states or nations, but extends to every market where the traders goods have become
known and identified.
The letter-complaint that preceded the petition was filed with the NBI. If prosecution would follow after the PI then the information
shall be in the name of the People of the RP and no longer the petitioner which is only an aggrieved party, since a criminal act is
an act against the State. Le Chemise capacity to sue, would then be of no significance. The Mentholatum case relied upon by
Hemandas is also not on all fours with the present case. The foreign corporation in Mentholatum is in fact doingbusiness in the RP
but without the requisite license. In the present case, Le Chemise is a foreign corporation not doing business in the RP. It has an
exclusive distributor, Rustans Commercial, which is an independent entity which buys and sells the products of Le Chemise, and is
in other words not a mere agent or conduit of Le Chemise. BOI rules also support a finding that Le Chemise is not doing business.
Rustans is a middleman acting and transacting business in its own name and account.
In upholding the rights of Le Chemise, SC held that we are recognizing our duties and rights of foreign states to which the
Philippines and France are parties. We are simply interpreting and enforcing a solemn international commitment of the Philippines
embodied in a multilateral treaty, the Paris Convention for the Protection of Industrial Property to which we are a party. The
convention has extraterritorial application, and is essentially a compact between the member countries to accord to membercountries citizens the same rights comparable to those accorded their own citizens by domestic law. The underlying principle is
that foreign nationals should be given the same treatment in each of the member-countries as that country makes available to its
own citizens. It is not premised upon the idea that the trademark and related laws shall be given extra-territorial application, but
on exactly the converse that each nations law shall have only territorial application. A treaty or convention is not a mere moral
obligation to be enforced but creates a legally binding obligation on the parties founded on the generally accepted principles of
international law of pacta sunt servanda, which has been adopted as the law of the law.
Agilent Technologies Singapore v. Integrated Silicon Technology Phils. F: Petitioner Agilent Technologies Singapore (Pte.),
Ltd. (Agilent) is a foreign corporation, which, by its own admission, is not licensed to do business in the Philippines. Respondent
Integrated Silicon Technology Philippines Corporation (Integrated Silicon) is a private domestic corporation, 100% foreign
owned, which is engaged in the business of manufacturing and assembling electronics components. A 5-year Value Added
Assembly Services Agreement (VAASA), was entered into on April 2, 1996 between Integrated Silicon and the Hewlett-Packard

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Singapore (Pte.) Ltd., Singapore Components Operation (HP-Singapore). Under the terms of the VAASA, Integrated Silicon was to
locally manufacture and assemble fiber optics for export to HP-Singapore. HP-Singapore, for its part, was to consign raw materials
to Integrated Silicon; transport machinery to the plant of Integrated Silicon; and pay Integrated Silicon the purchase price of the
finished products. HP-Singapore assigned all its rights and obligations in the VAASA to Agilent. Integrated Silicon sues Agilent and
its officers for specific performance, alleging that Agilent breached the parties oral agreement to extend the VAASA. Integrated
Silicon thus prayed that defendant be ordered to execute a written extension of the VAASA for a period of five years as earlier
assured and promised. Agilent then filed a separate complaint for specific performance against Integrated Silicon, Teoh Kang
Seng, Teoh Kiang Gong, Anthony Choo, Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz and Rolando T. Nacilla, and prayed for the
immediate return and delivery to plaintiff its equipment, machineries and the materials to be used for fiberoptic components
which were left in the plant of Integrated Silicon. TC denied MTD of Silicon. CA reverses. Integrated Silicon et al argue that since
Agilent is an unlicensed foreign corporation doing business in the Philippines, it lacks the legal capacity to file suit, assailing
various acts of Agilent, purportedly in the nature of doing business in the Philippines.
H: A foreign corporation without a license is not ipso facto incapacitated from bringing an action in Philippine courts. A license is
necessary only if a foreign corporation is transacting or doing business in the country.
The Corporation Code provides: Sec. 133. Doing business without a license. No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against
before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.
The aforementioned provision prevents an unlicensed foreign corporation doing business in the Philippines from accessing our
courts. In a number of cases, however, we have held that an unlicensed foreign corporation doing business in the Philippines may
bring suit in Philippine courts against a Philippine citizen or entity who had contracted with and benefited from said corporation.
Such a suit is premised on the doctrine of estoppel. A party is estopped from challenging the personality of a corporation after
having acknowledged the same by entering into a contract with it. This doctrine of estoppel to deny corporate existence and
capacity applies to foreign as well as domestic corporations. The application of this principle prevents a person contracting with a
foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has
received the benefits of the contract.
The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four
statements:
(1) if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts;
(2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an
isolated transaction or on a cause of action entirely independent of any business transaction;
(3) if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted
with said corporation may be estopped from challenging the foreign corporations corporate personality in a suit brought before
Philippine courts; and
(4) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any
transaction.
In Mentholatum, the Court discoursed on the two general tests to determine whether or not a foreign corporation can be
considered as doing business in the Philippines. The first of these is the substance test, thus: The true test [for doing business],
however, seems to be whether the foreign corporation is continuing the body of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to another.
The second test is the continuity test, expressed thus: The term [doing business] implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in the progressive prosecution of, the purpose and object of its organization.
Although each case must be judged in light of its attendant circumstances, jurisprudence has evolved several guiding principles
for the application of these tests. For instance, considering that it transacted with its Philippine counterpart for seven years,
engaging in futures contracts, this Court concluded that the foreign corporation in Merrill Lynch Futures, Inc. v. Court of Appeals
and Spouses Lara, was doing business in the Philippines. In Top- Weld Manufacturing v. ECED, IRTI, et al. both involved the License
and Technical Agreement and Distributor Agreement of foreign corporations with their respective local counterparts that were the
primary bases for the Courts ruling that the foreign corporations were doing business in the Philippines. In particular, the Court
cited the highly restrictive nature of certain provisions in the agreements involved, such that the Philippine entity is reduced to
a mere extension or instrument of the foreign corporation.
The case law definition has evolved into a statutory definition, having been adopted with some qualifications in various pieces of
legislation. The Foreign Investments Act of 1991 (the FIA; Republic Act No. 7042, as

amended), Sec 3 (d) defines doing business as those which include soliciting orders, service contracts, opening offices,
whether called liaison offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or
acts that imply
a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and in the progressive prosecution of, commercial gain or of the purpose
and object of the business organization.
An analysis of the relevant case law, in conjunction with Section 1 of the Implementing Rules and Regulations of the FIA (as
amended by Republic Act No. 8179), would demonstrate that the acts enumerated in the VAASA do not constitute doing
business in the Philippines.
The IRR of the FIA (as amended by Republic Act No. 8179) provides that the following shall not be deemed doing business:
a. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor;
b. Having a nominee director or officer to represent its interest in such corporation;
c. Appointing a representative or distributor domiciled in the Philippines which transacts business in the representatives or
distributors own name and account;
d. The publication of a general advertisement through any print or broadcast media;
e. Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the
Philippines;
f. Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export;
g. Collecting information in the Philippines; and
h. Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in
the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to
operate it, and similar incidental services.
By and large, to constitute doing business, the activity to be undertaken in the Philippines is one that is for profit-making. By the
clear terms of the VAASA, Agilents activities in the Philippines were confined to (1) maintaining a stock of goods in the Philippines
solely for the purpose of having the same processed by Integrated Silicon; and (2) consignment of equipment with Integrated
Silicon to be used in the processing of products for export. As such, we hold that, based on the evidence presented thus far,
Agilent cannot be deemed to be doing business in the Philippines. Respondents contention that Agilent lacks the legal capacity
to file suit is therefore devoid of merit. As a foreign corporation not doing business in the Philippines, it needed no license before it
can sue before our courts.
Merrill Lynch Futures v CA. F: Merrill Lynch Futures, Inc. a non-resident foreign corporation not doing business in the
Philippines, sued the Spouses Pedro M. Lara and Elisa G. Lara for the recovery of a debt and interest thereon. Merrill Lynch is a
"futures commission merchant" duly licensed to act as such in the futures markets and exchanges in the United States, and
essentially functioning as a broker (executing)
orders to buy and sell futures contracts received from its customers on U.S. futures exchanges. It also defined a "futures contract"
as a "contractual commitment to buy and sell a standardized quantity of a particular item at a specified future settlement date
and at a price agreed upon, with the purchase or sale being executed on a regulated futures exchange." It entered into a Futures
Customer Agreement with the defendant spouses, in virtue of which it agreed to act as the latter's broker for the purchase and
sale of futures contracts in the U.S. and that pursuant to the contract, orders to buy and sell futures contracts were transmitted to
ML FUTURES by the Lara Spouses "through the facilities of Merrill Lynch Philippines, Inc., a Philippine corporation and a company
servicing plaintiffs customers. Later, the Laras would reaffirm their lack of awareness that Merrill Lynch Philippines, Inc. (formerly
registered as Merrill Lynch, Pierce, Fenner & Smith Philippines, Inc.) did not have a license, claiming that they learned of this only
from inquiries with the Securities and Exchange Commission which elicited the information that it had denied said corporation's
application to operate as a commodity futures trading advisor. Lara Spouses actively traded in futures contracts, including "stock
index futures" for four years or so, i.e., from 1983 to October, 1987. A loss amounting to US$160,749.69 was incurred in respect of
three (3) transactions involving "index futures," and after setting this off against an amount of US$75,913.42 then owing by ML
FUTURES to the Lara Spouses, said spouses became indebted to ML FUTURES for the ensuing balance of US$84,836.27. Lara
Spouses however refused to pay this balance, "alleging that the transactions were null and void because Merrill
Lynch Philippines, Inc., the Philippine company servicing accounts of plaintiff had no license to operate as a 'commodity and/or
financial futures broker. Lara files a MTD, and TC sustains the motion. CA affirms, holding that the Trial Court had seen "through
the charade in the representation of MLPI and the plaintiff that MLPI is only a trading advisor and in fact it is a conduit in the
plaintiff's business transactions in the Philippines, citing the ruling in: Mentholatum v Mangaliman. I: W/n (a) ML FUTURES is
prohibited from suing in Philippine Courts because doing business in the country without a license, and that (b) it is not a real
party in interest since the Lara Spouses had not been doing business with it, but with another corporation, Merrill Lynch, Pierce,
Fenner & Smith, Inc.

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H: The ground that the plaintiff has no legal capacity to sue may be understood in two senses: one, that the plaintiff is
prohibited or otherwise incapacitated by law to institute suit in Philippine Courts; or two, although not otherwise incapacitated in
the sense just stated, that it is not a real party in interest. Now, the Lara Spouses contend that ML Futures has no capacity to sue
them because the transactions subject of the complaint were had by them, not with the plaintiff ML FUTURES, but with Merrill
Lynch Pierce Fenner & Smith, Inc.
The facts on record adequately establish that ML FUTURES, operating in the United States, had indeed done business with the
Lara Spouses in the Philippines over several years, had done so at all times through Merrill
Lynch Philippines, Inc. (MLPI), a corporation organized in this country, and had executed all these transactions without ML
FUTURES being licensed to so transact business here, and without MLPI being authorized to operate as a commodity futures
trading advisor. The Laras did transact business with ML FUTURES through its agent corporation organized in the Philippines, it
being unnecessary to determine whether this domestic firm was MLPI (Merrill Lynch Philippines, Inc.) or Merrill Lynch Pierce Fenner
& Smith (MLPI's alleged predecessor). The fact is that ML FUTURES did deal with futures contracts in exchanges in the United
States in behalf and for the account of the Lara Spouses, and that on several occasions the latter
received account documents and money in connection with those transactions.
I: W/N ML FUTURES may sue in Philippine Courts to establish and enforce its rights against said spouses, in light of the undeniable
fact that it had transacted business in this country without being licensed to do so. W/N the Lara Spouses are now estopped to
impugn ML FUTURES' capacity to sue them in the courts of the forum.
H: The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the same by
entering into a contract with it. And the "doctrine of estoppel to deny corporate existence applies to foreign as well as to
domestic corporations; "one who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its
corporate existence and capacity." The principle "will be applied to prevent a person contracting with a foreign corporation from
later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the
contract where such person has acted as agent for the corporation and has violated his fiduciary obligations as such, and where
the statute does not provide that the contract shall be void, but merely fixes a special
penalty for violation of the statute " There would seem to be no question that the Laras received benefits
generated by their business relations with ML FUTURES. Those business relations, according to the Laras themselves, spanned a
period of seven (7) years; and they evidently found those relations to be of such
profitability as warranted their maintaining them for that not insignificant period of time; otherwise, it is reasonably certain that
they would have terminated their dealings with ML FUTURES much, much earlier. In fact, even as regards their last transaction, in
which the Laras allegedly suffered a loss in the sum of US$160,749.69, the Laras nonetheless still received some monetary
advantage, for ML FUTURES credited them with the amount of US$75,913.42 then due to them, thus reducing their debt to
US$84,836.27. Given these facts, and assuming that the Lara Spouses were aware from the outset that ML FUTURES had no
license to do business in this country and MLPI, no authority to act as broker for it, it would appear quite inequitable for the Laras
to evade payment of an otherwise legitimate indebtedness due and owing to ML FUTURES upon the plea that it should not have
done business in this country in the first place, or that its agent in this country, MLPI, had no license either to operate as a
"commodity and/or financial futures broker."
Estoppel doctrine: if local parties knew that the foreign entity does not have a license, yet it is doing business, and they still
transacted with themestopped from invoking lack of license!
Villanueva: Merrill Lynch lacks an element of estoppel action/representation by the local which induces the foreign to believe
that he would be entitled to relief the simple act of entering into a contract with a foreign entity does not of itself give rise to
estoppel.