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CHAPTER 2: DEFINITION

AND ATTRIBUTES
A corporation is an artificial being created by operation of law, having the
right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.

7.

Corporations are subject to governmental regulations supervision and control including


submission of reportorial requirements not otherwise imposed in other business form.
CHAPTER 3: CLASSIFICATION OF CORPORATIONS

Attributes:
1.

Artificial being;

2.

Created by operation of law;

3.

Right of succession; and

4.

Powers, attributes and properties expressly authorized by law or


incident to its existence.

A corporation may claim for moral damages under Art. 2219 (7) of the Civil
Code in cases of libel, slander or any form of defamation. (Filipinas
Broadcasting Network vs. Ago Medical and Educational Center)

Capacity to act as a single unit;

2.

Limited shareholders liability;

3.

Continuity in existence;

4.

Feasibility of greater undertaking;

5.

Transferability of shares;

6.

Centralized management; and

7.

Standardized method of organization, management and finance

Disadvantage of corporate form


of business:
1.

To have valid and binding corporate act, formal proceedings, such as board
meetings are required.

2.

The business transactions of a corporation is limited to the State of its


incorporation and may not act as such corporation in other jurisdiction
unless it has obtained a license or authority from the foreign state.

3.

The shareholders limited liability tends to limit the credit available to the
corporation as a separate legal entity.

4.

By the very nature of shares of stock which are personal properties,


transferable at will by the owners thereof, transfers of share may result to
uniting incompatible and conflicting interests.
5.

6.

The minority shareholders have practically no say in the conduct of


corporate afairs.

In large scale enterprises, stockholders voting rights may become


merely fictitious and theoretical because of disinterest in management,
wide-scale ownership and inaccessible place of meeting.

Classes of corporations:
1.

Stock

2.

Non-stock

Requisites to be classified as a stock corporation:


1.
2.

That they have a capital stock divided into shares; and

That they are authorized to distribute dividends or allotments as


surplus profits to its stockholders on the basis of the shares held by them

Non-stock corporations no part of their income is distributable as


dividends to its members, trustees or officers subject to the provisions on
dissolution. (Sec. 87)

The plain and ordinary meaning of a business is restricted to activities or affairs


where profit is the purpose or livelihood is the motive, and the term business
when used without qualification, should be construed in its plain and ordinary
meaning, restricted to activities for profit or livelihood. (CIR vs. Club Filipino,
Inc.)

Advantages of corporate form


of business:
1.

Double taxation may be imposed on corporate income.

The test in determining whether a government owned or controlled corporation is


subject to the Civil Service Law is the manner of its creation, such that government
corporations created by special charter are subject to its provisions while those
incorporated under the General Corporation Law are not within its coverage. (PNOC-EDC
vs. NLRC)

Other classes of
corporations:
1.

Public and Private.

a.

Public corporations those created, formed or organized for political


or governmental purposes with political powers to be exercised for
purposes connected with the public good in the administration of civil
government.

b.

Private corporations those formed for some private purpose,


benefit, aim or end.

2.

Ecclesiastical (religious societies or corporation sole) and Lay


(eleemosynary or civil).

a.

Ecclesiastical or religious corporations those composed exclusively


of ecclesiastics organized for spiritual purposes or for administering
properties held for religious ones. They are further classified as
religious societies or corporation sole.

b.

Lay corporations those established for the purposes other than


religion. They are further classified as eleemosynary or civil.

Eleemosynary corporations are created for charitable and benevolent


purposes. Civil corporations are organized not for the purpose of public
charity but for the benefit, pecuniary or otherwise, of its members.
3.

Aggregate and Sole.

a.

Aggregate corporations those composed of a number of individuals


vested with corporate powers.

b.

Corporations sole those that consist of one person or individual only


and who are made as bodies corporate and politic in order to give
them some legal capacity and advantage which, as natural persons,
they cannot have.

4.

Close corporations those whose shares of stock are held by limited


number of persons.

b.

Open corporations those formed to openly accept outsiders as


stockholders or investors.
Domestic and Foreign.

a.

Domestic corporations those that are organized or created under or


by virtue of the Philippine laws. Note: issues of intra-corporate nature
are governed by Philippine law.

b.

Foreign corporations those formed, organized or existing under any


laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state.

6.

Holding corporations corporations that confine their activities to


owning stock in, and supervising management of other companies.

b.

Subsidiary corporations those which another corporation owns at


least a majority of the shares, and thus have control.

c.
7.

Affiliates those corporations which are subject to common control and


operated as part of a system.
Quasi-public.

Quasi-public corporations private corporations which have accepted from the State
the grant of a franchise or contract involving the performance of public duties (public
service corporations).
8.
a.

De jure corporations.

De facto corporations those which exist by virtue of an irregularity or


defect in the organization or constitution or from some other omission to
comply with the conditions precedent by which corporations de jure are
created, but there was colorable compliance with the requirements of the
law under which they might be lawfully incorporated for the purposes and
powers assumed, and user of the rights claimed to be conferred by law.
11. Corporations by estoppel.

a.

Corporations by estoppel those which are so defectively formed as not


to be either de jure or de facto corporations but which are considered as
corporations in relation only to those who cannot deny their corporate
existence due to their agreement, admission or conduct.

The mere fact that the government happens to be a majority stockholder does
not make it a public corporation. (National Coal vs. CIR)

CHAPTER 4: FORMATION AND


ORGANIZATION

Stages in the life of a corporation:

1.

Creation

2.

Reorganization or quasi-reorganization

3.

Dissolution and winding up

Steps in creation:
1.

Promotional stage

2.

Process of incorporation

3.

Organization and commencement of business

PROMOTIONAL STAGE

A promoter acting for a proposed corporation has 3 options:


1.

He may make a continuing ofer on behalf of the corporation, which, if


accepted after incorporation, will become a contract. In this case, the
promoter does not assume any personal liability, whether or not the
corporation will accept the offer.

2.

The promoter may make a contract at the time binding himself, with the
understanding that if the corporation, once formed, accepts or adopts the
contract, he will be relieved of responsibility.

Quasi corporations.

Quasi corporations public bodies or municipal societies such as


townships, counties, school districts, road or highway districts which,
though not vested with the general powers of corporations, are organized
by statutes or immemorial usage, as persons or aggregate corporations
with precise duties which may be enforced, and privileges which may be
maintained, by suits of law.
9.

a.

Parent or Holding Companies and Subsidiaries and Afiliates.

a.

De jure corporations juridical entities created or organized in strict or


substantial compliance with the statutory requirements of incorporation
and whose right to exist as such cannot be successfully attacked even by
the State in a quo warranto proceeding.
10. De facto corporations.

Close and Open.

a.

5.

a.

The promoter may bind himself personally and assume the responsibility of looking to the
proposed corporation, when formed, for reimbursement.
PROCESS OF INCORPORATION

Process of incorporation:
1.

Drafting the articles of incorporation

2.

Preparation and submission of additional and supporting documents

3.

Filing with the SEC

4.

Subsequent issuance of certificate of incorporation

Contents of the articles of incorporation

8.

1.

Name

2.

Purpose

3.

Principal ofice

4.

Term

5.

Incorporators

6.

Number of directors/trustees

7.

Names, nationalities and residences of directors/trustees

If a stock corporation, amount of authorized capital stock, number of


shares, par value, original subscribers
9.

11. Treasurers certificate


CORPORATE NAME

In determining the existence of confusing similarity in corporate names, the


test is whether the similarity is such as to mislead a person using ordinary
care and discrimination. Proof of actual confusion need not be shown. It
suffices that confusion is probably or likely to occur. (Philips Export
B.V. vs. CA)

A corporation has an exclusive right to the use of its name, which may be
protected by injunction upon a principle similar to that upon which persons
are protected in the use of trademarks and tradenames. (Philips Export B.V.
vs. CA)

A mere change in the name of a corporation, either by the legislature or by


the corporators or stockholders under legislative authority, does not,
generally speaking, afect the identity of the corporation, nor in any way afect
the rights, privileges or obligations previously acquired or incurred by it.

PURPOSE CLAUSE
A corporation has only such powers as are expressly granted to it by law
and by its articles of incorporation including those which are incidental to
such conferred powers, those reasonably necessary to accomplish its purpose
and those which may be incidental to its existence.

patently deceptive, confusing or contrary to law.

The law gives a corporation no express or implied authority to assume


another name that is unappropriated; still less that of another corporation,
which is expressly set apart from it and protected by law. (Red Line
Transportation Co. vs. Rural Transit Co.)
A word or phrase originally incapable of exclusive appropriation with reference
to an article on the market, because geographically or otherwise descriptive,
might nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that branch of
the purchasing public, the word or phrase has come to mean that the article
was his product. (Doctrine of secondary meaning, Lyceum of the Philippines, Inc.
vs.CA)
A corporation's right to use its corporate and trade name is a property right, a
right in rem, which it may assert and protect against the world in the same
manner as it may protect its tangible property, real or personal, against
trespass or conversion. It is regarded, to a certain extent, as a property right
and one which cannot be impaired or defeated by subsequent appropriation

That the complainant corporation acquired a prior right over the use of
such corporate name; and

The proposed name is either: (a) identical or (b) deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law; or (c)
patently deceptive, confusing or contrary to existing law. (Philips Export B.V. vs. CA)

identical or deceptively or confusingly similar to that of any existing


corporation or to any other name protected by law; or
2.

To come within the scope of the prohibition of Sec. 18, two requisites must be
proven, namely:
1.

A corporation cannot use a name which is:


1.

If a non-stock corporation, amount of capital, contributors

10. Such other matters not inconsistent with law and which the
incorporator may deem necessary and convenient

by another corporation in the same feld. (Philips Export B.V. vs. CA)

Reasons for requiring a statement of purposes or objects:


1.

In order that the stockholder who contemplates on an investment in a


business enterprise shall know within what lines of business his money is to
be put at risk.

2.

So that the board of directors and management may know within what
lines of business they are authorized to act.

3.

So that anyone who deals with the company may ascertain whether a
contract or transaction into which he contemplates entering is one within
the general authority of the management.

If the corporate purpose or objective includes any purpose under the


supervision of another government agency, prior clearance and/or approval
of the concerned government agencies or instrumentalities will be required.

General limitations on the purpose clause:


1.

The purpose must be lawful.

2.

The purpose must be specific or stated concisely although in broad or


general terms.

3.

the Code.

If there is more than one purpose, the primary as well as the secondary
ones must be specified.
4.

The purpose must be capable of being lawfully combined.

Qualifications:
1.

THE PRINCIPAL OFFICE

2.

The residence of the corporation is the place of its principal office as may be
indicated in its articles of incorporation and may, therefore, be sued only at that
place. (CRS vs. Antillon)

TERM OF EXISTENCE
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding
fifty (50) years from the date of incorporation unless sooner dissolved or unless
said period is extended. The corporate term as originally stated in the articles
of incorporation may be extended for periods not exceeding fifty (50) years in
any single instance by an amendment of the articles of incorporation, in
accordance with this Code; Provided, That no extension can be made earlier
than five (5) years prior to the original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier extension as may be determined by
the Securities and Exchange Commission.

General rule: Only natural persons can be incorporators.

Exception: Cooperatives and corporations primarily organized to hold equities in


rural banks.

Minors are not qualified to become incorporators.

THE
DIRECTORS/
TRUSTEES
General rule: There must be at least 5 but not more than 15 directors or
trustees in a private corporation.

2.

Educational corporations registered as a non-stock corporation whose


number of trustees, though not less than 5 and not more than 15 should be
divisible by 5;
In close corporations where all the stockholders are considered as
members of the board of directors thereby efectively allowing 20 members
in the board; and
3.

Corporation sole.

The by-laws may provide for additional qualifications and disqualifications.


However, it may not do away with the minimum disqualifications laid down by

Conviction by final judgment of an ofense punishable by imprisonment


for a period exceeding six (6) years, or a violation of this Code committed
within five (5) years prior to the date of election or appointment.
2.

Other disqualifications under applicable special laws.

A by-laws may validly provide that no person may be elected as director


unless he owns a specified number of shares required for the directorate
qualification.

It may likewise disqualify a stockholder from being elected into ofice if he has a
substantial interest in a competitor corporation to avoid any possible adverse
effects of conflicting interest of a director.

In order to be eligible as a director, what is material is the legal title to, not
beneficial ownership, of the stock as appearing on the books of the corporation.
(Lee vs. CA)

If no election is conducted or no qualified candidate is elected, the incumbent


director shall continue to act as such in a hold over capacity until the election is
held and a qualified candidate is so elected. (Detective and Protective Bureau
vs. Cloribel)

CAPITALIZATION

Authorized capital the maximum amount fixed in the articles to be


subscribed and paid-in or secured to be paid by the subscribers.

Subscribed capital stock the total number of shares and its total value
for which there are contracts for their acquisition or subscription.

Paid-up capital stock the actual amount or value which has been actually
contributed or paid to the corporation in consideration of the subscriptions
made thereon.

Exceptions:
1.

A majority of the directors or trustees must be residents of the


Philippines.

Disqualifications:
1.

INCORPORATORS
Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not
less than five (5) but not more than fifteen (15), all of legal age and a majority of whom
are residents of the Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of a stock corporation must own or be
a subscriber to at least one (1) share of the capital stock of the corporation

Directors must own at least one (1) share of the capital stock of the
corporation. Trustees must be members.

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 f:
1.
2.

Actual cash paid to the corporation;

Property, tangible or intangible, actually received by the corporation and


necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued;
3.

Labor performed or services actually rendered to the corporation;

4.

Previously incurred indebtedness by the corporation;

5.

Amounts transferred from unrestricted retained earnings to stated


capital; and

6.

Outstanding shares in exchange for stocks in the event of


reclassification or conversion.

Stocks shall not be issued in exchange of promissory notes or future services.

The board has the discretion to determine whether or not to declare dividends.

Participating preferred shares the holders thereof are still given the right to
participate with the common stockholders in dividends beyond their stated preference.
Cumulative preferred share those that entitle the owner thereof to payment
not only of current dividends but also back dividends not previously paid
whether or not, during the past years, dividends were declared or paid.

Shares of stock and their classification

Shares of stock designate the interest or right which the stockholder has in the
management of the corporation, and in the surplus profits and, in case of
distribution, in all assets remaining after the payment of its debts.

Stock certificate is a document or instrument evidencing the interest of a


stockholder in the corporation.

The shares of stock of stock corporations may be divided into classes or series
of shares, or both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of incorporation.

2.

For regulation and control of the issuance of sale of corporate securities for
the protection of purchasers and stockholders.
3.

As a management control device.

4.

To comply with statutory requirements.

5.

To better insure return on investment.

6.

For flexibility in price.

Common stock a stock which entitles its owner to an equal pro-rata division of
profits, if there be any, but without any preference or advantage in that respect
over any other stockholder or class of stockholders.

Limitations on preferred stock:


1.
2.

Types of non-cumulative preferred shares:


1.

Discretionary dividend type gives the holder of such shares the right to
have dividends paid thereon in a particular year depending on the
judgment or discretion of the board of directors.

2.

Mandatory if earned type impose a positive duty on directors to declare


dividends every year when profits are earned.

3.

Earned cumulative or dividend credit gives the holder thereof the


right to arrears in dividends if there were profits earned during the
previous years but dividends were not declared.

Unless the right to vote is clearly withheld, a preferred stockholder has the right
to vote.
Preference upon liquidation must be clearly indicated otherwise they shall
be placed on equal footing with other shares.

Par and no par value shares

Par value shares those whose value are fxed in the articles of incorporation.

Par value shares cannot be issued nor sold by the corporation at less than par.
No par value shares those whose issued price are not stated in the certificate
of stock but which may be fixed in the articles of incorporation, or by the board
of directors when so authorized by the said articles or by the by-laws, or in the
absence thereof, by the stockholders themselves.

Preferred stock a stock that gives the holder a preference over the holder of
common stocks with respect to the payment of dividends and/or with respect to
distribution of capital upon liquidation.

Non-cumulative preferred shares those which grant the holders of such


shares only to the payment of current dividends but not back dividends, when
and if dividends are paid, to the extent agreed upon before any other
stockholders are paid the same.

Common and preferred shares

In absence of express stipulation, preferred shares are presumed to be noncumulative.

To specify and define the rights and privileges of the stockholders.

Except as otherwise provided in the articles of incorporation and stated in the


certificate of stock, each share shall be equal in all respects to every other
share.

Purpose of classification:
1.

Preferred shares are presumed to be non-participating.

Limitations of no par value shares:

Must be issued with a stated par value; and

The preferences must be stated in the articles of incorporation and in


the certificate of stock, otherwise, each share shall be, in all respect, equal
to every other share.

The guarantee to preference as to dividends does not create a relation of


debtor and creditor between the corporation and the holders of such stock.

3.

1.

Such shares, once issued, are deemed fully paid and thus, non
assessable;

2.

The consideration for its issuance should not be less than P5.00;

The entire consideration for its issuance constitutes capital, hence, not
available for dividend declaration;
4.

They cannot be issued as preferred stock; and

5.

They cannot be issued by banks, trust companies, insurance companies,


public utilities and building and loan associations.

1.

Flexibility in price;

2.

Evasion of the danger of liability upon watered stock; and

Voting shares
management
the election
stockholders

Non-voting shares do not grant the holder thereof the right to vote except
under the penultimate paragraph of Sec. 6.

gives the holder thereof the right to vote and participate in the
of the corporation through the exercise of such right, either at
of the board of directors, or in any manner requiring the
approval.

They may be purchased or taken up by the corporation upon the expiration


of a fixed period, regardless of the existence of unrestricted retained earnings
in the books of the corporation, and upon such other terms and conditions as
may be stated in the articles of incorporation, which terms and conditions must
also be stated in the certificate of stock representing said shares.

Treasury shares

Non-voting shares shall nevertheless be entitled to vote on the following


matters:

3.

7.

1.

Amendment of the articles of incorporation;

2.

Adoption and amendment of by-laws;

Sale, lease, exchange, mortgage, pledge or other disposition of all or


substantially all of the corporate property;
4.

Incurring, creating or increasing bonded indebtedness;

5.

Increase or decrease of capital stock;

6.

Merger or consolidation of the corporation with another corporation or


other corporations;

Investment of corporate funds in another corporation or business in


accordance with this Code; and
8.

Sec. 7. Founders shares. - Founders' shares classified as such in the articles of


incorporation may be given certain rights and privileges not enjoyed by the
owners of other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited period
not to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of
the aforesaid approval by the Securities and Exchange Commission.

Treasury shares have no voting and dividend rights. Such rights are only
granted to outstanding shares of stock. (CIR vs. Manning)

Sec. 12. Minimum capital stock required of stock corporations. - Stock


corporations incorporated under this Code shall not be required to have any
minimum authorized capital stock except as otherwise specifically provided
for by special law, and subject to the provisions of the following section.

Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of incorporation,
and at least twenty-five (25%) per cent of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call for
payment by the board of directors: Provided, however, That in no case shall the paid-up
capital be less than fve Thousand (P5,000.00) pesos.
RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES

General rule: Corporations may or may not provide for restrictions and
preferences regarding the transfer, sale or assignment of shares in the articles
of incorporation. It is discretionary.

Exception: Close corporations are required


specified restrictions as required in Sec. 96.

General rule: Restrictions or preferences must be contained in the articles of


incorporation and in all stock certificates to be issued by the corporation.

Exception: In close corporations, such restrictions and preferences must also


be embodied in the by-laws.

Founders shares

Treasury shares may again be issued for a price less than par.

CAPITAL REQUIREMENT

Dissolution of the corporation.

Except as provided in the penultimate paragraph of Sec. 6, the vote


necessary to approve a particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights.

Treasury shares are shares of stock which have been issued and fully paid for,
but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the board of directors.

Only preferred and redeemable shares may be denied the right to vote.

There must always be a class or series of shares which have complete voting rights.

Redeemable shares may be issued by the corporation when expressly so


provided in the articles of incorporation.

Disappearance of personal liability on the part of the holder thereof for


unpaid subscription.

Voting and non-voting shares

Advantages to the issuance of no par value shares:

3.

Redeemable shares

to

subject

their

shares

to

NO TRANSFER CLAUSE

No transfer of stock or interest which will reduce the ownership of Filipino


citizens to less than the required percentage of the capital stock as provided by

existing laws shall be allowed or permitted to be recorded in the books of the


corporation and this restriction shall be indicated in all of the stock
certificates to be issued by the corporation.
GROUNDS FOR DISAPPROVAL

Only substantial and not strict compliance is required.

Grounds for disapproval:

1.

The articles of incorporation or any amendment thereto is not substantially


in accordance with the form prescribed;

2.

The purpose or purposes of the corporation are patently unconstitutional,


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

3.

The Treasurers Affidavit concerning the amount of capital stock subscribed


and/or paid is false;

4.

The percentage of ownership of the capital stock to be owned by


citizens of the Philippines has not been complied with as required by
existing laws or the Constitution,

5.

The articles of incorporation of corporations subject to government


supervision are not accompanied by a favorable recommendation from the
appropriate government agency.

The grounds are not exclusive.

COMMENCEMENT OF CORPORATE EXISTENCE


It is only from the time of the issuance of the certificate of incorporation that a
corporation acquires juridical personality and legal existence.

De facto corporation one that is so defectively created as not to be a de


jure corporation but nevertheless exists, for all practical purposes, as a
corporate body, by virtue of its bona fide attempt to incorporate under
existing statutory authority, coupled with the exercise of corporate powers.

There is a valid law under which the corporation could have been
created as a de jure corporation;

2.

An attempt, in good faith, to form a corporation according to the


requirements of law (colorable compliance);
3.

Without having obtained a certificate of incorporation, a corporation even its


stockholders may not claim in good faith to be a corporation. (Hall vs. Piccio)

CORPORATION BY ESTOPPEL

Sec. 21. Corporation by estoppel. - All persons who assume to act as


corporation knowing it be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result
thereof; Provided, however, That when any such ostensible corporation is sued
on any transaction entered by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a defense its lack of corporate
personality.

The doctrine of corporation by estoppel may apply to the alleged corporation


or to a third party transacting with the former.

The principle of estoppel cannot be invoked in favor of a person who is a


member of the association and therefore must be presumed to know that it is
not a corporation. (Lozano vs. De Los Santos)

The principle of estoppel applies when persons assume to form a corporation


and exercise corporate functions and enter into business relations with third
persons. Where there is no third person involved and the conflict arises only
among those assuming to form a corporation, who therefore know that it has
not been registered, there is no corporation by estoppel. (Lozano vs. De Los
Santos)

One who has induced another to act upon his willful misrepresentation that a
corporation was duly organized and existing under the law, cannot, thereafter
set up against his victim the principle of corporation by estoppel. Such
persons becomes liable for the contracts entered into by such ostensible
corporation. (Albert vs. University Publishing Co., Inc.)

A person who has contracted or dealt with an association in such a way


as to recognize its existence as a corporate body is estopped from denying
the same in an action arising out of such transaction or dealing, yet this
doctrine may not be held to be applicable where fraud takes part in the said
transaction. (Salvatierra vs. Garlitos)

Persons who have continuously and for a long period misrepresented


themselves as a corporation as estopped from denying such personality to
defeat claims against it. (Chiang Kai Shek School vs. CA)

In the absence of fraud, a person who has contracted or dealt with an


association in such a way as to recognize and in effect admit its legal existence
as a corporate body is thereby estopped to deny its corporate existence in an

A user of corporate powers; and

Good faith in claiming to be and doing business as a corporation.

Rules on collateral and direct attack against corporate existence:


1.

The corporate existence of a de jure corporation cannot be directly


attacked either directly or collaterally, even by the State.

The corporate existence of a de facto corporation is not subject to


collateral attack by any party.

Requisites:
1.

3.

A municipal corporation created by an unconstitutional law cannot be cannot


exist as a de facto corporation unless there is some other valid law giving
corporate vitality to the organization. An unconstitutional law confers no rights.
(Municipality of Malabang vs. Benito)

DE FACTO CORPORATION

The corporate existence of a de facto corporation can be directly


attacked on a quo warranto proceeding.

Prior to incorporation, a corporation has no juridical personality to enter into


contracts. (Cagayan Fishing Development vs. Sandiko)

2.

action leading out of or involving such contract or dealing, unless the existence
is attacked for causes which have arisen since making the contract or other
dealing relied on as an estoppel. (Asia Banking Corp. vs. Standard Products Co.,
Inc.)
The doctrine of estoppel applies to a third party only when he tries to escape
liability on a contract from which he has benefited. It does not apply when the
third party is the one claiming from the contract. (International Express Travel
& Tours Services, Inc. vs. CA)

CHAPTER 5: THE CORPORATE CHARTER AND ITS


AMENDMENTS CORPORATE CHARTER

Between the corporation and the state insofar as it concerns its primary
franchise to be and act as a corporation;

If a corporation by estoppel exists and enters into a contract or transacts


business with a third party, the latter has three remedies:

2.

Between the corporation and the stockholders or members insofar as it


governs their respective rights and obligations; and

1.

He may file a suit against the ostensible corporation to recover from


the corporate properties;

3.

Between and among the stockholders or members themselves as far as


their relationship with one another is concerned.

2.

He may file the case directly against the associates personally who
held out the association a corporation; and
Against both the ostensible corporation and persons forming it, jointly
and severally.

As regards the liability of the associates of the alleged corporation, only those
who actively participated in holding out the association as a corporation should
be held personally liable.

The charter of corporations created under the Corporation Code consists of the
articles of incorporation and the Corporation Code inclusive of the by-laws
adopted thereunder and all pertinent provisions of any statute governing them.

The charter of corporations created by special laws consists of the special law
creating the same and any and all laws, rules and regulations affecting or
applicable to them.

Franchise the right or privilege itself to be and act as a corporation or to do a certain act.

ORGANIZATION AND COMMENCEMENT OF BUSINESS


Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a
corporation. - If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years
from the date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall
be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.

This provision shall not apply if the failure to organize, commence


the transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the corporation as
may be determined by the Securities and Exchange Commission.
Organization the election of officers, providing for the subscription and
payment of capital stock, the adoption of by-laws, and such other steps as are
necessary to endow the legal entity with the capacity to transact the legitimate
business for which it was created.

Failure of the corporation to organize within the prescribed period would


result in its automatic dissolution, unless its failure to do so is due to causes
beyond its control.

The corporate charter is a three-fold contract:


1.

3.

Corporate charter an instrument or authority from the sovereign power,


bestowing rights and power.

The doctrine of estoppel applies to foreign as well as domestic corporations. Foreign


corporations doing business in the Philippines may sue in Philippine courts although
not authorized to do business here against the Philippine citizen who had contracted
with and been benefited by said corporation. (Georg Grotjahn GMBH & Co. vs. Isnani)

Subsequent inoperation is merely a ground for suspension or revocation of


corporate franchise.
Dissolution is not automatic.

Substantial compliance is suficient.

Kinds of franchises:
1.

Primary franchise the right or privilege of being a corporation which


the state confers upon the applicant for this faculty.

2.

Secondary franchise the powers and privileges vested in, and to be


exercised by the corporate body as such.

CORPORATE ENTITY THEORY

The corporation is possessed with a personality separate and distinct from


the individual stockholders or members.

A corporation is a distinct legal entity to be considered as separate and apart


from the individual stockholders or members who compose it, and is not
afected by the personal rights, obligations and transactions of its stockholders
or members. Conversely, a corporation has no interest in the individual
property of its stockholders unless transferred to the corporation, even in case
of a one- man corporation. (Sulo ng Bayan, Inc. vs. Gregoria Araneta, Inc.)

A bona fide corporation should alone be liable for its corporate acts as duly
authorized by its directors and officers. (Caram vs. CA)

The president and manager of a corporation who entered into and signed a
contract in his official capacity, cannot be made liable thereunder in his
individual capacity in the absence of stipulation to that efect due to the

personality of the corporation being separate and distinct from the person
composing it. (Rustan Pulp and Paper Mills, Inc. vs. IAC)

A corporation has a personality distinct and separate from its individual


stockholders or members.
The mere fact that one is president of a corporation does not render the
property he owns and possesses the property of the corporation, since the
president, as an individual, and the corporation are separate entities. (Cruz vs.
Dalisay)
Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not, of itself, sufficient
ground for disregarding the separate corporate personality. (Palay Inc. vs.
Clave)

In a right of action against the corporation, the officers may not be held
personally liable as long as they act within the scope of their authority. (Soriano
vs. CA)

PIERCING THE VEIL OF CORPORATE FICTION


Piercing the veil of the corporate fction is resorted to only in cases where the
corporation is used or being used to defeat public convenience, justify wrong,
protect fraud, defend crime, confuse legitimate issues, or to circumvent the
law or perpetuate deception, or an alter-ego, adjunct or business conduit for
the sole benefit of a stockholder or a group of stockholders or another
corporation.

Test in determining the applicability of the doctrine of piercing the veil of


corporation fiction:
1.

2.

3.

Control, not mere majority or complete stock control, but complete


domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own;
Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintif's legal rights;
and
The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of. (Instrumentality Rule, Concept Builders, Inc.
vs. NLRC)

WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED

Corporate fiction cannot be disregarded in the absence of intent to defraud


in corporate transactions. (Remo, JR vs. IAC)

For the separate juridical personality of a corporation to be disregarder, the wrongdoing


must be clearly and convincingly established. (Del Rosario vs. NLRC)

Mere corporate ownership of all the stocks of another corporation will not justify
their being treated as single entity. (PNB vs. Ritratto)

There being not the least indication that the second corporation is a dummy or

serves as a client of the frst corporation, the fction of separate and distinct corporate
entities cannot be disregarder and brushed aside. (Yu vs. NLRC)
AMENDMENT OF THE CORPORATE CHARTER

Steps to be followed for an efective amendment of the articles of incorporation:

1.

Resolution by at least a majority of the board of directors or trustees.

2.
Vote or written assent of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in case of non-stock corporation.
3.

Submission and fling of the amendments with the SEC as follows:

a.
The original and amender articles together shall contain all the provisions
required by law to be set out in the articles of incorporation. Such articles, as amended,
shall be indicated by underscoring the change or changes made.
b.
A copy thereof, duly certifed under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that such amendments have been duly
approved by the required vote of the stockholders or members.
c.
Favorable recommendation of the appropriate government agency concerned in
the case where the corporation is under its supervision.

Time when the amendments shall take efect:

1.

Upon approval of the SEC; or

2.
From the date of fling with the SEC if not acted upon with 6 months from the date
of fling for a cause not attributable to the corporation. (Note: not applicable to special
amendments)

Special amendments:

1.

Extension or shortening of corporate term (Sec. 37)

2.

Increase or decrease of capital stock (Sec. 38)

3.

Incurring, creating or increasing bonded indebtedness (Sec. 38)

PROVISIONS SUBJECT TO AMENDMENT

Matters which are fait accompli are not subject to change.

A change in the name of the corporation does not afect the identity of the
corporation, nor in any way afect the rights, privileges, or obligations previously acquired
or incurred by it. (Philippine First Insurance Co. vs. Hartigan)
AMENDMENT OF THE CORPORATE TERM

Procedure to amend the corporate term:

1.

Approval by a majority vote of the board or directors or trustees.

2.
Written notice of the proposed action and the time and place of meeting shall be
served to each stockholder or member either by mail or by personal service.
3.
Ratifcation by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporations.
4.
In case of extension of corporate term, the extension should be for periods not
exceeding 50 years in any single instance, and provided that no extension can be made
earlier than
5 years prior to the original or subsequent expiry date(s) unless there are justifable
reasons for an earlier extension as may be determined by the SEC.
5.
In cases of extension of corporate term, a dissenting stockholder may
exercise his appraisal rights.

Extension may be made only before the term provided in the corporate charter
expires. (Alhambra Cigar & Cigarette Mfg. Co., Inc. vs. SEC)
CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS POWERS OF THE BOARD

Sec. 23. The board of directors and trustees. - Unless otherwise provided in the
Code, the corporate powers of all corporations formed under this Code shall be exercised,
all business conducted and all property of such corporations controlled and held by the
board of directors or trustees.

The authority of the board of directors does not extend to the fundamental
changes in the corporate charter.

The board may delegate the exercise of corporate powers.

A corporation is bound by the acts of its corporate officers if they act within the
scope of the 5 classifcations of powers of corporate agents:
1.
Those expressly conferred or those granted by the articles of incorporation, the
corporate by-laws or by the official act of the board of directors.
2.
Those that are incidental or those acts as are naturally and ordinarily done which
are reasonable and necessary to carry out the corporate purpose or purposes.
3.

Those that are inherent or acts that go with the office.

4.
Those that are apparent or those acts which although not actually granted, the
principal knowingly allows or permits it to be done.
5.

Powers arising out of customs, usage or emergency.

Where a corporation seeks to evade liability on a contract on the ground of lack of


authority on the part of the person who assumed to act for it, such defense should be
specially pleaded. Failure to make an issue as to such authority eliminates any questions
regarding it. (Ramirez vs. Orientalist Co.)

The fact that the power to make corporate contracts is thus vested in the board of
directors does not signify that a formal vote of the board must always be taken before
contractual liability can be fxed upon a corporation; for the board can create liability, like
an individual, by other means than by a formal expression of its will. (Ramirez vs.
Orientalist Co.)

The power to make corporate contracts resides primarily in the company's board
of directors; but the board may ratify an unauthorized contract made by an officer of the
corporation. Ratifcation in this case is held to have occurred when the board, with
knowledge that the contract had been made, adopted a resolution recognizing the
existence of the contract and directing that steps be taken to enable the corporation to
utilize its benefts. (Ramirez vs. Orientalist Co.)

Where a corporate contract has been efected with the approval of the board of
directors, a resolution adopted at a meeting of stockholders refusing to recognize the
contract or repudiating it is without efect. (Ramirez vs. Orientalist Co.)

Contracts between a corporation and third persons must be made by or under the
authority of its board of directors and not of its stockholders. (Barreto vs. La Previsora)
QUALIFICATIONS AND DISQUALIFICATIONS

Qualifcations:

1.
Directors must own at least one (1) share of the capital stock of the corporation.
Trustees must be members.
2.

A majority of the directors or trustees must be residents of the Philippines.

Disqualifcations:

1.
Conviction by fnal judgment of an ofense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this Code committed within fve (5) years
prior to the date of election or appointment.
2.

Other disqualifcations under applicable special laws.

In order to be eligible as a director, what is material is the legal title to, not
benefcial ownership, of the stock as appearing on the books of the corporation. (Lee vs.
CA)

If no election is conducted or no qualifed candidate is elected, the incumbent


director shall continue to act as such in a hold-over capacity until the election is held and a
qualifed candidate is so elected. (Detective and Protective Bureau vs. Cloribel)
ELECTION AND VOTING

In stock corporations, the majority of the outstanding capital stock, in person or


by representative authorized to act by written proxy, must be present at the election of
directors.

In non-stock corporations, a majority of the members entitled to vote, in person or


by proxy, if allowed in its articles of incorporation or by-laws, must be present in the
election.

The election may be adjourned if, for any reason, no election is held, or if the
required quorum is not obtained. However, it may not be adjourned indefnitely.

The election must be by ballot if requested by any voting stockholder or member.

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

Exceptions:

In stock corporations, cumulative voting is a matter of right.

1.

By delegation of authority;

In non-stock corporations, cumulative voting is not available unless provided for


in the articles of incorporation or by-laws. I.e., a member may cast as many votes as there
are trustees to be elected but may not cast more than one vote for one candidate.

2.

Where expressly conferred; or

3.

Where the officer or agent is clothed with actual or apparent authority.

Although an officer or agent acts without, or in excess of, his actual authority if he
acts within the scope of an apparent authority with which the corporation has clothed him
by holding him out or permitting him to appear as having such authority, the corporation is
bound thereby in favor of a person who deals with him in good faith in reliance on such
apparent authority, as where an officer is allowed to exercise a particular authority with
respect to the business, or a particular branch of it, continuously and publicly, for a
considerable time. Also, if a private corporation intentionally or negligently clothes its
officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent third persons dealing
in good faith with such officers or agents. This apparent authority may result from (1) the
general manner by which the corporation holds out an officer or agent as having power to
act or, in other words, the apparent authority with which it clothes him to act in general, or
(2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or without the scope of his ordinary powers. (Yao Ka Sin
Trading vs. CA)

In stock corporations, the stockholder may:

1.
Vote such number of shares for as many persons as there are directors to be
elected;
2.
Cumulate said shares and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall equal;
3.
ft.

Distribute them on the same principle among as many candidates as he shall see

No delinquent stock shall be voted.

Officers to be elected

1.

President, who shall be a director

2.

Treasurer, who may or may not be a director

3.

Secretary, who shall be a resident and citizen of the Philippines

4.

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

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.

The directors or officers shall hold office for one (1) year until their successors are
elected and qualifed.
VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS

General rule: the quorum requirement for a valid board meeting is the majority of
the number of the directors or trustees as fxed in the articles of incorporation.

Exception: The articles of incorporation or the by-laws may provide for a greater
majority.

General rule: To have a valid corporate act, the decision of at least a majority of
the directors or trustees present at a meeting at which there is a quorum is required.

Any action of the board without a meeting and without the required voting and
quorum requirement will not bind the corporation unless subsequently ratifed, expressly
or impliedly. (Lopez vs. Fontecha)

Where a general business manager of a corporation is clothed with apparent


authority to borrow money and the amount borrowed does not exceed the ordinary
requirements of the business, the authority is implied and that the corporation is bound.
(Pua Casim & Co. vs. Neumark and Co.)

An invalid contract may be validated by the ratifcation only of the board of


directors; the president has no authority to ratify such contract. (Yu Chuck vs. Kong Li Po)

Silence coupled with acceptance of benefts constitutes a binding ratifcation.


(Francisco vs. GSIS)

A corporate officer entrusted with the general management and control of its
business, has implied authority to make any contract or do any other act which is
necessary or appropriate to the conduct of the ordinary business of the corporation. As
such officer, he may, without any special authority from the Board of Directors, perform all
acts of an ordinary nature, which by usage or necessity are incident to his office, and may
bind the corporation by contracts in matters arising in the usual course of business. Where
similar acts have been approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without formal authorization of
the board of directors. (Board of liquidators vs. Kalaw)

Exception: The election of corporate officers requires the vote of a majority of all
the members.

Lack of repudiation, acquiescence and acceptance of benefts are equivalent to an


implied ratifcation by the Board of Directors and binds the corporation even without
formal resolution passed and recorded. (Buenaseda vs. Bowen & Co., Inc.)

acts.

General rule: Individual directors cannot bind the corporation by their individual

Express ratifcation: through formal board action.

Implied ratifcation:

1.

Silence or acquiescence;

2.

Acceptance and/or retention of benefts; or

3.

By recognition or adoption.

REMOVAL AND FILLING UP OF VACANCIES

Requirements and procedure:

1.
The removal should take place at a general or special meeting duly called
for that purpose;
2.
The removal must be a vote of the stockholders representing at least 2/3
of the outstanding capital stock or 2/3 of the members in case of non-stock corporations;
3.
Prior notice of the proposed removal must be made stating the time and place of
meeting either by publication or by written notice.

The special meeting must be called by the secretary, on order of the president or
on the written demand of the stockholders representing a majority of the outstanding
capital stock, or a majority of the members entitled to vote. Should the secretary fail or
refuse to call the special meeting upon such demand or fail or refuse to give notice, or if
there is no secretary, the call for the meeting may be addressed directly to the
stockholders or members by any stockholder or member signing the demand.

General rule: Directors or trustees may be removed with or without just cause.

Vacancy due to removal may be flled by an election at the same meeting without
further notice.

Any change in the constitution of the board of directors or trustees must be


reported to the SEC.

The tenure of the director flling up the vacancy shall only be for the unexpired
term of his predecessor in office.

If the successor is not qualifed, the predecessor shall hold office in a hold-over
capacity until such successor is duly elected and qualifed. (Detective and Protective
Bureau vs. Cloribel)
COMPENSATION OF DIRECTORS

General rule: Directors shall not receive any compensation, as such directors,
except for reasonable per diems.

Exceptions:

1.

When there is a provision in the by-laws fxing their compensation;

2.
When the stockholders, by a majority vote the outstanding capital stock grant the
same; and
3.

If the director renders extra-ordinary or unusual service.

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.

Exception: Removal without just cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled
under Sec. 24.

PD 902-A grants the court the power and authority to remove or oust a director
and it can do so, even motu propio by the appointment of a management committee.

In case of a deadlock in a close corporation, the SEC is authorized to issue an


order cancelling, altering, or enjoining any resolution or other act of the corporation or its
board of directors or directing or prohibiting any act of the corporation or the board of
directors thereby efectively taking away the rights of the directors to act as managers of
the corporation.

Vacancies to be flled by the stockholders or members in a regular or special


meeting:
1.

Vacancy due to removal;

2.

Vacancy due to expiration of term;

3.

Vacancy due to an increase in the number of board of directors; and

4.
Vacancy due to other causes when the remaining directors or trustees do not
constitute a quorum.

If there is wastage of corporate assets, the courts may be justifed to look into the
reasonableness and fairness of the compensation despite the fact that the grant thereof is
authorized pursuant to the by-laws and by the vote of the majority of the holders of the
outstanding capital stock of the corporation.

The board may not grant compensation upon itself without authorization of the
by-laws or in contravention of the by-laws. (Central Cooperative Exchange vs. Tibe, Jr.)

Members of the board of directors may receive compensation, in addition to


reasonable per diems, when they render services to the corporation in a capacity other
than as directors or trustees. (Western Institute of Technology, Inc. vs. Salas)

The fact that the amount paid as compensation to directors under a by-law
provision has increased beyond what would probably be necessary to secure adequate
service from them is a matter that cannot be corrected by the court. The remedy is in the
hands of the stockholders who have the power at any lawful meeting to change the rule.
(Govt. vs. El Hogar Filipino)
LIABILITY OF CORPORATE OFFICERS

The general rule is that unless the law specifcally provides, a corporate officer or

agent is not civilly or criminally liable for acts done by him as such officer or agent.

Personal liability of a corporate director, trustee or officer along with the


corporation may validly attach, as a rule, only when:
1.
He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith,
gross negligence in directing its afairs, or (c) for conflict of interest, resulting in damages
to the corporation, its stockholders or other persons;
2.
He consents to the issuance of watered stocks or who, having knowledge thereof,
does not forthwith fle with the corporate secretary his written objection thereto;
3.

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

4.
He is made, by specifc provision of law, to personally answer for his corporate
action. (Tramat Mercantile, Inc. vs. CA)

Where a check is drawn by a corporation, company or entity, the person or


persons who actually signed the check in behalf of such drawer shall be liable under this
Act. (Sec. 1, BP 22)

In labor cases, corporate directors and officers are solidarily liable with the
corporation for the termination of employment of corporate employees done with malice or
in bad faith. (Uichico vs. NLRC)
THREE-FOLD DUTY OF DIRECTORS

Three-fold duty of directors:

1.

Obedience

2.

Diligence

3.

Loyalty

Solidarily liability for all damages sufered by the corporation, its stockholders or
members or other persons shall be imposed upon directors or trustees:
1.
Who willfully and knowingly vote for or assent to patently unlawful acts of the
corporation;
2.
Who are guilty of gross negligence or bad faith in directing the afairs of the
corporation; or
3.
Who acquire any personal property or pecuniary interest in conflict with their duty
as such directors or trustees.

Business judgment rule directors are not liable for losses due to imprudence or
honest error of judgment. Questions of policy and management are left solely to the
honest decision of the board of directors and the courts are without authority to substitute
its judgment as against the former.

Resolutions passed in good faith by the board of directors are valid and binding,
and whether or not it will cause losses or decrease in profts are not subject to the review
of the court. (Montelibano vs. Bacolod Murcia Milling, Co., Inc.)

General rule: A director is not liable for misconduct of co-directors or other


officers.

Exceptions:

1.

He connives or participates in it; or

2.

He is negligent in not discovering or acting to prevent it.

The duty of loyalty is violated in the following instances:

1.
When a director or trustee acquires any personal or pecuniary interest in conflict
with his duty as such director or trustee;
2.
When he attempts to acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect to any matter which has been reposed in him in
confdence, as to which equity imposes a disability upon him to deal in his own behalf; and
3.
When he, by virtue of his office, acquires for himself a business opportunity which
should belong to the corporation, thereby obtaining proft to the prejudice of such
corporation.

Corporate opportunity doctrine It places a director of a corporation


position of a fduciary and prohibits him from seizing a business opportunity
developing it at the expense and with the facilities of the corporation. He
appropriate to himself a business opportunity which in fairness should belong
corporation.

in the
and/or
cannot
to the

Distinction between Secs. 31 & 34:

1.
Sec. 31, where a director is liable to account for profts if he attempts to acquire
or acquires any interest adverse to the corporation in respect to any matter reposed in him
in confdence as to which equity imposes a disability upon him to deal in his own behalf is
not subject to ratifcation by the stockholders.
2.
Sec. 34, where the director acquires for himself a business opportunity which
should belong to the corporation, he is bound to account for such profts unless his act is
ratifed by the stockholders owning or representing at least 2/3 of the outstanding capital
stock.

Directors are liable for fraud committed by concealment of information as to the


state and probable result of the negotiations for the sale of corporate assets which may
afect the price of the corporations stock. (Strong vs. Repide)
SELF-DEALING DIRECTORS

A contract of the corporation with one or more of its directors or trustees or


officers is voidable, at the option of such corporation, unless all of the following conditions
are present:
1.
That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2.

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

contract;
3.

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

4.
That in case of an officer, the contract has been previously authorized by the
board of directors.

Where any of the frst two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may be ratifed,
provided:
1.
The contract is ratifed by the vote of the stockholders representing at least twothirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members
2.

Such ratifcation is made at a meeting called for that purpose;

3.
Full disclosure of the adverse interest of the directors or trustees involved is
made; and
4.

The contract is fair and reasonable under the circumstances.

In the absence of express delegation, a contract entered into by the president, on


behalf of the corporation, may bind the corporation if the board should ratify the same
expressly or impliedly. Furthermore, the president as such may bind the corporation by a
contract in the ordinary course of business, provided the same is reasonable under the
circumstances. These rules only apply where the president or other officer, purportedly
acting for the corporation, is dealing with a third person, i.e., person outside the
corporation. It does not apply to self-dealing directors or officers. (Prime White Cement
Corp. vs. IAC)

A director or officer may in good faith and for an adequate consideration purchase
from a majority of the directors or stockholders the property even of an insolvent
corporation. (Mead vs. Mc Cullough)
INTERLOCKING DIRECTORS

Sec. 33. Contracts between corporations with interlocking directors. - Except in


cases of fraud, and provided the contract is fair and reasonable under the circumstances, a
contract between two or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the interlocking director
in one corporation is substantial and his interest in the other corporation or corporations is
merely nominal, he shall be subject to the provisions of the preceding section insofar as
the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors.

A director who owns a substantial interest in one corporation dealing with another
where he has a nominal interest is a regarded as a self-dealing director in so far as the
latter corporation is concerned.
DERIVATIVE SUIT

Suits that stockholders may bring against erring directors or officers:

1.
Individual or personal suit one brought by the shareholders for direct injury to
his rights, such as denial of his right to inspect corporate books and records or pre-emptive
right;
2.

Representative of class suit - ; and

3.
Derivative suit an action based on injury to the corporation to enforce a
corporate right
wherein the corporation is joined as a necessary party, and recovery is in favor of the
corporation.

A stockholder in a corporation who was not such at the time of the transactions
complained of, or whose shares had not devolved upon him since by operation of law, can
not maintain a derivative suit unless such transactions continue and are injurious to the
stockholder, or afect him specifcally in some other way. (Pascual vs. Orozco, et al.)

When the board is under the complete control of the principal defendants in the
case, demand upon such board to institute action and prosecute the same is not required.
The law does not require litigants to do useless acts. (Everett vs. Asia Banking Corporation)

The corporation should be made a party, in order to make the courts judgment
binding upon it, and thus bar future relitigation of the issue. On what side the corporation
appears is not important. (Republic Bank vs. Cuaderno)

The minority shareholder who is suing for and in behalf of the corporation must
allege in his complaint before the proper forum that he is suing on a derivative cause of
action on behalf of the corporation and all other shareholders similarly situated who wish
to join. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is
the allegations in the complaint that vest jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. (Western Institute of
Technology, Inc. vs. Salas)

The bona fde ownership by a stockholder of stock in his own right suffices to
invest him with standing to bring a derivative action for the beneft of the corporation. The
number of his shares is immaterial since he is not suing in his own behalf, or for the
protection or vindication of his own particular right, or the redress of a wrong committed
against him, individually, but in behalf and for the beneft of the corporation. (SMC vs.
Khan)

Where corporate directors are guilty of breach of trust not mere error of
judgment or abuse of discretion and intra-corporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the
beneft of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. (Reyes vs. Tan, et al.)

The stockholders in a derivate suit cannot allege or vindicate their own individual
interests or prejudice. (Gamboa vs. Victoriano, et al.)

In a derivative suit, the injury complained of is primarily to the corporation, so


that the suit for the damages claimed should be by the corporation rather than by the
stockholders. The stockholders may not directly claim those damages for themselves for
that would result in the appropriation by, and the distribution among them of part of the
corporate assets before the dissolution of the corporation and the liquidation of its debts
and liabilities. (Evangelista vs. Santos)


Rules, requirements and procedure so that a derivative suit may proceed or
prosper:
1.
The party bringing the action should be a stockholder as of the time the act or
transaction complained of took place, or whose shares have evolved upon him since by
operation of law. This rule, however, does not apply if such act or transaction continues
and is injurious to the stockholder or afects him specifcally in some other way. The
number of shares is immaterial.
2.
He has tried to exhaust intra-corporate remedies, i.e. he has made a demand on
the board of directors for the appropriate relief but the latter had failed or refused to heed
his plea. Demand, however, is not required if the company is under the complete control of
the directors who are the very ones to be sued (or where it becomes obvious that a
demand upon them would have been futile and useless) since the law does not require a
litigant to perform useless acts.
3.
The stockholder bringing the suit must allege in his complaint that he is suing on
a derivative cause of action on behalf of the corporation and all other stockholders
similarly situated, otherwise, the case is dismissible.
4.
The corporation should be made a party, either as party-plaintif or defendant, in
order to make the courts judgment binding upon it.
5.

Any beneft or damages recovered shall pertain to the corporation.

EXECUTIVE COMMITTEE

An executive committee may be created when authorized by the by-laws.

General rule: The executive committee may act, by majority vote of all its
members, on such specifc 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.

Exceptions:

1.

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

2.

The flling of vacancies in the board;

3.

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

4.
The amendment or repeal of any resolution of the board which by its express
terms is not so amendable or repealable; and
5.

A distribution of cash dividends to the shareholders.

CHAPTER 7: CORPORATE POWERS AND AUTHORITY

Classifcation of corporate authority:

1.
Those expressly granted or authorized by law inclusive of the corporate charter or
articles of incorporation
2.
Those impliedly granted as are essential or reasonably necessary to the carrying
out of the express powers

3.

Those that are incidental to its existence.

Powers expressly granted

1.

Power to sue and be sued (Sec. 36)

2.

Power of succession (Sec. 36)

3.

Power to adopt and use a corporate seal (Sec. 36)

4.

Power to amend its articles of incorporation (Sec. 36)

5.

Power to adopt, amend or repeal by-laws (Sec. 36)

6.

Power to issue or sell stocks/ to admit members (Sec. 36)

7.

Power to acquire or alienate real or personal property (Sec. 36)

8.

Power to enter into merger or consolidation (Sec. 36)

9.

Power to make reasonable donations (Sec. 36)

10.

Power to establish pension, retirement, and other plans (Sec. 36)

11.

Power to extend or shorten corporate term (Sec. 37)

12.

Power to increase or decrease capital stock (Sec. 38)

13.

Power to incur, create or increase bonded indebtedness (Sec. 38)

14.

Power to deny pre-emptive right (Sec. 39)

15.

Power to sell or dispose corporate assets (Sec. 40)

16.

Power to acquire own shares (Sec. 41)

17.
Power to invest corporate funds in another corporation or business or for any
other purpose (Sec. 42)
18.

Power to declare dividends (Sec. 43)

19.

Power to enter into management contract (Sec. 44)

POWER TO SUE AND BE SUED

The residence of the corporation is the place of its principal office as may be
indicated in its articles of incorporation and may, therefore, be sued only at that place.
(CRS vs. Antillon)

Service of summons upon a corporation must be made upon:

1.

President,

2.

Managing partner,

3.

General manager,

4.

Corporate secretary,

5.

treasurer, or

6.

In-house counsel

Strict compliance with the mode of service is necessary to confer jurisdiction of


the court over a corporation. The officer upon whom service is made must be one who is
named in the statute; otherwise the service is insufficient. (Delta Motor Sales Corp. vs.
Mangosing)

Motors Co. vs. A.D. Santos, Inc.)

A corporation whose business may properly conducted in a populous center may


acquire an appropriate lot and construct thereon an edifce with facilities in excess of its
own immediate requirements. (Govt. vs. El Hogar)

A corporation may register alienable public lands if it has been held by it,
personally or through its predecessor-in-interest, openly, continuously and publicly within
the prescribed statutory period of 30 years under the Public Land Law, as amended, since
it is converted into private property by mere lapse of completion of said period. (Dir. of
Lands vs. CA)
POWER TO MAKE REASONABLE DONATIONS

Under the new rules, service of summons upon an agent of the corporation is no
longer authorized.
(E.B. Villarosa & Partner Co., LTD. vs. Benito)

Limitations imposed upon corporate donations:

1.

The donation must be reasonable;

POWER OF SUCCESSION

2.
It must be for public welfare, or for hospital, charitable, scientifc, cultural
or similar purpose; and

Right of succession a corporation persists to exist despite the death, incapacity,


civil interdiction or withdrawal of the stockholders or members thereof.

POWER TO ADOPT AND USE COMMON SEAL

Statutes empowering corporations to make and own a seal are not mandatory but
merely permissive.
POWER TO AMEND ARTICLES OF INCORPORATION

General rule: Amendment of the articles of incorporation is a matter of right


(Note: procedure difers for special amendments)

Exception: Corporations created by special law

POWER TO ADOPT BY-LAWS

A corporation, once formed is required to adopt its by-laws, not contrary to law,
morals or public policy, within one month from receipt of official notice of the issuance of
certifcate of incorporation or registration.
POWER TO ISSUE/SELL STOCKS OR ADMIT MEMBERS

The power of a corporation to issue or sell stock is an inherent right except where
it sells or issues stocks of other corporations (Securities Regulation Code).
POWER TO ACQUIRE/ALIENATE PROPERTY

Real or personal properties must be acquired, held or conveyed as the transaction


of the lawful business of the corporation may reasonably and necessarily require.
Furthermore, it shall be subject to the limitations imposed by law and the Constitution.

A corporation cannot undertake acquisition of property which would have no


purpose and would have no necessary connection with its legitimate business. (Luneta

3.
It shall not be in aid of any political party or candidate, or for purpose of partisan
political activity.
POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER PLANS

While as a rule an ultra vires act is one committed outside the object for which a
corporation is created as defned by law of its organization and therefore beyond the
powers conferred upon it by law, there are however certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if they are necessary to
promote the interest or welfare of the corporation. (Republic vs. Acoje Mining Co., Inc.)
POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR NECESSARY TO CARRY OUT ITS
PURPOSES (IMPLIED POWERS)

Classifcation of implied powers:

1.
2.
3.
4.
5.

Acts in the usual course of business


Acts to protect debts owing to the corporation
Embarking on a diferent business
Acts in part or wholly to protect or aid employees
Acts to increase business

express
suitable
charter,

A corporation has authority to do what will legitimately tend to efectuate the


purposes and objects; that it may ordinarily do all things that are convenient,
or necessary to enable it to fully perform the undertaking designated in its
and for which it is organized.

There must be a logical and necessary relation of the act to the corporate
purpose. (NPC vs. Vera)

If the act is one which is lawful in itself and not otherwise prohibited, and is done
for the purpose of serving corporate ends, and reasonably contributes to the promotion of
those ends in a substantial and not in a remote and fanciful sense, it may be fairly
considered within the corporations charter powers. (NPC vs. Vera)

9.

Examples:

1.

Operation and maintenance of an electric plant for a cement factory. (Teresa


Electric Power Co., Inc. vs. PSC)
2.
NPCs undertaking of stevedoring services for its power plant. (NPC vs. Vera)
3.
International Schools imposition of a development fee for expansion and
maintenance. (Powers vs. Marshall)
POWER TO EXTEND/SHORTEN CORPORATE TERM

1.
2.

Requirements and procedure:


Approval by the majority vote of the board of directors or trustees;
Ratifcation by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporations;
3.
The ratifcation must be at a meeting duly called for that purpose;
4.
Prior written notice of the proposal to extend or shorten the corporate term must
be made stating the time and place of meeting addressed to each stockholder or
member at his place of residence, either by mail or personal service;
5.
In case of extension, the same cannot be made ealier than fve (5) years prior to
the original or subsequent expiry date unless there are justifable reasons for an
earlier extension;
6.
In case of extension, the same must be made during the lifetime of the
corporation;
7.
Any dissenting stockholder may exercise his appraisal right;
8.
Submission of the amended articles with the SEC; and
9.
Approval thereof by the SEC.
POWER
TO
INCREASE/DECREASE
BONDED INDEBTEDNESS

CAPITAL;

INCUR,

CREATE

OR

Requirements and procedure:

1.

Approval by the majority vote of the board of directors or trustees;

INCREASE

2.
Ratifcation by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporations;
3.

The ratifcation must be at a meeting duly called for that purpose;

4.
Prior written notice of the proposed action must be made stating the time and
place of meeting addressed to each stockholder or member at his place of residence,
either by mail or personal service;
5.
A certifcate in duplicate must be signed by a majority of the directors of the
corporation, countersigned by the chairman and the secretary of the stockholders
meeting, setting forth the matters contained in subsection 1 to 7 of Sec. 38;
6.
In case of increase in capital stock, 25% of such increased capital must be
subscribed and that at least 25% of the amount subscribed must be paid either in cash or
property;
7.
In case of decrease in capital stock, the same must not prejudice the right of the
creditors;
8.
Filing of the certifcate of increase and amended articles with the SEC; and

Approval thereof by the SEC.

3 ways of increasing the capital stock:


1.
Increasing the par value of the existing number of shared without increasing the
number of shares;
2.
Increasing the number of existing shares without increasing the par value thereof;
and
3.
Increasing the number of existing shares and at the same time increasing the par
value of the shares.

Existence of unissued or unsubscribed share out of the original capital stock will
not prohibit the increase of capital stock.

Reasons for decreasing capital stock:

1.
To reduce or wipe out existing defcit where no creditors would thereby be
afected;
2.
When capital is more than what is necessary to procreate the business or
reduction of capital surplus; or
3.
To write down the value of its fxed assets to reflect the present actual value in
case where there is a decline in the value of the fxed assets of the corporation.

A corporation has no power to release an original subscriber to its capital stock


from the obligation of paying for his shares, without a valuable consideration for such
release; and as against creditors a reduction of the capital stock can take place only in the
manner and under the conditions prescribed by law. Moreover, strict compliance with the
statutory regulations is necessary. (Philippine Trust Company vs. Rivera)

A reduction of capital stock may not be used as a subterfuge, a deception as it


were, to camouflage the fact that a corporation has been making profts to obviate a just
sharing to labor. (Madrigal & Co. vs. Zamora)

A corporation which has the power to borrow or raise money, to contract for labor
or services, or otherwise contract a debt has the implied power to issue bonds in payment
or as a security provided it violates no prohibition or restriction in its charter or any other
statutes.

Corporate bonds must be registered and approved by the SEC before they are
issued.
POWER TO DENY PRE-EMPTIVE RIGHTS

Pre-emptive right is a right granted by law to all existing stockholders of a stock


corporation to subscribe to all issues or disposition of shares of any class, in proportion to
their respective stockholdings, subject only to the limitations imposed under Sec. 39.

The basis for the grant of this right is the preservation, unimpaired and undiluted,
of the old stockholders relative and proportionate voting strength and control, that is, the
existing ratio of their proprietary interest and voting power in the corporation.

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


to all issues or disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or an
amendment thereto.

Exceptions:

1.

Shares to be issued in compliance with laws requiring stock oferings or minimum


stock ownership by the public; or
Shares to be issued in good faith with the approval of the stockholders
representing two- thirds (2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of a previously contracted
debt.

2.

The exceptions do not apply to stockholders of a close corporation.


The right may be lost by waiver, expressly or impliedly by inability or failure to
exercise it after having been notifed.
The pre-emptive right covers all issues or disposition of share of any class. It
includes new share issued pursuant to an increase in capital stock, unissued
shares which form part of the original capital stock and treasury shares.

POWER TO SELL/DISPOSE ASSETS

There is a sale or other disposition of substantially all the corporate property and
assets if the corporation would thereby be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated.

1.
2.

Conditions for the valid exercise of this right:


Resolution by the majority vote of the board of directors or trustees;
Authorization from the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporations;
The ratifcation must be at a meeting duly called for that purpose;
Prior written notice of the proposed action must be made stating the time and
place of meeting addressed to each stockholder or member at his place of
residence, either by mail or personal service;
The sale of the assets shall be subject to the provisions of existing laws on illegal
combinations and monopolies; and
Any dissenting stockholder shall have the option to exercise his appraisal right.
(Note: 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 such transaction.)

3.
4.
5.
6.
7.

1.
Where the purchaser expressly or impliedly agrees to assume such debts;
2.
Where the transaction amounts to a consolidation or merger of the corporations;
3.
Where the purchasing corporation is merely a continuation of the selling
corporation; and
4.
Where the transaction is entered into fraudulently in order to escape liability for
such debts.
POWER TO ACQUIRE OWN SHARES

A stock corporation shall have the power to purchase or acquire its own shares for
a legitimate corporate purpose or purposes, including but not limited to the
following cases:

1.
2.

To eliminate fractional shares arising out of stock dividends;


To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale;
3.
To pay dissenting or withdrawing stockholders entitled to payment for their
shares; and
4.
To redeem redeemable shares.

General rule: the corporation must have unrestricted retained earnings.


Exceptions:

1.
2.

Redemption of redeemable shares; and


Stockholders right to compel a close corporation to purchase his shares when
the corporation has sufficient assets to cover its debts and liabilities.

The acquisition of shares must be made in good faith, free from fraud, actual or
constructive, and that the corporation is not insolvent or in the process of dissolution and
that the rights of creditors and other stockholders are in no way injuriously afected.
POWER TO INVEST FUNDS

The right refers to investment in the form of money, stock, bonds and other liquid
assets and does not include real properties or other fxed assets.

Exception to application of the procedure and requirements:

Requirements and procedure:

1.

The sale, lease, exchange, mortgage, pledge or other dispose of property and
assets is necessary in the usual and regular course of business of the corporation;
or
The sale or other disposition of property and assets is appropriated for the
conduct of the corporations remaining business.

1.

Resolution by the majority vote of the board of directors or trustees;

2.

The sale or other disposition of all or substantially all of the corporate property or
assets must be voted for by the legitimate board and concurred in by the bona
fde stockholders or members. (IDP vs. CA)

General rule: Where a corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the
transferor.

Exceptions:

2.
Ratifcation by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporations;
3.

The ratifcation must be at a meeting duly called for that purpose;

4.
Prior written notice of the proposed investment and the time and place of meeting
shall be made, addressed to each stockholder or member at his place of residence, either
by mail or personal service; and
5.

Any dissenting stockholder shall have the option to exercise his appraisal right.

The approval of the stockholders or members is not required where the


investment is reasonably necessary to accomplish its primary purpose.


An unauthorized investment which is not illegal or void ab initio or not contrary to
law, morals, public order or public policy, is merely voidable and may become binding and
enforceable when ratifed by the stockholders. (Gokongwei, Jr. vs. SEC)

fraudulently, oppressively, unreasonably or unjustly or abuse of discretion can be shown so


as to impair the rights of the complaining stockholders to their just proportion of corporate
profts.

POWER TO DECLARE DIVIDENDS

The essential test of bad faith is to determine if the policy of the directors is
dictated by their personal interest rather than the corporate welfare.

Dividends are corporate profts set aside, declared and ordered by the Board of
Directors to be paid to the stockholders.

Dividends can only be declared out of unrestricted retained earnings.

Unrestricted retained earnings undistributed earnings of a corporation which


have not been allocated for any managerial, contractual or legal purpose and which are
free for distribution to the stockholders as dividends.

Types of dividends:

1.

Cash dividend those that are payable in lawful money.

2.
Property dividend those that take form of bonds, notes, evidences of
indebtedness or stock in other corporations.
3.

Stock dividends refer to the corporations shares of stock.

Rules on dividends due on delinquent stock:

1.
Cash dividend frst applied to the unpaid balance on subscription costs and
expenses.
2.

Stock dividend withheld until subscription is fully paid.

General rule: Stock corporations are prohibited from retaining surplus profts in
excess of 100% of their paid-in capital stock.

Exceptions:

1.
When justifed by defnite corporate expansion projects or programs approved by
the board of directors; or
2.
When the corporation is prohibited under any loan agreement with any fnancial
institution or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or
3.
When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special reserve
for probable contingencies.

General rule: The board of directors exercise exclusive authority in declaring


dividends.

Exception: In declaring stock dividends, the approval of the stockholders


representing at least 2/3 of the outstanding capital stock is required.

The judgment of the board of directors in the matter of declaring dividends is


conclusive except when they act in bad faith, or for a dishonest purpose or act

The right of the stockholders to be paid dividends vest as soon as they have been
lawfully and fnally declared by the Board of Directors.

No revocation of dividend may be had unless it has not been officially


communicated to the stockholders or is in the form of stock dividends which is revocable
at any time prior to distribution.

Stock dividends cannot be issued to a person who is not a stockholder. (Neilson &
Co., Inc. vs.
Lepanto Consolidated Mining Co.)

Directors are not liable for declaration of dividend contrary to law, unless
attended with bad faith, gross negligence or willful and knowing assent. (Ladia)
POWER TO ENTER INTO MANAGEMENT CONTRACTS

Requirements and procedure:

1.

Resolution by the board of directors or trustees;

2.
Approval by the stockholders representing a majority of the outstanding capital
stock or majority of the members in case of non-stock corporations;
3.

The approval must be at a meeting duly called for that purpose;

4.
The contract shall not be for a period longer than 5 years for any one term,
except those which relate to exploration, development or utilization of natural resources
which may be entered into for such periods as may be provided by pertinent laws and
regulations.

When approval of the stockholders of the managed corporation owning at least


2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock
corporations are required:
1.
Where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than 1/3 of the total
outstanding capital stock entitled to vote of the managing corporation;
2.
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; or
3.
Where the contract would constitute the management or operation of all or
substantially all of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise.
ULTRA-VIRES ACTS


Ultra-vires acts are those that can not be executed or performed by a
corporation because they are not within its express, inherent or implied powers as defned
by its charter or articles of incorporation.

regulate, govern and control its own actions, afairs and concerns and its stockholders or
member and directors and officers with relation thereto and among themselves in their
relation to it.

1.
2.

Requirements and procedure for adoption of by-laws:


The by laws must not be inconsistent with the Code;
If adopted prior to incorporation:

a.

Approved and signed by all the incorporators;

b.

Submitted together with the articles of incorporation to the SEC;

3.

If adopted subsequent to incorporation:

Consequences of ultra-vires acts:

1.
On the corporation itself the proper forum may suspend or revoke, after proper
notice and hearing, the franchise or certifcate of registration of the corporation for serious
misrepresentation as to what the corporation can do or is doing to the great damage or
prejudice of the general public.
2.
On the rights of the stockholders a stockholder may either an individual or
derivative suit to enjoin a threatened ultra-vires act or contract.
3.
On the immediate parties (a) if the contract is fully executed on both sides, the
contract is efective; (b) if the contract is executory on both sides, neither party can
maintain an action for its non-performance; and (c) if the contract is executory on one side
only, and has been fully performed on the other, the party who has received the benefts is
estopped to set up that the contract is ultra-vires.

Acts which are clearly benefcial to the company or necessary to promote the
interest or welfare of the corporation, its employees and their families, or in the legitimate
furtherance of its business are within corporate powers. (Republic vs. Acoje Mining)

Mere ultra-vires acts which are not illegal per se may become binding and
enforceable either by ratifcation, estoppel or on equitable grounds unless the public or
third parties are thereby prejudiced. (Privano vs. De la Rama Steamship)

Corporations authorized to acquire the bonds have the implied power to


guarantee them in order to place them upon the market under better, more advantageous
conditions, and thereby secure the proft derived from their sale. When a contract is not on
its face necessarily beyond the scope of the power of the corporation by which it was
made, it will, in the absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The doctrine of ultra vires,
when invoked for or against a corporation, should not be allowed to prevail where it would
defeat the ends of justice or work a legal wrong. (Carlos vs. Midoro Sugar Co.)

Actions which are beyond the powers of the corporation as embodied in its
articles of incorporation and have absolutely no relation to the avowed purpose of the
corporation are ultra-vires. (Japanese War Notes Claimants Assoc., Inc. vs. SEC)

Corporate officers have no power to execute for mere accommodation a


negotiable instrument of the corporation for their individual debts or transactions arising
from or in relation to matters in which the corporation has no legitimate concern. Since
such accommodation paper cannot thus be enforced against the corporation, especially
since it is not involved in any aspect of the corporate business or operations, the
signatories thereof shall be personally liable therefor, as well as for the consequences
arising from their acts in connection therewith. (Crisologo-Jose vs. CA)
CHAPTER 8: BY-LAWS

By-laws are rules and ordinances made by a corporation for its own
government; to regulate the conduct and defne the duties of the stockholders or members
towards the corporation and among
themselves. They are rules and regulations or private laws enacted by the corporation to

a.
Adopted within one (1) month after receipt of official notice of the issuance of its
certifcate of incorporation by the SEC;
b.
Affirmative vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members in case of non- stock
corporations,
c.

Signed by the stockholders or members voting for them

d.
Kept in the principal office of the corporation, subject to the inspection of the
stockholders or members during office hours.
e.
A copy thereof, duly certifed to by a majority of the directors or trustees
countersigned by the secretary of the corporation, must be fled with the SEC which shall
be attached to the original articles of incorporation.
4.
Certifcation of the appropriate government agency concerned to the efect that
such by- laws or amendments are in accordance with law.
5.
Issuance by the Securities and Exchange Commission of a certifcation that the
by-laws are not inconsistent with this Code.

Contents of by-laws:

1.
The time, place and manner of calling and conducting regular or special meetings
of the directors or trustees;
2.
The time and manner of calling and conducting regular or special meetings
of the stockholders or members;
3.
The required quorum in meetings of stockholders or members and the manner of
voting therein;
4.
them;

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

5.
The qualifcations, duties and compensation of directors or trustees, officers
and employees;
6.
The time for holding the annual election of directors of trustees and the mode or
manner of giving notice thereof;

7.
The manner of election or appointment and the term of office of all officers other
than directors or trustees;

3.
It must be general and uniform in its efect or applicable to all alike or those
similarly situated.

8.

The penalties for violation of the by-laws;

4.

It must not impair obligations and contracts or vested rights.

9.

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

5.

It must be reasonable.

10.
Such other matters as may be necessary for the proper or convenient transaction
of its corporate business and afairs.

CHAPTER 9: MEETINGS

By-laws are subordinate to the articles of incorporation, the Corporation Code and
other statutes which form part of the corporate charter.

Meetings applies to every duly convened assembly either stockholders,


members, directors or trustees, manages, etc. for any legal purpose, or the transaction of
business of a common interest.

By-laws become efective only upon the approval of the SEC

Classes of meetings:

Time of fling:

1.

General

2.

Special

1.
Prior to incorporation must be signed by all the incorporators, must be fled
together with the articles of incorporation
2.
stock

After incorporation approval of at least a majority of the outstanding capital

Failure to fle by-laws may result to suspension or revocation of corporate


franchise after proper notice and hearing

Failure to fle by-laws does not result in automatic dissolution. (LGVHA vs. CA)

By-laws are internal rules an cannot bind, efect or prejudice third persons without
knowledge. (Fleisher vs. Botica Nolasco)

Two modes of amending or repealing by laws or adopting a new one:

1.
By a majority vote of the directors or trustees and the majority vote of the
outstanding capital stock or members, at a regular or special meeting called for that
purpose; or
2.
By the board of directors alone when delegated by 2/3 of the outstanding capital
stock or members

Delegated power to amend, repeal or adopt by-laws may be revoked

Incorporation of an invalid by-law provision is not a misdemeanor. It does not


justify the dissolution of the corporation. (Govt. vs. El Hogar)

The by-laws may disqualify a stockholder from being elected into office if he has a
substantial interest in a competitor corporation to avoid any possible adverse efects of
conflicting interest of a director. (Gokongwei, Jr. vs. SEC)

Elements of a valid by laws:

1.

It must not be contrary to law, public policy or morals.

2.

It must not be inconsistent with the articles of incorporate.

STOCKHOLDERS MEETINGS

Requirements to have a valid stockholders meeting:

1.

It must be held on the date fxed in the by-laws or in accordance with law.

2.

Prior notice must be given.

3.

It must be held at the proper place.

4.

It must be called by the proper party.

5.

Quorum and voting requirements must be met

It must be held on the date fxed in the by-laws or in accordance with law.

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

Special meetings of stockholders or members shall be held at any time deemed


necessary or as provided in the by-laws.
Prior notice must be given.

Regular 2 weeks prior notice

Special 1 week prior notice

The by-laws may provide for a diferent period (shorter or longer)

Failure to give notice of a meeting would render the resolution made thereunder
voidable at the option of the stockholder or member who was not notifed. (Board of
Directors vs. Tan)

Notice may be waived, expressly or impliedly.

Notice must state the agenda otherwise it may become voidable.

Notice of meetings shall be in writing, and the time and place thereof stated
therein.
It must be held at the proper place.

General Rule: Stockholders' or members' meetings, whether regular or special,


shall be held in the city or municipality where the principal office of the corporation is
located, and if practicable in the principal office of the corporation.

Exceptions to the rule:

1.
A non-stock corporation, in its by laws, may provide for any place within the
Philippines.
2.

Metro Manila is considered a city or municipality.

It must be called by the proper party.

Persons who may call the meeting:

1.

The person or persons authorized under the by-laws;

2.

Absent of any provision in the by-laws, the president;

3.
Under Sec. 28 (removal of director), by the secretary on order of the president or
on written demand of the stockholder representing or holding at least a majority of the
outstanding capital stock or majority of the members entitled to vote in a non-stock
corporation, or the stockholder or member making the demand if there is no secretary or
he refuses to do so; and
4.

On order of the proper forum under Sec. 50.

A stockholder may only petition the SEC to issue an order directing the petitioner
to call a meeting when there is no person authorized to call a meeting. Otherwise, the
remedy is to fle a petition for mandamus.
Quorum and voting requirements must be met

A quorum shall consist of the stockholders representing a majority of the


outstanding capital stock.

The by-laws or the Code itself may provide for a greater quorum.

The basis of determining the presence of a quorum:

1.

Stock corporation total subscription irrespective of the amount paid by them.

2.

Non-stock corporation total number of registered voting members.

A quorum once present is not broken by the subsequent withdrawal of a part or


fraction of the stockholders.

If the voting requirement is met, any resolution passed in the meeting, even if
improperly held or called will be valid if all the stockholders or members are present or
duly represented.
DIRECTORS/TRUSTEES MEETING

Regular meetings held monthly, unless the by-laws provide otherwise

Special meetings held at any time upon the call of the president or as provided
in the by-laws

Meetings may be held anywhere in or outside of the Philippines, unless the bylaws provide otherwise.

Notice must be sent at least one (1) day prior to the scheduled meeting, unless
otherwise provided by the by-laws.

Notice may be waived, expressly or impliedly.

If the notice requirement is not complied with the meeting is illegal and will not
bind the corporation except when subsequently ratifed. (Lopez vs. Fontecha)

In a close corporation, the act of any one director may bind the corporation
without a meeting.

Presence at a meeting waives want of notice.

Physical presence at the meeting is not required; teleconferencing and


videoconferencing is allowed. (RA 8792)

The president shall preside at the meeting, unless the by-laws provide otherwise.

A director or trustee cannot attend or vote by proxy at any board meeting.

STOCKHOLDERS RIGHT TO VOTE AND MANNER OF VOTING

General rule: The right to vote is an inherent right and the stockholder may vote
any way he pleases.

Exceptions:

1.
Non-voting shares are not entitled to vote except in those instances provided for
in the penultimate paragraph of Sec. 6
2.

Treasury shares

3.

Delinquent shares

4.

Unregistered transferee of stock

General rule: Stockholders or members may vote personally or through a


representative by way of proxy, voting trust agreement or by the executor, administrator,
receiver of other legal representative.

Exception: In non-stock corporations, the right to vote may be limited, broadened

or denied in the articles of incorporation or in the by-laws.

The right to vote is vested with the legal owner of the shares.

In case of pledged or mortgaged shares, the pledgor or mortgagor is entitled to


vote in absence of a written agreement (recorded in the corporate books) to the contrary.
(Sec. 55)

Executors, administrators, receivers, and other legal representatives duly


appointed by the court may attend and vote in behalf of the stockholders or members
without need of any written proxy. (Sec. 50)

An executor or administrator of a stockholder may not be elected unless he owns


at least 1 share.

General Rule: In case of shares jointly owned, the consent of all the co-owners
shall be necessary.

Exceptions:

1.

Written proxy signed by all the co-owners

2.

The shares are owned in an "and/or" capacity

PROXY

Proxy the authority given by the stockholder or member to another to vote for
him at a stockholders or members meeting. It also refers to the instrument or paper
which is evidence of the authority of the agent or the holder thereof to vote for and in
behalf of the stockholder or member.

Two types of proxies:

No proxy shall be valid and efective for a period longer than fve (5) years at any
one time.

A proxy is revocable unless coupled with an interest.

Revocation may be expresses:

1.

To the proxy holder

2.

To the election committee

3.

By a subsequent proxy to another

4.

By sale of the shares

VOTING TRUST

A voting trust is one created by an agreement between a group of stockholders of


a corporation and a trustee, or a group of identical agreements between individual
stockholders and a common trustee, whereby it is provided that for a term of years, or for
a period contingent upon a certain event, or until the agreement is terminated, control
over the stock owned by such stockholders, shall be lodged in the trustee, either with or
without reservation to the owners or persons designated by them the power to direct how
such control shall be used. It is a device of binding stockholders to vote as a unit and thus
assuring a desirable stability and continuity in management in situations where it is
needed.

Requirements:

1.
It should confer upon the trustee or trustees the right to vote and other rights
pertaining to the shares;

1.
General gives a general discretionary power of attorney to vote for directors and
all ordinary matters that may properly come before a meeting. It is not an authority,
however, to vote for fundamental changes in the corporate charter or for other unusual
transactions, unless specifed.

2.
It should be for a period not exceeding fve (5) years at any time unless the voting
trust is specifcally required as a condition in a loan agreement, in which case, the voting
trust may be for a period exceeding fve (5) years but shall automatically expire upon full
payment of the loan;

2.
Limited restricts the authority to vote on specifed matters only and may direct
the manner in which the vote will be cast.

3.
It must be in writing and notarized, and shall specify the terms and conditions
thereof;

Proxy voting may not be denied except in a non-stock corporation.

4.
A certifed copy thereof must be fled with the corporation and with the Securities
and Exchange Commission, otherwise, said agreement is inefective and unenforceable;

Requirements:

1.

In writing

2.

Signed by the stockholder or member

3.

Filed before the scheduled meeting with the corporate secretary

By-laws may reasonably regulate the form and execution of proxies.

Unless otherwise provided in the proxy, it shall be valid only for the meeting for
which it is intended.

5.
The certifcate or certifcates of stock covered by the voting trust agreement shall
be canceled and new ones shall be issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. In the books of the corporation, it shall
be noted that the transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement;
6.
The trustee or trustees shall execute and deliver to the transferors voting trust
certifcates, which shall be transferable in the same manner and with the same efect as
certifcates of stock.
7.
It should not 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.

Voting trust distinguished from proxy

general form of subscription must be accepted by the corporation to create a binding


contract. (Trillana vs. Quezon College, Inc.)

A corporation is not a party to a voting trust agreement therefore it is not a real


party interest in a suit to enforce the same. (NIDC vs. Aquino)

A condition facultative as to the debtor renders the whole obligation void. (Trillana
vs. Quezon College, Inc.)

A voting trust transfers only voting and other rights pertaining to the shares
subject of the agreement or control over the stock. It does not include the assets,
operation and management of the corporation. (NIDC vs. Aquino)

PRE-INCORPORATION SUBSCRIPTIONS

CHAPTER 10: STOCKS AND STOCKHOLDERS

1.
Pre-incorporation subscriptions subscriptions for shares of stock of a corporation
still to be formed; and

3 ways in which a person may become a stockholder:

1.

By a contract of subscription with the corporation;

2.

By the purchase of treasury shares from the corporation; and

Types of subscriptions as to time of execution:

2.
Post-incorporation subscriptions
formation or organization of the corporation.

those

made

or

Exceptions:

SUBSCRIPTION CONTRACT

1.

Lapse of a period of 6 months from the date of subscription;

Subscription the mutual agreement of the subscribers to take and pay for the
stocks of a corporation.

2.

All the subscribers consent to the revocation; or

A subscription contract is not required to be written; an oral contract for


subscription is valid and enforceable. The statutes of fraud do not apply to a subscription
contract because such subscription does not fall under the statutory defnition of a sale.

Conditional subscription one made upon a condition precedent, does not make
the subscriber a stockholder, or render him to pay the amount of his subscription, until the
performance or fulfllment of the condition.

Subscription upon special terms an absolute subscription, making the subscriber


a stockholder, and rendering him liable as such, as soon as the subscription is accepted,
the special term being an independent stipulation.

In case of doubt, a subscription shall be considered one upon special terms in


order to protect the creditors and other subscribers.

General rule: Conditional subscriptions are valid.

Exceptions:

1.

The charter or enabling act prohibits the same; or

2.
The conditions are such as to render their performance beyond the powers
of the corporation or in violation of law or contrary to public policy.

An application for subscription which is at variance with the terms evidenced in a

after

the

General rule: A subscription for shares of stock of a corporation still to be formed


is irrevocable.

3.
By purchase or acquisition of shares from existing stockholders (includes
purchase from the stock exchange).

Subscription contract any contract for the acquisition of unissued stock in an


existing corporation or a corporation still to be formed, not withstanding the fact that the
parties refer to it as a purchase or some other contract.

executed

3.
The incorporation of said corporation fails to materialize within 6 months or within
a longer period as may be stipulated in the contract of subscription.

Exception to the exceptions: No pre-incorporation subscription


revoked after the submission of the articles on incorporation to the SEC.

may

be

Pre-incorporation subscriptions are mandatory in view of Secs. 13 and 14 which


mandates that a corporation may be registered as such only if at least 25% of its
authorized capital stock has been subscribed and that at least 25% of the total
subscription has been paid.

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 f:
1.

Actual cash paid to the corporation;

2.
Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal to the par
or issued value of the stock issued;
3.

Labor performed or services actually rendered to the corporation;

4.

Previously incurred indebtedness by the corporation;

5.

Amounts transferred from unrestricted retained earnings to stated capital; and

6.

Outstanding shares in exchange for stocks in the event of reclassifcation or

conversion.

Stocks shall not be issued in exchange of promissory notes or future services.


Their realization is uncertain.

Issue the making of a share contract or contract of subscription; transaction by


which a person becomes the owner of shares and by which new share contracts are
created.

The issuance of shares is not dependent on the delivery of a certifcate of stock.

Par or issue price indicates the amount which the original subscribers are
supposed to contribute to the corporate capital as the basis of the privilege of proft
sharing with limited liability.

conversion refers to stocks surrendered to the corporation in exchange for a new or


diferent type of shares. (Ex. conversion of founders shares to common shares.)

The prohibition against the issuance of shares by corporations except for actual
cash or property at its fair valuation secures absolute equality among stockholders with
respect to their liability upon stock subscriptions. A stipulation is a stock subscription
which obligates the subscriber to pay nothing for the shares except as dividends may
accrue upon the stock is a discrimination in favor of the particular subscriber, and hence,
illegal. (National Exchange Co., Inc. vs. Dexter)

A corporation has no power to receive a subscription upon such terms as will


operate as a fraud upon the other subscribers as stockholders by subjecting the particular
subscribers to lighter burden, or by giving his greater rights and privileges, or as fraud
upon creditors of the corporation by withdrawing or decreasing capital. Therefore, an
agreement between a corporation and a particular subscriber, by which the subscription is
not to be payable, or is to be payable in part only, is illegal and void. (National Exchange
Co., Inc. vs. Dexter)

Valuation of properties given as a consideration for issuance of stock:

1.

Tangible properties (particularly real properties):

a.

Appraisal report of an independent appraiser;

b.

Zonal valuation as certifed by the BIR; or

c.

Market value indicated in the Real Estate Tax Declaration.

2.

Intangible properties (such as patents or copyrights):

1.
It must be signed by the president or vice-president and countersigned by the
secretary or assistant secretary;

a.
Initial determination by the incorporators or the board of directors subject to the
approval of the SEC; or
b.

Appraisal report of an independent appraiser.

Labor performed or services actually rendered to the corporation must be capable


of valuation and in fact fairly valued.

Two theories in the valuation of property or services:

1.
True value rule the motives or intent of those making the valuation are
disregarded and the sole and decisive factor or question is whether or not the property or
services are in fact worth the value placed on them.
2.
Good faith rule the value of the property or services is a matter about which
there can be an honest diference of opinion. Therefore, if the parties have acted in good
faith without fraud or intentional over-valuation, the transaction cannot be overturned
even if the later becomes evident that the property or services were in fact worth much
less than the value fxed on them initially.

The set-of or satisfaction of a debt due from the corporation is a lawful and valid
consideration for the issuance of stock.

Amounts transferred from unrestricted retained earnings to stated capital refers


to the declaration and distribution of stock dividends where corporate earnings are
capitalized.

Outstanding shares exchanged for stocks in the event of reclassifcation or

CERTIFICATES OF STOCK AND THEIR TRANSFER

Certifcate of stock the piece of paper or document which evidences the


ownership of shares and a convenient instrument for the transfer of the title.

2.

Requisites for the issuance of a certifcate of stock:

It must be sealed with the corporate seal; and

3.
The full amount of subscription together with interest and expenses (in case of
delinquent shares) if any is due, has been paid.

General rule: Holders of subscribed shares not fully paid are entitled to all the
rights of a stockholder.

Exceptions:

1.

The shares have been declared delinquent; or

2.

The stockholder exercises his appraisal right.

The issuance of a stock certifcate is not a condition sine quanon to consider a


subscriber as a stockholder.

Two modes of transferring shares of stock:

1.
When the corporation has already issued stock certifcates only by delivery of
the certifcate or certifcates of stock indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer.
2.
deed.

When the corporation has not yet issued certifcates of stock by a duly notarized

No transfer shall be valid, except as between the parties, until the transfer is

recorded in the books of the corporation.

Until registration is accomplished, the transfer of stock, though valid between the
parties, cannot be efective as against the corporation. The corporation looks only though
its books for the purpose of determining who its stockholders are.

Non-registration of a transfer of stock will not, however, afect the validity thereof
at least in so far as the contracting parties are concerned.

Reasons for the necessity of the registration of transfers of stock:

1.

To enable the corporation to know who its stockholders are;

2.

To enable the transferee to exercise his rights as a stockholder;

3.
To aford the corporation an opportunity to object or refuse registration of the
transfer in cases allowed by law (as when it has unpaid claims on the shares transferred);
4.

To avoid fctitious and fraudulent transfers; and

rights to existing stockholders and/or the corporation, giving them the frst option to
purchase the shares of a selling stockholder within a reasonable period not exceeding 30
days provided that the same is contained in the articles of incorporation and in all of the
stock certifcates to be issued by the corporation. This is considered reasonable since it
merely suspends the right to transfer within the period specifed.

A corporation may classify its shares and grant such rights, privileges or
restrictions provided that such are made in the articles of incorporation and subject to
reasonable terms, conditions or period. (Go Soc & Sons vs. IAC)

Other restrictions on the right to transfer shares:

1.
It is not valid, except as between the parties, until recorded in the books of the
corporation;
2.
Share of stock against which the corporation holds any unpaid claim shall not be
transferable in the books of the corporation; unpaid claims, refer to claims arising from
unpaid subscription and not to any indebtedness which a stockholder may owe the
corporation such as monthly dues;

5.
To protect creditors who have the right to look upon stockholders, in case of nonpayment or watered shares, for the satisfaction of their claims.

3.
Restrictions required to be indicated in the articles of incorporation, by-laws and
stock certifcates of a close corporation;

The duty of the corporate secretary to record a valid transfer of shares of stock is
ministerial. Thus, he may be compelled by mandamus.

4.
Restrictions imposed by special law, such as the Public Service Act requiring the
approval of the government agency concerned if it will vest unto the transferee 40% of the
capital of the public service company;

General rule: A certifcate of stock is not a negotiable instrument. A bona-fde


purchaser of a certifcate of stock will acquire no better title to the shares than his
transferor had and will be subject to all rights, remedies and defenses which the true and
lawful owner may have.

Exception: When the general principles of estoppel apply. Thus, if the legal owner
thereof, by his act or negligence, is estopped from claiming ownership, (as when he
clothes another with apparent title or authority to dispose of the same) a purchaser in
good faith and without notice will acquire a better title as against the owner so estopped.

Shares of stock are personal properties and the owners thereof have the
unbridled right to transfer the same to anyone they please subject only to reasonable
charter provisions.

The duty of the corporate secretary to register a valid transfer of shares is


ministerial. Therefore, mandamus will lie to compel registration in case the corporation or
the corporate secretary refuses registration. (Rural Bank of Salinas vs. CA) However, the
transferee has no such right when his title to said shares has no prima facie validity of is
uncertain. (Tay vs. CA)

The right to transfer shares of stock may not be unreasonably restricted or


prohibited. Every owner of corporate shares has the same uncontrollable right to alienate
them and is under no obligation from selling them at his sacrifce and for the welfare and
beneft of the corporation and other stockholders. (Padgett vs. Bobcock & Templeton;
Fleischer vs. Botica Nolasco)

However, the right to transfer may be regulated to give the corporation


protection against colorable or fraudulent transfer or to enable it to know who its
stockholders are. Also, as a matter of policy, the SEC allows the grant of preferential

5.
Sale to aliens in violation of maximum ownership of shares under the
Nationalization Laws; and
6.

Those covered by reasonable agreement of the parties.

Transfer refers to absolute and unconditional conveyance of the title and


ownership of a share of stock to warrant registration in the books of the corporation in
order to bind the latter and other third persons. (Monserrat vs. Ceron)

Only the transfer or absolute conveyance of the ownership of the title to a share
need be entered and noted upon the books of the corporation in order that such transfer
may be valid, therefore, inasmuch as a chattel mortgage of the aforesaid title is not a
complete and absolute alienation of the dominion and ownership thereof, its entry and
notation upon the books of the corporation is not a necessary requisite to its validity.
(Monserrat vs. Ceron)

Chattel mortgages over shares of stock should be registered both at the owners
domicile and in the province where the corporation has its principal office or place of
business in order to bind third persons. The ownership of shares in a corporation is
property distinct from the certifcates which are merely the evidence of such ownership.
The property in the shares are deemed to be situated in the province in which the
corporation has its principal office or place of business. (Chua Guan vs. Samahang
Magsasaka, Inc.)

All transfers of shares should be entered in the books of the corporation. Transfers
not so entered are invalid as to attaching or execution creditors of the assignors as well as
to the corporation and to subsequent purchasers in good faith, and indeed, as to all
persons interested, except the parties to such transfer. (Uson vs. Diosomito)


A clause contained in the by-laws of a corporation which provides that the owner
of a share of stock cannot sell it to another person except to the defendant corporation is
ultra-vires, violative of the property rights of shareholders, and in restraint of trade.
(Fleischer vs. Botica Nolasco Co.)

Shares of stock being regarded as property, the owner of such shares may, as a
general rule, dispose of them as they see ft, unless the corporation has been dissolved, or
unless the right to do so is properly restricted, or the owners privilege of disposing of his
shares has been hampered by his own action. (Padgett vs. Babcock & Templeton)

Any restriction on a stockholders right to dispose of his shares must be


construed strictly; and any attempt to restrain a transfer of shares is regarded as being in
restraint of trade, in the absence of a valid lien upon its shares, and except to the extent
that valid restrictive regulations and agreements exist and are applicable. Subject only to
such restrictions, a stockholder cannot be controlled in or restrained from exercising his
right to transfer by the corporation or its officers or by other stockholders, even though the
sale is to a competitor or the company, or to an insolvent person, or even though a
controlling interest is sold to one purchaser. Therefore, restrictions consisting in the word
non-transferable is illegal. (Padgett vs. Babcock & Templeton)

The suspension of the power to sell shares of stock which has a benefcial
purpose, results in the protection of the corporation as well as of the individual parties to
the contract, and is reasonable as to the length of time of suspension is valid. (Lambert vs.
Fox)

An indorsee of an undelivered certifcate of stock has no power to efectively


transfer the shares to other persons or his nominees. For an efective transfer of shares of
stock the mode and manner of transfer prescribed by law must be followed. (Embassy
Farms, Inc. vs. CA)

Indorsement of the certifcate of stock is a mandatory requirement of law for an


efective transfer of a certifcate of stock. (Razon vs. IAC)

The right of a transferee/assignee to have stocks transferred to his name is an


inherent right flowing from his ownership of the stocks. The corporations obligation to
register is ministerial. (Rural Bank of Salinas vs. CA)

The pledge of shares of stock does not vest ownership of such shares to the
pledgee. The pledgor remains the owner during the pendency of the pledge and prior to
foreclosure and sale. Therefore, the pledgee has no right to demand the registration of the
pledged shares in his name. In order that a writ of mandamus may issue, it is essential
that the person petitioning for the same has a clear legal right to the thing demanded and
that is it the imperative duty of the respondent to perform the act required. (Tay vs. CA)

Without a stock certifcate, which is the evidence of ownership of corporate stock,


the assignment of corporate shares is efective only between the parties to the
transaction. (Nava vs. Peers Marketing)

transfer
1.
2.
3.

For a valid transfer of stocks, there must be strict compliance with the mode of
prescribed by law.
There must be delivery of the stock certifcate;
The certifcate must be endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and
To be valid against third parties, the transfer must be recorded in the books of the

corporation.
An assignment, without endorsement and delivery, while valid as among the parties, does
not necessarily make the transfer efective. The assignees cannot enjoy the status of a
stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar as
the assigned shares are concerned. (Rural Bank of Lipa City, Inc. vs. CA)

Delivery is not essential where it appears that the person sought to be held as
stockholders are officers of the corporation, and have custody of the stock books. (Tan vs.
SEC)

After a valid transfer of share, the right to have such registered commences to
exist. However, it would not follow that said right should be exercised immediately or
within a defnite period. (Won vs. Wack Wack Golf & Country Club, Inc.)

Certifcates of stock are not negotiable instruments. Consequently, a transferee


under a forged assignment acquires no title which can be asserted against the true owner,
unless his own negligence has been such as to create an estoppel against him. If the
owner of the certifcate has endorsed it in blank, and it is stolen from him, no title is
acquired by an innocent purchaser for value. (De Los Santos vs. Republic)
FORGED AND UNAUTHORIZED TRANSFERS

Forged and unauthorized transfer what is forged or unauthorized is the transfer


of the certifcate from the true and lawful owner to another person.

Unauthorized issuance of certifcate of stock the act of the corporation in issuing


a certifcate, either fraudulently or by mistake.

General rule: In forged or unauthorized transfer of stock the purchaser acquires


no title as against the lawful owner and will have no right or remedy against the
corporation (non-negotiability of stock certifcates).

Exception: If after such forged or unauthorized transfer, the corporation issues a


new certifcate and such certifcate passes into the hands of subsequent bona fde
purchaser, the latter may rightfully acquire title thereto since the corporation will be
estopped to deny the validity thereof. The subsequent purchaser in good faith took the
shares by virtue of the genuiness of the certifcates issued by the corporation or of the
representation made by the corporation that the same is valid and subsisting and that the
person named therein is a stockholder of the corporation. He may therefore, compel the
corporation to recognize him as a stockholder or claim reimbursement and damages
against the latter.
ISSUANCE OF STOCK CERTIFICATES

Subscriptions to shares of stock are indivisible. Thus, no certifcate of stock shall


be issued to a subscriber until the full amount of his subscription together with interest
and expenses (in case of delinquent shares), if any is due, has been paid.

Once a subscriber has paid his subscription in full, he becomes entitled to be


issued a stock certifcate.

The duty of the corporate officers to issue stock certifcates to those entitled is a
ministerial duty enforceable by mandamus.


A stockholder whose subscription is not fully paid may not be issued a stock
certifcate for that portion already paid. (Fua Cun vs. Summers and China Banking
Corporation)
WATERED STOCK

Watered stock one which is issued by the corporation as fully paid-up shares
when in fact the whole amount of the value thereof has not been paid.

Directors or officers shall be solidarily liable with the stockholder concerned to the
corporation and its creditors for the diference between the fair value received at the time
of issuance of the stock and the par or issued value of the same for the following acts:
1.

Consenting to the issuance of watered stocks; or

2.
Having knowledge thereof, failing to forthwith express his objection in writing and
fle the same with the corporate secretary.

All creditors, whether prior or subsequent to the issuance of watered stock may
enforce payment of such water.

Ways in which watered stocks may be issued:

1.

For a monetary consideration less than its par or issued value;

2.
For a consideration in property, tangible or intangible, valued in excess of its fair
market value;
3.

Gratuitously or under an agreement that nothing shall be paid at all; or

4.
In the guise of stock dividends when there are no surplus profts of the
corporation.

Evil efects of stock watering:

1.
The corporation is deprived of its capital thereby hurting its business prospects,
fnancial capability and responsibility;
2.
Stockholders who paid their subscriptions in full, or promised to pay the same, are
injured and prejudiced by the reduction of their proportionate interest in the corporation;
and

Efects of issuance of watered stock:

1.
As to the corporation when a corporation is guilty of ultra-vires acts which
constitute an injury to or fraud upon the public, or which will tend to injure or defraud the
public, the State may institute a quo-warranto proceeding to forfeit its charter for the
misuse or abuse of its franchise.
2.
As between the corporation and the subscriber the subscription is void; the
subscriber is liable to pay the full par or issued value thereof, to render it valid and
efective.
3.
As to the consenting stockholders they are estopped from raising any objection
thereto.
4.
As to dissenting stockholder in view of the dilution of their proportionate interest
in the corporation, they may compel the payment of the water in the stock solidarily
against the responsible and consenting directors and officers inclusive of the holder of the
watered stock.
5.
As to creditors they may enforce payment of the diference in the price, or the
water in the stock, solidary against the responsible directors/officers and the stockholders
concerned.
6.
As against transferees of the watered stock his right is the same as that of his
transferor.
If however, a certifcate of stock has been issued and duly indorsed to a bona fde
purchaser, without knowledge, actual or constructive, the latter cannot be held liable, at
least as against the corporation, since he took the shares on reliance of the
misrepresentation made by the corporation that the stock certifcate is valid and
subsisting. This is because a corporation is prohibited from issuing certifcates of stock
until the full value of the subscriptions have been paid and could not, therefore, deny the
validity of the stock certifcate it issued as against a purchaser in good faith.

Subscribers for stock shall pay to the corporation interest on all unpaid
subscriptions from the date of subscription, if so required by, and at the rate of interest
fxed in the by-laws. If no rate of interest is fxed in the by-laws, such rate shall be deemed
to be the legal rate.
ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS

When unpaid subscription or any percentage thereof, together with interest if


required, shall be paid:

3.
Present and future creditors are deprived of corporate assets for the protection of
their interest.

1.

2.
On the date or dates that may be specifed by the board of directors pursuant to a
call declaring any or all unpaid portion thereof to be so payable.

Two theories advanced as the basis for the liability on water stocks:

1.
Trust fund doctrine treating the capital of the corporation, inclusive of the
unpaid portion of subscriptions to said capital, as a trust fund which the creditors have a
right to look up to for the satisfaction of their claims.
2.
Fraud or misrepresentation theory liability is based on the false representation
made by the corporation and the stockholder concerned to the creditors that the true par
value or issued price of the shared has been paid or promised to be paid full.

On the date or dates fxed in the contract of subscription; or

Two possible remedies available to the corporation to enforce payment of unpaid


subscription:
1.

By board action (delinquency sale);

2.

By a collection case in court.


Failure or refusal of the corporation, through its board of directors to enforce or
collect payment of unpaid subscription will not prevent the creditors or the receiver of the
corporation to institute a court action to collect the unpaid portion thereof (trust fund
doctrine).

Procedure for the enforcement of payment through board action:

1.
The board of directors, by a formal resolution, declares the whole or any
percentage of unpaid subscriptions to be due and payable on a specifc date. However, if
the contract of subscription provides the date or dates when payment is due, no call
declaration of the board is necessary;
2.
The stockholders concerned are given notice of the board resolution by the
corporation either personally or by registered mail. Publication of the notice of call is not
required unless the by-laws provide otherwise. Notice is not likewise necessary if the
contract of the subscription stipulates a specifc date when any unpaid portion is due and
payable;
3.
Payment shall be made in the date specifed in the call or on the date provided for
in the contract of subscription;
4.
Failure to pay on the date required in the call or as specifed in the contract of
subscription will render the entire balance due and payable and making the stockholder
liable for the interest;
5.
If within 30 days from the date stated in the call or as may be provided in the
contract of subscription no payment is made, all the stock covered by the subscription
shall become delinquent and shall be subject to a delinquency sale;
6.
The board, by resolution, orders the sale of the delinquent stock stating the
amount due and the date, time and place of the sale;
7.
The sale shall be made not less than 30 days nor more than 60 days from the
date the stocks became delinquent;
8.
Notice of the sale, with the copy of the board resolution should be sent to every
delinquent stockholder either personally or by registered mail;
9.
Publication of the notice of sale must be made once a week for two consecutive
weeks in the newspaper of general circulation in the province or city where the principal
officer is located;
10.
Sale at public auction if no payment is made by the delinquent stockholder in
favor of the bidder who ofered to pay the full amount of the balance in the subscription,
inclusive of interest, cost of advertisement and expenses for the smallest number of
shares;
11.
Registration or transfer of the shares of stock in the name of the bidder and
corresponding issuance of the stock certifcate covering the shares successfully bidded;
12.
If there be any remaining shares, the same shall be credited in favor of the
delinquent stockholder who shall be entitled to the issuance of a certifcate of stock
covering such shares;
13.

If there is no bidder at the public auction who ofers to pay the total amount due

plus interest, cost and expenses, the corporation may, subject to the provisions of the
Code, bid for the same and the total amount due shall be credited or paid in full in the
corporate books; and
14.
The shares so purchased by the corporation shall be vested in the latter as
treasury shares.

Highest bidder is such bidder who shall ofer to pay the full amount of the
balance on the subscription together with accrued interest, cost of advertisement and
expenses of sale, for the smallest number of shares or fraction of a share.

Grounds to question the delinquency sale:

1.

Irregularity or defect in the notice of sale; or

2.

Irregularity or defect in the sale itself.

Two conditions before an action to recover delinquent stocks irregularly sold may
be allowed:
1.
The party seeking to maintain such action frst pays or tenders to the party
holding the stock the sum for which the same was sold, with interest from the date of the
sale at the legal rate; and
2.
The action shall be commenced by the fling of a complaint within six months
from the date of the sale.

A call is a condition precedent before the right of action to institute a recovery


suit accrues. A demand is required before a debtor may incur a delay in the performance
of his obligation.

Instances when a call is not necessary:

1.

The contract of subscription provides for a date or dates when payment is due; or

2.

The corporation has become insolvent.

A subscription for shares of stock does not require an express promise to pay the
amount subscribed, as the law implies a promise to pay on the part of the subscriber. The
subscriber is as much bound to pay the amount of the share subscribed by him as he
would be to pay any other debt, and the right of the company to demand payment is no
less incontestable. (Velasco vs. Poizat)

Notwithstanding the fact that the by-laws of the corporation provides for a
method for the collection of the unpaid portion of stock subscriptions, the corporation may
still make use of the methods provided by the Code. (De Silva vs. Aboitiz & Co.)

General rule: A valid and binding subscription for stock of a corporation cannot be
cancelled so as to release the subscriber from liability thereon.

Exception: Consent of all the stockholders is given.

Exceptions to the exception:

1.

Bona fde compromise;

2.

Set-of of a debt due from the corporation; or

3.

Release supported by consideration. (Lingayen Gulf vs. Baltazar)

those lost, stolen or destroyed:


1.
The registered owner of a certifcate of stock in a corporation or his legal
representative shall fle with the corporation an affidavit in triplicate setting forth:

The NLRC has no jurisdiction to determine intra-corporate disputes between the


stockholder and the corporation as in the matter of unpaid subscriptions. (Apocada vs.
NLRC)

a.

The circumstances as to how the certifcate was lost, stolen or destroyed;

b.

The number of shares represented by such certifcate;

Unpaid subscriptions are not due and payable until a call is made by the
corporation for payment. (Apocada vs. NLRC)

c.

The serial number of the certifcate; and

d.

The name of the corporation which issued the same.

Subscription to the capital of a corporation constitutes a fund to which the


creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debt. (Lumanlan vs. Cura)

The President of the Philippines is devoid of the prerogative of suspending the


operation of any stature or any of its items. Thus the President cannot condone the
payment of stock subscriptions in the event that the counterpart fund to be invested by
the government would not be available. (PNB vs. Bitulok Sawmill, Inc.)

A stockholder is personally liable for the fnancial obligations of a corporation to


the extent of his unpaid subscription. (Edward Keller & Co., Ltd. vs. Cob Group Marketing,
Inc.)

The subscription to capital stock of the corporation, unless otherwise stipulated, is


not payable at the moment of the subscriptions but on a subsequent date which may be
fxed by the corporation. (Garcia vs. Suarez)

Shares of stock become delinquent when no payment is made on the balance of


all or any portion of the subscription on the date or dates fxed in the contract of
subscription without need of call, or on the date specifed by the board of directors
pursuant to a call made by it.

General rule: No delinquent stock shall not be entitled to:

1.

Be voted for or to vote;

2.

Representation at any stockholder's meeting; or

3.

Any of the rights of a stockholder.

Exception: Delinquent stocks are entitled to the right to dividends (any cash
dividends due on delinquent stockholders shall frst be applied to the unpaid balance on
his subscription plus cost and expenses, while stock dividends shall be withheld until his
unpaid subscription is paid in full).

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

Exception: Shares of stock not fully paid are not entitled to be issued a certifcate
of stock.

Requirements and procedure for issuance of new certifcates of stock in lieu of

2.
He shall also submit such other information and evidence which he may deem
necessary.
3.
Publication of a notice in a newspaper of general circulation published in the place
where the corporation has its principal office, once a week for 3 consecutive weeks at the
expense of the registered owner of such certifcate of stock.
4.
If no contest has been presented within 1 year from the date of the last
publication, the right to make such contest shall be barred and said corporation shall
cancel in its books the certifcate of stock which has been lost, stolen or destroyed and
issue in lieu thereof new certifcate of stock. However, the registered owner may fle a
bond or other security, efective for a period of 1 year, for such amount and in such form
and with such sureties as may be satisfactory to the board of directors, in which case a
new certifcate may be issued even before the expiration of the one 1 year period.
5.
If a contest has been presented to said corporation or if an action is pending in
court regarding the ownership of said certifcate of stock, the issuance of the new
certifcate of stock shall be suspended until the fnal decision by the court regarding the
ownership of said certifcate of stock.

Except in case of fraud, bad faith, or negligence on the part of the corporation
and its officers, no action may be brought against any corporation which shall have issued
certifcate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure
above-described.
RIGHTS AND LIABILITIES OF STOCKHOLDERS

Certain basic rights for the protection of stockholders:

1.
Participation in the management of the corporate afairs by exercising their right
to vote and be voted upon either personally or by proxy;
2.

To enter into a voting trust agreement;

3.

To receive dividends and to compel their declaration if warranted;

4.
To transfer shares of stock subject only to reasonable restrictions inclusive of the
right of the transferee to compel the registration of the transfer in the books of the
corporation;
5.

To be issued a certifcate of stock for fully paid-up shares;

6.

To exercise pre-emptive rights;

7.

To exercise their appraisal right;

8.

To institute and fle a derivative suit;

9.

To recover shares of stock unlawfully sold for delinquency;

10.

To inspect the books of the corporation;

11.

To be furnished the most recent fnancial statements of the corporation;

12.

To be issued a new stock certifcate in lieu of the lost or destroyed one;

13.

To have the corporation dissolved;

14.

To participate in the distribution of the assets of the corporation upon dissolution;

15.

In the case of a close corporation, to petition the SEC to arbitrate a deadlock; and

16.
In the case of a close corporation, to withdraw therefrom, for any reason, and to
compel the purchase of his shares.

Certain obligations and liabilities of stockholders:

1.

To pay the corporation the balance of his unpaid subscriptions;

2.
To pay interest on his unpaid subscription if required by the by-laws or by the
contract of subscription;
3.
To answer to creditors for the unpaid portion of their subscription;
4.
To answer the water in their stocks;
5.
To be liable, as general partners, for all debts, liabilities and damages of
ostensible corporations; and
6.
In case of a close corporation, to be personally liable for corporate torts when
they actively participate in the management of the corporation.
CHAPTER 11: CORPORATE BOOKS AND RECORDS

Records to be kept and maintained by the corporation:

1.

Records of all business transactions which include, among others, journals,


ledgers, contracts, vouchers and receipts, fnancial statements and other books of
accounts, income tax returns, and voting trust agreement which must be kept and
carefully preserved at its principal office.

2.

3.

Minutes of all meetings of stockholders or members and of the directors or


trustees - setting forth in detail the time and place of holding the meeting, how
authorized, the notice given, whether the meeting was regular or special, if
special its object, those present and absent, and every act done or ordered done
thereat which must likewise be kept at the principal office of the corporation.
Stock and transfer book showing the names of the stockholders, the amount
padi or unpaid on all
stock for which subscription has been made, a
statement of every alienation, sale or transfer of stock
made, the date
thereof, and by and to whom made which must be kept either in the principal

office of the corporation or in the office of its stock transfer agent.

These corporate books and records, inclusive of all business transactions and
minutes of meetings, are subject to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and a copy of excerpts of
said records may be demanded.

General rule: Any officer or agent of the corporation who refuses to allow the
inspection of corporate books and records, or any director or trustee who through a
resolution by the board votes for such refusal shall be liable for damages and shall be
guilty of an ofense which shall be punishable under Sec. 144.

Exception. It shall be a defense that the person demanding inspection


1.
2.

Has improperly used any information secured through any prior


examination of the records or minutes of such corporation or of any
other corporation; or
Was not acting in good faith or for a legitimate purpose in making his

demand.

Within ten (10) days from receipt of a written request of any stockholder or
member, the corporation shall furnish to him its most recent fnancial statement, which
shall include a balance sheet as of the end of the last taxable year and a proft or loss
statement for said taxable year, showing in reasonable detail its assets and liabilities and
the result of its operations.

At the regular meeting of stockholders or members, the board of directors or


trustees shall present to such stockholders or members a fnancial report of the operations
of the corporation for the preceding year, which shall include fnancial statements, duly
signed and certifed by an independent certifed public accountant. However, if the paid-up
capital of the corporation is less than P50,000.00, the fnancial statements may be
certifed under oath by the treasurer or any responsible officer of the corporation.

The basis of the right of the stockholder to inspect the books and records of the
corporation for a proper purpose is to protect his interest as a stockholder.

General rule: The right of stockholders to examine corporate books extends to a


wholly owned subsidiary which is completely under the control and management of the
parent company where he is such a stockholder. (Gokongwei vs. SEC)

Exception: The subsidiary and the parent are legally being operated as separate
and distinct entities.

The right to inspect corporate books, although personal, may be exercised


through an agent or representative since it may be unavailing in many instances. (W.G.
Philpotts vs. Philippine Manufacturing Co.)

The corporation, or its responsible directors and officers cannot unduly restrict the
right of inspection and may not arbitrarily set a few days of the year within which the
stockholder may make the inspection. (Pardo vs. Hercules Lumber, Co.)

Directors of a corporation have the unqualifed right to inspect the books and
records of the corporation at all reasonable hours. However, there is no absolute right to
secure certifed copies of the minutes of the corporation until these minutes have been

written up and approved by the directors. (Vegaruth vs. Isabela Sugar Co., Inc.)

It is a required condition for the inspection of corporate books that the one
requesting it must not have been guilty of using improperly any information secured
through a prior examination and that the person asking for such examination must be
acting in good faith and for a legitimate purpose in making his demand. (Gonzales vs. PNB)

Remedies of a stockholder who is denied inspection of corporate books:

1.

Mandamus;

2.

Damages either against the corporate or the responsible officer; or

3.

Criminal complaint based on Sec. 144 of the Code.

CHAPTER 12: MERGER AND CONSOLIDATION

Merger a union efected by absorbing one or more existing corporations by


another which survives and continues the combined business; the uniting of two or more
corporations by the transfer of property to one of them which continues in existence, the
other or others being dissolved and merged therein.

Consolidation the uniting or amalgamation of two or more existing corporations


to form a new corporation and the termination of existence of the old ones.

Requirements and procedure for merger or consolidation:

1.
The board of directors or trustees of each constituent corporation shall approve a
plan of merger or consolidation setting forth the following:
a.

The names of the constituent corporations;

b.
efect;

The terms of the merger or consolidation and the mode of carrying the same into

c.

A statement of changes, if any, in the articles of incorporation; and

d.

Other provisions deemed necessary and desirable.

2.
Approval of the plan by the stockholders representing 2/3 of the outstanding
capital stock or 2/3 of the members in a non-stock corporations of each constituent
corporation at separate corporate meetings called for the purpose;
3.
Prior notice of such meeting, with a copy or summary of the plan of merger or
consolidation shall be given to all stockholders or members at least 2 weeks prior to the
scheduled meeting, either personally or by registered mail stating the purpose thereof;
4.
Execution of the articles of merger or consolidation by each constituent
corporation to be signed by the president or vice-president and certifed by the corporate
secretary or assistant secretary setting forth the following:
a.

The plan of the merger or consolidation;

b.
As to stock corporations, the number of shares outstanding, or in the case of nonstock corporations, the number of members; and

c.
As to each corporation, the number of shares or members voting for and against
such plan, respectively.
5.
Submission of the articles of merger or consolidation in quadruplicate to the SEC
subject to the requirement of that if it involves corporations under the direct supervision of
any other government agency or governed by special laws the favorable recommendation
of the government agency concerned shall frst be secured; and
6.
Issuance of the certifcate of merger or consolidation by the SEC at which time the
merger or consolidation shall be efective. If the plan, however, is believed to be contrary
to law, the SEC shall set a hearing to give the corporations concerned an opportunity to be
heard upon proper notice and thereafter, the SEC shall proceed as provided in the Code.

Any amendment to the plan of merger or consolidation must be approved by


majority vote of the respective boards of directors or trustees of all the constituent
corporations and ratifed by the affirmative vote of stockholders representing at least 2/3
of the outstanding capital stock or of 2/3 of the members of each of the constituent
corporations.

Mergers and consolidations may not be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in restraint of trade or
for purposes of fraud.

Efects of merger or consolidation:

1.
There will only be a single corporation. In case of merger, the surviving
corporation, or in case of consolidation, the consolidated corporation;
2.
Termination of the corporate existence of the constituent corporations, except
that of the surviving or the consolidated corporation;
3.
The surviving or the consolidated corporation will possess all the rights,
privileges, immunities and powers and shall be subject to all the duties and liabilities of a
corporation organized under the Code;
4.
The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and franchises of the constituent corporations; and all property and
all receivables due on whatever account, including subscriptions to shares and other
choses in action, and all and every other interest of, or belonging to, or due to each
constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5.
The surviving or consolidated corporation shall be responsible and liable for all
the liabilities and obligations of each of the constituent corporations; and any pending
claim, action or proceeding brought by or against any of such constituent corporations
may be prosecuted by or against the surviving or consolidated corporation. The rights of
creditors or liens upon the property of any of such constituent corporations shall not be
impaired by such merger or consolidation.

Merger or consolidation does not become efective upon the mere agreement of
the constituent corporations. It shall be efective only upon the issuance of a certifcate of
merger. (Associated Bank vs. CA)
CHAPTER 13: APPRAISAL RIGHT


Appraisal right the method of paying a shareholder for the taking of his
property; the statutory means whereby a stockholder can avoid the conversion of his
property into another property not of his own choosing. The purpose of the right is to
protect the property rights of dissenting stockholders from actions by the majority
shareholders which alters the nature and character of their investment. It is a right granted
to dissenting stockholders on certain corporate or business decisions to demand payment
of the fair market value of their shares.

Instances when a stockholder may have the right to dissent and demand payment
of the fair value of his shares:
1.

In case any amendment to the articles of incorporation has the efect of:

a.

Changing or restricting the rights of any stockholder or class of shares;

b.
Authorizing preferences in any respect superior to those of outstanding shares of
any class; or
c.

Extending or shortening the term of corporate existence.

2.
In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of
all or substantially all of the corporate property and assets as provided in the Code; and
3.

In case of merger or consolidation.

Other instances provided for in the Code:

1.
Investment of corporate funds in another corporation or business or for any other
purpose;
2.
In a close corporation, a stockholder has the right to compel the corporation for
any reason to purchase his shares at their fair value which shall not be less than the par or
issued value when the corporation has sufficient assets to cover it debts and liabilities,
exclusive of capital stock.

Requirements and procedure for the exercise of the appraisal right:

1.
The stockholder must have voted against the proposed corporate action in any of
the instances allowed by law for the exercise of the appraisal right;
2.
A written demand for payment must be made by the dissenting stockholder
within 30 days after the date on which the vote was taken. Failure to make the demand
within the said period shall be deemed a waiver of the appraisal right;
3.
Surrender of the certifcate of stock by the dissenting stockholder for notation in
the corporate books and payment by the corporation of the fair market value of said
shares as of the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action. If the stockholder and
the corporation cannot agree on the fair market value thereof, the same shall be
determined by appraisers;
4.
The corporation must have unrestricted retained earnings in it books to cover the
payment of the fair value of the shares of the dissenting stockholder;

5.
Upon payment of the shares by the corporation, the dissenting stockholder shall
transfer his shares to the corporation.

Efects of demand for payment of the fair value of a stockholders shares:

1.
From the time of demand for payment all rights accruing to such shares,
including voting and dividend rights, are suspended, except the right to receive payment.
2.
After either the right ceases or the purchase of the said shares by the corporation
all rights accruing to such shares are restored and all dividend distributions which would
have accrued on the shares shall be paid to the holder thereof.

If the dissenting stockholder is not paid the value of his shares within 30 days
after the award, his voting and dividend rights shall immediately be restored.

No demand for payment may be withdrawn unless the corporation consents


thereto.

Instances when the right to payment ceases:

1.
The stockholder withdraws his demand for payment with the consent of the
corporation;
2.

The proposed corporate action is abandoned or rescinded by the corporation;

3.
The proposed corporate action is disapproved by the SEC where such approval is
necessary;
4.

The SEC determines that such stockholder is not entitled to the appraisal right;

5.
The stockholder fails within 10 days after demanding payment for his shares to
submit the certifcates of stock representing his shares to the corporation for notation and
the corporation, at its option, terminates the right.
6.
The shares represented by the certifcates bearing such notation are transferred
and the certifcates subsequently canceled.

General rule: The costs and expenses of appraisal shall be borne by the
corporation.

Exception: The fair value ascertained by the appraisers is approximately the same
as the price which the corporation ofered to pay the stockholder.

General rule: In an action to recover the fair value of stocks, all costs and
expenses shall be assessed against the corporation.

Exception: The refusal of the stockholder to receive payment is unjustifed.

A dissenting stockholder is required within 10 days after demanding payment for


his shares to submit the stock certifcates representing his shares to the corporation for
notation. His failure to do so shall, at the option of the corporation, terminate his rights.

The dissenting stockholder is not prohibited from selling, transferring or assigning


his shares. If such be the case, once the certifcates are subsequently canceled, the rights
of the transferor as a dissenting stockholder shall cease and the transferee shall have all

the rights of a regular stockholder; and all dividend distributions which would have accrued
on such shares shall be paid to the transferee.

be authorized by the by-laws of non-stock corporations with the approval of, and under
such conditions which may be prescribed by the SEC.

A director who exercises his appraisal right remain to be a director until his shares
are no longer registered in his name.

General rule: Membership in a non-stock corporation and all rights arising


therefrom are personal and non-transferable.

A stockholder whose subscription is not fully paid is still entitled to exercise his
appraisal right.

CHAPTER 14: NON-STOCK CORPORATIONS

Non-stock corporation - one where no part of its income is distributable as


dividends to its members, trustees, or officers, subject to the provisions of the Code on
dissolution.

Even if a corporation has capital stock divided into shares it is considered as nonstock so long as it does not distribute dividends to its members and officers. (CIR vs. Club
Filipino de Cebu)

Any proft which a non-stock corporation may obtain as an incident to its


operations shall, whenever necessary or proper, be used for the furtherance of the
purpose or purposes for which the corporation was organized.

The fact that a non-proft corporation earns a proft, gain or income for the
corporation or members does not make it a proft-making corporation where such proft or
income is used for the purpose set forth in the articles of incorporation and is not
distributable to its incorporators, members or officers, since mere intangible or pecuniary
benefts of the members does not change the nature of the corporation.

The determination of whether or not a non-stock corporation can engage in proftmaking business or activity depends largely on the purpose or purposes indicated in the
articles of incorporation. If the business activity is authorized in the said articles,
necessary, incidental or essential thereto, the same may be undertaken by the
corporation, otherwise, not, as it would be an ultra-vires act.

Exception: The articles of incorporation or the by-laws provide otherwise.

Membership in non-stock corporations may be acquired by complying with the


provisions of its rules prescribed in the by-laws. In absence of restrictions, a non-stock
corporation may act arbitrarily and exclude any persons it may see ft, and the courts have
no power to interfere. It is free to fx qualifcations for membership and to provide for
termination of membership.

General rule: The board of directors of a non-stock corporation shall have the
authority to admit members.

Exception: The by-laws provide otherwise.

Membership shall be terminated in the manner and for the causes provided in the
articles of incorporation or the by-laws.

General rule: Termination of membership shall have the efect of extinguishing all
rights of a member in the corporation or in its property.

Exception: The articles of incorporation or the by-laws provide otherwise.

In terminating membership, strict compliance with the manner and procedure laid
down in the by- laws must be observed, otherwise it may render the expulsion inefective
and invalid. (Carmoan vs, PED)

In absence of any provision in the articles of incorporation or by-laws relative to


the manner and causes of termination, the power is nonetheless inherent in the following
situations:

Purposes: Charitable, religious, educational, professional, cultural, fraternal,


literary, scientifc, social, civic service, or similar purposes, like trade, industry, agricultural
and like chambers, or any combination thereof (non-exclusive).

1.
When an ofense is committed which, although it has no immediate relation to a
members duty as such, it is so infamous as to render him unft for society of honest men,
and which is indictable at common law;

The provisions governing stock corporation, when pertinent, shall be applicable to


non-stock corporations.

2.

MEMBERSHIP AND VOTING RIGHTS

General rule: Each member, regardless of class, shall be entitled to one vote (no
cumulative voting).

Exception: The right to vote is limited, broadened or denied in the articles of


incorporation or the by- laws.

When the ofense is a violation of his duty as a member of the corporation; and

3.
When the ofense is of a mixed nature, being both against his duty as a member
of the corporation, and also indictable at common law.

As to whether or not a member should be expelled or maintained is the


established right of the corporation to determine and the courts are without authority to
strip a member of his membership without cause.

General rule: A member may vote by proxy.

Courts cannot strip a member of a non-stock corporation of his membership


therein without cause.
Otherwise, that would be an unwarranted and undue interference with the well established
right of a corporation to determine its membership. (Chinese YMCA vs. Ching)

Exception: Proxy voting is denied in the articles of incorporation or the by-laws.

TRUSTEES AND OFFICERS

Voting by mail or other similar means by members of non-stock corporations may

Non-stock or special corporations may designate their governing boards by any

name through their articles of incorporation or their by-laws.

General rule: The number of trustees in a non-stock corporation may exceed 15.

Exception: The articles of incorporation or the by-laws provide otherwise.

General rule: The term of office of the board of trustees may be staggered. They
shall classify themselves in order that 1/3 of their number shall expire every year and
subsequent elections of trustees comprising 1/3 shall be held annually.

Exception: The articles of incorporation or the by-laws provide otherwise.

Qualifcations of trustees:

1.

He is a member of the corporation;

2.

Majority thereof must be residents of the Philippines; and

3.

Other qualifcations as may be provided for in the by-laws.

General rule: officers of a non-stock corporation may be directly elected by the


members.

Exception: The articles of incorporation or the by-laws provide otherwise.

Trustees elected to fll vacancies occurring before the expiration of a particular


term hold office only for the unexpired period.

General rule: The courts will not interfere on matters involving the internal afairs
of an unincorporated association such as elections, the manner by which it was conducted
and the results thereof. (Lions Club International vs. CA)

Exceptions:

1.

There is fraud, oppression or bad faith;

2.

The action complained of is capricious, arbitrary or unjustly discriminatory;

3.

Property and civil rights are invaded;

4.
The proceedings are violative of the laws of society, or the law of the land, as by
depriving a person of due process of law;
5.

There is lack of jurisdiction on the part of the tribunal conducting the proceedings;

6.

The organization exceeds its powers;

7.

The proceedings are illegal; or

8.
An incorporated association or its members avail of the remedy of instituting an
intra- corporate dispute case.

General rule: Regular or special meetings of members of a non-stock corporation


shall be held in the city or municipality where the principal office is located, and if
practicable in the principal office of the corporation.

Exceptions:

1.

The by-laws of the corporation provide otherwise; and

2.

Metro Manila is considered a city or municipality.

Requirements for meetings held outside the location of the principal office as
provided for by the by-laws:
1.
Proper notice is sent to all members indicating the date, time and place of the
meeting; and
2.

The place of meeting must be within the Philippines.

General rule: All proceedings and business transactions at a meeting improperly


held or called are invalid.

Exception: All of the members are present or duly represented at the meeting.

DISTRIBUTION OF ASSETS UPON DISSOLUTION

Rules of distribution:

1.
All liabilities and obligations of the corporation shall be paid, satisfed and
discharged, or adequate provision shall be made therefore;
2.
Assets held by the corporation upon a condition requiring return, transfer or
conveyance, and which condition occurs by reason of the dissolution, shall be returned,
transferred or conveyed in accordance with such requirements;
3.
Assets received and held by the corporation subject to limitations permitting their
use only for charitable, religious, benevolent, educational or similar purposes, but not held
upon a condition requiring return, transfer or conveyance by reason of the dissolution,
shall be transferred or conveyed to one or more corporations, societies or organizations
engaged in activities in the Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution;
4.
Assets other than those mentioned in the preceding paragraphs, if any, shall be
distributed in accordance with the provisions of the articles of incorporation or the by-laws,
to the extent that the articles of incorporation or the by-laws, determine the distributive
rights of members, or any class or classes of members, or provide for distribution; and
5.
In any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for proft, as may be specifed in a
plan of distribution.

Procedure and requirements for a plan of distribution of assets:

1.

Majority vote of the board of trustees adopting a plan of distribution;

2.
Approval of such plan by at least 2/3 of the members having voting rights present
or represented by proxy at a regular or special meeting for that purpose; and
3.

Prior 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 the Code for the giving of
notice of meetings to members.

stockholders thereof take an active role in the management of the corporate afairs either
as directors, officers or even perhaps as partners in management which is akin to the
partnership form of business.

CHAPTER 15: CLOSE CORPORATIONS

1.
For a classifcation of shares or rights and the qualifcations for owning or holding
the same and restrictions on their transfers as may be stated therein;

Close corporation - one whose articles of incorporation provide that:

1.
All the corporation's issued stock of all classes, exclusive of treasury shares, shall
be held of record by not more than a specifed number of persons, not exceeding 20;
2.
All the issued stock of all classes shall be subject to one or more specifed
restrictions on transfer permitted by Title XV of the Code; and
3.
The corporation shall not list in any stock exchange or make any public ofering of
any of its stock of any class.

Absent any of the three requisites, a corporation cannot be considered a close


corporation and would thus be governed by the general provisions on ordinary
corporations.

A corporation does not become a close corporation just because a husband and
wife owns 99.86% of the capital stock. (San Juan Structural Steel vs. CA)

A corporation shall not be deemed a close corporation when at least 2/3 of its
voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation.

General rule: Any corporation may be incorporated as a close corporation.

Exceptions:

1.

Mining or oil companies;

2.

Stock exchanges;

3.

Banks;

4.

Insurance companies;

5.

Public utilities;

6.

Educational institutions; and

7.

Corporations declared to be vested with public interest.

The articles of incorporation of a close corporation may provide:

2.
For a classifcation of directors into one or more classes, each of whom may be
voted for and elected solely by a particular class of stock;
3.
For a greater quorum or voting requirements in meetings of stockholders or
directors;
4.
That the business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision continues in
efect:
a.

No meeting of stockholders need be called to elect directors;

b.
Unless the context clearly requires otherwise, the stockholders of the corporation
shall be deemed to be directors; and
c.

The stockholders of the corporation shall be subject to all liabilities of directors.

5.
That all officers or employees or that specifed officers or employees shall be
elected or appointed by the stockholders, instead of by the board of directors.

In order to bind purchasers in good faith, restrictions on the right to transfer


shares must appear in:
1.

The articles of incorporation;

2.

The by-laws; and

3.

The certifcate of stock.

Restrictions on the right to transfer shares shall not be more onerous than
granting the existing stockholders or the corporation the option to purchase the shares of
the transferring stockholder within reasonable terms, conditions or period. 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.

Efects of issuance or transfer of stock in breach of qualifying conditions:

Sec. 140 authorizes the NEDA to recommend to the legislature the setting of
maximum limits to family or group ownership of stock in corporation vested with public
interest, and the determination of whether or not it should be vested with public interest is
within its domain.

General rule: A close corporation may refuse to register the transfer of stock in
the name of the transferee who has or is conclusively presumed to have notice that:

The provisions of Title XV of the Code shall primarily govern close corporations.
However, the provisions of other Titles of the Code apply suppletorily.

2.
Transfer of stock to him causes 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

A close corporation may partake the nature of a partnership in that the

1.

He is not eligible to be a holder of stock of the corporation;

3.

The transfer of stock is in violation of a restriction on transfer of stock.

Exceptions:

1.

The transfer of stock has been consented to by all the stockholders; or

2.

The close corporation has amended its articles of incorporation.

Options granted to the transferee:

1.

Rescind the transfer; or

2.

Recover under any applicable warranty, express or implied.

The term "transfer" is not limited to a transfer for value.

Agreements by and among stockholders executed before the formation and


organization of a close corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be valid and binding between and
among such stockholders, if such be their intent, to the extent that such agreements are
not inconsistent with the articles of incorporation, irrespective of where the provisions of
such agreements are contained, except those required by this Title to be embodied in said
articles of incorporation.

An agreement between two or more stockholders, if in writing and signed by the


parties thereto, may provide that in exercising any voting rights, the shares held by them
shall be voted as therein provided, or as they may agree, or as determined in accordance
with a procedure agreed upon by them.

No provision in any written agreement signed by the stockholders, relating to any


phase of the corporate afairs, shall be invalidated as between the parties on the ground
that its efect is to make them partners among themselves.

A written agreement among some or all of the stockholders in a close corporation


shall not be invalidated on the ground that it so relates to the conduct of the business and
afairs of the corporation as to restrict or interfere with the discretion or powers of the
board of directors: Provided, That such agreement shall impose on the stockholders who
are parties thereto the liabilities for managerial acts imposed by this Code on directors.

To the extent that the stockholders are actively engaged in the management or
operation of the business and afairs of a close corporation, the stockholders shall be held
to strict fduciary duties to each other and among themselves. Said stockholders shall be
personally liable for corporate torts unless the corporation has obtained reasonably
adequate liability insurance.

Sec. 101. When board meeting is unnecessary or improperly held. - Unless the bylaws provide otherwise, any action by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:

General rule: Any action by the directors of a close corporation without a meeting
is invalid.

Exceptions:

1.

Written consent is signed by all the directors;

2.
All the stockholders have actual or implied knowledge of the action and make no
prompt objection thereto in writing;
3.
The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4.
All the directors have express or implied knowledge of the action in question and
none of them makes prompt objection thereto in writing.
(If a director's meeting is held without proper call or notice, an action taken therein within
the corporate powers is deemed ratifed by a director who failed to attend, unless he
promptly fles his written objection with the secretary of the corporation after having
knowledge thereof.)

Exception to the exceptions: The by-laws provide otherwise.

General rule: The pre-emptive right of stockholders in close corporations shall


extend to all stock to be issued, including reissuance of treasury shares, whether for
money, property or personal services, or in payment of corporate debts.

Exception: The articles of incorporation provide otherwise.

Any amendment to the articles of incorporation which seeks to:

1.
Delete or remove any provision required by Title XV of the Code to be contained
in the articles of incorporation, or
2.

Reduce a quorum or voting requirement stated in said articles of incorporation,

must be approved by the affirmative vote of at least 2/3 of the outstanding capital stock,
whether with or without voting rights, or of such greater proportion of shares as may be
specifcally provided in the articles of incorporation for amending, deleting or removing
any of the aforesaid provisions, at a meeting duly called for the purpose.

Deadlock - the directors or stockholders are so divided respecting the


management of the corporation's business and afairs that the votes required for any
corporate action cannot be obtained, with the consequence that the business and afairs of
the corporation can no longer be conducted to the advantage of the stockholders
generally.

In case of a deadlock and upon written petition by any stockholder, the SEC has
the power to arbitrate the dispute and the authority to:
1.
Cancel or alter any provision contained in the articles of incorporation, by-laws, or
any stockholder's agreement;
2.
Cancel, alter or enjoin any resolution or act of the corporation or its board of
directors, stockholders, or officers;
3.
Direct or prohibit any act of the corporation or its board of directors, stockholders,
officers, or other persons party to the action;
4.
Require the purchase at their fair value of shares of any stockholder, either by
the corporation regardless of the availability of unrestricted retained earnings in its books,

or by the other stockholders;


5.

Appoint a provisional director;

6.

Dissolve the corporation; or

7.

Grant such other relief as the circumstances may warrant.

Provisional director:

1.
A provisional director shall be an impartial person who is neither a stockholder nor
a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose
further qualifcations, if any, may be determined by the SEC.
2.
A provisional director is not a receiver of the corporation and does not have the
title and powers of a custodian or receiver.
3.
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 or by all the
stockholders.
4.
His compensation shall be determined by agreement between him and the
corporation subject to approval of the SEC, which may fx his compensation in the
absence of agreement or in the event of disagreement between the provisional director
and the corporation.

imposed duty or obligation. Consequently, its stockholder who was actively engaged in the
management or operation of the business should be held personally liable. (Naguiat vs.
NLRC)
CHAPTER 16: SPECIAL CORPORATIONS EDUCATIONAL CORPORATIONS

Educational corporations those which provide facilities for teaching or


instruction.

Educational corporations are governed primarily by special laws and secondarily


by the Code.

Educational institutions are required to incorporate within 90 days after their


recognition as such.
However, failure to comply will not immune the educational institution from suit as a
corporation.

A favorable recommendation of the Secretary of Education, Culture and Sports is


required before the SEC accepts or approves the articles of incorporation or by-laws of any
educational institution.

Trustees of non-stock educational corporations shall not be less than 5 nor more
than ffteen 15, in multiples of 5.

Any stockholder of a close corporation may, for any reason, compel the said
corporation to purchase his shares at their fair value, which shall not be less than their par
or issued value, when the corporation has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock.

Unless otherwise provided in the articles of incorporation on the by-laws, the


board of trustees of incorporated schools, colleges, or other institutions of learning shall,
as soon as organized, so classify themselves that the term of office of 1/5 of their number
shall expire every year. Trustees thereafter elected to fll vacancies, occurring before the
expiration of a particular term, shall hold office only for the unexpired period. Trustees
elected thereafter to fll vacancies caused by expiration of term shall hold office for 5
years. A majority of the trustees shall constitute a quorum for the transaction of business.
The powers and authority of trustees shall be defned in the by- laws.

Any stockholder of a close corporation may, by written petition to the SEC,


compel the dissolution of such corporation whenever:

For institutions organized as stock corporations, the number and term of directors
shall be governed by the provisions on stock corporations.

1.
Any of acts of the directors, officers or those in control of the corporation is illegal,
or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any
stockholder; or

General rule: Educational institutions shall be owned solely by citizens of the


Philippines or corporations or associations at least 60% of the capital of which is owned by
such citizens. The control and administration of educational institutions shall be vested in
citizens of the Philippines.

2.

Corporate assets are being misapplied or wasted.

Close corporations distinguished ordinary stock corporations

In a close corporation, a corporate action taken at a board meeting without proper


call or notice is deemed ratifed by the absent director unless the latter promptly fles his
written objection with the secretary of the corporation after having knowledge of the
meeting. (Manuel Dulay Enterprises vs. CA)

Stockholders who actively engage in the management or operation of the


business and afairs of a close corporation shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate liability insurance. Essentially a
tort consists in the violation of a right given or the omission of a duty imposed by law.
Article 283 of the Labor Code mandates the employer to grant separation pay to
employees in case of closure or cessation of operations of establishment or undertaking
not due to serious business losses or fnancial reverses. CFTI failed to comply with this law-

Exception: Educational institutions established by religious groups and mission


boards.

General rule: No educational institution shall be established exclusively for aliens


and no group of aliens shall comprise more than 1/3 of the enrollment in any school.

Exception: The rule shall not apply to schools established for foreign diplomatic
personnel and their dependents and, unless otherwise provided by law, for other foreign
temporary residents.
RELIGIOUS CORPORATIONS

Religious corporation one composed entirely of spiritual persons which is


created for the furtherance of religion or perpetuating the rights of the church or for the
administration of church or religious work or property.

Classes of religious corporations:

1.

Corporations sole; and

2.

Religious societies.

Religious corporations are governed by the appropriate chapter of the Code and
the general provisions on non-stock corporations.

Corporation Sole

Corporation sole consists of one person only and his successor in some
particular station, who are incorporated by law in order to give them some legal capacities
and advantages, particularly that of perpetuity, which in their natural persons they could
not have had.

Purpose Administration and management, as trustee, of the afairs, properties


and temporalities of any religious denomination, sect or church.

Who Chief archbishop, bishop, priest, minister, rabbi or other presiding elder of
such religious denomination, sect or church.

Requirements and procedure of incorporation:

Verifed by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be;
Accompanied by a copy of the commission, certifcate of election or letter of appointment
of such chief archbishop, bishop, priest, minister, rabbi or presiding elder; and
Duly certifed to be correct by any notary public.
4.
From and after the fling of the aforementioned documents with the SEC, such
chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a
corporation sole.

All temporalities, estate and properties of the religious denomination, sect or


church administered or managed by the corporation sole shall be held in trust for the use,
purpose, behalf and sole beneft of the religious denomination, sect or church, including
hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof.

A provision relative to its term of existence is not required since a corporation sole
is supposed to exist in perpetuity.

General rule: A corporation acquires juridical personality only upon the issuance
of a certifcate of incorporation by the SEC.

Exception: A corporation sole becomes endowed with corporate personality after


fling of the verifed articles of incorporation together with other required documents.

1.
The chief archbishop, bishop, priest, minister, rabbi or other presiding elder of
such religious denomination, sect or church must fle the articles of incorporation with the
SEC which must contain the following:

A corporation sole may purchase and hold real estate and personal property for
its church, charitable, benevolent or educational purposes, and may receive bequests or
gifts for such purposes.

a.
That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of
his religious denomination, sect or church and that he desires to become a corporation
sole;

General rule: A court order is required before a corporation sole may sell or
mortgage real property held by it. Before such an order is granted, a verifed petition must
be made by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as
corporation sole and it must be shown that notice of the application has been given as
directed by the court and that it is to the interest of the corporation that the petition be
granted. However, such application may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole.

b.
That the rules, regulations and discipline of his religious denomination, sect or
church are not inconsistent with his becoming a corporation sole and do not forbid it;
c.
That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he
is charged with the administration of the temporalities and the management of the afairs,
estate and properties of his religious denomination, sect or church within his territorial
jurisdiction, describing such territorial jurisdiction;
d.
The manner in which any vacancy occurring in the office of chief archbishop,
bishop, priest, minister, rabbi of presiding elder is required to be flled, according to the
rules, regulations or discipline of the religious denomination, sect or church to which he
belongs; and
e.
The place where the principal office of the corporation sole is to be established
and located, which place must be within the Philippines.
2.
The articles of incorporation may include any other provision not contrary to law
for the regulation of the afairs of the corporation.
3.

The articles of incorporation must be:

Exception: Court intervention is not necessary when the rules, regulations and
discipline of the religious denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the method of acquiring, holding,
selling and mortgaging real estate and personal property.

Registration of real property in the name of the corporation sole does not vest
ownership unto the head thereof.

The constitutional requirement that 60% of the capital of a corporation must be


owned by Filipino citizens before it may register land in its own name does not apply to a
corporation sole. A corporation sole has no nationality and the framers of the constitution
did not have in mind the corporation sole when it provided for such requirement. (Roman
Catholic Apostolic Adm. of Davao, Inc. vs. LRC)

Whether or not a corporation sole, or any private corporation for that matter, can
acquire alienable land of the public domain depends upon the character of the land at the
time of the institution of the registration proceeding. If it still forms part of the public

domain, no. If it is private, yes. (Republic vs. INC)

Under the Public Land Act, alienable public land may be subject to registration by
a possessor if he, personally or through his predecessor-in-interest, had openly,
continuously, exclusively and notoriously possessed the same for 30 years. The law
creates the legal fction whereby the land, upon completion of the requisite period ipso
jure and without the need of judicial or other sanction, ceases to be public land and
becomes private property. (Director of Lands vs. CA)

In case of vacancy in the office of the head of the corporation, the person
authorized by the rules, regulations or discipline of the denomination shall exercise all the
powers and authority of the corporation sole during such vacancy and until such vacancy
has been flled-up.

The successors in office shall become the corporation sole and shall be permitted
to transact business as such only upon the fling with the SEC of a copy of their
commission, certifcate of election, or letters of appointment, duly certifed by a notary
public.

Requirements for the voluntary dissolution of corporations sole:

1.
Filing with the SEC of a verifed declaration of dissolution which must set
forth the following:

b.
That at least 2/3 of its membership have given their written consent or have
voted to incorporate, at a duly convened meeting of the body;
c.
That the incorporation of the religious society or religious order, or diocese,
synod, or district organization desiring to incorporate is not forbidden by competent
authority or by the constitution, rules, regulations or discipline of the religious
denomination, sect, or church of which it forms a part;
d.
That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its afairs, properties and
estate;
e.
The place where the principal office of the corporation is to be established and
located, which place must be within the Philippines; and
f.
The names, nationalities, and residences of the trustees elected by the religious
society or religious order, or the diocese, synod, or district organization to serve for the
frst year or such other period as may be prescribed by the laws of the religious society or
religious order, or of the diocese, synod, or district organization, the board of trustees to
be not less than 5 nor more than 15.

a.

The name of the corporation;

3.
The articles of incorporation must be verifed by the affidavit of the presiding
elder, secretary, or clerk or other member of such religious society or religious order, or
diocese, synod, or district organization of the religious denomination, sect or church.

b.

The reason for dissolution and winding up;

4.

Issuance of the SEC of the certifcate of incorporation.

c.
The authorization for the dissolution of the corporation by the particular religious
denomination, sect or church; and

The articles of incorporation of a religious society need not indicate a term since it
is supposed to exist in perpetuity.

d.
The names and addresses of the persons who are to supervise the winding up of
the afairs of the corporation.

CHAPTER 17: DISSOLUTION

2.

Approval of the SEC.

Religious Societies

Religious society a body of person associated together for the purpose of


maintaining religious worship.

Purpose the administration of its temporalities or for the management of its


afairs, properties and estate

Who any religious society or religious order, or any diocese, synod, or district
organization of any religious denomination, sect or church.

Requirements and procedure for incorporation:

1.

Filing of the articles of incorporation with the SEC;

2.

The articles of incorporation must set forth the following:

a.
That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or church;

Dissolution the extinguishment


termination of corporate existence.

of

the

corporate

franchise

and

the

General rule: When a corporation is dissolved, it ceases to be a juridical entity


and can no longer pursue the business for which it is incorporated.

Exception: The corporation will continue as a body corporate for another period of
3 years from the time it is dissolved for the purpose of winding up its afairs and the
liquidation of its assets.

Three modes of dissolution:

1.

By expiration of the corporate term;

2.

By voluntary surrender of its primary franchise (voluntary dissolution); or

3.

By the revocation of its corporate franchise (involuntary dissolution).

EXPIRATION OF CORPORATE TERM

General rule: A corporation registered under the Corporation Code is required to


indicate its term of existence in the articles of incorporation.

Exceptions:

1.

Corporations sole; and

2.

Religious societies.

A corporation ceases to exist and is automatically dissolved upon the expiration


of the term indicated in its articles of incorporation without the need of formal proceeding.
There is no need to for the institution of a proceeding for quo warranto to determine the
time and date of the dissolution of a corporation because the period of corporate existence
is provided in the articles of incorporation. (PNB vs. CFI)
SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)

Three modes of voluntary dissolution:

1.

Voluntary dissolution where no creditors are afected;

2.

Voluntary dissolution where creditors are afected; and

3.

Shortening of corporate term.

Voluntary dissolution where no creditors are afected

Formal and procedural requirements for voluntary dissolution where no creditors


are afected:
1.

Majority vote of the board of directors or trustees;

2.
Sending of notice to each stockholder or member either by registered mail or
personal delivery at least 30 days prior to the meeting (scheduled by the board for the
purpose of submitting the board action to dissolve the corporation for approval of the
stockholders or members);
3.
Publication of the notice of time, place and subject of the meeting for 3
consecutive weeks in a newspaper published in the place where the principal office of said
corporation is located or in a newspaper of general circulation in the Philippines;
4.
Resolution adopted by the affirmative vote of the stockholders owning at least 2/3
of the outstanding capital stock or 2/3 of the members at the meeting duly called for the
purpose;
5.
A copy of the resolution authorizing the dissolution must be certifed by a majority
of the board of directors or trustees and countersigned by the corporate secretary; and
6.

Issuance of a certifcate of dissolution by the SEC.

The requirements and formalities provided by law for the dissolution of


corporations are mandatory such that failure to comply therewith will have no efect on the
legal existence of the corporation. A corporation being a creation of law may only
terminate its existence in the manner prescribed by law.

A mere resolution by the stockholders or the board of directors of a corporation to


dissolve the same does not afect the dissolution of a corporation. (Daguhoy Enterprises

vs. Ponce)
Voluntary dissolution where creditors are afected

Formal and procedural requirements for voluntary dissolution where creditors are
afected:
1.
Affirmative vote of the stockholder representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members at a meeting duly called for that purpose;
2.
Petition for the dissolution shall be flled with the SEC signed by the majority of its
board of directors or trustees or other officers having the management of its afairs,
verifed by the president or secretary or one of its directors or trustees, setting forth all
claims and demands against it;
3.
Issuance of an order by the SEC reciting the purpose of the petition and fxing the
date on or before which objections thereto may be fled by any person, which date shall
not be less than 30 days nor more than 60 days after entry of the order;
4.
Before such date, a copy of the order must be published once a week for 3
consecutive weeks in a newspaper of general circulation published in the city or
municipality where the principal office is situated or in a newspaper of general circulation
in the Philippines;
5.
Posting of the same order for 3 consecutive weeks in 3 public places in such city
or municipality;
6.
Upon 5 days notice, given after the date on which the right to fle objects has
expired, the SEC shall hear the petition and try any issue made by the objections fled; and
7.
Judgment dissolving the corporation and directing disposition of its assets as
justice requires and the appointment of a receiver (if necessary in the courts discretion)
to collect such assets and pay the debts of the corporation.

The appointment of a receiver is only permissive and not mandatory. The law is
intended to let the stockholders have control of the assets of the corporation upon
dissolution and winding up of its afairs.
Dissolution by shortening the corporate term

Procedure to shorten the corporate term:

1.

Approval by a majority vote of the board or directors or trustees.

2.
Written notice of the proposed action and the time and place of meeting shall be
served to each stockholder or member either by mail or by personal service.
3.
Ratifcation by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporations.
4.

Submission of the amended articles of incorporation to the SEC.

5.

Approval of the SEC.

In case of a corporation sole, an authorization for the dissolution by the particular

religious denomination, sect or church is necessary.

A vote must cast at a duly constituted meeting. Written assent is insufficient.

It is only upon the approval of the SEC that the corporation is deemed dissolved.

INVOLUNTARY DISSOLUTION

fulfll the design and purpose of its organization. But when such abuses and violations
constitute or threaten a substantial injury to the public or such as to amount to a violation
of the fundamental conditions of the contract (charter) by which the franchise were
granted and thus defeat the purpose of the grant, then dissolution will be granted.
(Government vs. Philippine Sugar Estates Co.)

The court has a discretion with respect to the infliction of capital punishment
upon corporations and there are certain misdemeanors and misusers of franchises which
should not be recognized as requiring their dissolution. (Government vs. El Hogar)

Requirements for involuntary dissolution by the SEC:

1.

Filing of a verifed complaint; and

2.

Proper notice and hearing on the grounds provided by laws, rules and regulations.

That the corporation is guilty of willful and repeated violation of the law and that
its continuance inflicts substantial injury to the public warrants its dissolution. (Republic vs.
Security Credit)

Notwithstanding the fact that RA 8799 transferred the jurisdiction of the SEC
under Sec. 5 of PD 902-A to the Special Commercial Courts, the same law granted the SEC
concurrent jurisdiction over revocation proceedings. Sec. 5 (m) of RA 8799 provides that
the SEC shall have the power to suspend or revoke, after proper notice and hearing, the
franchise or certifcate of registration of corporations, partnerships or associations, upon
any ground provided by law.

Relief by dissolution will be awarded only where no other adequate remedy is


available, and is not available where the rights of the stockholders can be, or are,
protected in some other way. The several acts of misuse and misapplication of the funds
and/or assets of the corporation were committed more particularly by the corporations
president, for the commission of which they may be held personally liable. (Republic vs.
Bisaya Land Transportation Co., Inc.)

Grounds for involuntary dissolution under Sec. 6, PD 902-A:

1.

Fraud in procuring the certifcate of registration;

Under the present state of law, any stockholder or member of a corporation can
institute a dissolution proceeding against his own corporation before the proper forum.

2.
Serious misrepresentation as to what the corporation can do or is doing to the
great prejudice of or damage to the general public;
3.
Refusal to comply or defance of any lawful order of the Commission
restraining commission of acts which would amount to a grave violation of its franchise;
4.

Continuous inoperation for a period of at least 5 years;

5.

Failure to fle by-laws within the required period; and

The Special Commercial Courts, shall hear and decide cases involving intracorporate dispute or partnership relations between and among stockholders, members or
associates; between any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity. (PD 902-A)

The SEC has concurrent jurisdiction to suspend, revoke, after proper notice and
hearing, the franchise or certifcate of registration of corporations, partnership or
associations upon any of the grounds provided by law. (Sec. 5(m) RA 8799)

6.
Failure to fle required reports in appropriate forms as determined by the
Commission within the prescribed period.

The existence of a de jure corporation may be determined in a private suit for its
dissolution between stockholders, without intervention of the State. (Hall vs. Piccio)

Other grounds provided for the in Corporation Code:

In a close corporation, a petition for the dissolution of the corporation may be


instituted by any shareholder on the ground of mere dishonesty.

1.

Violation of any provision of the Code (Sec. 144);

2.

In case of deadlock in a close corporation (Sec. 105);

3.
In a close corporation, any acts of directors, officers or those in control of the
corporation which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial
to the corporation or any stockholder or whenever corporate assets are being misapplied
or wasted (Sec. 105).

Other grounds can be found in special laws, e.g. the Securities Regulation Code
and the General Banking Act.

Courts proceed with extreme caution in the proceeding which have for their
object the forfeiture of corporate franchises, and a forfeiture will not be allowed, except
under express limitation, or for a plain abuse of power by which the corporation fails to

EFFECTS OF DISSOLUTION

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 by
the subsequent dissolution of said corporation.

Dissolution terminates a corporations primary franchise and generally prevents it


from further exercising other or secondary franchises which have been conferred to it.

Dissolution terminates the corporations power to enter into contracts or to


continue the business as a going concern. (Hall vs. Piccio)

General rule: In a lease to a corporation, the rights and obligations thereunder are

not extinguished by the corporations dissolution since leases afect property rights and
survives the death of parties. The stockholders succeed to the rights and liabilities of the
dissolved corporation in an unexpired leasehold state which may be enforced by or against
the receiver or liquidating trustee.

exist.

Exception: The lease, by its terms, terminates when the corporation ceases to

Contracts for personal services are deemed terminated by the dissolution of the
corporation. There is an implied condition that the contract shall terminate in such event.
(Gelano vs. CA)

A dissolved corporation has no juridical personality; it ceases to exist as a


corporation and cannot apply for a new certifcate or a secondary franchise. (Buenaflor vs.
Camarines Sur Industry Corp.)

The 3-year period allowed by the law is only for the purpose of liquidation or
winding up of corporate afairs. No act can be done for the purpose of continuing the
business for which it was established. Neither can it enforce a contract executed prior to
its dissolution. (Cebu Port Labor Union vs. State Marine Co.)

The termination of the life of a juridical entity does not, by itself, imply the
diminution or extinction of rights demandable against such juridical entity. Debts due to or
against the corporation will not be extinguished. Otherwise, it will amount to an
impairment of contracts or a denial of due process. (Gonzales vs. Sugar Regulatory
Administration)
LIQUIDATION AND WINDING UP

Liquidation and winding up the collection of all corporate assets, the payments
of all its debts and settlement of its obligations and the ultimate distribution of the
corporate assets, if any of it remains, to all stockholders in accordance with their
proportionate stockholdings in the corporation or in accordance with their respective
contracts of subscription (e.g. preferred stocks).

A dissolved corporation continues as a body corporate for a period of 3 years from


the time of dissolution for the purpose of prosecuting and defending suits by or against it
and enabling it to settle and close its afairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it was
established.

At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the beneft of stockholders,
members, creditors, and other persons in interest. From and after any such conveyance by
the corporation of its property in trust for the beneft 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 benefcial interest in the
stockholders, members, creditors or other persons in interest.

Upon the winding up of the corporate afairs, 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.

General rule: No corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its debts and liabilities.

Exceptions:

1.

By decrease of capital stock; or

2.

As otherwise allowed the Code.

Three methods of liquidation:

1.

By the corporation itself though the Board of Directors.

2.

By a Trustee appointed by the corporation.

3.

By appointment of a receiver.

Mere appointment of a receiver without anything more does not imply the
dissolution of a corporation.

Pending actions by or against a corporation are abated upon expiration of the


period allowed by law for the liquidation of its afairs; but trustees to whom the corporate
assets have been conveyed may sue or be sued as such in all matters connected with the
liquidation. The efect of conveyance is to make the trustees the legal owners of the
property conveyed, subject to the benefcial interest therein of creditors and stockholders.
(National Abaca Other Fibers Co. vs. Pore)

If the corporation carries out the liquidation of its assets through its own officers
and continues and defends the actions brought by or against it, its existence shall
terminate at the end of three years from the time of dissolution; but if a receiver or
assignee is appointed, as has been done in the present case, with or without a transfer of
its properties within three years, the legal interest passes to the assignee, the benefcial
interest remaining in the members, stockholders, creditors and other interested persons;
and said assignee may bring an action, prosecute that which has already been
commenced for the beneft of the corporation, or defend the latter against any other
action already instituted or which may be instituted even outside of the period of three
years fxed for the offices of the corporation. (Sumera vs. Valencia)

(Board of Liquidators vs. Kalaw)

The counsel who prosecuted and defended the interest of the corporation and
who appeared in behalf of the corporation may be considered a trustee of the corporation
at least with respect to the matter in litigation only. The word trustee must be
understood in its general concept. (Gelano vs. CA)

A claim established against the corporation may be prosecuted against the


liquidator of such corporation even after the three years from its dissolution. (Republic vs.
Marsman Development Company)

Upon dissolution of the corporation its assets are held for the beneft of its
stockholder after payment of its debts and will be so distributed to the said stockholder in
accordance with their proportionate interest in the corporation or their contracts of
subscription.

Holders of preferred shares may be granted certain rights or privileges upon


dissolution.


General rule: The board of directors of a dissolved corporation is not permitted to
undertake any activity outside of the usual liquidation of the corporation.

Exception: The stockholders of a dissolved corporation may convey their


respective shareholdings toward the creation of a new corporation to continue the
business of the old. Winding up is the sole activity of a dissolved corporation that does not
intend to incorporate a new. (Chung Ka Bio vs. IAC)

necessary.
2.
The application shall be under oath and, unless already stated in its articles of
incorporation, shall specifcally set forth the following:
a.

The date and term of incorporation;

b.

The principal office of the corporation in the country or state of incorporation;

c.

The resident agent;

d.

The place in the Philippines where the corporation intends to operate;

e.

The purpose or purposes of the corporation;

f.

The directors and officers of the corporation;

g.

Its authorized capital stock;

CHAPTER 18: FOREIGN CORPORATIONS

h.

Its outstanding capital stock;

Foreign corporation one formed, organized or existing under any laws other than
those of the Philippines (and whose laws allow Filipino citizens and corporations to do
business in its own country or state).

i.

The amount actually paid in; and

If the three year period of liquidation has elapsed and no efort to fnally settle or
close the corporate afairs was undertaken, those having pecuniary interest in the
corporate assets, including not only the stockholders but likewise the creditors, acting for
and its behalf, may make proper representations with the SEC for working out a fnal
settlement of the corporate concern. (Clemente vs. CA)

Note: The above decision is an aberrant ruling. Once the three year period for
liquidation and winding up has elapsed without any trustee or receiver being appointed,
the assets of the corporation will be escheated in favor of the Government thus barring the
claims of stockholders and creditors.

The phrase whose laws allow Filipino citizens and corporations to do business in
its own country or state is a mere condition precedent to the grand of a license of a
foreign corporation to do business in the Philippines.

General rule: The incorporation test is applied in determining whether a


corporation is domestic or foreign. If it is incorporated in another state, it is a foreign
corporation, while if it is registered under Philippine laws, it is deemed a Filipino or
domestic corporation irrespective of the nationality of its stockholders.

Exception: In times of war, the control test would apply in determining the
corporate nationality, i.e., the citizenship of the controlling stockholders determines the
nationality of the corporation.

General rule: A corporation can have no legal existence outside the boundaries of
the sovereign by which it is created.

Exception: By virtue of state comity, a corporation created by laws of one state is


usually allowed to transact business in other states and to sue in the courts of the forum,
subject to restrictions and certain requirements imposed therein.

Requisites for a foreign corporation to transact business in the Philippines:

1.

A license or permit to do so; and

2.

A certifcate of authority from the appropriate government agency.

Procedure for application of a license:

1.
Submission to the SEC of its articles of incorporation and by-laws, certifed in
accordance with law, and their translation to an official language of the Philippines, if

j.
Such additional information as may be necessary or appropriate in order to
enable the SEC to determine whether such corporation is entitled to a license to transact
business in the Philippines, and to determine and assess the fees payable.
3.
Attached to the application for license shall be a duly executed certifcate under
oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to
the fact that the laws of the country or state of the applicant allow Filipino citizens and
corporations to do business therein, and that the applicant is an existing corporation in
good standing. If such certifcate is in a foreign language, a translation thereof in English
under oath of the translator shall be attached thereto.
4.
The application for a license to transact business in the Philippines shall likewise
be accompanied by a statement under oath of the president or any other person
authorized by the corporation, showing to the satisfaction of the Securities and Exchange
Commission and other governmental agency in the proper cases that the applicant is
solvent and in sound fnancial condition, and setting forth the assets and liabilities of the
corporation as of the date not exceeding one (1) year immediately prior to the fling of the
application.
5.
Foreign banking, fnancial and insurance corporations shall, in addition to the
above requirements, comply with the provisions of existing laws applicable to them. In the
case of all other foreign corporations, no application for license to transact business in the
Philippines shall be accepted by the Securities and Exchange Commission without previous
authority from the appropriate government agency, whenever required by law.

Foreign corporations already issued a license to transact business in the


Philippines prior to the efectivity of the Code continue to have such authority under the
terms and conditions of its license, subject to the provisions of the Code and other special
laws.

Upon compliance with the provisions of Sec. 125, other special laws and the rules
and regulations implementing them, the SEC shall thereafter issue the license.


Upon issuance of the license, such foreign corporation may commence to transact
business in the Philippines and continue to do so for as long as it retains its authority to act
as a corporation under the laws of the country or state of its incorporation, unless such
license is sooner surrendered, revoked, suspended or annulled in accordance with this
Code or other special laws.

Within 60 days after the issuance of the license, a foreign corporation, except
those engaged in foreign banking or insurance, shall deposit with the SEC, for the beneft
of creditors, securities consisting of bonds or other evidence of indebtedness of the
Philippine government or its political subdivisions or instrumentalities, or of government
owned or controlled corporations and entities, shares of stock in registered enterprises,
shares of stock in domestic insurance companies and banks, or any combination thereof,
with an actual market value of P100,000.00. Additional securities may be required by the
SEC if the actual market value of the securities on deposit has decreased by at least 10%.

The objective of the law requiring the license is not to prevent the foreign
corporation from performing isolated or single acts, but to prevent it from acquiring a
domicile for the purpose of pursuing its business without taking steps to render it
amendable to suit in the local courts. (Marshall-Wells Co. vs. H. W. Elser & Co.)

Modes of entry of foreign corporations:

1.

Branch office;

2.

Representative or liaison office;

3.

Local subsidiary;

4.

Regional or area headquarters;

5.

Regional operating headquarters;

6.

Regional warehouse; or

7.

Joint venture.

2.
Service upon the SEC if the licensed foreign corporation has ceased to
transact business in the Philippines or has no resident agent in the Philippines; or
3.

Service upon any of its officers or agents within the Philippines.

DOING BUSINESS WITHOUT A LICENSE

General rule: 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

Exception: Such corporation may be sued or proceeded against before Philippine


courts or administrative tribunals on any valid cause of action recognized under Philippine
laws.

1.

As to whether or not it can sue.

a.
A foreign corporation transacting or doing business in the Philippines with a
license can sue before Philippine Courts.
b.
Subject to certain exceptions, a foreign corporation doing business in the country
without a license can not sue in Philippine Courts.
c.
If it is not transacting business in the Philippines, even without a license, it can
sue before the Philippine Courts.
2.

The appointment of a resident agent is a condition precedent to the issuance of a


license to transact business in the Philippines by a foreign corporation.
The following may be appointed as a resident agent:

1.
An individual residing in the Philippines, of good moral character and of sound
fnancial standing; or
2.
A domestic corporation lawfully transacting business
(includes partnerships such as law frms and accounting frms).

1.
Service upon the resident agent service upon the resident agent is mandatory if
the foreign corporation is license to do business in the Philippines;

General rules regarding whether or not a foreign corporation may sue or be sued
in the Philippines:

RESIDENT AGENT

Modes of service of summons upon a foreign corporation:

A foreign corporation cannot transact business in the Philippines without the


requisite license. If it does so, the responsible officers may be subjected to the penal
provisions of Sec. 144.

MODES OF ENTRY OF FOREIGN CORPORATIONS

in

the

Philippines

The necessity of the appointment of a resident agent is only for the purpose of
receiving summons and other legal processes in any legal action or proceeding against the
foreign corporation.

As to whether it can be sued or not.

a.
A foreign corporation transacting business in the Philippines with the requisite
license can be sued in the Philippines.
b.
A foreign corporation transacting business in the Philippines without a license can
be sued in Philippine courts.
c.
If it is doing business in the Philippines, it cannot be sued in Philippine courts for
lack of jurisdiction.

It is not the lack of required license but doing business without a license which
bars a foreign corporation from access to our courts. (Universal Shipping vs. IAC)

General rule: A foreign corporation must have the requisite license to sue before
the Philippine courts.

Exceptions:

1.

The act or transaction involved is an isolated transaction;

2.
The foreign corporation is not seeking to enforce any legal or contractual rights
arising from, or growing out of any business which it has transacted in the Philippines;
3.
The purpose of the suit is to protect its trademark, tradename, corporate name,
reputation or goodwill;
4.

The suit is based on a violation of the Revised Penal Code;

5.

The foreign corporation is merely defending a suit fled against it;

Under the rules of the BOI, the phrase doing business has been exemplifed with
illustrations, among them being as follows:
1.
Soliciting orders, purchase (sales) or service contracts. Concrete and specifc
solicitations by a foreign frm, not acting independently of the foreign frm amounting to
negotiation or fxing of the terms and conditions of sales or service contract, regardless of
whether the contracts are actually reduced to writing, shall constitute doing business even
in the enterprise has no office or fxed place of business in the Philippines.
2.
Appointing a representative or distributor who is domiciled in the Philippines
unless said representative or distributor has an independent status, i.e., it transacts
business in its name and for its own account, and not in the name or for the account of the
pricipal.

6.
The party is estopped to challenge the personality of the corporation by entering
into a contract with it.

3.
Opening offices, whether called liaison offices, agencies or branches, unless
provided otherwise.

Exception to an exception: Where a single act or transaction however, is not


merely incidental or casual but indicates the foreign corporations intention to do other
business in the Philippines, said single act or transaction constitutes doing or engaging
in or transacting business in the Philippines.

4.
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, or in the progressive prosecution of,
commercial gain or of the purpose and objective of the business organization. (Facilities
Management Corp. vs. De La Rosa)

The true test regarding doing or engaging in or transacting business is


whether the foreign corporation is continuing the body or substance of the business or
enterprise for which it was organized or whether it has substantially retired from it and
turned it over to another. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and in progressive prosecution of,
the purpose and object of its organization. (Mentholatum Co., Inc. vs. Mangaliman)

The object of the statute was to subject the foreign corporation doing business in
the Philippines to the jurisdiction of its courts. The object of the statute was not to prevent
the foreign corporation from performing single acts, but to prevent is from acquiring
domicile for the purpose of business without taking the steps necessary to render it
amenable to suit in the local courts. The law simply means that no foreign corporation
shall be permitted to transact business in the Philippine Islands unless it shall have the
license required by law, and until it complies with the law, shall not be permitted to
maintain any suit in the local courts. (Marshall-Wells Co. vs. Henry W. Elser & Co.)

A foreign corporation not engaged in business in the Philippines may not be


denied the right to fle an action in Philippine courts for isolated transactions. (Bulakhidas
vs. Navarro)

If A foreign corporation not engaged in business in the Philippines has the right to
sue on an isolated transaction, more so may it sue based on a mistake. (Swedish East Asia
Co., Ltd. vs. Manila Port Service)

There was only one agreement between petitioners and the respondent. The
three seemingly diferent transactions were entered into by the parties only in an efort to
fulfll the basic agreement and in no way indicate an intent on the part of the respondent
to engage in a continuity of transactions with petitioners which will categorize it as a
foreign corporation doing business in the Philippines. The respondent, being a foreign
corporation not doing business in the Philippines, does not need to obtain a license to do
business in order to have the capacity to sue. (Atnam Consolidated, Inc. vs. CA)

A single act may bring the corporation within the purview of the statute where it
is an act of the ordinary business of the corporation. In such a case, the single act of
transaction is not merely incidental or casual, but is of such character as distinctly to
indicate a purpose on the part of the operations for the conduct of a part of the
corporations ordinary business. (Far East Intl Import vs. Nankai)

ITECs arrangement with its various business contacts in the country indicate its
purpose to bring about the situation among its customers and the general public that they
are dealing directly with ITEC and that ITEC is actively engage in business in the country. In
determining whether a corporation does business in the Philippines or not, aside from their
activities within the forum, reference may be made to the contractual agreements entered
into by it with other entities in the country. (Communication Materials and Design, Inc. vs.
CA)

A foreign corporation doing business in the Philippines may sue in Philippine


courts although no authorized to do business here against a Philippine citizen or entity who
had contracted with and benefted by said corporation. To put it another way, a party is
estopped to challenge the personality of a corporation after having acknowledged the
same by entering into a contract with it. An the doctrine of estoppel to deny corporate
existence applies to a 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 benefts of the contract.
(Communication Materials and Design, Inc. vs. CA)

The right of a corporation to use its corporate and trade name is a property right,
a right in rem, which it may assert and protect against all the world, in any of the courts of
the world even in jurisdictions where it does not transact business just the same as it
may protect its tangible property, real or personal, against trespass, or conversion. Since it
is the trade and not the make 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 identifed by the use of the mark.
(Western Equipment and Supply Co. vs. Reyes)

A foreign corporation which has never done business in the Philippine Islands and
which is unlicensed and unregistered to do business here, but is widely and favorably
known in the Islands through the use therein of its products bearing its corporate and trade
name has a legal right to maintain an action in the Islands. Parenthetically the Trademark
Law allows a foreign corporation or juristic person to bring an action in Philippine courts for
infringement of a mark or trade-name, for unfair competition, or false designation of origin
and false description, whether or not it has been licensed to do business in the Philippines.
(General Garments Corporation vs. Director of Patents)

Article 8 of the Paris Convention to which the Philippines became a party provides
that a trade name shall be protected in all the countries of the Union without the obligation
of fling or registration, whether or not it forms part of the trademark. (Puma vs. IAC)

A foreign corporation not doing business not doing business in the Philippines
needs no license to sue before Philippine courts for infringement of trademark and unfair
competition. (Le Chemise Lacoste vs. Fernandez)

In a suit involving the violation of the Revised Penal Code the complainant foreign
corporations capacity to sue is not signifcant. (Le Chemise Lacoste vs. Fernandez)
CAPACITY TO SUE

General rule: A foreign corporation must affirmatively plead its capacity to sue in
order that it may proceed and efectively institute a case in Philippine courts.

Exceptions:

1.

The action involves a complaint for violation of the Revised Penal Code.

2.
The foreign corporation is not suing or maintaining a suit but is merely defending
itself from one fled against it.

The qualifying circumstance of whether or not a foreign corporation has engaged


in business in the Philippines is an essential part of the element of a foreign corporations
capacity to sue and must be affirmatively pleaded. (Atlantic Mutual Insurance Co. vs. Cebu
Stevedoring Co., Inc.)

If the dismissal of the case, based on failure of the foreign corporation to aver its
capacity to sue, would not, however, bar the institution of the same action, dismissal
should not be allowed, especially so if it would be an idle, circuitous ceremony considering
the absence of any meritorious substantial defense of the defense of the defendant.
Technical rules should not be accorded undue importance to frustrate and defeat a plainly
valid claim. (Olympia Business Machines Co. vs. Razon, Inc.)

Since petitioner is not maintaining any suit but is merely defending one against
itself (it did not fle any complaint but only a corollary defensive petition to prohibit the
lower court from further proceeding with a suit that it had no jurisdiction to entertain), its
failure to aver its legal capacity to institute the present petition is not fatal. (Time, Inc. vs.
Reyes)
LAWS GOVERNING FOREIGN CORPORATIONS

General rule: Any foreign corporation lawfully doing business in the Philippines
shall be bound by all laws, rules and regulations applicable to domestic corporations of the
same class.

Exceptions:

1.
Laws which provide for the creation, formation, organization or dissolution of
corporations; or
2.
Laws which fx the relations, liabilities, responsibilities, or duties of stockholders,
members or officers of a corporation to each other or to the corporation.

Intra-corporate or internal matters not afecting creditors or the public in general


are governed not by Philippine laws but the law under which the foreign corporation was
formed or organized.

Special laws may provide or grant certain restrictions, limitations, privileges or


incentives to a foreign corporation not otherwise applicable or granted to domestic
corporations (e.g. import duties and tax incentives under the Omnibus Investments Code).

A foreign corporation authorized to transact business in the Philippines which


amends its articles of incorporation or by-laws must fle a copy of such amended articles of
incorporation or by-laws with the SEC or the appropriate government agency within
60 days from the efectivity of such amendment.

Instances when a foreign corporation authorized to transact business in the


Philippines must obtain an amended license:
1.

The foreign corporation changes its corporate name; or

2.
The foreign corporation desires to pursue other or additional purposes in the
Philippines.

Requirements in a merger or consolidation of a foreign corporation licensed in the


Philippines: With a domestic corporation:
Such must be permitted under Philippines laws and by the law of its incorporation; and
The requirements on merger or consolidation provided by the Code must be followed. With
a foreign corporation:
Such must be permitted by the law of its incorporation;
A duly authenticated articles of merger or consolidation must be fled with the SEC or the
appropriate government agency within 60 days from the efectivity of the merger or
consolidation; and
If the absorbed corporation is the foreign corporation doing business in the Philippines, a
petition for withdrawal of its license must also be fled.

Requirements and procedure for the withdrawal of foreign corporations:

1.

Filing of a petition for withdrawal of license;

2.
All claims which have accrued in the Philippines have been paid, compromised or
settled;

3.
All taxes, imposts, assessments and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have been paid;
4.
Publication of the petition for withdrawal once a week for 3 consecutive weeks in
a newspaper of general circulation in the Philippines; and
5.

Issuance of the certifcate of withdrawal by the SEC.

Grounds for the revocation or suspension of license:

1.

Failure to fle its annual report or pay any fees as required by the Code;

2.

Failure to appoint and maintain a resident agent in the Philippines;

3.
Failure, after change of its resident agent or of his address, to submit to the SEC a
statement of such change;
4.
Failure to submit to the SEC an authenticated copy of any amendment to its
articles of incorporation or by-laws or of any articles of merger or consolidation within the
time prescribed by the Code;
5.
Misrepresentation of any material matter in any application, report, affidavit
or other document submitted;
6.
Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political subdivisions;
7.
Transacting business in the Philippines outside of the purpose or purposes for
which such corporation is authorized under its license;
8.
Transacting business in the Philippines as agent of or acting for and in behalf of
any foreign corporation or entity not duly licensed to do business in the Philippines; or
9.

Any other ground as would render it unft to transact business in the Philippines.

Other grounds for revocation of license under special laws:

1.

General Banking Act imminent danger of insolvency;

2.
Insurance Code unsound condition, failure to comply with the provisions of law
or regulation obligatory upon it, a condition or method of business hazardous to the public
or its policy holders, impairment of its security deposit, or defciency in the margin of
solvency.
3.
Omnibus Investments Code willful violation of the provisions of existing laws and
implementing guidelines or violation of the terms and conditions of its license.

In case the revocation is warranted the SEC shall:

1.

Issue a certifcate of revocation;

2.

Furnish a copy thereof to the appropriate government agency; and

3.

Mail a notice of such revocation accompanied by a copy of the certifcate of

revocation to the corporation at its registered office in the Philippines.


CHAPTER 18: MISCELLANEOUS PROVISIONS

Outstanding capital stock the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or partially
paid, except treasury shares.

Non-stock or special corporations may, through their articles of incorporation or


their by-laws, designate their governing boards by any name other than as board of
trustees.

The NEDA shall, from time to time, make a determination of whether the
corporate vehicle has been used by any corporation or by business or industry to frustrate
the provisions thereof or of applicable laws, and shall submit to Congress, whenever
deemed necessary, a report of its fndings, including recommendations for their prevention
or correction.

Maximum limits may be set by Congress for stockholdings in corporations


declared by it to be vested with a public interest pursuant to the provisions of this section,
belonging to individuals or groups of individuals related to each other by consanguinity or
affinity or by close business interests, or whenever it is necessary to achieve national
objectives, prevent illegal monopolies or combinations in restraint or trade, or to
implement national economic policies declared in laws, rules and regulations designed to
promote the general welfare and foster economic development.
In recommending to Congress corporations, business or industries to be declared vested
with a public interest and in formulating proposals for limitations on stock ownership, the
NEDA shall consider the type and nature of the industry, the size of the enterprise, the
economies of scale, the geographic location, the extent of Filipino ownership, the labor
intensity of the activity, the export potential, as well as other factors which are germane to
the realization and promotion of business and industry.

Every corporation, domestic or foreign, lawfully doing business in the Philippines


shall submit to the SEC an annual report of its operations, together with a fnancial
statement of its assets and liabilities, certifed by any independent certifed public
accountant in appropriate cases, covering the preceding fscal year and such other
requirements as the SEC may require. Such report shall be submitted within such period as
may be prescribed by the SEC.

All interrogatories propounded by the SEC and the answers thereto, as well as the
results of any examination made by the Commission or by any other official authorized by
law to make an examination of the operations, books and records of any corporation, shall
be kept strictly confdential, except insofar as the law may require the same to be made
public or where such interrogatories, answers or results are necessary to be presented as
evidence before any court.

The SEC shall have the power and authority to implement the provisions of this
Code, and to promulgate rules and regulations reasonably necessary to enable it to
perform its duties hereunder, particularly in the prevention of fraud and abuses on the part
of the controlling stockholders, members, directors, trustees or officers.

Violations of any of the provisions of this Code or its amendments not otherwise
specifcally penalized therein shall be punished by a fne of not less than one thousand
(P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment

for not less than thirty (30) days but not more than fve (5) years, or both, in the discretion
of the court. If the violation is committed by a corporation, the same may, after notice and
hearing, be dissolved in appropriate proceedings before the Securities and Exchange
Commission: Provided, That such dissolution shall not preclude the institution of
appropriate action against the director, trustee or officer of the corporation responsible for
said violation: Provided, further, That nothing in this section shall be construed to repeal
the other causes for dissolution of a corporation provided in this Code.

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.

All corporations lawfully existing and doing business in the Philippines on the date
of the efectivity of this Code and heretofore authorized, licensed or registered by the
Securities and Exchange Commission, shall be deemed to have been authorized, licensed
or registered under the provisions of this Code, subject to the terms and conditions of its
license, and shall be governed by the provisions hereof: Provided, That if any such
corporation is afected by the new requirements of this Code, said corporation shall, unless
otherwise herein provided, be given a period of not more than two (2) years from the
efectivity of this Code within which to comply with the same.
PD 902-A, AS AMENDED

The SECs quasi-judicial functions under Sec. 5 of PD 902-A, as amended were


transferred to the Special Commercial Courts by RA 8799.

General rule: The Special Commercial Courts shall have exclusively and originally
jurisdiction over cases falling under Sec. 5 of PD 902-A.

Even if the action is for recovery of sums of money paid or given to the
corporation through devices and schemes amounting to fraud or misrepresentation
detrimental to the investing public, the same must be fled, heard and tried by the Special
Commercial Courts.

Examples of acts amount to fraud or misrepresentation within the original and


exclusive jurisdiction of the Special Commercial Courts:
1.
Fraud committed by a corporation in failing to pay individual money market
placements. (Orosa, Jr. vs. CA)
2.
Corporations act of duping persons into investing money when such corporations
authority to issue commercial papers has already expired. (Mangalad vs. Premier
Corporation)
3.
Corporate officers act of diverting corporate funds and assets for his personal
use. (Alleje vs. CA)
4.

Pyramiding schemes.

The allegation of fraud must be stated with particularity to place the case with the
jurisdiction of the Special Commercial Courts.
INTRA-CORPORATE CONTROVERSIES (Sec. 5 [b])

Intra-corporate controversies include those of corporations, partnerships and


associations.

Elements of intra-corporate controversies:

Exception: The SEC shall retain jurisdiction over cases involving suspension of
payments and corporate rehabilitation fled on or before June 30, 2000.

1.

An intra-corporate relationship:

Distribution of Special Commercial Courts:

a.
Between and among the stockholders, members, associates of a corporation,
partnership or association;

1.

Two in Makati City;

2.

Two in Quezon City;

3.

One in each in other cities in Metro Manila; and

4.

One per region.

DEVICES OR SCHEMES AMOUNTING TO FRAUD AND MISREPRESENTATION (Sec. 5 [a])

General rule: The Special Commercial Courts shall have original and exclusive
jurisdiction to hear and decide cases involving devices or schemes employed by or any
acts of the board of directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest of the public and/or
of the stockholder, partners, members of associations or organizations registered with the
SEC.

Exception: The complaint is based on the violation of the Revised Penal Code (Ex.
Syndicated Estafa)

b.

Between them and the corporation, partnership or association; or

c.

Between the corporation, partnership or association and the State.

2.

The controversy must arise out of said relationship.

The dispute among the parties must be intrinsically connected with the regulation
of the corporation. If the nature of the controversy involves matters that are purely civil in
character necessarily the case does not involve an intra-corporate controversy. (Speed
Distributing Corp. vs. CA)

The fact that shares of stock were issued to be used as part payment for lease
rentals does not convert it into a intra-corporate controversy. (DMRC Enterprises vs. Este
del Sol Mountain Reserve, Inc.)

Recovery of the control and management of a corporation in the guise of a


complaint for rescission of a memorandum of agreement which vested such control and
management is an intra-corporate controversy. (DPB vs. Ilustre, Jr.)


If all of the requirements for a valid transfer have been complied the dispute is
intra-corporate and is within the jurisdiction of the Special Commercial Court. (Abejo vs. de
la Cruz; Rural Bank of Salinas, Inc. vs. CA)

If the petitioner does not have a prima facie title to the share sought to be
recorded in his name the dispute is not intra-corporate and the ordinary or regular court
can assume jurisdiction over the case. (Rivera vs. Florendo; Tay vs. CA)

A dispute regarding the automatic rescission clause of a Memorandum of


Agreement regarding the sale of shares of a group of stockholders to another group of
stockholders is intra-corporate. (Saavedra vs. SEC)

Where the conflict involves the enforcement of rights and obligations under the
Corporation Code or the inter and intra-corporate afairs of the corporation, jurisdiction
would fall with the Special Commercial Courts. But if it requires a mere determination of
the contractual rights of the parties under an ordinary agreement, the ordinary/regular
courts can acquire jurisdiction thereto.

The factor which decides whether the action is within the jurisdiction of the
Special Commercial Courts is that the controversy arose out of an intra-corporate relation
between and among the parties. (SEC vs. CA)

The fling of the civil/intra-corporate case before the SEC does not preclude the
simultaneous and concomitant fling of a criminal action before the regular courts; such
that, a fraudulent act may give rise to liability for violation of the rules and regulations of
the SEC cognizable by the SEC itself, as well as criminal liability for violation of the Revised
Penal Code cognizable by the regular courts, both charges to be fled and proceeded
independently, and may be simultaneously, with the other. (Fabia vs. CA)
CONTROVERSIES IN THE APPOINTMENT, ELECTION AND REMOVAL OF DIRECTORS
AND OFFICERS (Sec. 5 [c])

The Special Commercial Courts have original and exclusive jurisdiction to hear
and decide cases involving controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships or associations.

General rule: A corporate officers election, appointment or termination by the


board of directors is always a corporate act, and the fact that the officer asks for
backwages does not alter the picture. The original and exclusive jurisdiction rests with the
Special Commercial Courts.

Exception: The main cause of action is for the recovery of unpaid wages and
separation pay. (Midland Construction Co., Inc. vs. Movilla)

The main aspect to be considered is whether the corporate officer asserts his
rights as such officer or questions his removal or ouster. If so, the case would fall within the
ambit of the jurisdiction of the Special Commercial Courts and not the NLRC.
RECEIVERSHIP AND SUSPENSION (Sec. 5 [d] and 6[c, d])

Petitions for suspension of payments of corporations, partnerships or associations,


and appointment of receivership, management committee, board or body are lodged
within the jurisdiction of the Special Commercial Courts.

A corporation, partnership or association, whether or not insolvent, can fle a

petition for suspension of payments provided it is placed under a rehabilitation receiver or


management committee or rehabilitation receiver.

Three types of suspension of payments:

1.
Simple suspension of payments mere deferment of payment of debts and it
refers to a petition which is fled by a corporation which possesses sufficient assets to
cover its liabilities but foresees the possibility of meeting them when they respectively fall
due owing to temporary liquidity problems.
2.
Suspension of payments with the appointment of a receiver with or without a
rehabilitation plan. The rehabilitation plan is a plan under which the corporation will
reschedule the payment of its debts and liabilities. Either the petitioner corporation will
propose the plan or ask for the appointment of a receiver who will study and make the
plan.
3.
Suspension of payments where the corporation has no sufficient assets to cover
its debts and liabilities with or without the appointment of a management committee with
or without a rehabilitation plan.
EFFECTS OF SUSPENSION OF PAYMENTS

The proper court may issue an order suspending payments of claims due from a
distress corporation.

Upon the appointment of a management committee, rehabilitation receiver,


board or body all actions for claims against the corporation, partnership or association
under management or receivership pending before any court, tribunal, board or body shall
be suspended accordingly.

The reason for suspension of payments for claims against a distressed


corporation is to enable the management committee to efectively exercise its powers free
from judicial or extrajudicial interference that might unduly hinder or prevent the rescue
of the debtor company. (PAL vs. Sps. Sadic and Kurangking)

The suspension of all actions for claims against a corporation embraces all phases
of the suit, be it before the trial court or any tribunal or before this Court. No other action
may be taken, including the rendition of judgment during the state of suspension. It must
be stressed that what are automatically stayed or suspended are the proceedings of a suit
and not just the payment of claims during the execution stage after the case had become
fnal and executory. Once the process of rehabilitation, however, is completed, this Court
will proceed to complete the proceedings on the suspended actions. Furthermore, the
actions that are suspended cover all claims against the corporation whether for damages
founded on a breach of contract of carriage, labor cases, collection suits or any other
claims of a pecuniary nature. No exception in favor of labor claims is mentioned in the law.
(PAL vs. Zamora)

Claims refers to debts or demands of pecuniary nature; the assertion of right to


have money paid.

Suspended proceedings include extra judicial foreclosures. You cannot even


consolidate. All proceedings at whatever stage are suspended.

Even if the suspension order is issued after a creditors action in court has
already become fnal but pending execution, the execution of the decision is likewise
suspended. (Filinvest vs. Ejercito)

Note the words against the corporation.

If a corporation secures a loan, and one of its key officers uses his private
properties to guarantee the loan, corporation fles for suspension, the bank want to
foreclose on the prop, may the bank foreclose? Yes. It is not an action for ac claim against
the corporation. Union bank case.

Properties of an individual stockholder, director or officer, as surety of corporate


liabilities, are not, and will not be covered by the suspension of payments order issued by
the court pursuant to PD 902-A.

Same with regard to criminal proceedings, personal to corporate officer


concerned.

Despite the appointment of a receiver for a corporation under PD 902-A, an action


against a corporation seeking the nullifcation of corporate documents cannot be
suspended by reason thereof, since the civil action does not present a monetary claim
against the corporation. (Finasia Investment and Finance Corporation vs. CA)

The SEC does not have jurisdiction to entertain petitions for suspension of
payments fled by parties other than corporations, partnerships or associations. (Union
Bank vs. CA)

Equality is Equity during suspension the assets are held in trust for the equal
beneft of all creditors to preclude one from obtaining an advantage or preference over
another by the expediency of an attachment, execution or otherwise. The creditors should
stand on equal footing. Not anyone of them should be given any preference by paying one
of them ahead of the others. (Alemars Sibal and Son, Inc. vs. Elibenas)

The issue of whether or not preferred creditors of distressed corporations stand


on equal footing with all other creditors gains relevance and materiality only upon the
appointment of a management committee, rehabilitation receiver, board or body.
Suspension of claims against the corporation under rehabilitation is counted or fgured up
only upon the appointment of a management committee or a rehabilitation receiver. (RCBC
vs. IAC)

VERY IMPORTANT!!!

1.
All claims against corporations, partnerships or associations that are pending
before any court, tribunal or board, without distinction as to whether or not a creditor is
secured or unsecured, shall be suspended efective upon the appointment of a
management committee, rehabilitation receiver, board or body in accordance with the
provisions of PD 902-A.
2.
Secured creditors retain their preference over unsecured creditors, but
enforcement of such preferences is equally suspended upon the appointment of a
management committee, rehabilitation receiver, board or body. In the event that the
assets of the corporation, partnership or association are fnally liquidated, however,
secured or preferred credits under the applicable provisions of the Civil Code will defnitely
have preference over unsecured ones.

If the rehabilitation of the corporation is not feasible, the court muto propio or the
management committee may petition the lifting and the preferences will be there again.

APPOINTMENT OF MANAGEMENT COMMITTEE, BOARD OR BODY (Sec. 6 [d])

Special Commercial Courts may create or appoint a management committee,


board or body upon petition or muto propio to undertake the management of corporations,
partnerships or association not supervised or regulated by other government agencies in
appropriate cases where there is imminent danger of dissipation, loss or wastage or
destruction of assets or other properties or paralyzation of business operations of such
corporation or entities which may be prejudicial to the interest of minority stockholders,
parties-litigant or the general public.

It may also create or appoint a management committee, board or body to


undertake the management of corporations, partnerships or other associations supervised
or regulated by other government agencies such as banks and insurance companies, upon
the request of the government agency concerned.

Requisites before a management committee, board or body may be appointed or


created:
1.
2.

Dissipation, loss, wastage or destruction of assets or other properties; and


Paralyzation of its business operations which may be prejudicial to the interest of
the minority stockholders, parties-litigants or the general public. (Sy Chim vs. Sy
Siy Ho & Sons, Inc.)

Danger a general term, including peril, jeopardy, hazard and risk; refers to
exposure or liability to injury.

Imminent something which is threatening to happen at once, something close at


hand, something to happen upon the instant, close although not yet happening, and on the
verge of happening.

In the absence of a strong showing of an imminent danger of dissipation, loss,


wastage or destruction of assets or other properties of a corporation and paralysis of its
business operations, the mere apprehension of future misconduct based upon prior
mismanagement will not authorize the appointment of a management committee/receiver.
(Sy Chim vs. Sy Siy Ho & Sons, Inc.)

Mere disagreement among stockholder as to the fairness of the corporation would


not in itself suffice as a ground for the appointment of a management committee.
However, where the dissention among the stockholders is such that the corporation cannot
successfully carry on its corporate functions, the appointment of a management
committee becomes imperative. (Jacinto vs. First Womens Credit Corporation)

A management committee shall have the power to take custody of and control all
assets and properties owned and possessed by the entity under management. It shall take
the place of the management and board of directors of the entity under management,
assume their rights and responsibilities, and preserve the entitys assets and properties in
its possession.

The rehabilitation receiver shall not take over the management and control of the
debtor but shall closely oversee and monitor the operations of the debtor during the
pendency of the proceedings. He shall be primarily tasked to study the best way to
rehabilitate the debtor and to ensure that the value of the debtors property is reasonably
maintained pending the determination of whether or not the debtor should be
rehabilitated, as well as implement the rehabilitation plan after its approval.


Venue of actions in intra-corporate controversies Special Commercial Court
which has jurisdiction over the principal office of the corporation, partnership or
association.

Nature of proceedings is in rem. Jurisdiction acquired upon publication of the


proceeding.

Creditors have the personality (at least 25% of the total outstanding liablitities)
may fle, ex.
Bayantel.

Their compensation is subject to agreement of the parties.

Actuations of the board, body, committee subject to.

Service of pleadings . Sec. 6 rule 1. may be by fax or email. When authorized by


the court.

Service of summons. Sec. 5 rule 2. made upon any of the statutory or corporate
officers or their respective secretaries. vs. Eb Villarosa case. (Rule of Court)
SECURITIES REGULATION CODE (SRC)

Full disclosure rule as long as there is full and complete disclosure relative to the
issue of securities the investing public should determine for themselves whether or not to
invest.

Doctrine of primary jurisdiction courts will not determine a controversy involving


a question within the jurisdiction of the administrative tribunal, where the question
demands the exercise of sound administrative discretion requiring the specialized
knowledge and expertise of said administrative tribunal to determine technical and
intricate matters of fact.

A criminal charge for violation of the SRC is a specialized dispute. Hence, it must
frst be referred to an administrative agency of special competence, i.e., the SEC The
SRC is a special law. Its enforcement is particularly vested in the SEC. Hence, all
complaints for any violation of the Code and its implementing rules and regulations should
be fled with the SEC. Where the complaint is criminal in nature, the SEC shall indorse the
complaint to the DOJ for preliminary investigation and prosecution as provided in Section
53.1. (Baviera vs. Paglinawan)
Securities

Securities are shares, participation or interests in a corporation or in a


commercial enterprise or proft-making venture and evidenced by a certifcate, contract,
instrument, whether written or electronic in character. It includes:
1.
Shares of stock, bonds, debentures, notes, evidences of indebtedness, assetbacked securities;
2.
Investment contracts, certifcates of interest or participation in a proft sharing
agreement, certifcates of deposit for a future subscription;
3.

Fractional undivided interests in oil, gas or other mineral rights;

4.

Derivatives like option and warrants;

5.
Certifcates of assignments, certifcates of participation, trust certifcates, voting
trust certifcates or similar instruments;
6.

Proprietary or non proprietary membership certifcates incorporations; and

7.

Other instruments as may in the future be determined by the Commission.

The defnition of securities is extra-ordinarily broad. It is a catch all phrase meant


to include all novel devices which are of the same nature. Investment contracts and golf
club shares are included in the defnition of securities.

General rule: Securities cannot be sold or ofered for sale or distribution to more
than 19 persons without a Registration Statement duly fled and approved by the SEC.
Once the securities are sold or ofered to more than 19 persons, it becomes a public
ofering requiring prior registration with the SEC. Violation thereof renders the person
administratively, civilly and criminally liable.

Exception: The securities involved are covered by Sec. 9 (exempt securities) and
Sec. 10 (exempt transactions).

Persons engaging in the business of buying or selling securities in the Philippines


as a broker or dealer, or acting as a salesman for such entities must be registered and
authorized as such by the SEC.

Investment contract a contract or scheme whereby a person invests his money


in a common venture premised on a reasonable expectation of profts to be derived from
the entrepreneurial or managerial eforts of others.

Issuance of certifcates of participation in a multi-level marketing scheme, solely


on the management of others without goods or services is an investment contract and
thus a security. (Justee vs. SEC)

Pyramiding schemes partakes of a nature of an investing contract which cannot


be sold to more than 19 persons without prior approval of the SEC.

When an investor is relatively uninformed and turns over his money to others,
essentially depending upon their representations and their honesty and skill in managing
it, the transaction generally is considered as an investment contract. The touchstone is the
presence of an investment in a common venture premised on a reasonable expectation of
profts to be derived from the entrepreneurial or managerial eforts of others. (People vs.
Petralba)
Exempt Securities

Exempt Securities (Sec. 9):

1.
Any security issued or guaranteed by the Government of the Philippines, or by
any political subdivision or agency thereof, or by any person controlled or supervised by,
and acting as an instrumentality of said Government.
2.
Any security issued or guaranteed by the government of any country with which
the Philippines maintains diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided, That the Commission may require

compliance with the form and content of disclosures the Commission may prescribe.
3.
Certifcates issued by a receiver or by a trustee in bankruptcy duly approved by
the proper adjudicatory body.
4.
Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, HLURB, or BIR.
5.

Any security issued by a bank except its own shares of stock.

Exempt Transactions

Exempt Transactions (Sec. 10):

1.
Any judicial sale, or sale by an executor, administrator, guardian or receiver or
trustee in insolvency or bankruptcy.
2.
By or for the account of a pledge holder, or mortgagee or any other similar lien
holder selling or ofering for sale or delivery in the ordinary course of business and not for
the purpose of avoiding the provisions the SRC, to liquidate a bona fde debt, a security
pledged in good faith as security for such debt.
3.
An isolated transaction in which any security is sold, ofered for sale, subscription
or delivery by the owner thereof, or by his representative for the owners account, such
sale or ofer for sale, subscription or delivery not being made in the course of repeated and
successive transactions of a like character by such owner, or on his account by such
representative and such owner or representative not being the underwriter of such
security.
4.
The distribution by a corporation, actively engaged in the business authorized by
its articles of incorporation, of securities to its stockholders or other security holders as a
stock dividend or other distribution out of surplus.
5.
The sale of capital stock of a corporation to its own stockholders exclusively,
where no commission or other remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
6.
The issuance of bonds or notes secured by mortgage upon real estate or tangible
personal property, where the entire mortgage together with all the bonds or notes secured
thereby are sold to a single purchaser at a single sale.
7.
The issue and delivery of any security in exchange for any other security of the
same issuer pursuant to a right of conversion entitling the holder of the security
surrendered in exchange to make such conversion: Provided, That the security so
surrendered has been registered under the SRC or was, when sold, exempt from the
provisions of the SRC, and that the security issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion fall within the class of securities
entitled to registration under the SRC. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at which the securities issued and
delivered in such exchange are sold.
8.
Brokers transactions, executed upon customers orders, on any registered
Exchange or other trading market.
9.

Subscriptions for shares of the capital stock of a corporation prior to the

incorporation thereof or in pursuance of an increase in its authorized capital stock under


the Corporation Code, when no expense is incurred, or no commission, compensation or
remuneration is paid or given in connection with the sale or disposition of such securities,
and only when the purpose for soliciting, giving or taking of such subscriptions is to comply
with the requirements of such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be registered and duly incorporated,
or its authorized capital increased.
10.
The exchange of securities by the issuer with its existing security holders
exclusively, where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.
11.
The sale of securities by an issuer to fewer than 20 persons in the Philippines
during any twelve-month period.
12.

The sale of securities to any number of the following qualifed buyers:

a.

Bank;

b.

Registered investment house;

c.

Insurance company;

d.
Pension fund or retirement plan maintained by the Government of the Philippines
or any political subdivision thereof or managed by a bank or other persons authorized by
the Bangko Sentral to engage in trust functions;
e.

Investment company; or

f.
Such other person as the Commission may by rule determine as qualifed buyers,
on the basis of such factors as fnancial sophistication, net worth, knowledge, and
experience in fnancial and business matters, or amount of assets under management.
Tender Ofer

Tender Ofers a publicly announced intention by the purchaser to acquire a


certain block of equities of a company through open market purchases or private
negotiations.

A tender ofer is required of any person or group of persons acting in concert who
intend to acquire:
1.
At least 15% of any class of any equity security of a listed corporation or of any
class of any equity security of a corporation with assets of at least P50M and having 200 or
more stockholders with at least 100 shares each; or
2.

At least 30% of such equity over a period of 12 months.

Proxies

Proxies must be issued and proxy solicitation must be made in accordance with
rules and regulations to be issued by the Commission.

Requisites for proxies:

1.

In writing;

2.

Signed by the stockholder or his duly authorized representative; and

3.

Filed before the scheduled meeting with the corporate secretary.

General rule: A proxy shall be valid only for the meeting for which it is intended.

General rule: An insider may not sell or buy a security of the issuer while in
possession of material information with respect to the issuer or the security that is not
generally available to the public.

Exception: It is otherwise provided in the proxy.

Exceptions:

No proxy shall be valid and efective for a period longer than 5 years at one time.

1.

The insider proves that the information was not gained from such relationship; or

No broker or dealer shall give any proxy, consent or authorization, in respect of


any security carried for the account of a customer, to a person other than the customer,
without the express written authorization of such customer.

A broker or dealer who holds or acquires the proxy for at least 10% or such
percentage as the Commission may prescribe of the outstanding share of the issuer, shall
submit a report identifying the benefcial owner within 10 days after such acquisition, for
its own account or customer, to the issuer of the security, to the Exchange where the
security is traded and to the Commission.
Independent Director

Any corporation with a class of equity securities listed for trading on an Exchange
or with assets in excess of P50M and having 200 or more holders, at least of 200 of which
are holding at least 100 shares of a class of its equity securities or which has sold a class
of equity securities to the public pursuant to an efective registration statement shall have
at least 2 independent directors or such independent directors shall constitute at least
20% of the members of such board, whichever is the lesser.

Independent director a person other than an officer or employee of the


corporation, its parent or subsidiaries, or any other individual having a relationship with
the corporation, which would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.

5.
A person who learns such information by a communication from any of the
foregoing insiders.

2.
The insider disclosed the information to a party reasonably believed by the insider
to possess the information.

and:

Material non-public information has not been generally disclosed to the public

1.
would likely afect the market price of the security after being disseminated to the
public and the lapse of a reasonable time for the market to absorb the information; or
2.
would be considered by a reasonable person important under the circumstances
in determining his course of action whether to buy, sell or hold a security.

An insider may not communicate material non-public information to any person


who will likely buy or sell a security of the issuer while in possession of such information.

Trading by persons who have material non-public information about a tender ofer
is prohibited.
Registration of Brokers, Dealers, Salesmen and Associated Persons

Persons engaging in the business of buying or selling securities in the Philippines


as a broker or dealer, or acting as a salesman for such entities must be registered and
authorized as such by the SEC.

The SEC may exempt corporations from the required independent directors
as it did in the rehabilitation of Victorias Milling Co. Inc..

Broker a person engaged in the business of buying and selling securities for the
account of others.

Insider Trading

Dealer any person who buys and sells securities for his/her own account in the
ordinary course of business.

Insider:

1.

The issuer;

2.
A director or officer (or person performing similar functions) of, or a person
controlling the issuer;
3.
A person whose relationship or former relationship to the issuer gives or gave him
access to material information about the issuer or the security that is not generally
available to the public;
4.
A government employee, or director, or officer of an exchange, clearing agency
and/or self-regulatory organization who has access to material information about an issuer
or a security that is not generally available to the public; or

Salesman - a natural person, employed as such or as an agent, by a dealer,


issuer or broker to buy and sell securities.

A stockbrokerage frm can have no other business than that.

Purchase of shares should be coursed through a broker. However a private


transaction can be made.
Fraudulent Transactions and Other Market Manipulations

Fraudulent and manipulative devices:

1.

Wash sale any transaction in a security which involves no change in the

benefcial ownership thereof.


2.
Matched order an order or orders for the purchase or sale of security with the
knowledge that a simultaneous order or orders of substantially the same size, time and
price for the sale or purchase of such security has, or will be entered by or for the same or
diferent parties.
3.
Marking the close place of purchase or sale order, at or near the close of the
trading period.
4.
Painting the tape the activity is made during normal trading hours. It involves
buying activity among nominee accounts at increasingly higher or lower prices or causing
fctitious reports to appear on the ticker tape.
5.
Squeezing the float the part or portion of the issue/security which is outstanding
but intentionally held by dealers or other persons with a view of reselling them later for
proft.
6.
Hype and dump the act employed by a person or group of persons of purchasing
the outstanding capital stock of a dormant public shell company for a nominal amount and
merge it with their privately held company. They would then gain control of the majority of
the stocks of the merged entity. The shares of the Shell Company are often reverse-split
four to one or more to reduce the number of shares. Stock certifcates are often re-issued
in the name of the merged entity to relatives and associates who act as nominees of the
person or group of persons employing the device. They would then look for a brokerdealer who would be willing to make a market relative to the stocks of the newly merged
company; then hire a promoter who would hype the virtues of the company, its products
and stocks. The broker-dealer then generates volume and advance bid price. When the
market reaches a high price, they would dump their shareholdings and bail out.
7.
Boiler room operations involves an intensive selling campaign through
numerous salesmen by telephone or through direct mail oferings for securities of either a
certain type or from a specifc issuer. Investors are induced to purchase through hard-sell
techniques based on unfounded predictions and mailing of misleading market letters.
8.
Circulating or dissemination information that the price of any security listed in the
Exchange will or is like to rise or fall (illegal)
9.
Making false or misleading statements with respect to any material fact, which he
knew or had reasonable ground to believe was so false or misleading for the purpose of
inducing the purchase or sale of any security (illegal).
10.
Pegging or fxing or stabilizing the price of security efected either alone or with
others through any series of transactions for the purchase or sale thereof (illegal)
11.
Short sale sale of securities which the vendor does not own (illegal unless done
in accordance with the rules and regulations of the SEC) (T3 rule).
12.
Insider trading the act of an insider of buying or selling securities of the issuer
while in possession of material information with respect thereto that is not generally
available to the public (illegal unless exempted).

Wash sale and matched order is illegal when used as a means to create a false or
misleading appearance of active trading in the security concerned.

Marking the close, painting the tape, squeezing the float, hype and dump,
and boiler room operations are illegal when they are efected to:
1.
Raise the price or induce the purchase of a security or of a controlling, controlled
or commonly controlled company by others;
2.
Depress their price to induce the sale of a security, whether of the same or of a
diferent class, of the same issuer or of a controlling, controlled company, or common
controlled company of others; and
3.
Creates active trading to induce such purchase or sale through said devices or
schemes.

Other fraudulent transactions:

1.

Employing any device, scheme, or artifce to defraud;

2.
Obtaining money or property by means of any untrue statement of a material fact
of any omission to state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not misleading; or
3.
Engaging in any act, transaction, practice or course of business which operates or
would operate as a fraud or deceit upon any person.

Fraud akin to bad faith which implies a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity.
Settlement Ofer

At any time, during an investigation or proceeding under this Code, parties being
investigated and/or charged may propose in writing an ofer of settlement with the
Commission.

Upon receipt of such ofer of settlement, the Commission may consider the ofer
based on timing, the nature of the investigation or proceeding, and the public interest.

The Commission may only agree to a settlement ofer based on its fndings that
such settlement is in the public interest. Any agreement to settle shall have no legal efect
until publicly disclosed. Such decision may be made without a determination of guilt on the
part of the person making the ofer.
Limitation of Actions

SEC. 62. Limitation of Actions. - 62.1. No action shall be maintained to enforce


any liability created under Section 56 or 57 of this Code unless brought within two (2)
years after the discovery of the untrue statement or the omission, or, if the action is to
enforce a liability created under Subsection 57.1(a), unless brought within two (2) years
after the violation upon which it is based. In no event shall any such action be brought to
enforce a liability created under Section 56 or Subsection 57.1
(a)
more than fve (5) years after the security was bona fde ofered to the public, or
under Subsection 57.1 (b) more than fve (5) years after the sale.

62.2. No action shall be maintained to enforce any liability created under any
other provision of this Code unless brought within two (2) years after the discovery of the
facts constituting the cause of action and within fve (5) years after such cause of action

accrued.

Ceiling as to amount of damages - triple of the amount involved

Fasle registration statement - liable civily - sec. 56

limitation of actions - not later than 5 years after the cause of action accrues