UST Golden Notes - Corporation Law PDF

CORPORATION LAW
CORPORATIONLAW participated in the business affairs of the

proposed corporation would be considered as
Q: What are the distinctions between partners under a de facto partnership. On the
partnershipandcorporation? other hand, parties who took no part
notwithstanding their subscriptions do not
A:SeeAppendixD becomepartnerswithothersubscribers.(Pioneer
Insurancev.CA,G.R.No.84197,July28,1989)
A.CORPORATIONDEFINED
Q:Mayacorporationenterintoajointventure?
Q:Whatisacorporation?
A: Yes. It may enter into a joint venture with
A:Anartificialbeingcreatedbyoperationoflaw another where the nature of that venture is in
having the right of succession, and the powers, line with the business authorized by its charter.
attributesandpropertiesexpresslyauthorizedby (Aurbach v. Sanitary Wares Manufacturing
lawandincidenttoitsexistence.(Sec.2) Corporation,G.R.No.75875,Dec.15,1989)

Q: May a corporation enter into a contract of Q: What are the distinctions between joint
partnership? accountandpartnership?

A: A:
GR:Corporationshavenopowertoenterinto JOINTACCOUNT PARTNERSHIP
partnership. Hasnofirmnameandis
conductedInthenameof Hasafirmname.
Reason: Public policy. In a partnership, the theostensiblepartner.
corporation would be bound by the acts of the Hasnojuridical Hasjuridical
persons who are not its duly appointed and personalityandcansueor personalityandmay
authorized agents and officers, which would be besuedonlyinthename sueorbesuedunder
entirely inconsistent with the policy of the law oftheostensiblepartner. itsfirmname
thatthecorporationshallmanageitsownaffairs Hasnocommonfund. Hasacommonfund.
separatelyandexclusively. Theostensiblepartner Allgeneralpartners
managesitsbusiness havetherightof
XPN: The SEC allowed corporations to enter operations. management.
into partnerships with other Liquidationmay,by
Liquidationthereofcan
corporationsandindividualsprovided: agreement,be
onlybedonebythe
entrustedtoapartner
ostensiblepartner.
1. The authority to enter into partnership orpartners.
relation is expressly conferred by the
CharterortheAOIandthenatureofthe Q:Whataretheattributesofacorporation?
business venture to be undertaken by
the partnership is in line with the A:
business authorized by the charter or 1. Itisanartificialbeing
the AOI. (SEC Opinions, Feb. 29, 1980, 2. Itiscreatedbyoperationoflaw
Dec.1,1993,andFeb.23,1994.) 3. Itenjoystherightofsuccession
4. It has the powers, attributes and
2. The partnership must be a limited properties expressly authorized by law
partnership and the corporation must orincidenttoitsexistence
bealimitedpartner
Q: What are the theorieson the formation of a
3. If it is a foreign corporation, it must corporation?
obtain a license to transact business in
thecountry. A:
1. Concession theory or fiat theory
Q: Does a defective incorporation result into a Means that a corporation was
partnership? conceived as an artificial person owing
existencethroughcreationbyaforeign
A: The answerdepends on whether or not there power. It has without any existence
isaclearintenttoparticipateinthemanagement until it has received the imprimatur of
ofthebusinessaffairsonthepartoftheinvestor. the state acting according to law,
Partieswhointendstoparticipateorhasactually through the SEC. (Tayag v. Benguet

109
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII UNIVERSITYOFSANTOTOMAS
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
V ICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE Facultad de Derecho Civil
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
UST GOLDEN NOTES 2011

Consolidated, Inc., G.R. No. L23276, good and welfare and where no
Nov.29,1968) part of its income is distributable
as dividends to its members,
Note: Philippine jurisprudence adopted trustees,orofficers.(Sec87)
thistheoryastheunderlyingbasisforthe
existence and powers of corporate 2. As to the number of persons who
entities. composethem:
a. Corporation aggregate
2. Theory of corporate enterprise or corporation consisting of more
economic unit The corporation is not thanonememberorcorporator;
merely an artificial being, but more of
an aggregation of persons doing b. Corporation Sole religious
business, or an underlying business corporation which consists of one
unit. (However, this doctrine is being memberorcorporatoronlyandhis
usedinsupportofotherdoctrines) successor.

Note: Recognizes the existence of a 3. As to whether they are for religious
businessenterpriseasthebasesofseveral purposeornot:
contractsandtransactionsapartfromthe a. Ecclesiastical corporation one
issue of whether there was duly
organizedforreligiouspurpose
constitutedajuridicalperson.

b. Laycorporationoneorganizedfor
3. Genossenschaft theory Treats a
apurposeotherthanforreligion.
corporationastherealityofthegroup

asasocialandlegalentity,independent
4. As to whether they are for charitable
of State recognition and concession.
purposeornot:
(Tayag v. Benguet Consolidated, Inc.,
a. Eleemosynary one established for
G.R.No.L23276,Nov29,1968)
religiouspurposes

Q:Whatarethetwokindsoffranchise?
b. Civil one established for business

orprofit
A:

1. Corporate or primary/general franchise
5. As to state or country under or by
grantgiventoexistasacorporation;
whoselawstheyhavebeencreated:

a. Domestic one incorporated under
2. Specialorsecondaryfranchisecertain
thelawsofthePhilippines
rights and privileges conferred upon

existing as a corporation (e.g. right to
b. Foreignoneformed,organized,or
use the streets of a municipality to lay
existingunderanylawsotherthan
pipes of tracks, erect poles, or string
thoseofthePhilippinesandwhose
wires).
laws allow Filipino citizens and

corporations to do business in its
B.CLASSIFICATIONOFCORPORATIONS
owncountryorstate.(Sec123)

Q:Whataretheclassificationsofcorporation?
6. As to their legal right to corporate

existence:
A:
a. De jure one existing both in fact
1. AstoCorporationCode:
andinlaw
a. STOCK CORPORATION one which

have capital stock divided into
b. De facto one existing in fact but
shares and are authorized to
notinlaw
distribute to the holders of such

shares dividends or allotments or
7. As to whether they are open to the
the surplus profits on the basis of
publicornot:
thesharesheld.(Sec3)
a. Close one which is limited to

selected persons or members of
b. NONSTOCKCORPORATIONisone
thefamily.(Sec96105)
which do not issue shares and are
creatednotforprofitbutforpublic
110
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
CORPORATION LAW
b. Open one which is open to any Q: What are the requisites of a de facto
personwhomaywhichtobecome corporation?
astockholderormemberthereto
A:
8. As to their relation to another 1. Organizedunderavalidlaw.
corporation
a. Parent or Holding one which is 2. Attempt in good faith to form a
relatedtoanothercorporationthat corporation according to the
ithasthepowereither,directlyor requirementsofthelaw.
indirectly to, elect the majority of
the director of such other Note: The Supreme Court requires that
corporation Articles of Incorporation have already
been filed with the SEC and the
b. Subsidiaryonewhichissorelated corresponding certificate of incorporation
to another corporation that the isobtained.
majority of its directors can be
elected either, directly or 3. Useofcorporatepowers.
indirectly, by such other
corporation Note: The corporation must have
performedtheactswhicharepeculiartoa
corporation like entering into a

9. As to whether they are corporations in
subscriptionagreement,adoptingbylaws,
atruesenseoronlyinalimitedsense: andelectingdirectors.
a. Trueonewhichexistsbystatutory
authority Q: How is the status of a de facto corporation
attacked?
b. Quasi one which exist without
formallegislativegrant. A: The existence of a de facto corporation shall
notbeinquiredintocollaterallyinanyprivatesuit
i. Corporation by prescription one to which such corporation may be a party. Such
which has exercised corporate inquirymaybemadebytheSolicitorGeneralina
powers for an indefinite period quowarrantoproceeding.(Sec.20)
withoutinterferenceonthepartof
thesovereignpowerandwhichby Note: However, as long as it exists, a de facto
fictionoflaw,isgiventhestatusof corporation enjoys all attributes of a corporation
acorporation; untiltheStatequestionsitsexistence.

ii. Corporation by estoppel one Incomparisonwithacorporationbyestoppelwhere
which in reality is not a the stockholders are liable as general partners,
corporation, either de jure or de stockholdersinadefactocorporationareliableasa
facto, because it is so defectively dejurecorporation.Hence,uptotheextentoftheir
formed, but is considered a shareholdings.
corporations in relation to those
only who, by reason of theirs acts Q: Distinguish de facto corporation from
or admissions, are precluded from corporationbyestoppel.
asserting that it is not a
corporation. A:
DEFACTO CORPORATIONBY
10.As to whether they are for public CORPORATION ESTOPPEL
(government)orprivatepurpose: Thereisnoexistencein
Thereisexistenceinlaw
a. Public one formed or organized for law
the government or a portion of the Thedealingsamongthe Thedealingsamongthe
State partiesonacorporate partiesonacorporate
basisisnotrequired basisisrequired

Whenrequisitesare Itwillbeconsidereda
b. one formed for some provate
lacking,itcanbe corporationinanyshape
purpose,benefitorend
corporationbyestoppel orform
111

C.NATIONALITYOFCORPORATIONS vote is owned and held by Filipino
citizens
Q: What are the tests in determining the
nationalityofcorporations? 2. Corporations organized abroad and
registered as doing business in the
A: PhilippinesundertheCorporationCode
1. Incorporation test Determined by the of which 100% of the capital stock
state of incorporation, regardless of the entitledtovotebelongtoFilipinos.
nationalityofthestockholders.
Note:However,itprovidesthatwhereacorporation
2. Domiciliary test Determined by the and its nonFilipino stockholders own stocks in a
principal place of business of the SECregisteredenterprise,atleast60%ofthecapital
corporation. stock outstanding and entitled to vote of both
corporationsandatleast60%ofthemembersofthe
3. Control test Determined by the board of directors of both corporations must be
nationality of the controlling Filipinocitizens(DOUBLE60%RULE).

stockholders or members. This test is
Q: What is the nationality of a corporation
appliedintimesofwar.
organizedandincorporatedunderthelawsofa

foreigncountry,butowned100%byFilipinos?
4. Grandfather rule Nationality is

attributedtothepercentageofequityin
A: Under the control test of corporate
the corporation used in nationalized or
nationality, this foreign corporation is of Filipino
partlynationalizedarea.
nationality.Wheretherearegroundsforpiercing

the veil of corporate entity, that is, disregarding
Q:Whataretherequisitesofthecontroltest?
the fiction, the corporation will follow the

nationality of the controlling members or
A:
stockholders, since the corporation will then be
1. Control,notmeremajorityorcomplete
considered as one and the same. (1998 Bar
stockcontrol,butcompletedomination,
Question)
not only of finances but of policy and

business practice in respect to the
D.CORPORATEJURIDICALPERSONALITY
transaction attacked such that the

corporate entity as to this transaction
Q: What is the doctrine of separate (legal)
hadatthattimenoseparatemind,will
personality?
orexistenceofitsown

A: It is a wellsettled doctrine that a corporation
2. Such control must have been used by
has a personality distinct and separate from its
the defendant to commit fraud or
individual stockholders or members (Cruz vs.
wrong,toperpetuatetheviolationofa
Dalisay,A.M.No.R181P,July31,1987).
statutoryorotherpositivelegalduty,or

dishonestorunjustactincontravention
Q: What are the significancesof thedoctrineof
ofplaintiffslegalright;and
separatepersonality?

3. The control and breach of duty must
A:
proximately cause the injury or unjust
1. Liability for acts or contracts the acts
loss complained of. (Velarde v. Lopez,
of the stockholders do not bind the
Inc., G.R. No. 153886, Jan. 14, 2004;
corporation unless they are properly
Heirs of Ramon Durano, Sr. v. Uy, G.R.
authorized. The obligations incurred by
No.136456,Oct.24,2000)
a corporation, acting through its

authorizedagentsareitssoleliabilities.
Q: Who are considered Philippine Nationals
The obligations of the corporation are
under Foreign Investment Act of 1991 (R.A. No.
not the obligations of its shareholders
7042)?
andmembersandviceversa.(Ceasev.

CA,G.R.No.L33172,Oct.18,1979)
A:

1. Corporations organized under
2. Right to bring actions may bring civil
Philippine laws of which 60% of the
andcriminalactionsinitsownnamein
capitalstockoutstandingandentitledto
112
MERCANTILELAWTEAM:
CORPORATION LAW
the same manner as natural persons. XPN:Ifthepenaltyofthecrimeisonlyfineor

(Art.46,CivilCode) forfeiture of license or franchise. (Ching v
SecretaryofJustice,G.R.No.164317,Feb.6,
3. Righttoacquireandpossessproperty 2006)
property conveyed to or acquired by
thecorporationisinlawthepropertyof Q:Isacorporationentitledtomoraldamages?
the corporation itself as a distinct legal
entity and not that of the stockholders A:
ormembers.(Art.44[3],CivilCode) GR: A corporation is not entitled to moral
damages because it has no feelings, no
Note: The interest of the shareholder in emotions, no senses. (ABSCBN Broadcasting
the properties of the corporation is Corporation v. CA, G.R. No. 128690 Jan 21,
inchoate only. The interest of the 1999 and Phillip Brothers Oceanic, Inc, G.R.
shareholder on a particular property No.126204,Nov.20,2001)
becomes actual, direct and existing only
upon the liquidation of the assets of the XPN:
corporation and the same property is 1. The corporation may recover moral
assignedtotheshareholderconcerned.
damagesunderitem7ofArticle2219of
the New Civil Code because said

4. Acquisition of court of jurisdiction
provision expressly authorizes the
service of summons may be made on
recovery of moral damages in cases of
the president, general manager,
libel, slander, or any other form of
corporate secretary, treasurer or in
defamation. Article 2219(7) does not
house counsel. (Sec. 11, Rule 14, Rules
qualify whether the injured party is a
ofCourt).
naturalorjuridicalperson.Therefore,a

corporation, as a juridical person, can
5. Changes in individual membership
validly complain for libel or any other
corporation remains unchanged and
formofdefamationandclaimformoral
unaffected in its identity by changes in
damages (Filipinas Broadcasting
itsindividualmembership.
Network, Inc. v. AMECBCCM, G.R. No.

141994,Jan17,2005.
Q:Isacorporationliablefortorts?

2. Whenthecorporationhasareputation
A: Yes whenever a tortuous act is committed by
that is debased, resulting in its
anofficeroragentundertheexpressdirectionor
humiliation in the business realm
authority of the stockholders or members acting
(Manila Electric Company v. T.E.A.M.
asabody,or,generally,fromthedirectorsasthe
ElectronicsCorporation,et.al.,G.R.No.
governing body. (PNB v. CA, G.R. No. L27155,
131723,Dec.13,2007.
May18,1978)

Q: What is the doctrine of piercing the veil of

Q:Isacorporationliableforcrimes?
corporatefiction?

A:
A: It is the doctrine that allows the State to
GR: No. Since a corporation is a mere legal
disregard the notion of separate personality of a
fiction, it cannot be held liable for a crime
corporationforjustifiablereason/s.
committed by its officers, since it does not

havetheessentialelementofmalice; insuch Note: This is an exception to the Doctrine of
case the responsible officers would be SeparateCorporateEntity.
criminally liable. (People v. Tan Boon Kong,
G.R.No.L32066.Mar.15,1930) Q:Whataretheeffectsofpiercingtheveil?

Note: An officer of a corporation can be held
A: Courts will look at the corporation as an
criminally liable for acts or omissions done in
aggregation of persons undertaking the business
behalf of the corporation only where the law
directly makes the person who fails to perform
asagroup.
theactintheprescribedmannerexpresslyliable
criminally.(Siav.People,L30896,Apr.28,1983) Note:Whentheveilofcorporatefictionispiercedin
proper cases, the corporate character is not
necessarily abrogated. It continues for legitimate
objectives. The decision applies only for that

113

particularcase.(ReynosoIVv.CA,G.R.Nos.116124 E.CAPITALSTRUCTURE
25,Nov22,2000)
Q.Whatarethecomponentsofacorporation?
Q: What circumstances the mere existence of
which does not necessarily entitle piercing the A:
veil? 1. Corporators Those who compose a
corporation,whetherasstockholdersor
A: members
1. Controlling ownership of the
corporationsshare 2. Incorporators They are those
2. 2corporationshavecommondirectors mentioned in the Articles of
3. Substantialidentityoftheincorporators Incorporation as originally forming and
or 2 corporations and identity of its composingthecorporationandwhoare
business signatoriesthereof.

Q: What are the tests in piercing the corporate 3. Directors and trustees The Board of
veil? Directors is the governing body in a
stock corporation while the Board of
A: Trusteesisthegoverningbodyinanon
1. Fraudtest(Whencorporatefictionused stockcorporation.
to justify a wrong, protect fraud of
defendcrime) 4. Corporate officers they are the
2. Controltest officers who are identified as such in
3. Alterego or instrumentality test (or the Corporation Code, the Articles of
conduitcases) Incorporation, or the Bylaws of the
4. Publicconvenienceorobjectivetest corporation.
5. Equitycases/test
5. Stockholders Owners of shares of
Q: Plaintiffs filed a collection action against X stockinastockcorporation.
Corporation. Upon execution of the court's
decision,XCorporationwasfoundtobewithout 6. Members Corporators of a
assets. Thereafter, plaintiffs filed an action corporation which has no capital stock.
against its present and past stockholder Y Theyarenotownersofsharesofstocks,
Corporationwhichownedsubstantiallyallofthe and their membership depends on
stocks of X corporation. The two corporations terms provided in the articles of
have the same board of directors and Y incorporationorbylaws(Sec.91).
Corporation financed the operations of X
corporation. May Y Corporation be held liable 7. PromoterApersonwho,actingalone
forthedebtsofXCorporation?Why? or with others, takes initiative in
foundingandorganizingthebusinessor
A: Yes, Y Corporation may be held liable for the enterprise of the issuer and receives
debts of X Corporation. The doctrine of piercing consideration therefor. (Sec. 3.10, R.A.
theveilofcorporationfictionappliestothiscase. No.8799,SRC)
The two corporations have the same board of
directors and Y Corporation owned substantially 8. Subscriber persons who have agreed
all of the stocks of X Corporation, which facts to take and pay for original, unissued
justifytheconclusionthatthelatterismerelyan sharesofacorporationformedortobe
extension of the personality of the former, and formed.
thattheformercontrolsthepoliciesofthelatter.
Added to this is the fact that Y Corporation 9. Underwriterapersonwhoguarantees
controls the finances of X Corporation which is onafirmcommitmentand/ordeclared
merely an adjunct, business conduit or alter ego best effort basis the distribution and
of Y Corporation. (CIR v. Norton & Harrison saleofsecuritiesofanykindbyanother.
Company,G.R.No.L17618,Aug.31,1964)(2001
BarQuestion)

114
MERCANTILELAWTEAM:
CORPORATION LAW
(1)NUMBERANDQUALIFICATIONSOF cooperatives are allowed to be incorporators

INCORPORATORS ofruralbanks.

Q:Whatarethedistinctionsbetweencorporator Note: An incorporator can be corporator. Non
andincorporator? residentsmaybeincorporatorsbecausethelawonly
requires the majority to be residents of the
A: Philippines.
INCORPORATOR CORPORATOR
Mayornotbesignatory Anincorporatorremainstobeanincorporatoreven
SignatoryoftheArticles if he will later on cease to be a shareholder.
oftheArticlesof
ofIncorporation However, an incorporator who ceases to hold a
Incorporation
Ceasetobea sharecannotbeconsideredacorporator.
corporatorbysaleofhis
Doesnotceasetobean sharesincaseofstock
incorporatoruponsaleof corporation.Incaseof (2)MINIMUMCAPITALSTOCKAND
hisshares nonstockcorporation, SUBSCRIPTIONREQUIREMENTS
whenthecorporator
ceasestoeamember. Q:Whatarethecapitalstockrequirements?
GR:5to15natural
persons A:
XPN: In case of GR: There is no minimum authorized capital
Nolimit
cooperative,incorporator stockaslongasthepaidupcapitalisnotless
of rural bank; thanP5,000.00
corporationsole
Originallyformspartof XPN:Asprovidedbyspeciallaw(e.g.Banks).
Notnecessarily
thecorporation
GR:Filipinocitizenshipis Q:Isitrequiredthateachsubscriberpay25%of
notarequirement. Dependingonthe
eachsubscribedshare?
natureofbusinessof

XPN:Whenengagedina thecorporation.Ifitis
A:No.Itisonlyrequiredthatatleast25%ofthe
business which is partly nationalized,the
or wholly nationalized citizenshipbecomes subscribedcapitalmustbepaid.
where majority must be material.
residents (3)CORPORATETERM

Q: What are the required number and the Q:Whatisthetermofcorporateexistence?
qualifications of incorporators in a stock
corporation? A:
GR: It depends on the period stated in the
A: ArticlesofIncorporation.
1. Naturalperson
2. GR: Not less than 5 but not more than XPN: Unless sooner dissolved or unless said
15 periodisextended.

Note: Extension may be made for periods not
XPN:Corporationsole
exceeding(50)yearsinanysingleinstancebyan

amendment of the articles of incorporation.
3. Oflegalage
However, extension must be made within 5
4. Majority must be residents of the years before the expiry date of the corporate
Philippines term. Extention must aldo comply with
5. Each must own or subscribe to at least proceduralrequirementsforamendmentofAOI.
oneshare.(Sec.10)
Q: What is the doctrine of relation or relating
Q:Whocanbeincorporators? backdoctrine?

A: A: Generally, the filing and recording of a
GR: Only natural persons can be certificate of extension after the term cannot
incorporators. relate back to the date of the passage of the
resolution of the stockholders to extend the life
XPN: When otherwise allowed by law, Rural of the corporation. However, the doctrine of
Banks Act of 1992, where incorporated

115

relationappliesifthefailuretofiletheapplication 4. They cannot be issued by banks, trust
for extension within the term of the corporation companies,insurancecompanies,public
isduetotheneglectoftheofficerwithwhomthe utilities and building and loan
certificateisrequiredtobefiledortoawrongful association;
refusalonhisparttoreceiveit(Aquino,Philippine 5. Thearticlesofincorporationmuststate
Corporate Law Compendium, 2006). SHARES OF the fact that it issued no par value
STOC shares as well as the number of said
(4)CLASSIFICATIONOFSHARES shares;
6. Once issued, they are deemed fully
Q:Whatarethekindsorclassificationsofshare? paidandnonassessable.(Sec.6)

A: Q:Whatarecommonshares?
1. Parvalueshares
2. Noparvalueshares A: These are ordinarily and usually issued stocks
3. Commonshares without extraordinary rights and privileges, and
4. Preferredshares entitle the shareholder to a pro rata division of
5. Redeemableshares profits. It represents the residual ownership
6. Treasuryshares interest in the corporation. The holders of this
7. Foundersshare kind of share have complete voting rights and
8. Votingshares theycannotbedeprivedofthesaidrightsexcept
9. Nonvotingshares asprovidedbylaw.
10. Convertibleshares
11. Wateredstock Q:Whatarepreferredshares?
12. Fractionalshare
13. Sharesinescrow A:Theseentitletheshareholdertosomepriority
14. Overissuedstock ondistributionofdividendsandassetsoverthose
15. Streetcertificate holdersofcommonshares.
16. Promotionshare
Q:Areholdersofpreferredsharescreditors?
Q:Whatareparvalueshares?
A: No. Holders thereof cannot compel the
A: Shares with a value fixed in the articles of corporation to give them dividends. The
incorporation and the certificates of stock. The preference only applies once dividends are
par value fixes the minimum issue price of the declared.
shares.
Q:Whatarethekindsofpreferredshares?
Note: A corporation cannot sell less than the par
valuebutashareholdermaysellthesamelessthan A:
theparvaluebecauseitishis. 1. Preferred shares as to assets Shares
which gives the holder preference in
Shares sold below its par value is called watered the distribution of the assets of the
stocks. corporationincaseofliquidation.

Q:Whatarenoparvalueshares? a. Participating preferred shares
Entitled to participate with the
A:Theseareshareshavingnostatedvalueinthe common shares in excess
articleofincorporation. distribution

Q: What are the limitations on no par value b. Nonparticipating preferred shares
shares? Not entitled to participate with
the common shares in excess
A: distribution.
1. Shares which are no par value, cannot
haveanissuedpriceoflessthanP5.00; 2. PreferredsharesastodividendsShares
2. Theentireconsiderationforitsissuance which are entitled to receive dividends
constitutes capital so that no part of it onsaidsharetotheextentagreedupon
shouldbedistributedasdividends; before any dividends at all are paid to
3. They cannot be issued as preferred theholdersofcommonstock.
stocks;
116
MERCANTILELAWTEAM:
CORPORATION LAW
corporation by purchase, donation, and

a. Cumulative preferred shares If a redemptionorthroughsomelawfulmeans.(Sec.
dividend is omitted in any year, it 9)
must be made up in a later year
before any dividend may be paid Toputsimply,thesearesharesreacquiredbythe
onthecommonsharesinthelater corporation. They are called treasury shares
year. because they remain in the corporate treasury
untilreissued.Moreimportantly,theyhaveno:
b. Noncumulative preferred shares 1. VotingRights
There is no need to make up for 2. Righttodividends.
undeclareddividends
Note: Treasury shares are not retired shares. They
Q: What is preferred cumulative participating do not revert to the unissued shares of the
shareofstock? corporation but are regarded as property acquired
bythecorporationwhichmaybereissuedorresold
A: This is a kind of share which gives the holder atapricetobefixedbytheBoardofDirectors(SEC
preferenceinthepaymentofdividendsaheadof Rules Governing Redeemable and Treasury Shares,
common stockholders and to be paid the CCPNo.11982).
dividends due for prior years and to participate
further with common stockholders in dividend Q: What are the other means in which a
declaration. corporationmayacquireitsownshares?

Q:Whatareredeemableshares? A:
1. To collect or compromise unpaid
A: These are shares of stocks issued by a indebtednesstothecorporation;
corporation which said corporation can purchase 2. Toeliminatefractionalshares;
or take up from their holders upon expiry of the 3. To pay dissenting or withdrawing
periodstatedincertificatesofstockrepresenting stockholders entitled to payment for
saidshares(Sec.8). theirshares;
4. Redemption;and
Q: What are unrestricted retained earnings 5. Closecorporation.
(URE)?
Q:Whatarethelimitationsontreasuryshares?
A: These are surplus profits not subject to
encumbrance. A:
1. They may be reissued or sold again as
Q: What are the limitations on redeemable longastheyareheldbythecorporation
shares? astreasuryshares.
2. Cannotparticipateindividends.
A: 3. It cannot be represented during
1. Issuanceofredeemablesharesmustbe stockholdersmeetings.
expressly provided in the articles of 4. The amount of URE equivalent to the
incorporation; cost of treasury shares being held shall
2. Thetermsandconditionsaffectingsaid be restricted from being declared and
shares must be stated both in the issuedasdividends.
articles of incorporation and in the
Note:Whentreasurysharesaresoldbelowitsparor
certificatesofstock;
issued value, there can be no watering of stock
3. Redeemablesharesmaybedeprivedof
because such watering contemplates an original
voting rights in the articles of issuanceofshares.
incorporation, unless otherwise
providedintheCode.(Sec.6,par.6) Q:Whatarefounders'shares?
4. Redemption cannot be made if it will
causeinsolvencyofthecorporation. A: Shares classified as such in the articles of
incorporation which may be given special
Q:Whataretreasuryshares? preference in voting rights and dividend
payments.Butifanexclusiverighttovoteandbe
A: Shares that have been earlier issued as fully voted for as director is granted, this privilege is
paid and have thereafter been acquired by the
117

subject to approval by the SEC, and cannot Q:Whatisafractionalshare?
exceed5yearsfromthedateofapproval.(Sec.7)
A:Asharewithavalueoflessthanonefullshare.
Q:Whatarevotingshares?
Q:Whataresharesinescrow?
A: Shares with a right to vote. If the stock is
originally issued as voting stock, it may not A:Subjecttoanagreementbyvirtueofwhichthe
thereafter be deprived of the right to vote share is deposited by the grantor or his agent
withouttheconsentoftheholder. with a third person to be kept by the depositary
untiltheperformanceofcertainconditionorthe
Q:Whatarenonvotingshares? happening of a certain event contained in the
agreement.
A:Shareswithoutrighttovote.
Q:Whatisanoverissuedstock?
Thelawonlyauthorizesthedenialofvotingrights
in the case of redeemable shares and preferred A:Itisastockissuedinexcessoftheauthorized
shares,providedthatthereshallalwaysbeaclass capitalstock;itisnullandvoid.
or series of shares which have complete voting
rights. Q:Whatisastreetcertificate?

Q:Whataretheinstanceswhenholdersofnon A: It is a stock certificate endorsed by the
votingsharesareallowedtovote? registeredholderinblankandthetransfereecan
command its transfer to his name from issuing
A:Theseredeemableandpreferredshares,when corporation.
such voting rights are denied, shall nevertheless
beentitledtovoteonthefollowingfundamental Q:Whatispromotionalshare?
matters:
1. Amendmentofarticlesofincorporation A:Thisisashareissuedbypromotersorthosein
2. Adoptionandamendmentofbylaws some way interested in the company, for
3. Sale,lease,exchange,mortgage,pledge incorporating the company, or for services
or other disposition of all or rendered in launching or promoting the welfare
substantially all of the corporate ofthecompany.
property
4. Incurring,creatingorincreasingbonded Q:Areclassesofsharesinfinite?
indebtedness
5. Increaseordecreaseofcapitalstock A: Yes. There can be other classifications as long
6. Merger or consolidation of the astheyareindicatedintheAOI,stockcertificate
corporation with another corporation andnotcontrarytolaw.
orothercorporations
7. Investment of corporate funds in Q:Whomayclassifyshares?
another corporation or business in
accordancewiththisCode A:
8. Dissolution of the corporation. (Sec. 6 1. Incorporators the classes and number
par.6) of shares which a corporation shall
issue are first determined by the
Q:Whatareconvertibleshares? incorporatorsasstatedinthearticlesof
incorporationfiledwiththeSEC.
A: A share that is changeable by the stockholder
from one class to another at a certain price and 2. Board of directors and stockholders
withinacertainperiod. after the corporation comes into
existence; they may be altered by the
GR: Stockholder may demand conversion at boardofdirectorsandthestockholders
hispleasure. by amending the articles of
incorporationpursuanttoSec.16.
XPN: Otherwise restricted by the articles of
incorporation.

118
MERCANTILELAWTEAM:
CORPORATION LAW
F.INCORPORATIONANDORGANIZATION 2. Firm Commitment the underwriter

purchases outright the securities and
Q:Whatisincorporation? thenresellsthesame

A: It is the performance of conditions, acts, 3. Best Efforts the underwriter merely
deeds, and writings by incorporators, and the sellsforcommission.
official acts, certification or records, which give
thecorporationitsexistence. (2)SUBSCRIPTIONCONTRACT

Q: What are the steps in the creation of a Q:Whatisasubscriptioncontract?
corporation?
A: It is a contract for the acquisition of unissued
A: stock in an existing corporation or a corporation
1. Promotion still to be formed. It is considered as such
2. Incorporation(Sec10) notwithstandingthefactthatthepartiesreferto
3. Formalorganizationandcommencementof itaspurchaseorsomeothercontract.(Sec.60)
businessoperations(Sec22)
Q:Whatarethekindsofsubscriptioncontracts?
(1)PROMOTER
A:
Q:Whoisapromoter? 1. GR: Preincorporation subscription
entered into before the incorporation
A:Isapersonwhobringsaboutorcausetobring and irrevocable for a period of six (6)
about the formation and organization of a months from the date of subscription
corporationby: unlessallothersubscribersconsentorif
1. bringing together the incorporators or the corporation failed to materialize. It
the persons interested in the cannot also be revoked after filing the
enterprise, Articles of Incorporation with the SEC
2. procuring subscriptions or capital for (Sec.61)
thecorporationand
3. setting in motion the machinery which XPN:Whencreditorswillbeprejudiced
leads to the incorporation of the thereby.
corporationitself.
2. Postincorporation subscription
Q:Whatistheliabilityofapromoter? enteredintoafterincorporation.

A:Allpromoter(s)havejointpersonalliabilityfor (3)PREINCORPORATIONSUBCRIPTION
acorporationthatwasneverformed.Heremains AGREEMENTS
liableoncontractsevenafterincorporationeven
thoughcorporationadoptsthecontract. Q:Whoarerequiredtopaytheirsubscriptionin
full?
Q:Arepromotersagentsofacorporation?
A:
A: No. Promoters are not agents of the 1. Nonresident foreign subscribers upon
corporationbeforeitcomesintoexistence. incorporation must pay in full their
Uponincorporation,thepracticeisfortheBODto subscriptions unless their unpaid
pass a resolution ratifying the contracts entered subscriptions are guaranteed by a
into by the incorporators with the promoter. surety bond or by an assumption by a
Then,theybecomeagentsofthecorporation. resident stockholder through an
affidavitofliability.
Q: What are the kinds of underwriting
agreement? 2. Incaseofnoparvalueshares,theyare
deemedfullypaidandnonassessable.
A:
1. Englishtheunderwritersellswhatthe Q:Isastockholderentitledtothesharesofstock
corporationcannotsell subscribedalthoughnotfullypaid?

A: Yes. As long as the shares are not considered
delinquent,theyareentitledtoallrightsgranted

119

toitwhetherornotthesubscribedcapitalstocks (4)CONSIDERATIONFORSTOCKS
arefullypaid.
Q: What are valid considerations in a
Q: What are the distinctions between subscriptionagreement?
subscriptionandpurchase?
A:
A: 1. Actualcashpaidtothecorporation;
SUBSCRIPTION PURCHASE
Maybemadebeforeor Maybemadeonly 2. Property, tangible or intangible (i.e.
afterincorporation afterincorporation patents or copyrights), the requisites
Buyerdoesnot areasfollows:
becomea a. The property is actually received
Subscriberbecomesa stockholderuntilthe bythecorporation
stockholderevenifhehas fulfillmentofthe b. The property is necessary or
notfullypaidthe termsofthesaleand convenient for its use and lawful
subscription registrationthereof purposes
inthebooksofthe
c. It must be subject to a fair
corporation
valuation equal to the par or
Cannotbereleasedfromhis Thecorporationmay
issuedvalueofthestockissued
subscriptionunlessall rescindorcancelthe
stockholdersagreethereto contractfornon
d. Thevaluationthereofshallinitially
andnocreditoristhereby fulfillmentofthe be determined by the
prejudiced contractbythebuyer incorporators;and
Corporatecreditorsmay e. The valuation is subject to the
Creditorsmaynot approvalbytheSEC.
proceedagainstthe
proceedagainstthe
subscriberforhisunpaid
buyerfortheunpaid 3. Labor or services actually rendered to
subscriptionincasethe
priceasthereisno
assetsofthecorporation thecorporation
privityofcontract
arenotsufficienttopay
betweenthem
theirclaims 4. Prior corporate obligations or
Inpurchase indebtedness
Maybeinanyform,written
amountingtomore
ororal,expressorimplied,
than500pesos,the Note: The indebtedness involved is one
andtherefore,notcovered
StatuteofFrauds thatisacknowledgedbytheboard.
bytheStatuteofFrauds
shallapply
Subscriptionpriceare Purchasepricedoes 5. Amounts transferred from unrestricted
consideredassetsofthe notbecomeassetsof retained earnings to stated capital (in
corporation,hence, thecorporation caseofdeclarationofstockdividends)
creditorsmaygoafterthem unlessfullypaid
6. Outstanding shares in exchange for
Q: What is the rule on right to issuance of stocksintheeventofreclassificationor
certificateofstock? conversion.

A: A corporation may now, in the absence of Note: Promissory notes or future services are not
provisions in their bylaws to the contrary, apply validconsiderations.
payments made by subscribersstockholders,
eitheras: (5)ARTICLESOFINCORPORATION

1. Full payment for the corresponding Q:Definearticlesofincorporation.
numberofsharesofstock,theparvalue
of each of which is covered by such A: Articles of Incorporation (AOI) is one that
payment;or defines the charter of the corporation and the
contractual relationships between the State and
2. Payment prorata to each and all the the corporation, the stockholders and the State,
entirenumberofsharessubscribedfor. and between the corporation and its
(Baltazarv.LingayenGulfElectricPower stockholders.
Co., Inc, G.R. No. L1623638, June 30,
1965)

120
MERCANTILELAWTEAM:
CORPORATION LAW
Q:WhatarethecontentsofAOI? 5. Certification under oath by corporate

secretary and a majority of the
A:NaPPlaTINumASONO BOD/BOT stating the fact that said
1. Nameofcorporation amendment/shavebeendulyapproved
2. Purpose/s, indicating the primary and bytherequiredvoteofthestockholders
secondarypurposes or members, shall be submitted to the
3. Placeofprincipaloffice SEC;
6. MustbeapprovedbySEC.(Sec.16);
Note:Todeterminepropervenueinfiling 7. Must be accompanied by a favorable
ofanaction recommendation of the appropriate
governmentagencyincasesof:
4. Termofexistence a. Banks
5. Names, nationalities and residences of b. Banking and quasibanking
Incorporators institutions
6. Number of directors or trustees, which c. Buildingandloanassociations
shall not be less than 5 nor more than d. Trust companies and other
15,exceptforcorporationsole financialintermediaries
7. Names, nationalities, and residences of e. Insurancecompanies
the persons who shall Act as directors f. Publicutilities
or trustees until the first regular ones g. Educationalinstitutions
areelectedandqualified h. Other corporations governed by
8. IfaStockcorporation,theamountofits speciallaws.(Sec.17[2])
authorized capital stock, number of
shares and in case the shares are par Q:WhendoesamendmentofAOItakeeffect?
value shares, the par value of each
share; A: Upon approval by the SEC. That is upon
9. Names,nationalities,numberofshares, issuanceofamendedcertificateofincorporation.
and the amounts subscribed and paid
by each of the Original subscribers Q: Is it necessary that the approval of SEC be
which shall not be less than 25% of express?
authorizedcapitalstock;
10. IfNonstock,theamountofcapital,the A: No, implied approval of SEC is also allowed.
names,residences,andamountpaidby Thus amendment may also take effect from the
eachcontributor,whichshallnotbeless dateoffilingwithSECifnotacteduponwithin6
than25%oftotalsubscription;nameof months from the date of filing for a cause not
treasurerelectedbysubscribers;and attributabletothecorporation.
11. Other matters as are not inconsistent
with law and which the incorporators Q:WhataretheprovisionsofAOIthatcannotbe
may deem necessary and convenient. amended?
(Sec.14)
A:Thosemattersreferringtoaccomplishedfacts,
Q:Whatarethelimitationsintheamendmentof excepttocorrectmistakes.
AOI?
E.g.
A: 1. Namesofincorporators
1. Theamendmentmustbeforlegitimate 2. Names of original subscribers to the
purposes and must not be contrary to capital stock of the corporation and
other provisions of the Corporation theirsubscribedandpaidupcapital
CodeandSpeciallaws; 3. Namesoftheoriginaldirectors
2. ApprovedbymajorityofBOD/BOT; 4. Treasurer elected by the original
3. Vote or written assent of stockholders subscribers
representing 2/3 of the outstanding 5. Memberswhocontributedtotheinitial
capitalstockor2/3ofmembers; capitalofthenonstockcorporation
4. The original and amended articles 6. Witnesses to and acknowledgement
together shall contain all provisions withAOI
required by law to be set out in the
articles of incorporation. Such articles,
as amended, shall be indicated by
underscoringthechange/smade;

121

Q: What are the grounds for the rejection or revocation of corporate franchise or
disapprovalofAOIoramendmenttheretobythe certificateofincorporation(Sec.22).
SEC?
Note:Theaboveshallnotbeapplicableifitisdueto
A: causes beyond the control of the corporation as
1. Ifsuchisnotsubstantiallyinaccordance determinedbySEC.
withtheformprescribed
2. The purpose/s of the corporation are Q:Isthedissolutionorrevocationduetofailure
patently unconstitutional, illegal, tooperateorinoperationautomatic?
immoral, or contrary to government
rulesandregulations A:No,SECisoftheopinionthatthereshouldbe
3. Thetreasurersaffidavitconcerningthe proper proceedings for the revocation of AOI in
amount of capital stock subscribed compliancewithdueprocess.
and/orpaidisfalse
4. The required percentage of ownership (6)CORPORATENAME
of the capital stock to be owned by
Filipino citizens has not been complied Q: What are the limitations in adopting
with.(Sec.17) corporatename?

Note: The above grounds are not exclusive. The A:
groundsaccordingtoP.D.No.902Aare: 1. The proposed name is identical or
deceptively or confusingly similar to
1. Fraud in procuring its certificate of thatofanyexistingcorporation
incorporation; 2. Anyothernameprotectedbylaw;or
2. Serious misrepresentation as to what the 3. Patently deceptive, confusing or
corporation can do or its doing to the contrarytoexistinglaws.(Sec.18)
great prejudice of, or damage to, the 4. The corporate name shall contain the
generalpublic; word Corporation or its abbreviation
3. Refusal to comply with, or defiance or a Corp.orIncorporated,orInc.
lawful order of the SEC restraining the
5. Thepartnershipnameshallcontainthe
commission of acts which would amount
wordCompanyorCo.
toagraveviolationofitsfranchise;
4. Continuous inoperation for a period of at
6. For limited partnership, the word
least five (5) years after commencing the LimitedorLtd.Shallbeincluded
transactionofitsbusiness(Sec.22); 7. If the name or surname of a person is
5. Failure to file the bylaws within the used as part of a corporate or
requiredperiod; partnership name, the consent of said
6. Failuretofilerequiredreports. person or his heirs must be submitted
except if that person is a stockholder,
Q:IsthereanautomaticrejectionoftheAOIor member,partneroradeclarednational
anyamendmentthereto? hero.
8. The name of a dissolved firm shall not
A: No, the SEC shall give the incorporators a be allowed to be used by other firms
reasonable time within which to correct or within3yearsaftertheapprovalofthe
modify the objectionable portions of the AOI or dissolution of the corporation by SEC,
amendment.(Sec.17[1]) unless allowed by the last stockholders
representing at least majority of the
Q: What is the effect of nonuse of corporate outstanding capital stock of the
charter and continuous inoperation of a dissolved firm (SEC Memorandum
corporation? Circular14).

A: Q: If a corporation changes its corporate name,
1. Failure to organize and commence isitconsideredanewcorporation?
business within 2 years from
incorporation its corporate powers A:No,itisthesamecorporationwithadifferent
ceases and the corporation shall be name,anditscharacterisinnorespectchanged.
deemeddissolve. (Republic Planters Bank v. CA, G.R. No. 93073,
Dec21,1992)
2. Continuous inoperation for at least 5
years ground for the suspension or
122
MERCANTILELAWTEAM:
CORPORATION LAW
(7)REGISTRATIONANDISSUANCEOF present either in person or by

CERTIFICATEOFINCORPORATION representative authorized to act by
written proxy, the owners of the
Q: What are the basic requirements for a stock majority of the outstanding capital
corporation? stock or majority of the members
entitledtovote.
A: 2. The election must be by ballot if
1. Nameverificationslip requested;
2. AOIandbylaws 3. Astockholdercannotbedeprivedinthe
3. Treasurersaffidavit articles of incorporation or in the by
4. Registrationdatasheet lawsofhisstatutoryrighttouseanyof
5. Proof of payment of subscription like themethodsofvotingintheelectionof
Bank Certificate of Deposit if the paid directors;
upcapitalisincash 4. Nodelinquentstockshallbevoted;
6. Favorable endorsement from proper 5. The candidates receiving the highest
government agency in case of special number of votes shall be declared
corporations. elected.(Sec.24)

Q:Whatisthecontentofatreasurersaffidavit? Q: Is a provision in the bylaws of the
corporation declaring a person engaged in a
A: That at least 25% of the authorized capital competingbusinessineligiblefornominationfor
stockofthecorporationhasbeensubscribed,and electionstotheboardofdirectorsvalid?
at least 25% of the total subscription has been
fully paid in actual cash and/or property; such A: Yes, provided that before such nominee is
paidupcapitalbeingnotlessthanP5,000. disqualified, he should be given due process to
show that he is not covered by the
Q:Whatisthedoctrineofcorporateentity? disqualification (Gokongwei v. SEC, G.R. No. L
45911,Apr.11,1979).
A:
GR:Acorporationcomesintoexistenceupon Note: The disqualification of a competition from
the issuance of the certificate of being elected to the board is a reasonable exercise
incorporation. Then and only then will it ofcorporateauthority.
acquireajuridicalpersonality.
Q:Whohasjurisdictionoverelectioncontestsin
XPN: Sec. 112 clearly states that from and stockandnonstockcorporation?
afterthefilingwiththeSECofthearticlesof
incorporation, the chief archbishop shall A: As amended by R.A. 8799 (The Securities
becomecorporationsole Regulation Code), the jurisdiction of the SEC
under Sec. 5 P.D. No. 902A (SEC Reorganization
(8)ELECTIONOFDIRECTORSANDTRUSTEES Act) is now transferred to Courts of General
Jurisdiction(RegionalTrialCourt).Thus,RTCnow
Q: Is permanent representation allowed in the hasjurisdictionoverelectioncontest.
BOD?
Q: In case where there are 2 lists of BOD
A: No, the board of directors of corporations submittedtoSEC,whichoneiscontrolling?
mustbeelectedfromamongthestockholdersor
membersdirectorseveryyear.Estoppeldoesnot A: It is the list of directors in the latest general
set in to legitimize what is wrongful. (Grace information sheet as filed with the SEC which is
ChristianHighSchoolv.CA,G.R.No.108905,Oct. controlling. (Premium Marble Resources, Inc. v.
23,1997) CA,G.R.No.96551,Nov.4,1996)

Q: What are the limitations on the election of Q: What is the next step after the election of
directors/trustees? directors?

A: A: The directors must formally organize by the
1. At a meeting of stockholders or electionofcorporateofficers.(Sec.25)
members called for the election of
directors or trustees, there must be

123

Q:Whoarethecorporateofficers? 3. Must not impair obligations and
contracts or property rights of
A: stockholders
1. President Must be a director at the 4. Must be consistent with the charter or
timetheassumesoffice,notatthetime articlesofincorporation
ofappointment; 5. Mustbereasonable
2. Treasurer May or may not be a 6. Must be of general application and not
director;asamatterofsoundcorporate directedagainstaparticularindividual.
practice,mustbearesident
3. Secretary Need not be a director Q: In case of conflict between the bylaws and
unlessrequiredbythebylaws;mustbe thearticlesofincorporationwhichprevails?
aresidentandcitizenofthePhilippines;
(Sec.25);and A: The AOI prevails because the bylaws are
4. Such other officers as may be provided intendedmerelytosupplementtheformer.
inthebylaws.
Q:Whatisthebindingeffectofbylaws?
Note: An officer is also considered a corporate
officer if he has been appointed by the board of A:
directors. (Easycall Communications Phils., Inc. v. 1. As to members and corporation They
EdwardKing,G.R.No.145901,Dec.15,2005) havetheforceofcontractbetweenthe
Anytwoormorepositionsmaybeheldconcurrently membersthemselves.
bythesameperson,exceptthatnooneshallactas
president and secretary or as president and 2. As to third persons They are not
treasureratthesametime.(Sec.25)
bound to know the bylaws which are

merelyprovisionsfor the
Q: What are the distinctions between a
governmentofacorporationandnotice
corporateofficerandacorporateemployee?
tothemwillnotbepresumed.

A: Note: Bylaws have no extracorporate force
CORPORATE and are not in the nature of legislative
CORPORATEOFFICER
EMPLOYEE enactments so far as third persons are
Positionisprovidedfor Employedbytheaction concerned.
inthebylawsorunder ofthemanagingofficer

theCorporationCode. ofthecorporation.
Q:Givetheproceduresinadoptingbylaws.
RTCactingasaspecial

commercialcourthas LAhasjurisdictionin
A: The bylaws may be adopted before or after
jurisdictionoverintra caseoflabordisputes.
corporatecontroversies. incorporation. In all cases, the Bylaws shall be
effective only upon the issuance by the SEC of a
certificationthatthebylawsarenotinconsistent
(9)ADOPTIONOFBYLAWS
withtheAOI.
Q:Whatarebylaws?
1. Pre incorporation It shall be
A: Rules and regulations or private laws enacted approved and signed by all the
by the corporation to regulate, govern and incorporatorsandsubmittedtotheSEC,
control its own actions, affairs and concerns and togetherwithAOI.
ofitsstockholdersormembersanddirectorsand
officersinrelationtheretoandamongthemselves 2. Postincorporation
intheirrelationtoit. a. Vote of the majority of the
stockholders representing the
Q:Whataretherequisitesforthevalidityofby outstanding capital stock or
laws? members;
b. Bylaws shall be signed by the
A: stockholders or members voting
1. Must be consistent with the forthem;
CorporationCode,otherpertinentlaws c. It shall be kept in the principal
andregulations office of the corporation and
2. Must not be contrary to morals and subject to the inspection of the
publicpolicy stockholders ore members during
officehours
124
MERCANTILELAWTEAM:
CORPORATION LAW
d. Copythereof,dulycertifiedby the owners of at least a majority of the

BOD or BOT countersigned by the outstandingcapitalstock/members;or
secretary of the corporation, shall
be filed with the SEC and shall be 2. By the board only after due delegation
attached with the original AOI. by the stockholders owning 2/3 of the
(Sec.46) outstanding capital stock/members.
Provided,thatsuchpowerdelegatedto
Q:Whatistheeffectofnonfilingofthearticles the board shall be considered as
ofincorporationwithintherequiredperiod? revokedwheneverstockholdersowning
at least majority of the outstanding
A: Failure to submit the bylaws within 30 days capitalstockormembers,shallvoteata
from incorporation does not automatically regularorspecialmeeting.(Sec.48)
dissolvethecorporation.Itismerelyagroundfor
suspension or revocation of its charter after Q: What are the distinctions between AOI and
propernoticeandhearing.Thecorporationis, at bylaws?
the very least, a de facto corporation whose
existence may not be collaterally attacked. A:
(Sawadjaanv.CA,G.R.No.142284,June8,2005) AOI BYLAWS
Conditionsubsequent;its
Conditionprecedent
Q:Whatarethecontentsofbylaws? absencemerelyfurnishesa
intheacquisitionof
groundfortherevocation
corporateexistence
A: ofthefranchise
1. Time, place and manner of calling and Essentiallyacontract
conducting regular or special meetings betweenthe
Fortheinternal
ofdirectorsortrustees corporationandthe
governmentofthe
2. Time and manner of calling and stockholders/
corporationbuthasthe
members;between
conducting regular or special meetings forceofacontractbetween
thestockholders/
ofthestockholderormembers thecorporationandthe
memberinterse,and
3. The required quorum in meeting of stockholders/members,
betweenthe
stockholders or members and the andbetweenthe
corporationandthe
mannerofvotingtherein stockholdersandmembers;
State;
4. The form for proxies of stockholders
andmembersandthemannerofvoting Maybeexecutedafter
them incorporation.Sec.46
5. The qualification, duties and Executedbefore allowsthefilingoftheby
compensation of directors or trustees, incorporation lawssimultaneouslywith
officersandemployees theArticlesof
6. Time for holding the annual election of Incorporation
directors or trustees and the mode or Amendedbya
mannerofgivingnoticethereof majorityofthe
7. Mannerofelectionorappointmentand directors/trustees Maybeamendedbya
the term of office of all officers other andstockholders majorityvoteoftheBOD
thandirectorsortrustees representing2/3of andmajorityvoteof
8. Penaltiesforviolationofthebylaws theoutstanding outstandingcapitalstockor
9. In case of stock corporations, the capitalstock,or2/3 amajorityofthemember
ofthemembersin innonstockcorporation
mannerofissuingcertificates
caseofnonstock
10. Suchothermattersasmaybenecessary
corporations
for the proper or convenient
Powerto Powertoamendorrepeal
transaction of its corporate business amend/repealarticles bylawsoradoptnewby
andaffairs.(Sec.47) cannotbedelegated lawsmaybedelegatedby
bythestockholders/ the2/3oftheoutstanding
Q:Whatarethewaysofamending,repealingor memberstothe capitalstockor2/3ofthe
adoptingnewbylaws? boardofdirectors/ membersinthecaseof
trustees nonstockcorporation
A:
1. Amendment may be made by
stockholders together with the Board
by majority vote of directors and
125

G.CORPORATEPOWERS Q: When does the power to sue and be sued
commence?
Q:Whatarethekindsofpowersofcorporation?
A: Upon issuance by SEC of Certificate of
A: Incorporation.
1. Express powers Granted by law,
Corporation Code, and its Articles of Q:Whatarethelimitationsofthecorporationin
Incorporation or Charter, and dealingwithproperty?
administrativeregulations
A:
2. Inherent/incidental powers Not 1. In dealing with any kind of property, it
expressly stated but are deemed to be must be in the furtherance of the
within the capacity of corporate purpose for which the corporation was
entities. organized.

3. Implied/necessary powers Exists as a 2. Constitutional limitations cannot
necessary consequence of the exercise acquirepubliclandsexceptbylease.
of the express powers of the
corporation or the pursuit of its With regard to private land, 60% of the
purposesasprovidedforintheCharter corporation must be owned by the
Filipinos, same with the acquisition of a
(1)GENERALPOWERS condounit.

Q: What are the general powers of a Note: No law disqualifies a person from
corporation? purchasing shares in a landholding
corporation even if the latter will exceed
A:SuSuCoABSPMEDPO the allowed foreign equity, what the law
disqualifiesisthecorporationfromowning
1. ToSUeandbesued land.
2. OfSUccession
3. ToadoptanduseofCorporateseal 3. Speciallawsubjecttotheprovisionsof
4. ToamenditsArticlesofIncorporation theBulkSalesLaw
5. ToadoptitsBylaws
6. For Stock corporations: issue and sell Q:Whataretherequisitesforavaliddonation?
stocks to subscribers and treasury
stocks; for nonstock corporations: A:
admitmembers 1. Donationmustbereasonable
7. To Purchase, receive, take or grant, 2. Must be for valid purposes including
hold, convey, sell, lease, pledge, public welfare, hospital, charitable,
mortgage and deal with real and cultural, scientific, civic or similar
personalproperty,securitiesandbonds; purposes
8. ToEnterintomergerorconsolidation 3. Mustnotbeanaidinany
9. To Make reasonable Donations for a. Politicalparty,
public welfare, hospital, charitable, b. Candidateand
cultural, scientific, civic or similar c. Partisanpoliticalactivity
purposes, provided that no donation is 4. Donation must bear a reasonable
giventoany relation to the corporations interest
a. Politicalparty, andnotbesoremoteandfanciful.
b. Candidateand
c. Partisanpoliticalactivity. Q:Canacorporationactassuretyorguarantor?

10. To establish Pension, retirement, and A:
other plans for the benefit of its GR:No.
directors, trustees, officers and
employeesbasisofwhichisthelabor XPN: Such guaranty may be given in the
code accomplishment of any object for which the
11. To exercise Other powers essential or corporation was created, or when the
necessarytocarryoutitspurposes. particular transaction is reasonably necessary
orproperintheconductofitsbusiness.
126
MERCANTILELAWTEAM:
CORPORATION LAW
Q: What are the specific powers of a 4. Copy of the amended AOI shall be
corporation? submitted to the SEC for its approval;
and
A: 5. In case of special corporation, a
1. Power to extend or shorten corporate favorable recommendation of
term.(Sec.37) appropriate government agency. (Sec.
2. Increase or decrease corporate stock. 37)
(Sec.38)
3. Incur, create, or increase bonded Note: The extension must be done during the
indebtedness.(Sec.38) lifetime of the corporation not earlier than 5 years
4. Denypreemptiveright.(Sec.39) prior to the expiry date unless exempted. The
5. Sell, dispose, lease, encumber all or extensionmustnotexceed50years.
substantially all of corporate assets.
(Sec.40) After the term had expired without extension, the
6. Purchaseoracquireshares.(Sec.41) corporation is dissolved. The remedy of the
stockholdersisreincorporation.
7. Invest corporate funds in another

corporation or business for other
Any dissenting stockholder may exercise his
purpose other than primary purpose appraisal right in case of shortening or extending
.(Sec.42) corporateterm(Sec.37).
8. Declare dividends out of unrestricted
retainedearnings.(Sec.43) (b)POWERTOINCREASEORDECREASECAPITAL
9. Enter into management contract with STOCK
another corporation (not with an
individual or a partnership within Q: What are the procedural requirements in
general powers) whereby one increasingordecreasingcapitalstock?
corporation undertakes to manage all A:
orsubstantiallyallofthebusinessofthe 1. MajorityvoteoftheBOD;
other corporation for a period not 2. Ratification by stockholders
longer than five (5) years for any one representing 2/3 of the outstanding
term.(Sec.44) capitalstock;
10. Amend Articles of Incorporation. (Sec.
16) 3. Writtennoticeoftheproposedincrease
ordiminutionofthecapitalstockandof
(2)SPECIFICPOWERS thetimeandplaceofthestockholders
meetingatwhichtheproposedincrease
(a)POWERTOEXTENDORSHORTEN or diminution of the capital stock must
CORPORATETERM beaddressedtoeachstockholderathis
place of residence as shown on the
Note:Maybeusedasmeanstovoluntarilydissolvea booksofthecorporationanddeposited
corporation
totheaddresseeinthepostofficewith

postageprepaid,orservedpersonally
Q: What are the procedural requirements in

extending/shorteningcorporateterm?
4. Acertificateinduplicatemustbesigned
by a majority vote of the directors of

A:
the corporation and countersigned by
1. MajorityvoteoftheBODorBOT;
the chairman and the secretary of the
2. Ratification by 2/3 of the SH
stockholdersmeeting,settingforth:
representing outstanding capital stock

or by at least 2/3 of the members in
a. That the foregoing requirements
caseofnonstockcorporation;
havebeencompliedwith;
3. Written notice of the proposed action
b. The amount of increase or
and of the time and place of the
diminutionofthecapitalstock;
meeting shall be addressed to each
c. If an increase of the capital stock,
stockholder or member at his place of
the amount of capital stock or
residenceasshownonthebooksofthe
number of shares of no par stock
corporation and deposited to the
actually subscribed, the names,
addressee in the post office with
nationalities and residences of the
postageprepaid,orservedpersonally;
persons subscribing, the amount
127

of capital stock or number of no 3. Number of shares and increasing or
par stock subscribed by each, and decreasingtheparvalue.
the amount paid by each on his
subscriptionincashorproperty,or Q: The stockholders of People Power, Inc. (PPI)
the amount of capital stock or approved two resolutions in a special
number of shares of no par stock stockholders'meeting:
allottedtoeachstockholderifsuch a) Resolution increasing the authorized
increase is for the purpose of capitalstockofPPI;and
making effective stock dividend b) Resolution authorizing the Board of
authorized; Directors to issue, for cash payment,
d. The amount of stock represented the new shares from the proposed
atthemeeting;and capital stock increase in favor of
e. The vote authorizing the increase outside investors who are non
ordiminutionofthecapitalstock stockholders.

Note: The increase or decrease in the capital stock The foregoing resolutions were approved by
or the incurring, creating or increasing bonded stockholders representing 99% of the total
indebtednessshallrequirepriorapprovaloftheSEC. outstandingcapitalstock.Thesoledissenterwas
JimmyMoratowhoowned1%ofthestock.
Q: What is the additional requirement with
respecttotheincreaseofcapitalstock? Are the resolutions binding on the corporation
and its stockholders including Jimmy Morato,
A:TheapplicationtobefiledwiththeSECshallbe thedissentingstockholder?
accompanied by the sworn statement of the
treasurerofthecorporation,showingthatatleast A: No. The resolutions are not binding on the
25% of the amount subscribed has been paid corporation and its stockholders including Jimmy
eitherincashorpropertyorthattherehasbeen Morato. While these resolutions were approved
transferred to the corporation property the by the stockholders, the directors' approval,
valuation of which is equal to 25% of the which is required by law in such case, does not
subscription. exist.(1998BarQuestion)

Q: What shall be the basis of the required 25% Q: What remedies, if any, are available to
subscription? Morato?

A: It shall be based on the additional amount by A: Jimmy Morato can petition the Securities and
whichthecapitalstockincreasedandnotonthe Exchange Commission to declare the two (2)
totalcapitalstockasincreased. resolutions,aswellasanyandallactionstakenby
theBoardofDirectorsthereunder,nullandvoid.
Note:Therewillbenotreasurersaffidavitincaseof (1998BarQuestion)
decrease in capital stock. Corporation need not
exhaust its original capital before increasing capital Q:Whatisbondedindebtedness?
stock.
A:Itisalongtermindebtednesssecuredbyreal
Q: What is the additional requirement with orpersonalproperty(corporateassets).
respecttothedecreaseofcapitalstock?
Note: The requirements for the power to incur,
A: The same must not prejudice the right of the create or increase bonded indebtedness is also the
creditors. samewiththepowertoincreaseordecreasecapital
stock.
Q:Whatarethewaysofincreasingordecreasing
thecapitalstock? Not all borrowings of the corporation need
stockholders approval. Only bonded indebtedness
A:Byincreasingordecreasingthe: requiressuchapproval.
1. Numberofsharesandretainingthepar
value;
2. Par value of existing shares without
increasingordecreasingthenumberof
shares;

128
MERCANTILELAWTEAM:
CORPORATION LAW
(c)POWERTODENYPREEMPTIVERIGHT issues of shares made by the corporation in

proportion to the number of shares he holds on
Q:Whatispreemptiveright? recordinthecorporation.

A: It is the preferential right of shareholders to Q:WhenshouldstockholderAexercisethepre
subscribe to all issues or disposition of shares of emptiveright?
any class in proportion to their present
shareholdings.(Sec.39) A: Preemptive right must be exercised in
accordance with the Articles of Incorporation or
Q:Whatisthepurposeofpreemptiveright? the ByLaws. When the Articles of Incorporation
and the ByLaws are silent, the Board may fix a
A: To enable the shareholder to retain his reasonable time within which the stockholders
proportionate control in the corporation and to mayexercisetheright.
retainhisequityinthesurplus.
Q: Assuming a stockholder disagrees with the
Q: Is therepreemptive right on the reissuance issuance of new shares and the pricing for the
oftreasuryshares? shares,maythestockholderinvokehisappraisal
rights and demand payment for his
A: Yes. When a corporation reacquires its own shareholdings?
shareswhichtherebybecometreasuryshares,all
shareholders are entitled to preemptive right A:No,thestockholdermaynotexerciseappraisal
when the corporation reissues or sells these right because the matter that he dissented from
treasury shares. The reissuance of treasury is not one of those where right of appraisal is
shares is not among the exception provided by available under the Corporation Code. (1999 Bar
Sec.39whenpreemptiverightdoesnotexist. Question)

Q: May preemptive right be waived by the Q: When can the corporation deny preemptive
stockholder? right?

A: Yes when the stockholder fails to exercise his A: The corporation can deny preemptive right if
preemptive right after being notified and given the articles of incorporation or amendment
anopportunitytoavailofsuchright. theretodeniessuchright.

Q: Is the preemptive right of a stockholder Q:Distinguishpreemptiverightfromrightof
transferable? firstrefusal.

A:Yes,unlessthereisanexpressrestrictioninthe A:
AOI. RIGHTOFFIRST
PREEMPTIVERIGHT
REFUSAL
Q: Suppose that X Corporation has already Arisesonlybyvirtueof
issued the 1000 originally authorized shares of contractual
Maybeexercisedeven
the corporation so that its Board of Directors stipulationsbutisalso
whenthereisnoexpress
andstockholderswishtoincreaseX'sauthorized grantedunderthe
provisionoflaw
capital stock. After complying with the provisionsonclose
requirements of the law on increase of capital corporation
stock,Xissuedanadditional1000sharesofthe Pertainstounsubscribed
portionoftheauthorized Exercisableagainst
samevalue.
capitalstock.Arightthat anotherstockholderof
maybeclaimedagainst thecorporationofhis
Assume that stockholder A presently holds 200
thecorporation.It sharesofstock
outofthe1000originalshares.WouldAhavea includestreasuryshares.
preemptive right to 200 of the new issue of
1000shares?Why? Q:Whataretheinstanceswhenpreemptive
rightisnotavailable?
A: Yes, A would have a preemptive right to 200
of the new issue of 1000 shares. A is a A:
stockholder of record holding 200 shares in X 1. Sharestobeissuedtocomplywithlaws
Corporation. According to the Corporation Code, requiring stock offering or minimum
eachstockholderhasthepreemptiverighttoall stockownershipbythepublic;

129

2. Shares issued in good faith with the 2. If the proceeds of the sale or other
approval of the stockholders disposition of such property and assets
representing 2/3 of the outstanding are to be appropriated for the conduct
capital stock in exchange for property oftheremainingbusiness;
neededforcorporatepurposes; 3. If the transaction does not cover all or
3. Shares issued in payment of previously substantiallyalloftheassets.
contracteddebts;
4. IncasetherightisdeniedintheArticles Q: What is the effect of sale of all or
ofIncorporation; substantially all of assets of one corporation to
5. Waiveroftherightbythestockholder. anothercorporation?

(d)SELL,LEASE,EXCHANGE,MORTGAGE,PLEDGE A:
OROTHERDISPOSITION(SLEMPO)OFALLOR GR: The selling corporation of all or
SUBSTANTIALLYALLOFCORPORATEASSETS substantially all of the assets of the
purchasing corporation shall not be liable for
Q:Whataretheproceduralrequirements? thedebtsofthetransferorcorporation.

A: XPN:
1. MajorityvoteoftheBODorBOT 1. Express or implied assumption of
2. Ratification by stockholders liabilities;
representingatleast 2/3 of the 2. Mergerorconsolidation;
outstanding capital stock or by at least 3. If the purchase was in fraud of
2/3 of the members in case of non creditors;
stockcorporation 4. If the purchaser becomes a
3. Written notice of the proposed action continuationoftheseller;
and of the time and place of the 5. If there is violation of the Bulk Sales
meetingaddressedtoeachstockholder Law.
or member at his place of residence as
shownonthebooksofthecorporation (e)POWERTOACQUIREOWNSHARES
and deposited to the addressee in the
post office with postage prepaid, or Q:Canacorporationacquireitsownshares?
servedpersonally.(Sec.40)
A:
Note: The sale of the assets shall be subject to the GR:Intheabsenceofstatutoryauthority,the
provisions of existing laws on illegal combinations corporationcannotacquireitsownshares
andmonopolies. XPN:SECOpinion,Oct.12,1992,imposedthe
followingconditionsonitsexercise:
After such authorization or approval by the 1. Thecapitalofthecorporationmustnot
stockholders the board may, nevertheless, in its beimpaired;
discretion,abandonsuchSLEMPO.(Sec.40) 2. Legitimate and proper corporate
objectiveisadvanced;
Any dissenting stockholder shall have the option to
3. Condition of the corporate affairs
exercisehisappraisalright.
warrantsit;

4. Transactionisdesignedandcarriedout
Q: What is meant by substantially all of
ingoodfaith
corporateassets?
5. Interest of creditors not impaired, that

is, not violative of the trust fund
A:Ifthecorporationwouldbe:
doctrine.
1. rendered incapable of continuing the

business,or
Note:Sec.41oftheCoderequiresthat:
2. accomplishing the purpose for which it 1. the acquisition should be for a legitimate
wasincorporated. corporatepurpose;and
2. there should be unrestricted retained
Q: When may the corporation forgo the earnings[URE].
ratificationbySH/members?

A:
1. If sale is necessary in the usual and
regularcourseofbusiness;
130
MERCANTILELAWTEAM:
CORPORATION LAW
Q: What are the instances where corporation 3. In case of stock dividend, resolution of
mayacquireitsownshares? theboardwiththeconcurrenceofvotes
representing2/3ofoutstandingcapital.
A:
1. To eliminate fractional shares out of Q:Whatareunrestrictedretainedearnings?
stockdividends;
2. To collect or compromise an A: These are retained earnings which have not
indebtednesstothecorporation,arising been reserved or set aside by the board of
out of unpaid subscription, in a directorsforsomecorporatepurpose.
delinquency sale and to purchase
delinquentsharessoldduringsaidsale; Q:Whoareentitledtoreceivedividends?
3. To pay dissenting or withdrawing
stockholders (in the exercise of the A:Thestockholdersofrecorddateinsofarasthe
stockholdersappraisalright); corporation is concerned; if there is no record
4. Toacquiretreasuryshares; date, the stockholders at the time of declaration
5. Redeemable shares regardless of ofdividends(notatthetimeofpayment).
existenceofretainedearnings;
6. Toeffectadecreaseofcapitalstock; Note: In case of transfer, dividends declared before
7. In close corporations, when there is a the transfer of shares belong to the transferor and
deadlock in the management of the those declared after the transfer belongs to the
business. transferee.

(g)INVESTCORPORATEFUNDSINANOTHER Q:Whoareentitledtoreceivedividendsincase
CORPORATION OR BUSINESS FOR OTHER ofmortgagedorpledgedshares?
PURPOSEOTHERTHANPRIMARYPURPOSE
A:
Q:Whataretherequirements? GR: The mortgagor or the pledgor has the
righttoreceivethedividends.
A:
1. Approval by the majority vote of the XPN: When the mortage or pledge is
BODorBOT recordedinthebooksofthecorporation,in
2. Ratification by stockholders suchacasethenthemortgageeorpledgeeis
representing at least 2/3 of the entitledtoreceivethedividends.
outstanding capital stock or by at least
2/3 of the members in case of non Q:Whataretheformsofdividends?
stockcorporation
3. Ratificationmustbemadeatameeting A:
dulycalledforthepurposes,and 1. Cash
4. Prior written notice of the proposed
investment and the time and place of Note: Cash dividends due on delinquent
stock shall first be applied to the unpaid
themeetingshallbemadeaddressedto
balance on the subscription plus cost and
eachstockholderormemberbymailor
expenses.
bypersonalservice.
2. Stock
Note: Investment of a corporation in a business

which is in line with its primary purpose requires
Note:Stockdividendsarewithheldfromthe
onlytheapprovaloftheboard.
delinquent stockholder until his unpaid
subscriptionisfullypaid.
Anydissentingstockholdershallhaveappraisalright.

3. Property
(f)POWERTODECLAREDIVIDENDSOUTOF
UNRESTRICTEDRETAINEDEARNINGS(URE) Note:Stockholdersareentitledtodividends
PRORATA based on the total number of
Q:Whataretherequirements? shares and not on the amount paid on
shares.
A:
1. Existence of unrestricted retained
earnings
2. Resolutionoftheboard

131

Q:Whenmaycorporationdeclaredividends? Revaluationsurplus
Increaseinthevalueofa Cannotbedeclaredas
A: fixedassetasaresultof dividendsbecause
GR:Evenifthereareexistingprofits,BODhas itsappreciation.Theyare thereisnoactualgain
discretion to determine whether dividends bynaturesubjectto (gaininpaperonly).
aretobedeclared. fluctuations.
Reductionsurplus the
XPN: Stock corporations are prohibited from surplusarisesfromthe Itcannotbedeclared
retaining surplus profits in excess of 100% of reductionoftheparvalue ascashdividendbut
theirpaidincapitalstock. oftheissuedsharesof canbedeclaredonlyas
stocks. stockdividends
XPNtoXPN:
1. Definite corporate expansion projects GainfromSaleofReal
Availableasdividends
approvedbytheboardofdirectors; Property
2. Corporation is prohibited under any Cannotbedeclaredas
loan agreement with any financial stockorcashdividends
TreasuryShares
butitmaybedeclared
institution or creditor from declaring
aspropertydividend
dividends without its/his consent and
OperationalIncome
suchconsenthasnotyetbeensecured; Availableasdividends
Income
3. Theretentionisnecessaryunderspecial

circumstances obtaining in the
Q:Distinguishcashandstockdividends.
corporation, such as when there is a

need for special reserve for probable
A:
contingencies.
CASHDIVIDENDS STOCKDIVIDENDS

Partofgeneralfund Partofcapital
Q: What if there is a wrongful or illegal
Resultsincashoutlay Nocashoutlay
declarationofdividends?
Onceissued,canbelevied

Notsubjecttolevyby bycorporatecreditors
A: The Board of Directors is liable. The corporatecreditors becausetheyrepartof
stockholders should return the dividends to the corporatecapital
corporation(solutioindebiti). Declaredonlybythe Declaredbytheboard
boardofdirectorsat withtheconcurrenceof
Q:Whatarethesourcesofdividends? itsdiscretion thestockholders
(majorityofthe representingatleast2/3
A: quorumonly,not oftheoutstandingcapital
GR: Dividends can only be declared out of majorityofallthe stockataregular/special
actual and bona fide unrestricted retained board) meeting
earnings. Doesnotincreasethe Corporatecapitalis
corporatecapital increased
XPN:Dividendscanbedeclaredoutofcapital Itsdeclarationcreates
inthefollowinginstances: adebtfromthe Nodebtiscreatedbyits
1. Dividends from investments wasting corporationtoeachof declaration
assetscorporation; itsstockholders
2. Liquidatingdividends Ifreceivedby
individual:subjectto
Notsubjecttotaxeither
Q:Whatarethesourcesofretainedearnings?Is tax;
receivedbyindividualora
Ifreceivedby
itavailablefordividends? corporation
corporation:not

subjecttotax
A:
Canberevokeddespite
SOURCESOFRETAINED AVAILABILITYFOR Cannotberevoked
announcementbutbefore
EARNINGS DIVIDENDS afterannouncement
issuance
PaidinsurplusItisthe Canbewithhelduntil
Itcannotbedeclared
differencebetweenthe Appliedtotheunpaid
ascashdividendbut paymentofunpaid
parvalueandtheissued balanceofdelinquent
canbedeclaredonlyas balanceofdelinquent
valueorsellingpriceof shares
stockdividends shares
theshares

Note: For the purposes of this distinction, property
dividendsareconsideredascashdividends.
132
MERCANTILELAWTEAM:
CORPORATION LAW
Q: May stock dividends be issued to a person Q: What is the allowed period for every
whoisnotastockholderinpaymentofservices management contract entered into by the
rendered? corporation?

A:No.Onlystockholdersareentitledtopayment A:
ofstockdividends.(Nielson&Co.,Inc.v.Lepanto GR: Management contract shall be entered
ConsolidatedMiningCo.,G.R.No.21763,Dec.17, into for a period not longer than 5 years for
1966). anyoneterm.

(h)POWERTOENTERINTOMANAGEMENT XPN:Incasesofservicecontractsoroperating
CONTRACT agreements which relate to the exploitation,
development, exploration or utilization of
Q:Whatisamanagementcontract? naturalresources,itmaybeenteredforsuch
periods as may be provided by the pertinent
A: It is any contract whereby a corporation lawsorregulations.
undertakes to manage or operate all or
substantially all of the business of another (i)ULTRAVIRESACTS
corporation, whether such contracts are called
service contracts, operating agreements or Q:Whatareultraviresacts?
otherwise.(Sec.44)
A: Those powers that are not conferred to the
Note:Sec.44refersonlytoamanagementcontract corporationbylaw,byitsAOIandthosethatare
with another corporation. Hence, it does not apply not implied or necessary or incidental to the
to management contracts entered into by a exerciseofthepowerssoconferred.(Sec45)
corporationwithnaturalpersons.
Q:Whatarethetypesofultraviresacts(UVA)?
Q:Whataretherequirements?
A:
A: 1. Acts done beyond the powers of the
1. Contract must be approved by the corporation(throughBOD)
majority of the BOD or BOT of both 2. Ultraviresactsbycorporateofficers
managingandmanagedcorporation; 3. Actsorcontractswhichareperseillegal
2. Ratified by the stockholders owning at asbeingcontrarytolaw.
least the majority of the outstanding
capital stock, or members in case of a Q: When does the act of the officers bind the
nonstock corporation, of both the corporation?
managing and the managed
corporation,atameetingdulycalledfor A:
thepurpose 1. Ifitisprovidedinthebylaws
3. Contract must be approved by the 2. Ifauthorizedbytheboard
stockholders of the managed 3. Under the doctrine of apparent
corporation owning at least 2/3 of the authority
outstanding capital stock entitled to 4. Whentheactwasratified
vote,2/3memberswhen:
a. Stockholders representing the Q:Whatisthedoctrineofapparentauthority?
same interest in both of the
managing and the managed A: If a corporation knowingly permits one of its
corporation own or control more officers, or any other agent, to act within the
than 1/3 of the total outstanding scope of an apparent authority, it holds him out
capitalstockentitledtovoteofthe to the public possessing the power to do those
managingcorporation; acts; and thus, the corporation will, as against
b. Majority of the members of the anyone who has in good faith dealt with it
BOD of the managing corporation through such agent, be estopped from denying
also constitute a majority of the theagentsauthority.
BODofthemanagedcorporation.
Q: When is the corporation estopped to deny
ratification of contracts or acts entered by its
officersoragents?

133

A: Generally, when the corporation has 3. Creditors Nullification of contract in
knowledgethatitsofficersoragentsexceedtheir fraudofcreditors.
power,itmustpromptlydisaffirmthecontractor
act, and allow the other party or third person to (j)DOCTRINEOFINDIVIDUALITYOF
act in the belief that it was authorized or has SUBCRIPTION
been ratified. Otherwise, if it acquiesces, with
knowledge of the facts, or if it fails to disaffirm, Q: What is the Doctrine of Individuality of
ratification will be implied. (Premiere Subscription?
Development Bank vs. CA, G.R. No. 159352, Apr.
14,2004) A: A subscription is one entire and indivisible
whole contract. It cannot be divided into
Q:Whataretheeffectsofanultraviresact? portions.(Sec.64)

A: Ultra vires acts entered into by the board of (k)DOCTRINEOFEQUALITYOFSHARES
directors binds the corporation and the courts
willnotinterfereunlesstermsareoppressiveand Q:Whatisthedoctrineofequalityofshares?
unconscionable.(Gamboavs.Victoriano,G.R.No.
L43324.May5,1979) A: Where the articles of incorporation do not
provideforanydistinctionofthesharesofstock,
Thesearetheeffectsforthespecificacts: allsharesissuedbythecorporationarepresumed
to be equal and enjoy the same rights and
1. Executed contract courts will not set privileges and are also subject to the same
asideorinterferewithsuchcontracts liabilities.(Sec.6)
2. Executory contracts no enforcement
even at the suit of either party (void (l)TRUSTFUNDDOCTRINE
andunenforceable)
3. Partly executed and partly executory Q:Whatisthetrustfunddoctrine?
principle of no unjust enrichment at
expenseofanothershallapply A:Thesubscribedcapitalstockofthecorporation
4. Executory contracts apparently is a trust fund for the payment of debts of the
authorizedbutultravirestheprinciple corporationwhichthecreditorshavetherightto
ofestoppelshallapply. look up to satisfy their credits, and which the
corporationmaynotdissipate.Thecreditorsmay
Q:Whatarethedistinctionsbetweenultravires sue the stockholders directly for the latters
actsandillegalacts? unpaidsubscription.

A: Q: What are the exceptions to the trust fund
ULTRAVIRESACT ILLEGALACTS doctrine?
Notnecessarilyunlawful, Unlawful;againstlaw,
butoutsidethepowers morals,publicpolicy, A: The Code allows distribution of corporate
ofthecorporation andpublicorder capitalonlyintheseinstances:
Canberatified Cannotberatified 1. Amendment of the AOI to reduce
Canbindthepartiesif authorizedcapitalstock;
whollyorpartly Cannotbindtheparties 2. Purchase of redeemable shares by the
executed corporation regardless of existence of
unrestrictedretainedearnings;
Q: What are the remedies in case of ultra vires 3. Dissolution and eventual liquidation of
act? thecorporation.

A: (3)HOWEXERCISED
1. State
a. Obtainajudgmentofforfeiture;or Q:Howarecorporatepowersexercised?
b. The SEC may suspend or revoke
thecertificateofregistration A:
1. BytheshareholdersTheshareholders
2. Stockholders participate in controlling the affairs of
a. Injunction;or thecorporationbyexercisingtheirright
b. Derivativesuit to vote. They can elect the directors
who will actually govern the
134
MERCANTILELAWTEAM:
CORPORATION LAW
corporation and they can also vote on g. To adopt/amend/repeal the by

importantmattersthatarestillreserved laws or adopt new bylaws. (Secs.
to them by the Corporation Code. 46,48)
(Aquino,2006)
2. Proprietaryrights
2. BytheBoardofDirectorsTheBoardof a. To transfer stock in the corporate
Directorsisprimarilyresponsibleforthe book.(Sec.63)
governance of the corporation. Their b. To receive dividends when
primary duty is to set the policies for declared.(Sec.43)
the accomplishment of the corporate c. To the issuance of certificate of
objectives. (Art. 3, Revised Code of stock or other evidence of stock
Corporate Governance). They elect the ownership.(Sec.63)
officers who carry out the policies that d. Toparticipateinthedistributionof
theyhaveestablished. corporate assets upon dissolution.
(Sec.118,119)
3. By the Officers They are elected by e. To preemption in the issue of
the Board of Directors tasked to carry shares.(Sec.39)
outthepolicieslaiddownbytheBoard,
thearticlesofincorporationandtheby 3. Remedialrights
laws. a. To inspect corporate books. (Sec.
74)
H.STOCKHOLDERSANDMEMBERS b. To recover stock unlawfully sold
fordelinquency.(Sec.69)
Q: How does one become a shareholder in a c. To demand payment in the
corporation? exercise of appraisal right. (Secs.
41,81)
A:Apersonbecomesashareholderthemoment d. To be furnished recent financial
he: statements or reports of the
1. Entersintoasubscriptioncontractwith corporationsoperation(Sec.75);
an existing corporation (he is a e. To bring suits (derivative suit,
stockholder upon acceptance of the individual suit, and representative
corporation of his offer to subscribe suit).
whether the consideration is fully paid
ornot), (2)PARTICIPATIONINMANAGEMENT
2. Purchase treasury shares from the
corporation,or (a)PROXY
3. Acquires shares from existing
shareholders by sale or any other Q:Whatisaproxy?
contract.
A: Proxy is a written authorization, empowering
(1)FUNDAMENTALRIGHTS another person (proxy) to represent a
shareholder and vote in his stead in the
Q:Whataretherightsofstockholders? stockholdersmeeting.

A: Q:Whataretherequirementsforavalidproxy?
1. ManagementRight
a. Toattendandvoteinpersonorby A:
proxy at a stockholders meetings. 1. Proxies shall be in writing and shall be
(Secs.50,58) signed by the stockholder or member
b. To elect and remove directors. concerned
(Secs.24,18) 2. The proxy shall be filed before the
c. To approve certain corporate acts. scheduled meeting with the corporate
(Sec.58) secretary;
d. To compel the calling of the
meetings.(Sec.50) Note: For public companies, the SEC
e. Tohavethecorporationvoluntarily requiresthatproxyformsbesubmittedat
dissolved.(Sec.118,119) least5daysbeforethemeeting.
f. To enter into a voting trust
agreement.(Sec.59)

135

3. Unless otherwise provided (continuing Q: When may the right to vote by proxy be
in nature) in the proxy, it shall be valid exercised?
only for the meeting for which it is
intended;and A:
1. ElectionoftheBOD/BOT
4. Noproxyshallbevalidandeffectivefor 2. Voting in case of joint ownership of
aperiodlongerthan5yearsatanyone stock
time. (Sec.58 B.P. 68 as amended by 3. VotingbytrusteeunderVTA
Sec.20,SRC) 4. Pledgeormortgageofshares
5. Asprovidedforinthebylaws
Note: Stockholders or members may attend and
vote in their meetings by proxy (Sec. 58); directors Q:Howandwhenisaproxyrevoked?
cannot do so. Directors must always act in person.
(Sec.25). A:Aproxymayberevokedinwriting,orallyorby
conduct.
Q: Is the power to appoint a proxy a personal
right? GR: One who has given a proxy the right to
votemayrevokethesameatanytime.
A: Yes. The right to vote is inseparable from the
right of ownership of stock. Therefore, to be XPN:Saidproxyiscoupledwithinteresteven
valid,aproxymusthavebeengivenbytheperson itmayappearbyitstermstobeirrevocable.
whoisthelegalownerofthestockandisentitled
tovote.(SECOpinion,Sept.9,1991) (b)VOTINGTRUSTAGREEMENT

Note:Innonstockcorporationstherighttovoteby Q:Whatisavotingtrustagreement(VTA)?
proxy,oreventherighttovoteitselfmaybedenied
to members in the articles of incorporation or the
A: It is an agreement whereby one or more
bylawsaslongasthedenialisnotdiscriminatory.
stockholders transfer their shares of stocks to a

trustee,whotherebyacquiresforaperiodoftime
Q:Whatisthedurationofproxy?
thevotingrights(and/oranyotherspecificrights)

over suchshares; and in return, trust certificates
A:
are given to the stockholder/s, which are
1. Specificproxyauthoritygrantedtothe
transferablelikestockcertificates,subject,tothe
proxy holder to vote only for a
trustagreement.
particularmeetingonaspecificdate.

Q:WhatarethespecificlimitationsonVTA?
2. Continuingproxygrantsauthoritytoa

proxy to appear and vote for and in
A:
behalfofashareholderforacontinuing
1. VTA can be entered into for a period
periodwhichshouldnotbemorethan5
not exceeding 5 years at any one time
yearsatanyonetime.
except when it is a condition in a loan

agreement but shall automatically
Note: Bylaws may provide for a shorter
durationofacontinuingproxy.
expireuponfullpaymentoftheloan;
2. Itmustbeinwritingandnotarized,and
Q:Whatistheextentofauthorityofaproxy? shall specify the terms and conditions
thereof;(Sec.59)
A:
1. GeneralproxyAgeneraldiscretionary Q: What are the procedural requirements for
power to attend and vote at annual VTAtobevalid?
meeting.
A:
2. LimitedproxyRestricttheauthorityto 1. Execution and notarization of the VTA
votetospecifiedmattersonlyandmay stating the terms and conditions
direct the manner in which the vote thereof
shallbecast
2. Acertifiedcopyofsuchagreementshall
be filed with the corporation and with

136
MERCANTILELAWTEAM:
CORPORATION LAW
the SEC, otherwise, it is ineffective and Q:Whatarethedistinctionsbetweenavoting

unenforceable trustagreementandproxy?

3. Thecertificate/sofstockcoveredbythe A:
VTAshallbecancelled VOTINGTRUST PROXY
Theagreementis Revocableanytime
4. A new certificate shall be issued in the irrevocable exceptonewithinterest
name of the trustee/sstating that they Trusteeacquireslegal Proxyhasnolegaltitle
areissuedpursuanttotheVTA titletothesharesofthe tothesharesofthe
transferringstockholder principal
5. Thetransfershallbenotedinthebooks Notonlyrighttovoteis
of the corporation, that it is made given,otherrightsas Onlyrighttovoteis
pursuanttosaidVTA wellexcepttherightto given
receivedividends
6. The trustee/s shall execute and deliver Thetrustmayvotein
personorbyproxy Theproxymustvotein
to the transferors voting trust
unlesstheagreement person
certificates, which shall be transferable
providesotherwise
inthesamemannerandwiththesame
Theagreementmustbe Proxyneednotbe
effectascertificatesofstock notarized notarized
Proxycanonlyactata
7. No VTA shall be entered into for the Trusteeisnotlimitedto
specifiedstockholders
purpose of circumventing the law actatanyparticular
meeting(ifnot
against monopolies and illegal meeting
continuing)
combinations in restraint of trade or Thesharecertificate
usedforpurposesoffraud.(Sec.59) shallbecancelledand Nocancellationofthe
transferredtothe certificateshallbemade
Q:Whatistheeffectofavotingtrustagreement trustee
withrespecttotherightsofthetrustorandthe Atrusteecanvoteand
Aproxycanonlyvotein
trustee? exercisealltherightsof
theabsenceofthe
thestockholdereven
ownersofthestock
A: A voting trust agreement results in the whenthelatteris

separation of the voting rights of a stockholder present
from his other rights such as the right to receive Therighttovoteis
dividendsandotherrightstowhichastockholder Thevotingrightis inherentinor
may be entitled until the liquidation of the divorcedfromthe inseparablefromthe
corporation. It is the trustee of the shares who ownershipofstocks righttoownershipof
stock
acquireslegaltitletothesharesunderthevoting
Anagreementmustnot Aproxyisusuallyof
trustagreementandthusentitledtotherightto
exceed5yearsatany shorterduration
vote and the right to be elected as board of
onetimeexceptwhen althoughunderSec.58
directors while the trustorstockholder has the thesameismadea itcannotexceed5years
beneficialtitlewhichincludestherighttoreceive conditionofaloan. atanyonetime
dividends(Leevs.CA205SCRA752) Governedbythelawon Governedbythelawon
trust agency
Note:Unlessexpresslyrenewed,allrightsgrantedin
a voting trust agreement shall automatically expire
Q:Whatisapoolingagreement?
attheendoftheagreedperiod,andthevotingtrust

certificatesaswellasthecertificatesofstockinthe
A: This is an agreement, also known as voting
name of the trustee or trustees shall thereby be
deemedcancelledandnewcertificatesofstockshall agreement, entered into by and between 2 or
bereissuedinthenameofthetransferors.(Sec.59) more stockholders to make their shares as one
unit (ex: Shareholders, A,B,C,D,E, holds 50% of
the outstanding capital stock, entered into a
pooling agreement to vote for F as a memberof
the board of director). This usually relates to
election of directors where parties often provide
forarbitrationincaseofdisagreement.Thisdoes
not involve a transfer of stocks but is merely a
privateagreement(Sec.100).

137

Q:Whenarepoolingagreementsvalid?
Q:Whoisentitledtoreceivedividends?
A: As long as they do not limit the discretion of
the BOD in the management of corporate A:
affairs or work any fraud against stockholders GR: Those stockholders at the time of
notpartytothecontract. declaration. Dividends belong to the person
who owns the stock when the dividend is
Q: What is the difference between Pooling declared.
AgreementandVotingTrustAgreement?
XPN:
A: In Pooling Agreement, the stockholders
themselves exercise their right to vote. On the 1. In case a record date is provided for. A
other hand, the trustees are the ones who recorddateisthefuturedatespecifiedin
exercise the right to vote under the Voting Trust the resolution declaring dividend that
Agreement. the dividend shall be payable to those
who are stockholders of record on such
(c)CASESWHENSTOCKHOLDERSACTIONIS specifiedfuturedateorasofthedateof
REQUIRED themeetingdeclaringsuchdividends.
2. Unpaid Subscribers. Section 72 provides
Q: Give the summary of vote requirements for that holders of shares not fully paid
stockholderanddirectors which are not delinquent shall have all
therightsofastockholder.
A:SeeAppendixE
Q: What are the instances where a stockholder
Q: Is a provision stating that the consentof the mayexercisehisappraisalright?
board must be obtained before transfer of
sharesvalid? A: Any stockholder of a corporation shall have
the right to dissent and demand payment of the
A: No. A shareholder has the right to transfer, fairvalueofhissharesinthefollowinginstances:
sell,assignordisposehissharesasanincidentof
ownership. A provision that requires any to first 1. Incaseanyamendmenttothearticlesof
obtain the consent of the board of directors or incorporation has the effect of changing
other stockholders of the corporation before he orrestrictingtherightsofanystockholder
can transfer his shares is void as it unduly or class of shares, or of authorizing
restrains the exercise of the stockholder of his preferences in any respect superior to
righttotransfer. those of outstanding shares of any class,
orofextendingorshorteningthetermof
(3)PROPRIETARYRIGHTS corporateexistence.
2. In case of sale, lease, exchange, transfer,
Q: What are the proprietary rights of a mortgage, pledge or other disposition of
stockholder? all or substantially all of the corporate
property and assets as provided in the
A: Code.
1. RighttoDividend 3. Incaseofmergerorconsolidation.
2. RightofFirstRefusal
3. AppraisalRight Q:Whatistherightoffirstrefusal?
4. RighttoInspect
5. PreemptiveRight A: A right that grants to the corporation or
6. RighttoVote anotherstockholdertherighttobuythesharesof
stockofanotherstockholderatafixedpriceand
Q: What is the right to dividend of a only valid if made on reasonable terms and
stockholder? consideration.

A: It is the right of the stockholder to demand Except in the case of a close corporation where
payment of dividends after board declaration. therightoffirstrefusalisrequiredtobeafeature
Stockholders are entitled to dividends pro rata to be found in the articles of incorporation, the
based on the total number of shares that they rightoffirstrefusalcanonlyarisebymeansofa
ownandnotontheamountpaidfortheshares.
138
MERCANTILELAWTEAM:
CORPORATION LAW
contractualstipulation,orwhenitisprovidedfor 2. There must remain other shares with full

inthearticlesofincorporation. votingrights

Note: When the bylaws provide a right of first Q:Whenarenonvotingsharesentitledtovote?
refusal, it is null and void. There is no authority to
create property restrictions in bylaws provisions. A: The nonvoting shares may still vote in the
(Hodgesv.Lezama,62O.G.6823) followingmatters:

Q: May a provision in the articles of 1. Amendment of the articles of
incorporationvalidlygrantarightoffirstrefusal incorporation
infavorofotherstockholders? 2. Adoptionandamendmentofbylaws
3. Sale, lease, exchange, mortgage, pledge
A: Yes, the SEC, as a matter of policy, allows orotherdispositionofallorsubstantially
restrictionsontransferofsharesinthearticlesof allofthecorporateproperty.
incorporation if the same is necessary and 4. Incurring, creating or increasing bonded
convenienttotheattainmentoftheobjectivefor indebtedness
which the company was incorporated, unless 5. Increaseordecreaseofcapitalstock
palpably unreasonable under the circumstances. 6. Merger or consolidation of the
(SECOpinion,Feb.20,1995) corporation with another corporation or
othercorporations
Q:WhatistheRighttoInspect? 7. Investmentofcorporatefundsinanother
corporation or business in accordance
A: It is the right of a stockholder to inspect the withthecorporationcode
books of the corporation provided the following 8. Dissolutionofthecorporation
requisitesarepresent:
Q: What is the rule in case of pledged or
1. Itmustbeexercisedatreasonablehourson mortgagedshares?
businessdays;
2. Thestockholderhasnotimproperlyusedany A: As a rule, In case of pledged or mortgaged
information he has secured through any shares in stock corporations, the pledgor or
previousexaminationand mortgagorshallhavetherighttoattendandvote
3. Demand is made in good faith or for a atmeetingsofstockholders
legitimatepurpose.
XPN:Thepledgeeormortgageeisexpresslygiven
Q:WhatisPreemptiveright? bythepledgorormortgagorsuchrightinwriting
which is recorded on the appropriate corporate
A: It is the preferential right of shareholders to books.
subscribe to all issues or disposition of shares of
any class in proportion to their present Q:Whatistheruleincaseofjointownershipof
shareholdings.(Sec.39) stock?

Q:Howcanthestockholdersexercisetheirright A: Generally, in case of shares of stock owned
tovote? jointly by two or more persons, in order to vote
the same, the consent of all the coowners shall
A: The stockholders can exercise their right to benecessary.
vote through the election, replacement and
removalofBoardofDirectorsorTrusteesandon XPN:Ifthereisawrittenproxy,signedbyallthe
other corporate acts which require stockholders coowners, authorizing one or some of them or
approval. any other person to vote such share or shares.
Provided,That whenthesharesareownedinan
Q: What are the conditions for the issuance of "and/or"capacitybytheholdersthereof,anyone
nonvotingshares? of the joint owners can vote said shares or
appointaproxytherefor.
A:Theissuanceofnonvotingsharesissubjectto
the following conditions under Section 6 of the Note: treasury shares shall have no voting right as
CorporationCode: longassuchsharesremainintreasury.

1. Onlypreferredorredeemablesharesmaybe
madenonvotingshares;

139

(4)REMEDIALRIGHTS Board of Directors, the majority stockholders
adopted a resolution authorizing MOP
Q: What actions can the stockholders or Corporation to withdraw the suit. Pursuant to
membersbring? said resolution, the corporate counsel filed a
Motion to Dismiss in the name of the MOP
A: Corporation. Should the motion be granted or
1. Derivativesuitonebroughtbyoneor denied?Reasonbriefly.
more stockholders or members in the
name and on behalf of the corporation A: It should not be denied. The requisites for a
toredresswrongscommittedagainstit validderivativesuitexistinthiscase.First,AAwas
or to protect or vindicate corporate exempt from exhausting his remedies within the
rights, whenever the officials of the corporation and did not have a demand on the
corporation refuse to sue or are the BoardofDirectorsforthelattertosue.Here,such
ones to be sued or hold control of the ademandwouldbefutile,sincethedirectorswho
corporation. The requisites are as comprisethemajority(namelyBB,CC,DDandEE
follows: are the ones guilty of the wrong complained of.
Second, AA appears to be a stockholder at the
a. There should be an existing cause timeoftheallegedmisappropriationofcorporate
of action in favor of the funds.Third,thesuitisbroughtonbehalfandfor
corporation; the benefit of MOP Corporation. In this
b. Refusal of the corporation to file connection, it was held in
anactiondespitedemandfromthe Commart(Phils.)Inc.v.SEC, G.R. No. 85318, June
stockholder. 3, 1991, that to grant to the corporation
c. The party filing the suit must be a concernedtherightofwithdrawingordismissing
stockholder at the time of the the suit, at the instance of the majority
objectionable acts or transactions stockholders and directors who themselves are
occurred unless such transactions the persons alleged to have committed the
arecontinuinginnature;and breach of trust against the interests of the
d. Theactionmustbebroughtinthe corporation would be to emasculate the right of
name of the corporation which theminoritystockholderstoseekredressforthe
mustbealleged corporation.Filingsuchactionasaderivativesuit
even by a lone stockholder is one of the
Note: The stockholder is only nominal protections extended by law to minority
partyinaderivativesuit.Therealpartyin stockholdersagainstabusesofthemajority.
interestisthecorporation.
(5)OBLIGATIONSOFASTOCKHOLDER
2. Individualsuitandactionbroughtbya
stockholder against the corporation for Q:Whataretheobligationsofstockholders?
directviolationofhiscontractualrights.
A: The stockholders have the following
3. Representative suit one brought by a obligations:
personinhisownbehalfandonbehalf
ofallsimilarlysituated. 1. Obligation to pay the corporation for
the unpaid subscription including
Q:Whichcourthasjurisdictionoveraderivative interesttherein;
suit?
2. Obligation to pay the creditors of the
A: A derivative suit is an intracorporate corporation to the extent of their
controversy hence under the jurisdiction of the subscription if the corporate assets are
RTCactingspecialcommercialcourt. notsufficient.

Q:AA,aminoritystockholder,filedasuitagainst
BB, CC, DD, and EE, the holders of majority
shares of MOP Corporation, for alleged
misappropriation of corporate funds. The
complaint averred, inter alia, that MOP
Corporation is the corporation in whose behalf
and for whose benefit the derivative suit is
brought. In their capacity as members of the
140
MERCANTILELAWTEAM:
CORPORATION LAW
(6)MEETINGS
A:
Q:Whenwillstockholders/membersmeetingbe 1. Itmustbeheldintheproperplace;
held? 2. Itmustbeheldatthestateddateandat
the appointed time or at a reasonable
A: timethereafter;
REQUIREDWRITTEN
3. Itmustbecalledbytheproperperson:
DATEOFMEETING a. The person or persons designated
NOTICE
in the bylaws have authority to
Regularmeeting call stockholders or members
1. Annuallyondate meeting
fixedintheby b. Intheabsenceofsuchprovisionin
laws;or 1. Within the the bylaws it may be called by a
2. Ifthereisnodate periodprovided directorortrusteeorbyanofficer
inthebylaws inthebylaws entrustedwiththemanagementof
anydateinApril 2. Intheabsence thecorporation
asdeterminedby ofprovisionin c. A stockholder or member may
theboard. thebylaws2
make the call on order of the SEC
weekspriorto
wheneverforanycausethereisno
Venue: In the city or themeeting.
municipality where the
personauthorizedtocallameeting
principalofficeislocated d. The special meeting for the
removal of directors or trustees
Specialmeeting
may be called by the secretary or
1. Withinthe bystockholderormember.
1. Anytimedeemed
periodprovided
necessary;or 4. Theremustbeapreviousnotice
inthebylaws
2. Asprovidedinthe 5. Theremustbeaquorum
2. Ifnoprovision
bylaws
inthebylaws
Q: What are the rules on meeting or voting
1weekpriorto
Venue:Principaloffice whichareapplicabletocertainkindsofshares?
themeeting

Q: What is the required quorum in a stock A:
corporation? 1. Delinquent shares shall not be entitled
tovote
A: 2. Treasury shares have no voting rights
GR:Shallconsistofthestockholdersrepresenting while they remain in the treasury (Sec.
majority of the outstanding capital stock or a 57)
majority of the actual and living members with 3. Fractionalsharesshallnotbeentitledto
voting rights, in the case of nonstock vote
corporation. (Tan v. Sycip, G.R. No. 153468, Aug. 4. Escrow shares shall not be entitled to
17,2006) vote before the fulfillment of the
conditionimposedthereon
XPN: 5. Unpaid shares, if not delinquent, are
1. Adifferentquorummaybeprovidedfor entitledtoalltherightsofastockholder
inthebylaws includingtherighttovote
2. The corporation code provides for 6. Sequesteredshares
certain resolutions that must be As a rule, the right to vote remains on
approved by at least 2/3 of the the shareholder and the entity making
outstandingcapitalstock,inwhichcase, the sequestration may not exercise the
majority of the outstanding capital righttovote
stock is insufficient to constitute a
quorum, presence of the stockholders XPN:TheTwoTieredTest
representing 2/3 of the outstanding a. Whether there is a prima facie
capital stock is necessary for such evidence showing that the said
purpose. shares are illgotten and thus
belongtotheState
Q: What are the requirements for a valid b. Whether there is an immediate
meeting whether stockholders/members or the danger of dissipation thus
board? necessitating their continued
141

sequestration and voting by the recordingit.Thereisnoviolationofthe
PCGG while the main issue is AntiWire Tapping Act (R.A. 4200)
pending with the Sandiganbayan. because all the parties to the board
(Republic vs. Sandiganbayan, G.R. meeting are aware that all the
No.107789,Apr.30,2003) communicationsarerecorded.

XPN to the XPN: The twotiered test Note:Thebasictypesofteleconferencingare:
does not apply in cases involving funds 1. Videoconferencing;
of public character (public character 2. Computerconferencing;
exception). In such cases, the 3. Audioconferencing.
government is granted the authority to
votesaidshares,namely: I.BOARDOFDIRECTORANDTRUSTEES
a. Where the government shares are
taken over by private persons or (1)REPOSITORYOFCORPORATEPOWERS
entities who or which registered
themintheirownnames;and Q:Whoshallexercisecorporatepowers?
b. Where the capitalization of shares
that were acquired with public A:
funds somehow landed in private GR: The Board of Directors or the Board of
hands(ibid). Trustees(Sec.23).

7. Pledgor, mortgagor, or administrator XPN:
shares (Sec. 55); pledgor or mortagor 1. In case of delegation to the Executive
has the right to attend and vote at Committee duly authorized in the by
meetings unless pledge or morgagee is laws;
expresslygivensuch right in writing, as
recordedonthebooks. 2. Authorization pursuant to a contracted
manager whichmay be an individual, a
Executor, administrators, receivers, and partnership,oranothercorporation.
other legal representatives may attend
andvoteinbehalfofthestockholderor Note: In case the contracted manager is
members without need of any written another corporation, the special rule in
Sec.44applies.
proxy. In Gochan v. Young, G.R. No.

131889,Mar.12,2001,itwasheldthat
3. In case of close corporations, the
heirs are not prohibited from
stockholders may manage the business
representing the deceased with regard
ofthecorporationinsteadbyaboardof
to shares of stock registered in the
directors,ifthearticlesofincorporation
name of the latter, especially when no
soprovide.
administratorhasbeenappointed.

Q:Whoisanindependentdirector?
8. Sharesjointlyowned(Sec.56)consent

ofallthecoownersisnecessary,unless
A: Shall mean a person other than an officer or
thereisawrittenproxysignedbyallthe
employee of the corporation, its parent or
coowners. If shares are owned in an
subsidiaries, or any other individual having a
and/or capacity by the holders
relationship with the corporation, which would
thereof,anyoneofthejointownerscan
interfere with the exercise of independent
voteorappointaproxythereof.
judgment in carrying out the responsibilities of a

director(Sec38,SRC).
Q: Is teleconferencing or videoconferencing

valid?
Q: How many independent directors are

required for the corporations covered by the
A:Yes.(R.A.8792,asimplementedbySECMemo.
RevisedCodeofCorporateGovernance(RCCG)?
CircularNo.15,Nov30,2001)provided:

1. Directors must express their intent on
A: At least 2 or such number of independent
teleconferencing;
directors that constitute 20% of the members of
2. Properidentificationofthoseattending;
theboardwhicheverislesser,butinnocaseless
3. Thecorporatesecretarymustsafeguard
than2(Art.3[A],RCCG).
the integrity of the meeting by

142
MERCANTILELAWTEAM:
CORPORATION LAW
Note: All other companies not covered are Q: What are the common qualifications of a
encouraged to have independent directors on their directorandtrustee?
board.
A:
(2)TENURE,QUALIFICATIONSAND 1. Majority of the directors/trustees must
DISQUALIFICATIONSOFDIRECTORS beresidentsofthePhilippines(Sec.23)
2. He must not have been convicted by
Q:WhatisthetermofofficeofBOD/BOT? finaljudgmentofanoffensepunishable
byimprisonmentforperiodexceeding6
A: years or a violation of the Corporation
GR:Theregulardirectorshallholdofficefor Code,committedwithin5yearspriorto
1year. thedateofhiselection(Sec.27)
3. Hemustbeoflegalage
XPN:Ifnoelectionisheld,thedirectorsand 4. Other qualifications as may be
officersshallholdpositionunderaholdover prescribedinspeciallawsorregulations
capacity until their successors are elected orinthebylawsofthecorporation
and qualified. This is applicable to a going
concern where there is no break in the Q:Whatarethegroundsfordisqualificationofa
exercise of the duties of the officers and director?
directors.(SECOpinion,Dec.15,1989).
A:
Q:Whatarethequalificationsofadirector? 1. Conviction by final judgment of an
offense punishable by imprisonment
A: exceeding6years
1. Mustownatleast1shareofthecapital 2. Violation of the Corporation Code
stock; committed within 5 years prior to his
electionorappointment(Sec27)
Note:Ownershipofstockshallstandinhis
nameonthebooksofthecorporation. Note:PleasereadArt3.[E]oftheRevisedCodeof
Apersonwhodoesnotownastockatthe CorporateGovernance.
time of his election or appointment does
not disqualify him as director if he (3)ELECTIONS
becomes a shareholder before assuming
the duties of his office. (SEC Opinions,
Q:Whatarethedifferentmethodofvoting?
Nov.9,1987&Apr.5,1990)

A:
2. Mustbeanaturalperson;
1. Straightvotingeverystockholdermay

Note: What is material is the legal title,
votesuchnumberofsharesforasmany
not beneficial ownership of the stock as persons as there are directors to be
appearing on the books of the elected.
corporation.
2. Cumulativevotingforonecandidatea
Q: What are the additional qualifications stockholder is allowed to concentrate
provided by the Revised Code of Corporate his votes and give one candidate, as
Governance? many votes as the number of directors
tobeelectedmultipliedbythenumber
A:Adirectorshouldhavethefollowing: ofhissharesshallequal.

1. College education or equivalent 3. Cumulative voting by distribution a
academicdegree stockholdermaycumulatehissharesby
2. Practical understanding of the business multiplyingthenumberofhissharesby
ofthecorporation the number of directors to be elected
3. Membership in good standing in anddistributethesameamongasmany
relevant industry, business or candidatesasheshallseefit.
professionalorganizations
4. Previousbusinessexperience(Art3.[D], Note: Cumulative voting in case of nonstock
RCCG) corporations only if it is provided in the AOI.
The members of nonstock corporations may
castasmanyvotesastherearetrusteestobe

143

elected but may cast not more than one vote thevoteoftheBoardofDirectorsissufficientfor
foronecandidate. thepurpose.(2001BarQuestion)

Q: What is the quorum required in a stock or (5)FILLINGOFVACANCIES
nonstockcorporation?
Q:Whatarethewaysoffillingupthevacancies
A: Majority of the outstanding capital stock as intheboard?
statedinthearticlesofincorporation.
A:
(4)REMOVAL 1. Vacancies filled up by stockholders or
members,ifitisdueto
Q:Whomayremovedirectorsortrustees? a. Removal
b. Expirationofterm
A: The power to remove belongs to the c. Grounds other than removal or
stockholdersexclusively.(Sec.28) expiration of term, e.g. death,
resignation, abandonment, or
Q: What are the requisites for removal of disqualification where the
directorsortrustees? remaining directors do not
constitute a quorum for the
A: purposeoffillingthevacancy
1. It must take place either at a regular d. Ifthevacancymaybefilledbythe
meeting or special meeting of the remainingdirectorsortrusteesbut
stockholdersormemberscalledforthe the board refers the matter to
purpose stockholdersormembers;or
2. Previous notice to the stockholders or e. increaseinthenumberofdirectors
members of the intention to remove a
director 2. Vacancies filled up by the remaining
3. Avoteofthestockholdersrepresenting directors constituting a quorum or by
2/3 of outstanding capital stock or 2/3 the members of the board if still
ofmembers constituting a quorum, at least a
4. Generally, removal may be with or majorityofthemareempoweredtofill
withoutcause any vacancy occurring in the board
other than by removal by the
However,ifthedirectorwaselectedby stockholdersor members,expirationof
the minority, there must be cause for term or increase in the number of
removal because the minority may not boardseats.(Sec.29)
be deprived of the right to
representation to which they may be Note: A director elected to fill vacancy shall serve
entitledunderSec.24oftheCode.(Sec. theunexpiredterm.(Sec.29)
28)
(6)COMPENSATION
Q: In 1999, Corporation A passed a board
resolution removing X from his position as Q:Howaredirectorscompensated?
manager of said corporation. The bylaws of A
corporation provide that the officers are the A:
president, vicepresident, treasurer and GR: Directors, in their capacity as such, are
secretary. Upon complaint filed with the SEC, it not entitled to receive any compensation
heldthatamanagercouldberemovedbymere exceptforreasonableperdiems.
resolution of the board of directors. On motion
forreconsideration,Xallegedthathecouldonly XPN:
be removed by the affirmative vote of the 1. Whentheircompensationisfixedinthe
stockholdersrepresenting2/3oftheoutstanding bylaws
capital stock. Is X's contention legally tenable. 2. When granted by the vote of
Why? stockholders representing at least a
majority of the outstanding capital
A: No. Stockholders' approval is necessary only stockataregularorspecialmeeting
fortheremovalofthemembersoftheBoard.For 3. When they are also officers of the
the removal of a corporate officer or employee, corporation
144
MERCANTILELAWTEAM:
CORPORATION LAW
4. When a BOD/BOT becomes entitled to both Schiera and Jaz are directors. Malyn also
compensation other than reasonable found that Schiera and Jaz, on behalf of Patio
perdiems Investments, had obtained a loan of P500,
000.00, from PBCom Bank, for the purpose of
Q:Whatisthelimitationonthecompensationof opening Fort Patio Cafe. This loan was secured
directors? by the assets of Patio Investments and
personallyguaranteedbySchieraandJaz.
A:Innocaseshallthetotalyearlycompensation
of directors, as such directors exceed 10% of the Malyn then filed a corporate derivative action
netincomebeforeincometaxofthecorporation before the Regional Trial Court of Makati City
duringtheprecedingyear.(Sec.30) against Schiera and Jaz, alleging that the two
directors had breached their fiduciary duties by
(7)DISLOYALTY misappropriating money and assets of Patio
InvestmentsintheoperationofFortPatioCafe.
Q:Whatisdoctrineofcorporateopportunity?
Did Schiera and Jaz violate the principle of
A: Where a director, by virtue of his office, corporateopportunity?Explain.
acquiresforhimselfabusinessopportunitywhich
should belong to the corporation, thereby A: Shciera and Jaz violated the principle of
obtaining profits to the prejudice of such corporate opportunity, because they used Patio
corporation: Investments to obtain a loan, mortgaged its
assets and used the proceeds of the loan to
A director shall refund to the corporation all the acquireacoffeeshopthroughacorporationthey
profitsherealizesonabusinessopportunity(Sec. formed.(Sec.34)(2005BarQuestion)
34)which:
1. The corporation is financially able to (8)BUSINESSJUDGMENTRULE
undertake;
2. From its nature, is in line with Q:Whatisbusinessjudgmentrule?
corporationsbusinessandisofpractical
advantagetoit;and A: GR: Courts will not interfere in the decisions
3. The corporation has an interest or a madebytheBODasregardstheinternalaffairsof
reasonableexpectancy. thecorporation

Note: The rule shall be applied notwithstanding XPN:Unlesssuchcontractsaresounconscionable
thefactthatthedirectorriskedhisownfundsin and oppressive as to amount to a wanton
theventure. destructionofrightsoftheminority. (Ingersoll v.
Malabon Sugar Co., G.R. No. L16977, Apr. 21,
Ifsuchactisratifiedbyavoteofthestockholders 1922)
representing at least 2/3 of the outstanding
capital stock, the director is excused from Q: What are the consequences of business
remittingtheprofitrealized. judgmentrule?

Q: Malyn, Schiera and Jaz are the directors of A:
PatioInvestments,aclosecorporationformedto 1. Resolutions and transactions entered
run the Patio Cafe, an al fresco coffee shop in into by theBoard within the powers of
Makati City. In 2000, Patio Cafe began the corporation cannot be reversed by
experiencing financial reverses, consequently, the courts not even on the behest of
some of the checks it issued to its beverage thestockholders.
distributorsandemployeesbounced.
2. Directorsandofficersactingwithinsuch
In October 2003, Schiera informed Malyn that business judgment cannot be held
shefoundalocationforasecondcafeinTaguig personallyliableforsuchacts.
City. Malyn objected because of the dire
financialconditionofthecorporation. (9)SOLIDARYLIABILITYFORDAMAGES

Sometime in April 2004, Malyn learned about Q: What are the instances when directors or
FortPatioCafelocatedinTaguigCityandthatits trusteesaresolidaryliablewiththecorporation?
development was undertaken by a new
corporation known as Fort Patio, Inc., where

145

A: (11)PERSONALLIABILITY
GR: The directors or trustees are not liable
solidarily with the corporation by reason of Q:Whataretheinstanceswhereadirectormay
theirseparateanddistinctpersonalities. beheldpersonallyliable?

XPN: A:
1. Willfully and knowingly voting for and 1. Willfullyandknowinglyvotingforand
Assenting to patently unlawful acts of Assentingtopatentlyunlawfulactsof
thecorporation;(Sec.31) thecorporation.(Sec.31)
2. Gross negligence or bad faith in 2. Gross negligence or bad faith in
directing the affairs of the corporation; directing the affairs of the corporation.
(Sec.31) (Sec.31)
3. Acquiring any personal or pecuniary 3. Acquiring any personal or pecuniary
Interestinconflictofduty;(Sec.31) Interestinconflictofduty.(Sec.31)
4. Agreeing or stipulating in a contract to 4. Actingwithoutauthorityorinexcessof
holdhimselfliablewiththecorporation; authority or are motivated by illwill,
or malice or bad faith, which gives rise to
5. By virtue of a specific provision of Law consequent damages. (Lim vs. NLRC,
(Uichicovs.NRLC,G.R.No.121434,June G.R.No.80685.March16,1989)
2,1997). 5. Consenting to the issuance of Watered
stocks, or, having knowledge thereof,
Note: When the officers of the corporation failing to file objections with the
exceeded their authority, their actions are not secretary.(Sec.65)
binding upon the corporation unless ratified by the
corporation or is estopped from disclaiming them (12)RESPONSIBILITIESFORCRIMES
(Reyes v. RCPI Credit Employees Union, G.R. No.
146535,Aug.18,2006). Q: When is a director or officer liable for a
criminaloffense?
Q:Whencouldadirectorbesolidaryliablewith
thecorporationforterminationofemployees? A: Where a law requires a corporation to do a
particularact,failureofwhichonthepartofthe
A:Onlywhentheterminationisdonewithmalice responsible officer to do so constitutes an
or in bad faith on the part of the director. offense,theresponsibleofficeriscriminallyliable
Without any evidence of bad faith or malice, therefore. The reason is that a corporation can
directors may not be held personally liable actthroughitsofficersandagentsandwherethe
(Equitable Banking Corporation vs. NLRC, GR No. business itself involves a violation of law all who
02467,June13,1997). participate in it are liable. While the corporation
maybefinedforsuchcriminal offenseifthelaw
(10)LIABILITIESFORWATEREDSTOCKS so provides, only the responsible corporate
officer can be imprisoned. (People vs. Tan Boon
Q: What is the liability of directors for the Kon, 1930) However, a director or officer can be
issuanceofwateredstocks? heldliableforacriminaloffenseonlywhenthere
is a specific provision of law making a particular
A: Any director or officer of a corporation officerliablebecausebeingacorporateofficerby
consenting to the issuance of stocks for a itselfisnotenoughtoholdhimcriminallyliable.
consideration less than its par or issued value or
for a consideration in any form other than cash, (13)SPECIALFACTDOCTRINE
valued in excess of its fair value, or who, having
knowledge thereof, does not forthwith express Q:WhatisSpecialFactDoctrine?
hisobjectioninwritingandfilethesamewiththe
corporatesecretary,shallbesolidarily,liablewith A:Itisadoctrineholdingthatacorporateofficer
thestockholderconcernedtothecorporationand withsuperiorknowledgegainedbyvirtueofbeing
its creditors for the difference between the fair an insider owes a limited fiduciary duty to a
valuereceivedatthetimeofissuanceofthestock shareholder in transactions involving transfer of
andtheparorissuedvalueofthesame(Sec.65). stock(MiriamWebsterDictionary,2006).

146
MERCANTILELAWTEAM:
CORPORATION LAW
(14)INSIDEINFORMATION with respect to the corporation in which he has

nominalinterest.
Q:WhatisinsideInformation?
Where any of the first two conditions is absent,
A: Information not known to the public that one said contract must be ratified by the vote of the
has obtained by virtue of being an insider like a stockholders representing at least 2/3 of the
director(MiriamWebsterDictionary,2006). outstanding capital stock or 2/3 of the members
inameetingcalledforthepurpose,provided:
(15)CONTRACTS 1. That full disclosure of the adverse
interest of the director/ trustee
Q: Give the rules on contracts entered into by involvedismadeatsuchmeeting
directors/trusteesoforofficers. 2. The contract is fair and reasonable
underthecircumstances.
A:
1. Contracts which are entered by one or Q:SupposethatthebylawsofXCorporation,a
more of the corporate miningfirm,providesthat"Thedirectorsshallbe
directors/trustees,orofficers(Sec.32) relieved from all liability for any contract
Voidable at the option of the enteredintobythecorporationwithanyfirmin
corporation,unless: which the directors may be interested." Thus,
director A acquired claims which overlapped
a. The presence of such with X's claims and were necessary for the
director/trustee in the board development and operation of X's mining
meeting approving the contract properties.Isthebylawprovisionvalid?Why?
was not necessary to constitute a
quorum; A: No. It is in violation of Sec. 32 of the
b. The vote of such director/trustee CorporationCode.
in the board meeting approving
thecontractwasnotnecessaryfor Q: What happens if director "A" is able to
theapprovalofthecontract; consummate his mining claims over and above
c. Thecontractisfairandreasonable thatofthecorporation'sclaims?
underthecircumstances;
d. Inthecaseofanofficer,therewas A: "A" should account to the corporation for the
previous authorization by the profitswhichherealizedfromthetransaction.He
boardofdirectors. grabbed the business opportunity from the
corporation.(Sec.34)(2001BarQuestion)
Note: Even if stockholders representing
2/3 of the outstanding capital stock (16)EXECUTIVECOMMITTEE
authorizes the contract, the 3rd element
(contractisfairandreasonable)cannotbe Q:Whatisanexecutivecommittee?
dispensed with if the transaction is to be
validandenforceable. A: A body created by the bylaws and composed
of not more than three members of the board
2. Contracts entered into between which,subjecttothestatutorylimitations,hasall
corporations with interlocking directors theauthorityoftheboardtotheextentprovided
(Sec.33)Valid,providedthat: in the board resolution or bylaws. The
a. Thecontractisnotfraudulent;and committeemayactbyamajorityvoteofallofits
b. Thecontractisfairandreasonable members(Sec.35).
underthecircumstances.
Note: An executive committee can only be created
Q:Whatistheeffectiftheinterlockingdirectors byvirtueofaprovisioninthebylawsandthatinthe
interest in nominal in one corporation and absence of such bylaw provision, the board of
substantialinanother? directors cannot simply create or appoint an
executive committee to perform some of its
A: If the interlocking directors interest in one functions.(SECOpinion,Sept.27,1993)
corporation or corporations is nominal (not
exceeding 20% of the outstanding capital stock) A person not a director can be a member of the
and in the other substantial, then all the first 3 executive committee but only in a
conditionsprescribedinSec.32 mustbepresent recommendatoryoradvisorycapacity.

147

Q:Arethedecisionsoftheexecutivecommittee A: The president shall preside at all meetings of
subjecttoappealtotheboard? the directors or trustees as well as of
stockholders or members unless the bylaws
A:No.However,iftheresolutionoftheExecutive provideotherwise.(Sec.54)
Committee is invalid, i.e. not one of the powers
conferred to it, it may be ratified by the board Note: All proceedings had and any business
(SECOpinion,July29,1995). transacted at any meeting of the stockholders or
members, if within the powers or authority of the
Q:Whatarethelimitationsonthepowersofthe corporation, shall be valid even if the meeting be
executivecommittee? improperly held or called, provided all the
stockholders or members of the corporation are
A:Itcannotactonthefollowing: presentordulyrepresentedatthemeeting.
1. Mattersneedingstockholderapproval
2. Fillingupofboardvacancies Q:WhatistherequirednumberofBOD/BOTto
3. Amendment, repeal or adoption of by constitutequorum?
laws
4. Amendmentorrepealofanyresolution A:
oftheBoardwhichbyitsexpressterms GR: Majority of the number of directors or
isnotamendableorrepealable trustees.
5. Cashdividenddeclaration.(Sec.3)
XPN: If AOI or the bylaws provide for a
Q:Whataretheexecutivecommitteesprovided greaternumber.
intheRevisedCodeofCorporateGovernance?
Note:

GR: Every decision of at least a majority of the
A:
directors or trustees present at a meeting at
1. AuditCommittee which there is quorum shall be valid as a
2. NominationCommittee corporateact.
3. Compensation and Remuneration
Committee XPN:

(17)MEETINGS 1. Theelectionofofficerswhichshallrequire
thevoteofamajorityofallthemembers
Q:WhenwillBOD/BOTmeetingsbeheld? oftheboard.(Sec.25[2])
2. No board approval is necessary where
A: thereiscustom,usageandpracticeinthe
REQUIREDWRITTEN corporation not requiring prior board
DATEOFMEETING approvalorwheresubsequentapprovalis
/VERBALNOTICE
sufficient.(BoardofLiquidatorsv.Kalaw,
RegularMeeting
G.R.No.L18805,Aug.14,1967)
1. Thedatefixed 1. Withintheperiod
inthebylaws; providedinthe Note: The quorum is the same even if there is
or bylaws vacancyintheboard.
2. Ifthereisno 2. Intheabsenceof
dateintheby provisioninthe A meeting with a quorum remains to be such
lawsshallbe bylaws1day throughout the proceedings even if at any time
heldmonthly priortothe during the proceedings, the required number of
scheduled participantstoconstituteaquorumislessened(e.g.
Venue:Anywhere meeting walkoutduringthemeeting).
SpecialMeeting
1. Withintheperiod Q:WhatistheeffectofAbstention?
1. Anytimeupon
providedinthe
thecallofthe
bylaws A:Anabstentionmayhavethepracticaleffectof
president;or
2. Ifnoprovisionin a "no" vote since the motion may fail for lack of
2. Asprovidedin
thebylaws1 sufficient"yes"votes.Unlessagreaternumberis
thebylaws
daypriortothe called for in the articles or bylaws, a matter is

scheduled deemed "approved" by the board if at any
Venue:Anywhere
meeting
meeting at which a quorum is present at least a
majority of the required quorum of directors
Q:Whoshallpresideatallmeetings?

148
MERCANTILELAWTEAM:
CORPORATION LAW
votes in favor of the action (Sec 7211, United 2. Thecertificatemustbesealedwiththe

StatesCorporationCode). sealofthecorporation
3. Thecertificatemustbedelivered
Note: The Corporation Code is based from the 4. Theparvalueastoparvalueshares,or
United States Corporation Code; annotations of the full subscription as to no par value
USCorporationCodemightapply. shares must be fully paid, the basis of
which is the doctrine of indivisibility of
Q:WhentoAbstain? subscription
5. The original certificate must be
A: Whenever a director believes he/she has a surrendered where the person
conflict of interest, the director should abstain requesting the issuance of a certificate
from voting on the issue and make sure his/her is a transferee from the stockholder
abstention is noted in the minutes.(Robert's (Bitongv.CA.,G.R.No.123553,July13,
Rules, 10th ed., p 394.) The other reason a 1998).
director might abstain is that he/she believes
there was insufficient information for making a Q: What are the distinctions between shares of
decision. Otherwise, directors should cast votes stockfromcertificatesofstock?
on all issues put before them. Failure to do so
could be deemed a breach of their fiduciary A:
duties. SHAREOFSTOCK CERTIFICATEOFSTOCK
Evidenceoftheholders
Q: Give an example where a director needs to ownershipofthestock
Unitofinterestina
abstain andofhisrightasa
corporation
shareholderandofhis
A: To avoid Insider Trading, Insiders are extentspecifiedtherein.
obligatedtoabstainfromtradingthesharesofhis Itisanincorporeal
Itisconcreteand
corporation.Thisdutytoabstainisbasedontwo orintangible
tangible
factors: property
1. The existence of a relationship giving Itmaybeissuedby
access, directly or indirectly, to thecorporation Itmaybeissuedonlyif
information intended to be available evenifthe thesubscriptionisfully
only for a corporate purpose and not subscriptionisnot paid.
fullypaid.
forthepersonalbenefitofanyone;
2. The inherent unfairness involved when
a party takes advantage of such (A)NATUREOFTHECERTICIATE
informationknowingitisunavailableto
Q:Whatisthenatureofacertificateofstock?
those with whom he is dealing (SEC vs.
Interport Resources Corporation, G.R.
A:Acertificateofstockisaprimafacieproofthat
No.135808,October6,2008).
thestockdescribedthereinisvalidandgenuinein
theabsenceofanevidencetothecontrary.
J.CAPITALAFFAIRS
(B)UNCERTIFICATEDSHARES
(1)CERTIFICATEOFSTOCK
Q:Whatisanuncertificatedshare?
Q:Whatisacertificateofstock?
A: An uncertificated share is a subscription duly
A: It is a paper representation or tangible recorded in the corporate books but has no
evidence of the stock itself and of various correspondingcertificateofstockyetissued.
intereststherein(Tanv.SEC,G.R.No.95696,Mar.
3,1992) Q:Mayastockholderalienatehissharesevenif
there is no certificate of stock issued by the
Q: What are the requisites for the issuance of corporation?
theCertificateofStock?
A:Yes.Theabsenceofacertificateofstockdoes
A: not preclude the stock holder from alienating or
1. The certificate must be signed by the transferringhissharesofstock.
president or vicepresident,
countersigned by the secretary or
assistantsecretary

149

Q: In case of a fully paid subscription but the purchaserwhoreliedontheendorsementbyA
corporations has not yet issued a certificate of ofthecertificateofstock.(2001BarQuestion)
stock,howcanthetransferbeeffected?
i.REQUIREMENTSFORVALIDTRANSFEROF
A:Incaseofafullypaidsubscription,withoutthe STOCK
corporation having issued a certificate of stock,
thetransfermaybeeffectedbythesubscriberor Q: What are the requirements for a valid
stockholder executing a contract of sale of deed transferofstock?
ofassignmentcoveringthenumberofsharessold
and submitting said contract or deed to the
corporatesecretaryforrecordal. A:
1. The certificate of stock must be duly
Q: How are transfers of subscription not fully endorsed by the transferor or his legal
paiddone? representative.
2. There must be delivery of the stock
A: In case of subscription not fully paid, the certificate.
corporation may record such transfer, provided 3. To be valid against third parties, the
that the transfer is approved by the board of transfermustberecordedinthebooks
directors and the transferee executes a verified of the corporation. (G.R. No. 124535,
assumption of obligation to pay the unpaid September28,2001)
balanceofthesubscription.
Q:Howaresharesofstocktransferred?
(C)NEGOTIABLITY
A:
Q:Isastockcertificatenegotiable? 1. If represented by a certificate, the
following must be strictly complied
A: No. It is regarded as quasinegotiable in the with:
sensethatitmaybetransferredbyendorsement a. Indorsementbytheownerandhis
coupledwithdelivery. agent
b. Deliveryofthecertificate
Q:Whyisastockcertificatenotnegotiable? c. To be valid to third parties, the
transfer must be recorded in the
A: Because the holder thereof takes it without books of the corporation. (Rural
prejudice to such rights or defenses as the Bank of Lipa v. CA, G.R. No.
registered owners or transferors creditor may 124535,Sept28,2001).
haveunderthelaw,exceptinsofarassuchrights
ordefensesaresubjecttothelimitationsimposed 2. Ifnotrepresentedbyacertificate(such
by the principles governing estoppel. (De los aswhenthecertificatehasnotyetbeen
Santosv.Republic,G.R.No.L4818,Feb.28,1955) issuedorwhereforsomereasonisnot
inthepossessionofthestockholder).
Q:AistheregisteredownerofStockCertificate a. By means of deed of assignment:
No.000011.Heentrustedthepossessionofsaid and
certificatetohisbestfriendBwhoborrowedthe b. Suchisdulyrecordedinthebooks
said endorsed certificate to support B's ofthecorporation.
application for passport (or for a purpose other
than transfer). But Bsold the certificate to X, a Q:AistheregisteredownerofStockCertificate
bonafidepurchaserwhoreliedontheendorsed No.000011.Heentrustedthepossessionofsaid
certificates and believed him to be the owner certificatetohisbestfriendBwhoborrowedthe
thereof. said endorsed certificate to support B's
application for passport (or for a purpose other
CanAclaimthesharesofstocksfromX?Explain. than transfer). But Bsold the certificate to X, a
bonafidepurchaserwhoreliedontheendorsed
A: No. Since the shares were already transferred certificates and believed him to be the owner
to"B","A"cannotclaimthesharesofstockfrom thereof.
"X". The certificate of stock covering said shares
havebeendulyendorsedby"A"andentrustedby CanAclaimthesharesofstocksfromX?Explain.
himto"B".Byhissaidacts,"A"isnowestopped
from claiming said shares from "X", a bona fide
150
MERCANTILELAWTEAM:
CORPORATION LAW
A: No. Since the shares were already transferred (D)ISSUANCE

to"B","A"cannotclaimthesharesofstockfrom
"X". The certificate of stock covering said shares Q: When may a corporation issue a stock
havebeendulyendorsedby"A"andentrustedby certificate?
himto"B".Byhissaidacts,"A"isnowestopped
from claiming said shares from "X", a bona fide A: Under Sec. 64 of the Corporation Code, a
purchaserwhoreliedontheendorsementbyA certificate of stock may only be issued to a
ofthecertificateofstock.(2001BarQuestion) subscriber if the full amount of subscription
together with interest and expenses (in case of
Q: What if the transfer is not recorded, is it delinquentshares)ifanydue,hasbeenpaid.
valid?
Q:Whatistheruleonrighttoissuance?
A: Yes, but, only insofar as the parties to the
transferareconcerned. A: A corporation may now, in the absence of
provisions in their bylaws to the contrary, apply
Note:Tobindthecorporationthedeedeffectingthe payments made by subscribersstockholders,
transfer must be duly recorded in the corporate eitheras:
books.(Sec.63)
1. Full payment for the corresponding
Q: May a stockholder bring suit to compel the numberofsharesofstock,theparvalue
corporate secretary to register valid transfer of of each of which is covered by such
stocks? payment;or
2. Payment prorata to each and all the
A: Yes, it is the corporate secretarys duty and entirenumberofsharessubscribedfor.
obligationtoregistertransfersofstocks. (Baltazarv.LingayenGulfElectricPower
Co., Inc, G.R. No. L1623638, June 30,
Q: What are the remedies where corporation 1965)
refusestotransfercertificateofstocks?
Q: What is the Doctrine of Individuality of
A: Subscription?
1. Petitionformandamus
2. Suit for specific performance of an A: A subscription is one entire and indivisible
expressorimpliedcontract whole contract. It cannot be divided into
3. May sue for damages where specific portions.(Sec.64)
performancecannotbegranted
(E)STOCKANDTRANSFERBOOK
Note: There must be a special power of attorney
executed by the registered owner of the share Q: What books are required to be kept by a
authorizing transferor to demand transfer in the corporation?
stock and transfer book (Ponce vs. Arsons Cement,
G.R.No.139802,Dec.10,2002).
A:
1. Book for the minutes of SH and BOD

Thelawdoesnotprescribeaperiodwithinwhich
meetings
the registration of the transfer of shares should
2. Recordoftransactions
be effected. Hence, the action to enforce the
3. Stockandtransferbook
right does not accrue until there has been a
4. Otherbooksrequiredtobekept
demandandarefusalconcerningthetransfer.

i.CONTENTS
Q: When may the corporation validly refuse to

registerthetransferofshares?
Q:Whatarethecontentsofastockandtransfer
book?
A: The corporation may refuse to register the

transferofsharesifithasanexistingunpaidclaim
A:
over the shares to be transferred. The unpaid
1. All stocks in the name of the
claim refers to the unpaid subscription on the
stockholdersalphabeticallyarranged
shares transferred and not to any other
2. Amount paid and unpaid on all stocks
indebtednessthatthetransferormayhavetothe
and the date of payment of any
corporation.(Sec.63)
installment
151

3. Alienation,saleortransferofstocks 5. The right does not extend to trade
4. Other entries as the bylaws may secrets
prescribe 6. Itissubjecttolimitationsunderspecial
laws,e.g.SecrecyofBankDepositsand
ii.WHOMAYMAKEVALIDENTRIES FCDA or the Foreign Currency Deposits
Act.
Q: Who may make proper entries in stock and
transferbooks? Note: The right extends, in compliance with equity,
good faith, and fair dealing, to a foreign subsidiary
A:Theobligationanddutyfallsonthecorporate whollyownedbythecorporation
secretary. If the corporate secretary refuses to
comply, the stockholder may rightfully bring suit (F)LOSTORDESTROYEDCERTIFICATES
to compel performance. The stockholder cannot
take the law on to his hands; otherwise such Q: What is the procedure for the issuance of a
entry shall be void. (Torres, Jr. v. CA, G.R. No. new stock certificate in lieu of those which have
120138,Sept.5,1997) beenlost,stolenordestroyed?

Q:Whatistheprobativevalueofthestockand
transferbook? A:
1. The registered owner of a certificate of
A: The entries are considered prima facie stock in a corporation or his legal
evidence of the matters stated therein and may representative shall file with the
besubjecttoprooftothecontrary(Bitongv.CA, corporation an affidavit in triplicate
G.R.No.123553,July13,1999). setting forth, if possible, the
circumstances as to how the certificate
Q: Who are the persons given the right to was lost, stolen or destroyed, the
inspectcorporatebooks? number of shares represented by such
certificate, the serial number of the
A: certificate and the name of the
1. Any director, trustee, stockholder or corporationwhichissuedthesame.
member
2. Votingtrustcertificateholder 2. After verifying the affidavit and other
3. Stockholderofsequesteredcompany informationandevidencewiththebooks
4. Beneficialownersofshares ofthecorporation,saidcorporationshall
publish a notice in a newspaper of
Q:WhatisthebasisofSHsrightofinspection? generalcirculationpublishedintheplace
where the corporation has its principal
A: As owners of the assets and property of the office, once a week for three (3)
corporation stockholders should be entitled to consecutiveweeksattheexpenseofthe
the right of inspection which is predicated upon registered owner of the certificate of
thenecessityofselfprotection. stock which has been lost, stolen or
destroyed.
Q: What are the limitations on the right to
inspection? 3. Aftertheexpirationofone(1)yearfrom
the date of the last publication, if no
A: contest has been presented to said
1. The right must be exercised during corporation regarding said certificate of
reasonablehoursonbusinessdays stock, the right to make such contest
2. Thepersondemandingtherighthasnot shallbebarredandsaidcorporationshall
improperly used any information cancelinitsbooksthecertificateofstock
obtained through any previous whichhasbeenlost,stolenordestroyed
examination of the books and records and issue in lieu thereof new certificate
ofthecorporation ofstock.
3. Thedemandismadeingoodfaithorfor
legitimate purpose germane to his 4. If the registered owner files a bond or
interestasastyockholder.(Sec.74) other security effective for a period of
4. Itshouldfollowtheformalitiesthatmay one (1) year, a new certificate may be
berequiredinthebylaws issuedevenbeforetheexpirationofthe
one(1)yearperiod.
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MERCANTILELAWTEAM:
CORPORATION LAW
Q:Maythecorporationbesuedfortheissuance Q:Whenmayacorporationissueareplacement
of new certificates of stock in case of lost or certificate of subscription without waiting for
destroyedcertificate? theexpirationofoneyear?

A: No, the corporation cannot be sued unless A:Theregisteredownershallfileabondorother
thereisbadfaith,fraudornegligencepresent. security effective for a period of one (1) year in
which caseanewcertificatemaybeissuedeven
Q: A stockholder claimed that his stock before the expiration of the one (1) year period.
certificatewaslost.Aftergoingthroughwiththe Provided,Thatifacontesthasbeenpresentedto
procedurefortheissuanceoflostcertificate,and saidcorporationorifanactionispendingincourt
nocontestwaspresentedwithin1yearfromthe regarding the ownership of said certificate of
last publication, the corporation issued a new stock which has been lost, stolen or destroyed,
certificate of stock in lieu of the supposed lost theissuanceofthenewcertificateofstockinlieu
certificate.Thestockholderimmediatelysoldhis thereofshallbesuspendeduntilthefinaldecision
sharesandendorsedthereplacementcertificate by the court regarding the ownership of said
to a buyer. It turned out that the original certificateofstockwhichhasbeenlost,stolenor
certificatewasnotlost,butsoldandendorsedto destroyed.(Sec.73)
another person. (1) May the corporation be
madeliablebytheaggrievedparty?(2)Whowill (G)SITUSOFSHARESOFSTOCK
haveabetterrightovertheshares,theendorsee
oftheoriginalcertificateortheendorseeofthe Q:Whereisthesitusofsharesofstock?
replacementcertificate?
A: The situs of shares of stock is the country
A: wherethecorporationisdomiciled.
1. No, the corporation cannot be made
liable. Except in cases of fraud, bad Note: For purposes of execution, attachment,
faith, or negligence on the part of the garnishmentorauctionsale,itisnotthedomicileor
corporation and its officers, no action the residence of the owner of the shares but the
maybebroughtagainstanycorporation domicile or residence of the corporation, which is
which have issued certificates of stock theplaceofitsprincipalbusiness,whichdetermines
inlieuofthoselost,stolen,ordestroyed thesitusofthesharesofstock.
pursuant to the procedure prescribed
bylaw. (2)WATEREDSTOCK

2. The endorsee of the replacement (A)DEFINITION
certificate has a better right to the
shares.Afterexpirationof1yearfrom Q:Whatisawateredstock?
thedateofthelastpublication,andno
contest has been presented to said A:Astockissuedinexchangeforcash,property,
corporation regarding said certificate, share, stock dividends, or services lesser than its
therighttomakesuchcontesthasbeen parvalue.
barred and said corporation already
cancelled in its books the certificate WateredStocksincludestocks:
which have been lost, stolen, or 1. Issued without consideration (bonus
destroyed and issued in lieu thereof share)
newcertificate. 2. Issued for a consideration other than
cash, the fair valuation of which is less
Q:Whatifthereareoppositionsontheissuance than its par or issued value (discount
of new certificates, what may the corporation share)
do? 3. Issuedasstockdividendwhenthereare
nosufficientretainedearningstojustify
A: The corporation may file an interpleader it
proceeding to compel the parties to litigate 4. Issued as fully paid when the
amongthemselves. corporation has received a lesser sum
ofmoneythanitsparorissuedvalue

Note:Waterinthestockrepresentsthedifference
between the fair market value at the time of the
issuance of the stock and the par or issued value f
153

said stock. Both par and no par stocks can thus be stockholder through an affidavit of
wateredstocks. liability.

Wateredstocksreferonlytooriginalissueofstocks 2. In case of nopar value shares, they are
but not to a subsequent transfer of such stocks by deemedfullypaidandnonassessable.
thecorporation.
Q:Whenshouldthebalanceofthesubscription
(B)LIABILITYOFDIRECTORSFORWATERED bepaid?
STOCKS
A:Itshouldbepaid:
Q:Whatistheextentoftheliabilityofdirectors 1. On the date specified in the
who consented to the issuance of a watered subscription contract, without need of
stock? demandorcall,or
2. If no date of payment has been
A: Directors who consent to the issuance of a specified, on the date specified on the
wateredstockarepersonallyliable.Althoughthe callmadebytheBOD;orwithin30days
general rule is that directors, trustees or officers from the date of call (grace period is
are not solidarily liable with the corporation, granted
consenting to the issuance of a watered stock is 3. When insolvency supervenes upon a
oneoftheexceptions. corporation and the court assumes
jurisdiction to wind it up, all unpaid
Note:PursuanttoSec.65oftheCorporationCode,a subscriptions become payable on
directororofficerwhoconsentstotheissuanceofa
demand, and are at once recoverable,
watered stock or having knowledge thereof does
withoutnecessityofanypriorcall.
notforthwithexpresshiswrittenobjectionwiththe
corporate secretary is liable jointly and severally

withthestockholderconcernedforthewaterinthe Q:Willtheunpaidbalanceaccrueinterest?
stockinfavorofthecorporationanditscreditors.
A: Yes, if so required by the bylaws and at the
(C)TRUSTFUNDDOCTRINEFORLIABILITYFOR rateofinterestfixedinthebylaws.Ifnorateof
WATEREDSTOCK interestisfixedinthebylaws,suchrateshallbe
deemedtobethelegalrate.(Sec.66)
Q:Whatisthetrustfunddoctrine?
The above interest is different from the interest
A:Thesubscribedcapitalstockofthecorporation contemplatedbySec.67.Thesaidunpaidbalance
is a trust fund for the payment of debts of the willonlyaccrueinterest,bywayofpenalty,onthe
corporationwhichthecreditorshavetherightto datespecifiedinthecontractofsubscriptionoron
look up to satisfy their credits, and which the thedatestatedinthecallmadebytheboard.
corporationmaynotdissipate.
Note:InterestcontemplatedinSec.66ispertainsto
moratoryinterestwhichistheinterestonaccountof
Q: Where does the solidary liability of directors
delay,whileSec.67speaksofcompensatoryinterest
consenting to the issuance of watered stock
whichistheineterstonaccountofsubscriptioninan
emanates?
installmentbasis.

A:Thesolidaryliabilityofthedirectorsemanates
Q: What is the effect of failure to pay the
from the fiduciary character of the position of
subscriptiononthedateitisdue?
directororcorporateofficer.

A: It shall render the entire balance due and
(3)PAYMENTOFBALANCEOFSUBSCRIPTION
payableandshallmaketheshareholderliablefor

interestatthelegalrateonsuchbalance,unlessa
Q:Whoarerequiredtopaytheirsubscriptionin
different rate of interest is provided in the by
full?
laws.

A:
(A)CALLBYBOARDOFDIRECTORS
1. Nonresident foreign subscribers upon

incorporation must pay in full their
Q: How does the board of directors call for the
subscriptions unless their unpaid
paymentofunpaidsubscription?
subscriptions are guaranteed by a surety

bond or by an assumption by a resident
154
MERCANTILELAWTEAM:
CORPORATION LAW
A: A call is made in a form of board resolution 1. Resolution the board shall issue
that unpaid subscription to the capital stock are resolution ordering the sale of
due and payable and the same or such delinquentstock
percentage thereof shall be collected, together 2. Noticenoticeofsaidsale,withacopy
withallaccruedinterest,onaspecifieddateand oftheresolution,shallbesenttoevery
that if no payment is made within 30 days from delinquent stockholder either
said date, all stocks covered by said subscription personallyorbyregisteredmail
shall thereupon become delinquent and shall be 3. Publication the notice shall
subjecttopublicauctionsale. furthermore be published once a week
for two consecutive weeks in a
Q: Is the call of the board of directors always newspaper of general circulation in the
necessary to collect payment for unpaid province or city where the principal
subscription? officeofthecorporationislocated
4. Salethedelinquentstockshallbesold
A: No. A call is not necessary where the atthepublicauctiontobeheldnotless
subscription contract specifies the date of than 30 days nor more than 60 days
payment. from the date stocks become
delinquent;
(B)NOTICEREQUIREMENT 5. Transfer the stock so purchased shall
betransferredtosuchpurchaserinthe
Q:Whatisthenoticerequirementincasethere books of the corporation and a
isacalloftheboardofdirectorsforpaymentof certificateforsuchstockshallbeissued
subscription? inhisfavor;and
6. Credit remainder the remaining
A:Thenoticeofthecallhastobeservedonthe shares,ifany,shallbecreditedinfavor
stockholdersconcernedinthemannerprescribed ofthedelinquentstockholderwhoshall
inthecall,whichmayeitherbebyregisteredmail likewisebeentitledtotheissuanceofa
and/orpersonaldeliveryandpublication. certificate of stock covering the same
(Aquino, Philippine Corporate Law
(4)SALEOFDELINQUENTSHARES Compendium,2006).

Q:Whenwillthesharebecomedelinquent? Q: Who is the winning bidder in a delinquency
sale?
A: If within 30 days from expiry of the date of
paymentorfromthedatestatedinthecallmade A:
by the board, no payment is made, all stocks 1. The person participating in the
covered by said subscription shall thereupon delinquency sale who offers to pay the
become delinquent and shall be subject to full amount of the balance of the
delinquency sale unless the BOD orders subscription together with the accrued
otherwise. interest, costs of advertisement and
expenses of sale, for the smallest
Note: Call means the resolution or formal numberofshares;
declaration of the board that the unpaid 2. If there is no bidder as mentioned
subscriptionsaredueandpayable. above, the corporation may bid for the
same,andhetotalamountdueshallbe
Q:Whataretheremediesofcorporationsto credited as paid in full in the books of
enforcepaymentofstocks? the corporation. Such shares shall be
consideredastreasuryshares.
A:
1. Extrajudicialsaleatpublicauction(Sec. Note:Theboardisnotboundtoacceptthehighest
67) bid unless the contrary appears. This is for the
2. Judicialaction(Sec.70) reason that in public sale, the bidder is the one
makingtheoffertopurchasewhichthecorporation
Q: What is the procedure for the sale of isfreetoacceptorreject.
delinquentstocks?

A:

155

Q: When may delinquency sale be discontinued A: No. Stocks become delinquent when the
orcancelled? unpaid subscription and accrued interests
thereon are not paid within 30 days from their
A: If the delinquent SH pays the unpaid balance duedateasspecifiedinthesubscriptioncontract
plusinterest,costsandexpensesonorbeforethe orinthecallbytheboardofdirectors.
date specified for the sale or when the BOD
ordersotherwise. The delinquency is automatic after said 30 day
period and does not need a declaration by the
Q:Canastockholderassailthedelinquencysale? boardmakingthestockdelinquent.

A: The stockholder may file an action to nullify (C)NOTICEOFSALE
thesaleonthegroundofirregularityordefectin
the notice of sale or in the sale itself. But the Q:Whatisthenoticerequirementincaseofsale
stockholder must first pay the amount for which ofdelinquentstock?
thesharesaresoldwithinterestfromthedateof
sale at the legal rate. The action shall be A: The notice of sale and copy of the board
commenced within 6 months from the date of resolutionorderingthesaleshallbe:
sale.(Sec.69) 1. Sent to every delinquent stockholder
either personally or by registered mail
(A)EFFECTOFDELINQUENCY or;
2. Published once a week for 2
Q:Whataretheeffectsofstockdelinquency? consecutive weeks in a newspaper of
general circulation in the province or
A: city where the principal office of the
1. Uponthestockholder corporation,asspecifiedinitsarticlesof
a. Accelerates the entire amount of incorporation,islocated.
theunpaidsubscription;
b. Subjects the shares to interest (D)AUCTIONSALE
expensesandcosts;
c. Disenfranchises the shares from Q:Whatistheprocedurefortheauctionsaleof
any right that inheres to the to a adelinquentshare?
stockholder, except the right to
dividends (but which shall be A:Theprocedureisasfollows:
appliedtoanyamountdueonsaid 1. The board of directors shall pass a
shares, or, in the case of stock board resolution ordering the sale of
dividends, to be withheld by the delinquentstock.
corporation until full payment of 2. A notice of sale and copy of the board
thedelinquentshares.(Sec.43) resolution ordering the sale shall be
sent to every delinquent stockholder
2. Upon the director owning delinquent either personally or by registered mail
shares or; published once a week for 2
a. If the delinquent stockholder is a consecutive weeks in a newspaper of
director, the director shall general circulation in the province or
continue to be a director but he city where the principal office of the
cannot run for reelection corporation,asspecifiedinitsarticlesof
(SundiangandAquino,Reviewerin incorporation,islocated.
CommercialLaw,2006) 3. The minimum bid shall be the full
b. A delinquent stockholder seeking amount of the balance on the
to be elected as director may not subscription plus the accrued interest,
be a candidate for, not be duly cost of advertisement and expenses of
electedto,theboard. saleforthesmallestnumberofshares.
4. Thesalewillbeawardedtothehighest
(B)CALLBYRESOLUTIONOFBOARDOF bidderwhowillbegivenacertificateof
DIRECTORS sale and the same will be registered in
thebooksofthecorporation.
Q:Doesacalloftheboardofdirectorsrequired 5. Should there be no bidder, the
todeclareastockdelinquent? corporation may bid for the same if it

156
MERCANTILELAWTEAM:
CORPORATION LAW
has unrestricted earnings to cover the 2. To afford the corporation the

amount. opportunity to object or refuse its
consent to the transfer in case it has
Q: How do youdetermine thehighest bidder in anyclaimagainstthestockand
anauctionsale?
3. To avoid fictitious and fraudulent
A:Giventhetotalamountdue,thehighestbidder transfer
is determined by the smallest number of shares
orafractionofasharethatthebidderiswillingto (A)ALLOWABLERESTRICTIONSONTHESALEOF
buyforsaidtotalamount. SHARES

Q: May the sale of delinquent share in public Q: Can a stockholder dispose of his shares
auctionbequestioned? withoutanyrestriction?

A: The sale at public auction of delinquent share A: Shares of stock are regarded as personal
is absolute and not subject to redemption. propertyofthestockholderandasageneralrule,
However, an action may be filed to question the hemaydisposeofthemasheseesfitunlessthe
sale,therequisitesforwhichare: corporation has been dissolved, or unless the
righttodosohasbeenrestrictedinthearticlesof
1. Thereshouldbeallegationandproofof incorporation and in the stock certificate or the
irregularity or defect in the notice of owners right of disposing his shares has been
saleorinthesaleitself. hamperedbyhisownactions.

2. Thepartyfilingtheactionmustfirstpay Q: Can the corporation provide regulations to
thepartyholdingthestockthesumfor thesale/transferofthesharesofstockholders?
which the stock was sold with legal
interestfromthedateofsale. A:Yes,buttheauthoritygrantedtoacorporation
to regulate the transfer of its stock does not
3. Theactionisfiledwithin6monthsfrom empower it to restrict the right of a stockholder
thedateofsale. to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and
Q: Does the action to question a delinquency procedure to be followed in effecting transfer
saleprescribe? (Thomson vs. CA, G.R. No. 116631, October
28,1998).
A:Yes.Theactionprescribes6monthsfromsuch
sale. Q:Whataretherequisitesforarestrictiontobe
valid?
(5)ALIENATIONOFSHARES
A:Tobevalid,restrictionsonthesale/transferof
Q: Is the registration of the corporation of the sharesmustbe:
transfer of shares required for the alienation to
bevalid? 1. Providedinthearticlesofincorporation
and
A:Asbetweenthepartiestothecontractofsale, 2. it must be printed at the back of the
registration of the transfer of shares is not certificateofstock.
required for the sale to be valid but until it has
been recorded in the books of the corporation, Note:Thelatterrequirementisneededtobindthird
the transferee will not be considered as a persons who may buy or deal with the shares of
stockholderofthecorporation. stock.

Q:Whatarethereasonsfortherecordalofthe (B)SALEOFPARTIALLYPAIDSHARES
alienationofshares?
Q: May a shareholder sell his shares if the
A:Thereasonsfortherecordalare: paymentofhissubscriptionisincomplete?

1. Toenablethecorporationtoknowatall A: Yes. The incomplete payment of the
timestheiractualstockholders. subscription does not preclude the subscriber
from alienating his shares of stock. Since in this
case,thereisstillnostockcertificatesthatcanbe

157

issued (See Sec. 64), the transfer may be thru a Q: Give examples of involuntary dealings of
SharePurchaseAgreementContract. a share.

(C)SALEOFAPORTIONOFSHARESNOTFULLY A:
1. Attachment
PAID
2. Saleonexecutionofjudgmentorsales

fortaxes
Q:Isthesaleofaportionofsharesnotfullypaid
3. Adverseclaims
allowed?
4. Foreclosureofmortgageofstocks

A:Yes,incaseofdelinquentshares.
Q:Mustinvoluntarydealingsberegistered?
(D)SALEOFALLSHARESNOTFULLYPAID
A:Yes.Itistheactofregistrationwhichcreatesa
Q: Is the sale of shares of not fully paid constructive notice to the whole world of such
subscriptionallowed? instrument or court writ or process and is the
operative act that conveys ownership or affects
A:Yesbuttobindthecorporation,consentofthe the land insofar as third persons are concerned.
corporationshallbeobtainedunlessnotallowed (Aquino,p.185,2007ed)
byAOI.
K.DISSOLUTIONANDLIQUIDATION

(E)SALEOFFULLYPAIDSHARES
Q:Whatismeantbydissolution?

Q:Isthesaleoffullypaidsharesallowed?
A: It is the extinguishment of the franchise of a

corporation and the termination of its corporate
A: Yes, even without the consent of the
existence.
corporationaslongastherequisitesforthevalid

transferofsharesarecomplied.
(1)MODESOFDISSOLUTION

(F)REQUISITESOFAVALIDTRANSFER
Q: What are the modes of dissolution of

corporation?
Q: What are the requirements for a valid

transfer of stock already fully paid and covered
A:VoluntaryandInvoluntarydissolution.
bystockccertificates?

(A)VOLUNTARY
A:

1. There must be a delivery of the stock
Q:Whatarethevoluntarymodesofdissolution
certificate.
ofacorporation?
2. The certificate of stock must be duly

endorsed by the transferor or his legal
A:
representative.
1. Wherenocreditorsareaffected
3. To be valid against third parties, the
Procedure:
transfermustberecordedinthebooks
a. Majority vote of the board of
of the corporation (Rural Bank of Lipa
directorsortrustees;and
vs.CA,G.R.No. 124535,September28,
b. Resolution duly adopted by the
2001).
affirmative vote of the

stockholdersowningatleast2/3of
(G)INVOLUNTARYDEALINGS
the outstanding capital stock or at

least 2/3 of the members at a
Q:Whatisinvoluntarydealing?
meeting duly called for that

purpose.
A: It refers to such writ, order or process issued
c. A copy of the resolution
by a court of record affecting shares of stocks
authorizingthedissolutionshallbe
whichbylawshouldberegisteredtobeeffective,
certifiedbyamajorityoftheboard
and also to such instruments which are not the
of directors or trustees and
willful acts of the registered owner and which
countersigned by the secretary of
may have been executed even without his
thecorporation.
knowledgeoragainsthisconsent.
d. Such copy shall be filed with SEC.
(Sec.118)
158
MERCANTILELAWTEAM:
CORPORATION LAW
2. Wherecreditorsareaffected consolidation, except the surviving or

Procedure: consolidated corporation which shall
a. Filingapetitionfordissolutionwith continuetoexist.(Secs.79and80)
theSEC
b. Such petition must be signed by 6. Expiration of the corporate term (Sec.
majority of the board of directors 11).
ortrustees
c. Must also be verified by the (B)INVOLUNTARY
presidentorsecretaryoroneofits
directors Q: What are the involuntary modes of
d. The dissolutionwas resolved upon dissolutionofacorporation?
by the affirmative vote of the
stockholders representing at least A:
2/3 of the outstanding capital 1. Byexpirationofcorporateterm
stock or at least 2/3 of the
members at a meeting duly called 2. Failure to organize and commence
forthatpurpose. transaction of its business within 2
e. If there is no sufficient objection, years from date of incorporation (Sec.
andthematerialallegationsofthe 22).
petition are true, a judgment shall
be rendered dissolving the 3. Continuous inoperation for a period of
corporation and directing such atleast5years.
disposition of its assets as justice
requires, and may appoint a 4. Legislative dissolution. In this case, a
receiver to collect such assets and corporation created by special law is
pay the debts of the corporation. dissolvedalsobyaspeciallaw.
(Sec.119)
5. Dissolution of SEC on grounds under
3. By shortening the corporate term A existinglaws.
voluntary dissolution may be effected
by amending the AOI to shorten its Q:WhatareexamplesofdissolutionbytheSEC
corporate term pursuant to the underexistinglaws?
provisions of the Code. A copy of the
amendedAOIshallbesubmittedtothe A: Examples of dissolution by the SEC under
SEC. Upon approval of the amended speciallawsare:
AOI of the expiration of the shortened
term, the corporation shall be deemed 1. Failure to file bylaws within the
dissolved without any further requiredperiodbut,accordingtoaSEC
proceedings, subject to the provisions Opinion,SECwillgiveittheopportunity
oftheCodeonliquidation. to explain such failure and not
automaticallydissolvethecorporation.
As an additional requirement, the SEC
requires to submit the final audited 2. By order of the SEC upon a verified
financial statement not older than 60 petition and after proper notice and
days before the application for hearing on the ground of serious
shorteningthecorporateterm. misrepresentation as to what the
corporation can do or is doing to the
4. In case of a corporation sole, by great prejudice of or damage to the
submitting to the SEC for approval, a generalpublic.
verified declaration of dissolution
(Sec.115). This merely needs the 3. Revocationorforfeitureofthefranchise
affidavit of the presiding elder. No orcertificateofincorporationduetoits
needforaboardresolution. misuse or nonuse pursuant to quo
warranto proceedings filed by the
5. By merger or consolidation, whereby SolicitorGeneral.
the constituent corporations
automatically cease upon issuance by 4. Failuretofilerequiredreports.
the SEC of the certificate of merger or
159

Q: XYZ Corporation entered into a contract of
lease with ABC, Inc., over a piece of real estate Q: The Securities and Exchange Commission
foratermof20years,renewableforanother20 approved the amendment of the articles of
years, provided that XYZ's corporate term is incorporationofGHQCorporationshorteningits
extended in accordance with law. Four years corporate life to only 25 years in accordance
after the term of XYZ Corporation expired, but with Sec. 120 of the Corporation Code. As
still within the period allowed by the lease shortened, the corporation continued its
contract for the extension of the lease period, businessoperationsuntilMay30,1997,thelast
XYZCorp.notifiedABC,Inc.,thatitisexercising dayofitscorporateexistence.Priortosaiddate,
the option to extend the lease. ABC, Inc., therewereanumberofpendingcivilactions,of
objectedtotheproposedextension,arguingthat varyingnaturebutmostlymoneyclaimsfiledby
sincethecorporatelifeofXYZCorp.hadexpired, creditors, none of which was expected to be
it could no longer opt to renew the lease. XYZ completed or resolved within five years from
Corp. countered that withstanding the lapse of May 30, 1997. If the creditors had sought your
its corporate term it stillhas the right to renew professionalhelpatthattimeaboutwhetheror
theleasebecausenoquowarrantoproceedings nottheircasescouldbepursuedbeyondMay30,
forinvoluntarydissolutionofXYZCorp.hasbeen 1997,whatwouldhavebeenyouradvice?
instituted by the Office of the Solicitor General.
Is the contention of XYZ Corp. meritorious? A: The cases can be pursued even beyond May
Explainbriefly. 30,1997,thelastdayofthecorporateexistence
of GHQ Corporation. The corporation is not
A: XYZ Corporations contention is not actually dissolved upon the expiration of its
meritorious based on the ruling of the Supreme corporate term. There is still the period for
Court in PNB v. CFI of Rizal, May 27, 1992. XYZ liquidationorwindingup.(2000BarQuestion)
Corp. was dissolved ipso facto upon the
expiration of its original term. It ceased to be a Q:XCorporationshorteneditscorporatelifeby
bodycorporateforthepurposeofcontinuingthe amending its articles of incorporation. It has no
business for which it was organized, except only debts but owns a prime property located in
for purposes connected with its winding up or Quezon City. How would the said property be
liquidation. Extending the lease is not an act to liquidated among the five stockholders of said
wind up or litigate XYZs affairs. It is contrary to corporation? Discuss two methods of
the idea of winding up the affairs of the liquidation.
corporation.(2004BarQuestion)
A: The prime property of X Corporation can be
(2)METHODSOFLIQUIDATION liquidated among the five stockholders after the
property has been conveyed by the corporation
Q:Whatarethemodesofliquidation? to the five stockholders, by dividing or
partitioning it among themselves in any two of
A: thefollowingways:
1. Bythecorporationitselforitsboardof 1. By physical division or partition based
directorsortrustees;(Sec.122,par.1) ontheproportionofthevaluesoftheir
2. Byatrusteetowhomtheassetsofthe stockholdings;or
corporation had been conveyed. (Sec. 2. Bysellingthepropertytoathirdperson
122, par. 2); (Board of Liquidators v. and dividing the proceeds among the
Kalaw,G.R.No.L18805,Aug.14,1967) five stockholders in proportion to their
3. By a management committee or stockholdings;or
rehabilitation receiver appointed by 3. Afterthedeterminationofthevalueof
SEC;(Sec.119,lastpar.) the property, by assigning or
transferring the property to one
Q: Does a corporation in the process of stockholder with the obligation on the
liquidationhavelegalauthoritytoengageinany part of said stockholder to pay the
newbusiness? otherfourstockholderstheamount/sin
proportion to the value of the
A:No,acorporationintheprocessofliquidation stockholding of each. (2001 Bar
has no legal authority to engage in any new Question)
business, even if the same is in accordance with
the primary purpose stated in its article of
incorporation.
160
MERCANTILELAWTEAM:
CORPORATION LAW
Q:Whataretheconsequencesiftheliquidation A:No.Theappointmentofareceiveroperatesto
isnotterminatedwithinthe3yearperiod? suspendtheauthorityofacorporationandofits
directors and officers over its property and
A: effects, such authority being reposed in the
1. Pending suits for or against the receiver (Yam v. CA, G.R. No. 104726 Feb 11,
corporation which were initiated prior 1999).
to the expiration of the 3year period
shall continue. (Gelano v. CA, G.R. No. Q:WhenmaytheCommissionappointareceiver
L39050,Feb.24,1981) toundertakethewindingupandliquidationofa
2. New actions may still be filed against corporation?
the trustee of the corporation even
aftertheexpirationofthe3yearperiod A: Where the application for dissolution of a
but before the affairs of said corporationisuponapplication,affectingrightsof
corporationhavebeenfinallyliquidated creditors, or involuntarily initiated by verified
or settled by the trustee. (Republic v. complaint, the Commission may appoint a
Marsman, G.R. No. L18956 Apr. 27, receivertoundertakethewindingupratherthan
1972) entrust the responsibility to directors and
3. A corporation which has a pending corporateofficers.
action which cannot be finished within
the 3year period is authorized to Q:Whatistheeffectifthecorporationappoints
convey all its property, including a trustee and convey all its property to him for
pendingchosesofaction,ofatrusteeto the benefit of stockholders, members, creditors
enableittoprosecuteanddefendsuits andotherpersonsininterest?
by or against the corporation beyond
the3yearperiod.Wherenotrusteeis A: After such conveyance to the trustee, all
appointed, its counsel who prosecuted interest which the corporation had in the
and represented the interest of the property terminates and the legal interests vests
corporation may be considered as inthetrustee,subjecttothebeneficialinterestof
trusteeofsaidcorporation,atleastwith stockholders, members, creditors or other
respect to the matter in litigation personsininterest.
(Gelanov.CA,G.R.No.L39050,Feb.24,
1981). The directors may also be L.OTHERCORPORATIONS
permitted to continue as trustees to
complete the liquidation. (Clemente v. (1)CLOSEDCORPORATION
CA,G.R.No.82407,Mar.27,1995)
4. The creditors of the corporation who Q:Whatisaclosecorporation?
were not paid may follow the property
of the corporation that may have A:
passedtoitsstockholdersunlessbarred 1. Whosearticlesofincorporationprovide
by prescription or laches or disposition that:
ofsaidpropertyinfavorofapurchaser a. All the corporations issued stock
ingoodfaith. of all classes, exclusive of treasury
shares, shall be held of record by
Q: What is the rationale behind the 3year not more than a specified number
period? or persons not exceeding twenty
(20);
A: The continuance of a corporations legal b. All the issued stock of all classes
existence for three years for the purpose of shall be subject to one or more
enablingittocloseupitsbusinessisnecessaryto specifiedrestrictionsontransfer;
enable the corporation to collect the demands c. Thecorporationshallnotlistinany
dueitaswellastoallowitscreditorstoassertthe stockexchangeormakeanypublic
demandsagainstit. offering of any of its stock of any
class.
Q: May the corporation, through its president 2. Whosestocks,atleast2/3ofthevoting
condonepenaltiesandchargesafterithadbeen stocks or voting rights of which are
placedunderreceivership? owned or controlled by another
corporation which is a close
corporation.
161

Note: The Corporation is not a close corporation (B)VALIDITYONRESTRICTIONSONTRANSFEROF
even iftheshares belong to lessthantwentyif not SHARES
all the requisites are present. (San Juan Structural Q: What are the conditions for validity of
and Steel Fabricators, Inc. v. CA, G.R. No. 129459, restrictionsontransferofshares?
Sept.29,1998)
A:
(A)CHARACTERISTICSOFACLOSE 1. SuchrestrictionsmustappearintheAOI
CORPORATION and in the bylaws as well as in the
certificateofstock,otherwisetheyshall
Q: What are the characteristics of a close not be binding on any purchaser
corporation? thereofingoodfaith
2. They shall not be more onerous than
A: grantingtheexistingstockholdersorthe
1. Stockholders may act as directors corporationstheoptiontopurchasethe
without need of election and therefore shares of the transferring stockholders
areliableasdirectors withsuchreasonableterms,conditions,
2. Stockholders who are involved in the orperiodstatedtherein
management of the corporation are
liable in the same manner as directors Note: Any transfer made should not result in
are exceedingthenumberofstockholdersasallowedby
3. Quorum may be greater than mere theCode.
majority
4. Transfer of stocks to others, which Q:Whatisthenatureofrestrictionsontransfer?
would increase the number of
stockholders to more than the A: It is in the nature of a right of first refusal in
maximumareinvalid favorofstockholderswhichcanbewaivedbythe
5. Corporate actuations may be binding stockholder, if the latter fails to exercise the
evenwithoutaformalboardmeeting,if optiontopurchasewithintheperiodstatedinthe
the stockholder had knowledge or articlesandbylaws.
ratified the informal action of the
others (C)ISSUANCEORTRANSFEROFSTOCKIN
6. Preemptive right extends to all stock BREACHOFQUALIFYINGCONDITION
issues
7. Deadlock in board are settled by the Q:Cangoodfaithbeadefenseintheissuanceor
SEC, on the written petition by any transferinbreachofqualifyingconditions?
stockholder
8. Stockholder may withdraw and avail of A:No,accordingtoSec.99,thereisaconclusive
hisrightofappraisal presumptionofknowledgeoftherestrictions.

Q:Whatcannotbeaclosecorporation? (D)WHENBOARDMEETINGISUNNECESSARYOR
IMPROPERLYHELD
A:MOSBIPEP
1. Miningcompanies Q: What is the effect of unnecessary or
2. Oilcompanies improperlyheldboardmeeting?
3. Stockexchanges
4. Banks A: Any action by the directors of a close
5. Insurancecompanies corporationwithoutameetingshallbevalidif:
6. Publicutility 1. Before or after such action is taken,
7. Educationalinstitutions written consent is signed by all the
8. Other corporation declared to be directors
vestedwithPublicinterest.(Sec.96) 2. All the stockholders have actual or
implied knowledge of the action and
Note: A close corporation is different from a makenopromptobjection
closed corporation and a closely held 3. The directors are accustomed to take
corporation. informal action with the express or
implied acquiescence of all the
stockholders

162
MERCANTILELAWTEAM:
CORPORATION LAW
4. Allthedirectorshaveexpressorimplied Q:Whatistheremedyincaseofdeadlocksina
knowledgeoftheactioninquestionand closecorporation?
makenopromptobjectionthereto.
A:TheSECmaybeaskedtointerveneandtheSEC
(E)PREEMPTIVERIGHT mayperformsuchactionsthatmaybenecessary
under the circumstances including the
Q: What is the difference between preemptive appointmentofaprovisionaldirectorwho,asan
right in an ordinary corporation and in a close impartialpersonwillhaveallthepowersofaduly
corporation? electeddirector.

A: In an ordinary corporation, the preemptive
right extends only to new issues out of the (2)NONSTOCKCORPORATION
increased capital stock. In a close corporation,
preemptive right extends to all stock, including (A)DEFINITION
treasurystock.
Q: What is the concept of a nonstock
(F)AMENDMENTTOTHEARTICLESOF corporation?
INCORPORATION
A: It is one where no part of its income is
Q:CorporationA,aclosecorporation,amended distributableasdividendstoitsmembers.
its articles of incorporation and removed the
provision that all shares of stock, exclusive of Evenifthereisastatementofcapitalstock,foras
treasury stock, shall be held by a specified long as there is no distribution of unrestricted
numberofshareholdersnotexceeding20. retainedearningstoitsmembers,thecorporation
isnonstock.
What is the effect of such amendment to
CorporationA? Any profit which it may obtain as an incident to
its operations shall whenever necessary or
A: It is a special feature of a close corporation proper,beusedinfurtheranceofthepurposeor
that its shares of stock exclusive of treasury purposesforwhichitwasorganized.
shares shall be held by not more that 20 stock
holders. The deletion of such special feature Note: They are governed by the same rules
would render Corporation A, no longer a close establishedforstockcorporations,subjecthowever,
corporation. to special provisions governing nonstock
corporations.
Q: What is the required number of vote for the
deletionofsuchspecialfeature? Q: What are the characteristics of a nonstock
corporation?
A: The amendment by deletion of said special
feature and of the provision reducing a quorum A:
orvotingrequirementsrequiresthevoteof2/3of 1. It does not have capital stock divided
all outstanding shares, regardless of their intoshares
classifications, restrictions or voting rights. All
other matters may be amended by an ordinary 2. No part of its income during its
votebystockholdersconstitutingaquorum. existenceisdistributableasdividendsto
itsmembers,trustees,orofficers
(G)DEADLOCKS
(B)PURPOSES
Q:Whatisdeadlockinaclosecorporation?
Q: For what purposes may a nonstock
A:Itiswhenthedirectorsorstockholdersareso corporationbeorganized?
divided respecting the management of the
business and affairs of the corporation that the A: Nonstock corporation may be formed or
votesrequiredforanycorporateactioncannotbe organized for charitable, religious, educational,
obtainedandasaresult,businessandaffairscan professional,cultural,fraternal,literary,scientific,
no longer be conducted to the advantage of the social,civicservice,orsimilarpurposes,liketrade,
stockholdersgenerally. industry, agriculture and like chambers, or any
combinationthereof.

163

(C)TREATMENTOFPROFITS entitled to distribution of capital. They are only
entitledtodistributionofcapitalupondissolution
Q:Mayanonstockcorporationearnprofit? when it is provided for in the articles of
incorporation or bylaws. (SEC Opinion, Nov. 27,
A: Yes. Mere intangible or pecuniary benefit to 1985)
the members does not change the nature of the
corporation. (3)RELIGIOUSCORPORATION

Q:Ifanonstockcorporationearnsprofit,doesit Q:Whatisareligiouscorporation?
rendersuchcorporationastockcorporation?
A: A corporation composed entirely of spiritual
A:No.Thefactthatanonstockcorporationearns persons and which is organized for the
a profit does not make it a profitmaking furtherance of a religion or for perpetuating the
corporation where such profit or income is used rights of the church or for the administration of
for purposes set forth in its articles of church or religious work or property. It is
incorporation and is not distributed to its differentfromanordinarynonstockcorporation
incorporators,membersorofficers. organizedforreligiouspurposes.(Secs.109116)

(D)DISTRIBUTIONOFASSETSUPON Q:Arereligiousgroupsrequiredtoberegistered
DISSOLUTION withtheSEC?

Q:Whatistheorderofdistributionofassetson A:No,theCorporationCodedoesnotrequireany
dissolutionofnonstockcorporations? religiousgroupstoberegisteredasacorporation
but if it wants to acquire legal personality, its
A: membersshouldincorporateundertheCode.
1. Allitscreditorsshallbepaid
Q:WhatarethekindsofReligiousCorporation?
2. Assets held subject to return on
dissolution, shall be delivered back to A:
theirgivers 1. Corporation sole a special form of
corporation,usuallyassociatedwiththe
3. Assets held for charitable, religious clergy, consisting of one person only
purposes, etc., without condition for andhissuccessors,whoisincorporated
their return on dissolution, shall be bylawtogivesomelegalcapacitiesand
conveyedtooneormoreorganizations advantages(Sec.110);
engagedinsimilaractivitiesasdissolved
corporation; 2. Religious societies or corporate
aggregate a nonstock corporation
4. All other assets shall be distributed to governed by a board but with religious
members,asprovidedforintheArticles purposes. It is incorporated by an
orbylaws aggregate of persons, religious order,
diocese,synod,sect,etc.(Sec.116)
5. In case of there is no provision in the
AOI or bylaws, distribution may be (A)CORPORATIONSOLE
made in accordance to a plan of
distribution adopted by the board of Q:Howisacorporationsoleorganized?
trusteesbymajorityvoteandbyatleast
2/3ofthemembers.(Sec.94) A: By the mere filing of a verified articles of
incorporation with the SEC without the need of
Q: Can a nonstock corporation offset unused anissuanceofacertificateofincorporation.(Sec.
contributionsofmembersagainstthebalanceof 111)
receivablesfromthesamemembers?
(i)NATIONALITY
A: No. The unused contributions of members
cannot be offset against the balance of Q:Whatisthenationalityofacorporationsole?
receivables because this would amount to
distribution of the capital of the corporation. A: A corporation sole does not have any
Members of Nonstock Corporation are not nationality but for purposes of applying
164
MERCANTILELAWTEAM:
CORPORATION LAW
nationalizationlaws,nationalityisdeterminednot 4. Names and addresses of the persons

bythenationalityofitspresidingelderbutbythe who will supervise the dissolution and
nationality of its members, constituting the sect windingup
in the Philippines. Thus, the Roman Catholic
ChurchcanacquirelandsinthePhilippinesevenif Q: If a corporation sole wants to become a
it is headed by the Pope. (Roman Catholic corporation aggregate, does it need to be
Apostolic Church v. Land Registration dissolvedfirst?
Commission,G.R.No.L8451,Dec.20,1957)
A: No. There is no point to dissolving the
Q:Mayacorporationsoleacquireproperty? corporation sole of one member to enable the
corporation aggregate to emerge from it. The
A: Yes, a corporation sole may acquire property CorporationCodeprovidesnospecificmechanism
even without court intervention by purchase, for amending the articles of incorporation of a
donationandotherlawfulmeans. corporation sole but Section 109 of the
Corporation Code allows the application to
Q: How may a corporation sole alienate religious corporations of the general provisions
property? governingnonstockcorporations.

A: Innonstockcorporations,theamendmentneeds
1. By obtaining an order from the RTC of the concurrence of at least twothirds of its
the province where the property is membership.Ifsuchapprovalmechanismismade
situated after notice of the application tooperateinacorporationsole,itsonemember
for leave to sell or mortgage has been in whom all the powers of the corporation
givenbypublicationorotherwise technicallybelongs,needstogettheconcurrence
of twothirds of its membership (Iglesia
2. In cases where the rules, regulations Evangelica Metodista v. Bishop Lazaro. GR.
and discipline of the religious 184088July6,2010).
denomination, sect or church, religious
societyororderconcernedrepresented Q:Whataretherequirementsforamendmentof
by such corporation sole regulate the the articles of incorporation of a corporation
method of acquiring, holding, selling sole?
and mortgaging real estate and
personal property, such rules, A: The requirements for amendment of the
regulations and discipline shall control, articlesofincorporationofacoporationsoleare:
andtheinterventionofthecourtsshall 1. The amendment is not contrary to any
notbenecessary.(Sec.113) provision or requirement under the
CorporationCode,andthat
Q: How is the vacancy filled in a corporation 2. That it is for a legitimate purpose.
sole? (Iglesia Evangelica Metodista v. Bishop
Lazaro.GR.184088July6,2010)
A:Byaccessiontotheofficebythesuccessorsof
any chief archbishop, bishop, priest, minister, (ii)RELIGIOUSSOCIETIES
rabbiorpresidingelder.(Sec.114)
Q:Whatarereligioussocieties?
Note: They shall be permitted to transact business
onthefilingwiththeSECacopyoftheircommission, A:Religioussocietiesaregroupswithinareligious
certificate of election, or letters of appointment, denomination such as religious order, diocese,
dulycertifiedbyanynotarypublic.
synodordistrictorganization.

Q:Howisacorporationsoledissolved?
Q:Canreligioussocietiesincorporatethemselves
for the administration and management of its

A: By filing a verified declaration of dissolution
affairs,propertiesandestate?
stating:

1. Thenameofthecorporation
A: Yes, provided that such incorporation is not
2. Reasonfordissolution
forbidden by the constitution, rules, regulations
3. Authorizationforthedissolutionbythe
ordisciplineofthereligiousdenominationwhich
particular religious denomination, sect
itispart.(Sec.116)
orchurch

165

Q: What are the requirements for a religious (ii)DOCTRINEOFDOINGBUSINESS
societytobeincorporated?
Q:Whatarethejurisdictionaltestsofdoingor
A:SeeSec.116 transacting business in the Philippines for
foreigncorporations?
Q: Where two factions of a religious
denominationareindisputeastowhowouldbe A:
entitled to the possession of the properties of 1. TwinCharacterizationTest
thecorporation,towhosefavorshouldtheissue a. Continuity Test doing business
beresolved? implies a continuity of commercial
dealings and arrangements, and
A: The issue should be resolved in favor of the contemplates to some extent the
faction having the numerical majority of the performance of acts or works or
members. The minority, in choosing to separate the exercise of some functions
themselvesintoadistinctbody,andrefusingthe normally incident to and in
authority of the governing body, can claim no progressive prosecution of, the
rights to the property from the fact that they purpose and object of its
oncehavebeenmembers. organization.
b. Subsequent Test a foreign
(4)FOREIGNCORPORATIONS corporation is doing business in
the country if it is continuing the
Q:Whatisaforeigncorporation? body or substance of the
enterprise of business for which it
A: It is a corporation formed, organized or was organized. (Philippine
existing under any law other than those of the Corporate Law, Villanueva, 2001
Philippines,andwhoselawsallowFilipinocitizens ed.)
andcorporationtodobusinessinitsowncountry
orstate.(Sec.123) 2. ContractTest
Whether the contracts entered into by
Note:Thedefinitionespousestheincorporationtest the foreign corporation, or by an agent
and the reciprocity rule and is significant for acting under the control and direction
licensingpurposes. of the foreign corporation, are
consummatedinthePhilippines.
(A)BASESOFAUTHORITYOVERFOREIGN
CORPORATION To be doing or transacting business in
thePhilippinesforthepurposesofSec.
Q:Whatarethebasesofauthorityoverforeign 133 of the Corporation Code, the
corporation? foreign corporation must actually
transactbusinessinthePhilippines,that
A: is, perform specific business
1. Consent transactions within the Philippines
2. DoingbusinessinthePhilippines territory on a continuing basis, in its
ownnameorforitsownaccount.
(i)CONSENT
Note: Actual transaction of business
Q: What is an example of consent of foreign within the Philippine territory is an
corporation? essential requisite for the Philippines to
acquire jurisdiction over a foreign
A: Filing of an action by a foreign corporation corporation and thus require the foreign
before Philippine courts would mean that by corporation to secure a Philippine
voluntary appearance the local courts have businesslicense(B.VanZuidenBros.,Ltd.
actuallyobtainedjurisdictionoverthe"person"of v. GTVL Manufacturing Industries, Inc.,
G.R.No.147905,May28,2007).
the foreign corporation. (Communication

MaterialsandDesign,Inc.v.CA,260SCRA673,73

SCAD374(1996)

.
166
MERCANTILELAWTEAM:
CORPORATION LAW
Q: What are the considered as doing or A:Foreigncorporationsneedlicenseto:

transacting business in the Philippines for 1. Placethemunderthejurisdictionofthe
foreigncorporations? court;
2. Place them in the same footing as
A: domesticcorporation;
1. Soliciting orders, service contracts, 3. Protect the public in dealing with the
andopeningoffices saidcorporation.
2. Appointing representatives,
distributors domiciled in the Q: What are the jurisprudential rules related to
Philippinesorwhostayforaperiod the consequences of not obtaining license by a
or periods totaling 180 days or foreigncorporation?
more
3. Participating in the management, A:
supervision or control of any 1. Doctrine of isolated transactions
domestic business, firm, entity, or foreign corporations, even unlicensed
corporationinthePhilippines ones can sue or be sued on a
4. Any act or acts that imply a transactionorseriesoftransactionsset
continuity of commercial dealings apart from their common business in
orarrangements,andcontemplate the sense that there is no intention to
tosomeextenttheperformanceof engage in a progressive pursuit of the
acts or works or the exercise of purpose and object of business
some functions normally incident transaction (Eriks Pte. Ltd. v. CA, G.R.
to and in progressive prosecution No.118843,Feb.6,1997)
of, the purpose and object of its
organization. 2. InparidelictoruleinthecaseofTop
Weldmanufacturingvs.ECEDS.A.(G.R.
Q: What are the requisites for obtaining license No. L44944, Aug. 9, 1985), the court
todobusiness? denied the relief prayed for by
petitioner when it ruled that the very
A: purpose of the law was circumvented
1. The foreign corporation should file a and evaded when the petitioner
verified application containing and entered into the said agreements
togetherwiththefollowing: despitetheprohibitioncontainedinthe
a. Designated resident agent (who questioned law. The parties were
will receive summons and notices considered as being in pari delicto
forthecorporation; because they equally violated R.A. No.
b. aspecialpowerofattorneyshould 5455.
also be submitted for such
purpose; 3. Doctrine of Estoppel the party is
2. An agreement that if it ceases to estoppedfromquestioningthecapacity
transactbusinessorifthereisnomore of a foreign corporation to institute an
resident agent, summons shall then be action in our courts where it had
servedthroughSEC; obtainedbenefitsfromitsdealingswith
3. Oath of Reciprocity. Certificate under such foreign corporations and
Oath of the authorized official of the thereafter omitted a breach or sought
foreign corporations country that to renege its obligations (Merrill Lynch
allowsFilipinocitizensandcorporations v.CA,G.R.No.978160,July24,1992)
todobusinessinsaidcountry.
4. Within60daysfromissuanceoflicense, Q: What are considered doing business under
the corporation should deposit at least theForeignInvestmentAct?
P100, 000.00 (cash, property or bond)
for the benefit of creditors subject to A: Under the Foreign Investment Act, the
furtherdepositeverysixmonths. followingareconsidereddoingbusiness:

1. Solicitingorders
Q: Why do foreign corporations need license to 2. Servicecontracts
transactbusinessinthePhilippines? 3. Appointing representatives or distributors
domiciled in the Philippines or who in any
167

calendaryearstayinthecountryforaperiod A: Under the Foreign Investment Act, the
orperiodstotaling180daysormore followingarenotconsidereddoingbusiness:
4. Openingoffices,whethercalledliasonoffices 1. Mereinvestmentasashareholderbya
orbranches foreign entity in a foreign corporation
5. Establishing a factory, workshop or dulyregisteredtodobusiness.
processingplant 2. Theexerciseofrightsasastockinvestor
6. Undertaking building construction or and
erectionprojects 3. Havinganomineedirectororofficerto
7. Openingastore,whetherwholesaleorretail represent its interest in such
without prejudice to the provisions of the corporation
RetailTradeAct 4. Appointing a representative or
8. Maintaining or operating a warehouse for distributor domiciled in the Philippines
business purposes including the storage, which transacts business in its own
displayordeliveryofitsownproducts nameandforitsownaccount.
9. Participating in the management, 5. Publication of general advertisement
supervision or control of any domestic throughanyprintorbroadcastmedia
business, firm, entity or corporation in the 6. Maintaining a stock of goods in the
Philippines Philippines solely for the purpose of
10. Anyotheractoractsthatimplyacontinuity having the same processed by another
of commercial dealings or arrangements, entityinthePhilippines.
and contemplate to that extent, 7. Consignment by a foreign entity of
performance normally incident to , and in equipment with a local company to be
progressive prosecution of, commercial gain used in the processing of products for
orofthepurposeandobjectofthebusiness exportand
organization 8. Performing services auxiliary to an
11. Itshallnotinclude: existing isolated contract of sale which
a. Mere investment as a shareholder are not on a continuing basis, such as
by a foreign entity in domestic installinginthePhilippinesmachineryit
corporations duly registered to do has manufactured or exported to the
business and/or the exercise of Philippines,servicingthesame,training
suchrightsassuchinvestor domestic workers to operate it and
b. Having a nominee director or similarincidentalservices.
officer to represent its interests in
suchcorporations (B)NECESSITYOFALICENSETODOBUSINESS
c. Appointing a representative or
distributor domiciled in the Q: Why is there a necessity torequire a foreign
Philippines which transacts corporationtoacquirealicensebeforeengaging
business in its own name and for inbusinessinthePhilippines?
itsownaccount
12. Thefollowingactsbythemselvesshallnotbe A: The purpose of the law in requiring that a
deemeddoingbusinessinthePhil: foreign corporation doing business in the
a. The publication of a general Philippinesbelicensedtodosoistosubjectsuch
advertisement through corporation to the jurisdiction of the courts. The
newspapers, brochures or other objectisnottopreventforeigncorporationfrom
publicationmediaorthroughradio performing single acts but to prevent it from
ortelevision acquiring a domicile for the purpose of business
b. Maintaining the stock of goods in without taking steps necessary to render it
the Phil solely for the purpose of amenabletosuitsinlocalcourts.
having the same processed by
anotherentityinthePhil. (i)REQUISITESFORISSUANCEOFLICENSE
c. CollectinginformationinthePhil.
d. Performing services auxiliary to an Q: What are the requisites for the issuance of
existingcontractorsale,whichare licensetoaforeigncorporation?
notonacontinuingbasis.
A: A foreign corporation applying for a license
Q: What are not considered doing business shallsubmittotheSEC:
undertheForeignInvestmentAct?

168
MERCANTILELAWTEAM:
CORPORATION LAW
1. Copyofitsarticlesofincorporationand
bylaws, certified in accordance with Q:Whatisthepurposeofappointingaresident
law agent?
2. Their translation to an official language
ofthePhilippines,ifnecessary. A: The appointment of a resident agent is
3. The application, which shall be under required for the purpose of accepting and
oath. receiving,onbehalfoftheforeigncorporation:a)
4. Attached to the application for license notice affecting the corporation pending the
shall be a duly executed certificate establishment of its local office and b) summons
underoathbytheauthorizedofficialor andotherlegalprocessesinallproceedingsforor
officials of the jurisdiction of its againstthecorporation.
incorporation,attestingtothefactthat:
a. The laws of the country or Q: Can a resident agent sign the certificate of
state of the applicant allow nonforumshopping?
Filipino citizens and
corporations to do business A:No,whilearesidentagentmaybeawareofthe
therein actionsfiledagainsttheprincipal,hemaynotbe
b. The applicant is an existing aware of the actions initiated by the principal,
corporationingoodstanding. therefore he cannot sign the certificate of non
c. If such certificate is in a forumshoppingthatisarequirementforfilingof
foreignlanguage,atranslation an initiatory pleading in court (Expert Travel &
thereof in English under oath ToursInc.v.CA,G.R.No.152392,May26,2005).
of the translator shall be
attachedthereto. (C)PERSONALITYTOSUE

Theapplicationshalllikewisebeaccompaniedby Q: Do all foreign corporations have the
a statement under oath of the president or any personalitytosue?
other person authorized by the corporation,
showing to the satisfaction of the SEC and other A:No.
governmental agency in the proper cases that GR: Only foreign corporations that have been
the: issued a license to operate a business in the
Philippineshavethepersonalitytosue.(Sec.133)
1. Applicant is solvent and in sound
financialcondition,and XPN: Under the rule on estoppel, a party is
2. Setting forth the assets and estoppedtochallengethepersonalityofaforeign
liabilities of the corporation as of corporationtosue,evenifithasnolicense,after
the date not exceeding one (1) having acknowledged the same by entering to a
yearimmediatelypriortothefiling contractwithit.
oftheapplication.
One who has dealt with a corporation of foreign
Note: Foreign banking, financial and insurance originasacorporateentityisestoppedtodenyits
corporations shall, in addition to the above corporateexistence.
requirements,complywiththeprovisionsofexisting
lawsapplicabletothem. (D)SUABILITYOFFOREIGNCORPORATIONS

(ii)RESIDENTAGENT Q:Canaforeigncorporationwithoutanylicense,
engagedindoingbusinessinthePhilippines,be
Q:Whocanbearesidentagent? suedinthecountry?

A: A: Yes. While an unlicensed foreign corporation
1. An individual, who must be of good doing business in the country cannot maintain
moral character and of sound financial any action, said corporation can be sued in the
standing,residinginthePhilippines;or country.
2. A domestic corporation lawfully
transacting business in the Philippines,
designated in a written power of
attorney by a foreign corporation
authorized to do business in the
Philippines.

169

(E)INSTANCESWHEREANUNLICENSEDFOREIGN
CORPORATIONBEALLOWEDTOSUE 5. Amisrepresentationinmaterialmatters
inreports;
Q: Give instances when unlicensed foreign
corporationscansue. 6. Failure to pay taxes, imposts, and
assessments;
A:
1. Isolatedtransactions; 7. Engage in business unauthorized by
1. The action aims to protect its good SEC;and
name,goodwill,andreputation;
2. The subject contracts provide that 8. Acting as dummy of a foreign
Philippinecourtswillbetheonlyvenue corporation;(Sec.134).
tofuturedisputesorcontroversies;
3. Alicensesubsequentlygrantedenables (M)MERGERANDCONSOLIDATION
the foreign corporation to sue on
contracts executed before the grant of 1.DEFINITIONANDCONCEPT
thelicense;
4. Recovery of erroneously delivered Q:Whatismerger?
property;
5. Where the unlicensed foreign A: One where a corporation absorbs the other
corporationhasadomesticcorporation. and remains in existence while others are
dissolved.(Sec.76)
Q: May a foreign corporation not engaged in
business in the Philippines and a national of a Q:Whatisconsolidation?
country which is a party to any convention,
treaty, or agreement relating to intellectual A: One where a new corporation is created and
property rights or the repression of unfair consolidatingcorporationsareextinguished.(Sec.
competition, to which the Philippines is also a 76)
party or extend reciprocal rights sue in
trademarkorservicemarkenforcementaction? Q: What are the distinctions between merger
andconsolidation?
A:Yes,theforeigncorporationmentionedabove
may sue in trademark or service mark A:
enforcement action. This is in accordance with MERGER CONSOLIDATION
Section 160, in relation to Section 3 of R.A. No. Alloftheconstituent
Allconsolidated
8393, The Intellectual Property Code. (Sehwani corporationsinvolved
corporationsaredissolved
Inc.v.InnOut Burger,G.R.No.171053,Oct.15, aredissolvedexcept
withoutexception
2007) one
Nonewcorporationis Asinglenewcorporation
(F)GROUNDSFORREVOCATIONOFLICENSE created emerges
Thesurviving
Allassets,liabilities,and
Q: What are the grounds for revocation of corporationacquires
capitalstockofall
licenseofaforeigncorporation? alltheassets,
consolidatedcorporations
liabilities,andcapital
aretransferredtothenew
stockofallconstituent
A: corporation
corporations
1. Failure to file annual reports required

bytheCode;
(2)CONSTITUENTVS.CONSOLIDATED

CORPORATION
2. Failure to appoint and maintain a

resident agent in the Philippines as
Q:Whatisthedifferencebetweenaconstituent
requiredbytheCode;
andconsolidatedcorporation?

3. FailuretoinformtheSECofthechange
A:Aconstituentcorporationiscreatedwhentwo
ofaddressoftheresidentagent;
or more corporations merge into a single

corporation which is one of those merging
4. Failure to submit copy of amended
corporations. A consolidated corporation, on the
articlesorbylawsorarticlesofmerger
other hand, is created when two or more
orconsolidation;
170
MERCANTILELAWTEAM:
CORPORATION LAW
corporations merge into an entirely new c. Statementofchanges,ifany,inthe

corporation. present articles of surviving
corporation; or the articles of the
(3)PLANOFMERGERORCONSOLIDATION new corporation to be formed in
caseofconsolidation.
Q:Whatisaplanofmergerorconsolidation?
2. Plan for merger or consolidation shall
A: The plan of merger or consolidation is a plan be approved by majority vote of each
createdbytherepresentativesoftheconstituent boardoftheconcernedcorporationsat
corporations, providing for the details of such separatemeetings.
merger.
3. The same shall be submitted for
Q: What should the plan of merger or approval by the stockholders or
consolidationcontain? members of each such corporation at
separatecorporatemeetingsdulycalled
A:Theplanofmergerorconsolidationshallset forthepurpose.Noticeshouldbegiven
forththefollowing: to all stockholders or members at least
1. Names of corporations involved two(2)weekspriortodateofmeeting,
(constituentcorporations) eitherpersonallyorbyregisteredmail.
2. Termsandmodeofcarryingitout
3. Statement of changes, if any, in the 4. Affirmative vote of 2/3 of the
present articles of surviving outstanding capital stock in case of
corporation; or the articles of the new stock corporations, or 2/3 of the
corporation to be formed in case of members of a nonstock corporation
consolidation. shallberequired.

(4)ARTICLESOFMERGERORCONSOLIDATION 5. Dissenting stockholders may exercise
the right of appraisal. But if Board
Q:Whatisanarticleofmergerorconsolidation? abandons the plan to merge or
consolidate,suchrightisextinguished.
A: An article of merger or consolidation is a
document to be signed by the president or vice 6. The plan may still be amended before
president of the each corporation and signed by the same is filled with the SEC;
theirsecretaryorassistantsecretarysettingforth: however, any amendment to the plan
mustbeapprovedbythesamevotesof
1. The plan of the merger or the plan of the board members of trustees and
consolidation stockholders or members required for
2. Astostockcorporations,thenumberof theoriginalplan.
shares outstanding, or in the case of
nonstock corporations, the number of 7. After such approval, Articles of Merger
members or Articles of Consolidation shall be
3. As to each corporation, the number of executed by each of the constituent
shares or members voting for and corporations,signedbypresidentorVP
againstsuchplan,respectively and certified by secretary or assistant
secretary,settingforth:
(5)PROCEDURE a. Planofmergerorconsolidation
b. In stock corporation, the number
Q: What is the procedure for merger or of shares outstanding; in non
consolidation? stock,thenumberofmembers
c. Astoeachcorporation,numberof
A: shares or members voting for and
1. Boardofeachcorporationshalldrawup againstsuchplan,respectively
a plan of merger or consolidation,
settingforth: 8. FourcopiesoftheArticlesofMergeror
a. Names of corporations involved Consolidationshallbesubmittedtothe
(constituentcorporations) SEC for approval. Special corporations
b. Termsandmodeofcarryingitout like banks, insurance companies,
building and loan associations, etc.,
171

need the prior approval of the 2. The separate existence of the constituent
respective government agency corporations shall cease, except that of the
concerned. survivingortheconsolidatedcorporation

9. If SEC is satisfied that the merger or 3. The surviving or the consolidated
consolidation is legal, it shall issue the corporation shall possess all the rights,
Certificate of Merger or the Certificate privileges, immunities and powers and shall
ofIncorporation,asthecasemaybe. besubjecttoallthedutiesandliabilitiesofa
corporationorganizedunderthisCode
10. If the SEC is not satisfied, it shall set a
hearing, giving due notice to all the 4. The surviving or the consolidated
corporationsconcerned.(Secs.7679) corporation shall thereupon and thereafter
possess:
(6)EFFECTIVITY a. Alltherights,privileges,immunitiesand
franchises of each of the constituent
Q: When shall the merger or consolidation corporations
becomeeffective? b. All property, real or personal, and all
receivables due on whatever account,
A:UponissuancebytheSECofthecertificateof including subscriptions to shares and
mergerandconsolidation. otherchosesinaction,andallandevery
other interest of, or belonging to, or
Inthecaseofmergerorconsolidationofbanksor duetoeachconstituentcorporation
banking institutions, building and loan c. These shall be deemed transferred to
associations, trust companies, insurance and vested in such surviving or
companies, public utilities, educational consolidated corporation without
institutions and other special corporations furtheractordeed
governed by special laws, the favorable
recommendation of the appropriate government 5. The surviving or consolidated corporation
agencyshallfirstbeobtained. shall:
a. Be responsible and liable for all the
(7)LIMITATIONS liabilitiesandobligationsofeachofthe
constituent corporations in the same
Q: What are the limitations with regard to manner as if such surviving or
mergerorconsolidationofcorporations? consolidated corporation had itself
incurredsuchliabilitiesorobligations
A: Subject to the limitations provided by the b. Anypendingclaim,actionorproceeding
Constitution, the merger or consolidation should brought by or against any of such
not create illegal combinations nor create constituent corporations may be
monopolies and it should not eliminate free and prosecuted by or against the surviving
healthycompetition. orconsolidatedcorporation
c. Therightsofcreditorsorliensuponthe
(8)EFFECTS property of any of such constituent
corporations shall not be impaired by
Q: What are the effects of a merger or such merger or consolidation
consolidation?

A:Theeffectsofmergerorconsolidationare:

1. Theconstituentcorporationsshallbecomea
singlecorporationwhich:
a. Incaseofmerger,shallbethesurviving
corporation designated in the plan of
merger
b. In case of consolidation, shall be the
consolidated corporation designated in
theplanofconsolidation

172
MERCANTILELAWTEAM:
SECURITIES REGULATION CODE
SECURITIESREGULATIONCODE registration statements, and

registration and licensing
I.STATEPOLICY(PURPOSE) applications

Q: What is the nature of the Securities e. Regulate, investigate or supervise
RegulationCode(SRC)? the activities of persons to ensure
compliance
A: The SRC isenacted to protect the public from
unscrupulous promoters, who stake business or f. Supervise, monitor, suspend or
ventureclaimswhichhavereallynobasis,andsell take over the activities of
sharesorintereststhereintoinvestors. exchanges, clearing agencies and
otherSROs
Q: What is the state policy with regard to the
SRC? g. Impose sanctions for the violation
of laws and the rules, regulations
A: and orders issued pursuant
1. Establish a sociallyconscious market thereto;
thatregulatesitself
2. Encourage widest participation of h. Prepare,approve,amendorrepeal
ownership in enterprises and enhance rules, regulations and orders, and
democratizationofwealth issue opinions and provide
3. Promotedevelopmentofcapitalmarket guidance on and supervise
4. Protect investors and ensure full and compliance with such rules,
fairdisclosureaboutsecurities regulationsandorders
5. Minimize, if not totally eliminate,
insider trading and other fraudulent or i. Deputize any and all enforcement
manipulative devices; and practices agenciesoftheGovernmentaswell
whichdistortsthefreemarket asanyprivateinstitutions

II.POWERSANDFUNCTIONSOFTHESECURITIES j. Compel the officers of any
ANDEXCHANGECOMMISSION(SEC) registered corporation or
association to call meetings of
Q: What are the powers and functions of the stockholdersormembers
Commission?
k. Suspend, or revoke, after proper
A: noticeandhearingthefranchiseor
certificate of registration of
1. Regulatory corporations, partnerships or
associations
a. Have jurisdiction and supervision
over all corporations, partnerships l. Exercise such other powers as
or associations who are the whichareincidentaltotheprimary
grantees of primary franchises powersoftheCommission
and/or a license or permit issued
bytheGovernment; 2. Adjudicative

b. Formulate policies and a. Issueceaseanddesistorder
recommendations on issues
concerningthesecuritiesmarket; b. Punish for contempt of the
Commission, both direct and
c. Advise Congress and other indirect
governmentagenciesonallaspects
of the securities market and c. Issue subpoena duces tecum and
propose legislation and summon witnesses to appear in
amendmentsthereto; any proceedings of the
Commission
d. Approve,reject,suspend,revokeor
require amendments to
173

d. Ordertheexamination,searchand A:
seizure of all documents, papers, GR:Nosecuritycanbesoldorofferedforsale
files and records, tax returns, and or distribution within the Philippines unless
books of accounts of any entity or accompaniedbyaregistrationstatementfiled
personunderinvestigation. withandapprovedbytheSEC.

Note: The SECs jurisdiction under Section 5 of PD XPN:
No. 902A (intracorporate disputes) has been 1. Exemptsecurities
transferredtotheappropriateRTC,pursuanttoSec. 2. Securitiessoldinexempttransactions.
5.2ofSRC.
Q:Whataretheeffectsofnonregistration?
III.SECURITESTOBEREGISTERED
A: The issuer would be penalized. Issuers of
Q:Whataresecurities? securitiesnotregisteredshallbesubjectcriminal,
civilandadministrativecharges.
A:Securitiesareshares,participationorinterests
inacorporationorinacommercialenterpriseor Q:Whataretheexemptsecurities?
profitmaking venture and evidenced by a
certificate,contract,instrument,whetherwritten A:
orelectronicincharacter.Itincludes: 1. Any security issued or guaranteed by
the Government of the Philippines, or
1. Equity instruments Shares of stock, by any political subdivision or agency
certificatesofinterestorparticipationin thereof, or by any person controlled or
a profit sharing agreement, certificates supervised by, and acting as
of deposit for a future subscription, instrumentalityofsaidgovernment.
proprietary or nonproprietary
membershipcertificatesincorporations 2. Any security issued or guaranteed by
2. Investments instruments Investment the government of any country with
contracts, , fractional undivided which the Philippines maintains
interestsinoil, gas, or other diplomatic relations, or by any state,
mineralrights provinceorpoliticalsubdivisionthereof
3. Debt instruments bonds, debentures, on the basis of reciprocity: Provided,
notes, evidence of indebtedness, asset that the SEC may require compliance
backedsecurities with the form and content of
4. Derivativesoptionsandwarrants disclosurestheSECmayprescribe
5. Trust instruments Certificates of
assignments, certificates of 3. Certificatesissuedbyareceiverorbya
participation, trust certificates, voting trusteeinbankruptcydulyapprovedby
trustcertificatesorsimilarinstruments; theproperadjudicatorybody.
6. Future Other instruments as may in
the future be determined by the SEC. 4. Any security or its derivatives the sale
(1996BarQuestion) or transfer of which, by law, is under
the supervision and regulation of the
Q:Whatisregistrationwithregardtosecurities? Office of Insurance Commission,
Housing and Land Use Regulatory
A: ItisthedisclosingtotheSECofallmaterial Board, or the Bureau of Internal
andrelevantinformation about the issuer of Revenue.
thesecurity.
5. Anysecurityissuedbyabankexceptits
Q:Whyisregistrationofsecuritiesmandated? ownsharesofstock.

A:Itspurposeistoinformthepublicforthemto 6. Other securities as determined by the
beabletomakegoodbusinessjudgment.Itisthe SEC
filingofregistrationstatement.
Note:Beinganissuerofanexemptsecuritydoesnot
Q:Whatistherulewithregardtoregistrationof exempt such issuer from the requirement of
securities? submissionofreportsfullandfairdisclosure.

174
MERCANTILELAWTEAM:
Q:Whatareexempttransactions? IV.PROCEDUREFORREGISTRATIONOF
SECURITIES
A:
1. Anyjudicialsale,orsalebyanexecutor, Q: What is the procedure for registration of
administrator, guardian, receiver or securities?
trusteeininsolvencyorbankruptcy
A:
2. Those sold by a pledge, mortgagee, or 1. Application All securities required to
any other similar lien holder, to be registered shall be registered
liquidate a bona fide debt (a security throughthefilingbyissuerwithSEC,of
pledged in good faith as security for aswornregistrationstatement.
suchdebt
2. ProspectusTheregistrationstatement
3. Those sold or offered for sale in an shallincludeanyprospectusrequiredor
isolated transaction, the owner not permittedtobedelivered;
beinganunderwriter
3. Other information The information
4. Distribution by the corporation of requiredfortheregistrationofanykind
securities to its stockholders as and all securities shall include, among
dividends; others,theeffectofthesecuritiesissue
onownership,onthemixofownership,
5. Saleofcapitalstockofacorporationto especiallyforeignandlocalownership;
itsownstockholdersexclusively
4. Signatories to registration statement
6. Bonds or notes secured by a mortgage The registration statement shall be
aresoldtoasinglepurchaseratasingle signedbytheissuers:
sale a. Executiveofficer
b. Principaloperatingofficer
7. Deliveryofsecurityinexchangeforany c. Comptroller
other security pursuant to the right of d. Principalaccountingofficer
conversion e. Corporate secretary or
persons performing similar
8. Brokers transactions executed upon functions
thecustomersorders
Note: it shall be accompanied by a
9. Share subscriptions prior to dulyverifiedresolutionoftheBoDof
incorporation or in pursuance of an theissuer
increaseinitsauthorizedcapitalstock
5. WrittenconsentofexpertThewritten
10. Exchange of securities by the issuer consent of the expert named as having
with its existing security holders certified any part of the registration
exclusively statement or any document used in
connectiontherewithshallalsobefiled
11. Salebyissuertofewerthan20persons
in the Philippines during any 12 month 6. Certification by selling stockholders
period Where the registration statement
includes:
12. Sale to banks, investment houses, a. Shares to be sold by the
insurance companies and any entities sellingshareholders
ruledqualifiedbytheSEC b. Awrittencertificationbysuch
selling shareholders as to the
accuracy of any part of the
registration statement
contributed by such selling
shareholders shall also be
filed

7. Fees The issuer shall pay to the SEC;
the SEC shall prescribe by rule,

175

diminishing the fees in inverse c. Hasbeenorisengagedorisabout
proportion, the value of the aggregate to engage in fraudulent
priceoftheoffering transactions
Has made any false or misleading
8. Notice and publication Notice of the representationsofmaterialfactsin
filingoftheregistrationstatementshall any prospectus concerning the
beimmediatelypublishedbytheissuer issueroritssecurities;or
in two newspapers of general d. Has failed to comply with any
circulation in the Philippines; once a requirement that the SEC may
week for two consecutive weeks, impose as a condition for
recitingthat: registration of the security for
a. A registration statement has which registration statement has
beenfiled,and beenfiled.
b. The aforesaid registration
statement and papers 2. Theregistrationstatementisonitsface
attached thereto are open to incomplete or inaccurate or includes
inspection at the SEC during anyuntruestatementofamaterialfact
businesshours. or omits to state a material fact
requiredtobestatedtherein.
Note: copies shall be furnished to
interested parties at a reasonable 3. Theissueroranyunderwriterhasbeen
charge. convicted by a competent judicial or
administrative body of an offense
9. SECPowerforproductionofbooksThe involving moral turpitude and/or fraud
SECmay: or is enjoined by the SEC or other
a. Compel the production of all competent judicial or administrative
the books and papers of such body for violations of securities,
issuer commoditiesandotherrelatedlaws
b. Administeroaths
c. Examine the officers of such 4. Any issuer who refuses to permit the
issuer, or any other person examination to be made by the
connected therewith as to its Commissioner.
businessandaffairs
Q: What are the grounds for suspension or
10. Ruling Within 45 days after the date cancellationofcertificateofregistration?
of the filing of the registration
statement, or by such later date to A:
whichtheissuerhasconsented,theSEC 1. Fraudinprocuringregistration
shalldeclaretheregistrationstatement 2. Serious misrepresentation as to
effective or rejected, unless the objectivesofcorporation
applicant is allowed to amend the 3. Refusal to comply with lawful order of
registrationstatement. SEC
4. Continuous inoperation for at least 5
Q: What are the grounds for rejection and years
revocationofregistration? 5. Failure to file bylaws within required
period
A: The following acts constitute a ground for 6. Failuretofilereports
revocationofregistration: 7. Othersimilargrounds.(Sec.6[L])

1. Theissuer: Q: What are the grounds for suspension of
a. Has been judicially declared registration?
insolvent
b. Has violated any of the provisions A:
oftheCode,therulespromulgated 1. If any time, the information contained
pursuant thereto, or any order of in the registration statement filed is or
the SEC of which the issuer has has become misleading, incorrect,
notice in connection with the inadequate or incomplete in any
offering for which a registration materialrespect;or
statementhasbeenfiled
176
MERCANTILELAWTEAM:
2. The sale or offering for sale of the Q:Aresecuritymarketprofessionalsrequiredto

security registration there under may beregistered?
workortendtoworkafraud;
3. Pending investigation of the security A: Yes. No broker shall sell any securities unless
registered to ascertain whether the he is registered with the SEC (Sec. 19, Revised
registration of such security should be Securities Act) (Nicolas vs. CA, et al., G.R. No.
revoked on any ground specified the 12285,Mar.27,1998)
SRC;and
4. Refusal to furnish information required Q: Can a stockbroker without license from the
bytheCommission.(Sec.15) SEC, recover management fees allegedly earned
from handling the securities transactions of a
Q: Who are the securities market professionals client?
asclassifiedbytheSRC?
A: No. An unlicensed person may not recover
A:Theyarethebroker,dealer,associatedperson compensation for services as a broker where a
ofabrokerordealer,andasalesman. statuteorordinanceisapplicableandsuchisofa
regulatorynature.
Q:Whoisabroker?
Q:Whatismargintrading?
A: A person engaged in the business of buying
andsellingsecuritiesfortheaccountofothers. A: A kind of trading that allows a broker to
advance for the customer/investor part of the
Q:Whoisadealer? purchase price of the security and to keep it as
collateralforsuchadvance.
A: Any person who buys and sells securities for
his/her own account in the ordinary course of Q:Whatisthemarginallowancestandard?
business.
A: The credit extended must be for an amount
Q: Who is an associated person of a broker or notgreaterthan,whicheverishigherof:
dealer? 1. 65% of the current market price of the
security;or
A: He is an employee of a broker or dealer who 2. 100%ofthelowestmarketpriceduring
directlyexercisescontrolofsupervisoryauthority thepreceding36months,butnotmore
butdoesnotincludeasalesman,oranagent,ora than75%ofthecurrentmarketprice.
person, whose functions are solely clerical or
ministerial. Q: What are the purposes of the margin
requirements?
Q:Whoisasalesman?
A: They are primarily intended to achieve a
A:Heisanaturalperson,employedassuch,oras macroeconomic purpose the protection of the
anagent,byadealer,issuerorbrokertobuyand overall economy from excessive speculation in
sellsecurities;butforthepurposeofregistration, securities. Their recognized secondary purpose is
shallnotincludeanyemployeeofanissuerwhose toprotectsmallinvestors.
compensation is not determined directly or
indirectlyonsalesofsecuritiesoftheissuer. Q: Who has the burden of compliance with
marginrequirements?
Q: What is the obligation of the broker to his
client? A: Thebrokersanddealers.

A: The primary obligation of the broker is to Note: In securities trading, the brokers are
ensure his accounts compliance with the law. essentially the counterparties to the stock
(Abacus Securities Corp. v. Ampil, G.R. No. transactionsattheExchange.Sincetheprincipalsof
160922,Feb.27,2006) the broker are generally undisclosed, the broker is
personally liable for the contracts thus made.
Note: Since abrokeragerelationship isessentiallya Brokers have a right to be reimbursed for sums
contract for the employments of an agent, the law advanced by them with the express or implied
oncontractsgovernthebrokerprincipalrelationship authorization of the principal. (Abacus Securities
Corporation v. Ampil, G.R. No. 160016, Feb. 27,
2006)

177

V.PROHIBITIONSONFRAUD,MANIPULATIONS thepurposeofmanipulatingprices
ANDINSIDERTRADING aredrawingunsuspectinginvestors
into the market leaving them
A.MANIPULATIONOFSECURITYPRICES defrauded of their money and
securities.
Q: What acts are considered manipulation of
securityprices? Q: Suppose A is the owner of several inactive
securities. To create an appearance of active
A: tradingforsuchsecurities,AconniveswithBby
1. Transactions intended to create active whichAwillofferforsalesomeofhissecurities
trading: andBwillbuythematacertainfixedprice,with
a. WashSaleengagingintransaction theunderstandingthatalthoughtherewouldbe
inwhichthereisnogenuinechange an apparent sale, A will retain the beneficial
intheactualownershipofasecurity ownershipthereof.
b. MatchedSaleThereisachangeof
ownership in the securities by 1. Isthearrangementlawful?
entering an order for the 2. If the sale materializes, what is it
purchase/sale of security with the called?
knowledge that a simultaneous
orderofsubstantiallythesamesize, A:
time, and price, for the sale or 1. No.Thearrangementisnotlawful.Itis
purchase of any such security, has anartificialmanipulationofthepriceof
or will be entered by or for the securities. This is prohibited by the
sameordifferentparties. SecuritiesRegulationCode.
c. Similar transactions where there is 2. If the sale materializes, it is called a
nochangeofbeneficialownership. wash sale or simulated sale. (2001 Bar
Question)
2. Engaging in transactions which induce
pricetoincreaseordecrease: B.SHORTSALES
a. Marking the close buying and
sellingsecuritiesatthecloseofthe Q:WhatisShortSelling?
markettoaltertheclosingpriceof
thesecurity. A:Itisthesellingofshareswhichthesellerdoes
b. Painting the tape engaging in a not actually own or possess and therefore he
series of transactions in securities cannot,himself,supplythedelivery.
that are reported publicly to give
the impression of activity or price C.FRAUDULENTTRANSACTIONS
movementinasecurity.
c. Squeezing the float refers to Q:Whatareconsideredfraudulenttransactions?
taking advantage of a shortage of
securities in the market by A:
controlling the demand side and 1. Obtainingmoneyorpropertybymeans
exploiting market congestion of any untrue statement of a material
during such shortages in a way to fact
createartificialprices.
d. Hype and dump engaging in 2. Engaging in any act, transaction,
buying activity at increasingly practice or course of business, which
higher prices and then selling operates as a fraud or deceit upon any
securities in the market at the person.
higherprices.
e. Boiler room operations theuse of D.INSIDERTRADING
high pressure sale tactics to
promote purchase and sale of Q:Whatisinsidertrading?
securities
f. Daisychainitreferstoaseriesof A: A purchase or sale made by an insider or his
purchase and sales of the same relative within the second degree shall be
issue at successively higher prices presumed to be effected while in possession of
by the same group of people with material nonpublic information if transacted
after such information came into existence but
178
MERCANTILELAWTEAM:
prior to the public dissemination of such Q:Whenisinformationmaterialnonpublic?

information,andlapseofreasonabletimeforthe
markettoabsorbsuchinformation. A:If:
1. Information about the issuer or the
Q:Whoisaninsider? security which has not been generally
disclosedtothepublicandwouldlikely
A: A person in possession of corporate affect the market price of the security
informationnotgenerallyavailabletothepublic. after being disseminated to the public
and the lapse of a reasonable time for
Q:Whomaybeaninsider? the market to absorb the information;
or
A: 2. Would be considered by a reasonable
1. Theissuer person important under the
2. A director or officers of or a person circumstancesindetermininghiscourse
controllingtheissuer ofactionwhethertobuy,sellorholda
3. A person whose relationship or former security(Sec.27.2).(1995BarQuestion)
relationship to the issuer gives him
access to material information about Q: What are the possible defenses against
the issuer or the security that is not insidertrading?
generallyavailabletothepublic
4. A government employee, or director , A:
or officer of an exchange, clearing 1. That the information was acquired not
agency and/or selfregulatory on account of his relationship with the
organizationwhohasaccesstomaterial issuer;or
information about an issuer or a 2. That the other party knew or can be
security that is not generally available presumed to know the material
tothepublic;or information.
5. Constructive Insider A person who
learns such information by a VI.PROTECTIONOFINVESTORS
communication from any of the
foregoing insiders. (Sec. 3.8) (1995 Bar Q: What are the provisions in the SRC intended
Question) toprotecttheinvestors?

Q: What are the other prohibited acts in an A:
insidertrading? 1. TenderOfferRule
2. Rulesonproxysolicitation
A: Itshallbeunlawful: 3. Disclosurerule
1. Foraninsidertocommunicatematerial
nonpublicinformationabouttheissuer A.TENDEROFFERRULE
or the security to any person who
thereby becomes an insider, where Q:Whatisatenderoffer?
original insider communicating knows
or has reason to believe that such A:Publiclydeclaredintentiontobuysecuritiesof
personwilllikelybuyorsellonthebasis publiccompaniesgiventoallstockholdersby:
ofsuchinformation 1. FilingwiththeSECadeclarationtothat
2. For any person, other than the tender effect,andpayingthefilingfee.
offeror,whoisinpossessionofmaterial 2. Furnishing the issuer a statement
nonpublic information relating to such containing the information required of
tender offer to transact securities the issuers as SEC may prescribe,
coveredbythetenderoffer including subsequent or additional
3. For the tender offeror, or those acting materials.
in his behalf, the issuer of securities 3. Publishingallrequestsorinvitationsfor
covered by the tender offer, and any tender, or materials making a tender
insider, to communicate material non offerorrequestingorinvitinglettersof
public information relating to the suchsecurity.
tenderofferwhichwouldlikelyresultin
violation of prohibition of the insider Note: It is also defined as an offer by the acquiring
fromtrading. persontostockholdersofapubliccompanyforthem
179

totendertheirsharesonthetermsspecifiedinthe Q:Whataretheunlawfulandprohibitedacts
offer. relatingtotenderoffers?

Q:Whatisthepurposeoftenderoffer? A:Itshallbeunlawfulforanypersonto:
1. Make any untrue statement of a
A:Tenderofferisinplacetoprotecttheinterest material fact or omit to state any
of minority stockholders of a target company materialfactnecessaryinordertomake
againstanyschemethatdilutesthesharevalueof statementsmadenotmisleading,and
the investments. It affords such minority
shareholderstheopportunitytowithdraworexit 2. Engageinanyfraudulent,deceptive,or
from the company under reasonable terms, a manipulative acts or practices in
chance to sell their shares at the same price as connection with any tender offer or
thoseofthemajoritystockholders. requestorinvitationfortenders,orany
solicitation of security holders in
Q:Inwhatinstancesisatenderofferrequiredto opposition to or in favor of any such
bemade? offer,request,orinvitation.

A: B.RULESONPROXYSOLICITATION
TheSRCprovides:
1. The person intends to acquire 15% or Q: What are the requisite for valid proxy
more of the equity share of a public solicitation?
company pursuant to an agreement
made between or among the person A:
andoneormoresellers. 1. Itmustbeinwriting
2. The person intends to acquire 30% or 2. Itmustbesignedbythestockholderor
more of the equity shares of a public hisdulyauthorizedrepresentative
companywithinaperiodof12months. 3. Itmustbefiledbeforethescheduled
3. The person intends to acquire equity meetingwiththecorporatesecretary
shares of a public company that would (Sec.20)
resultinownershipofmorethan50%of
thesaidshares. Note: The proxy shall be valid only for the meeting
forwhichitisintended.Noproxyshallbevalidand
However,theIRRoftheSRCprovides: effective for a period longer than 5 years at one
1. The person intends to acquire 35% or time.
more of the equity share of a public
company pursuant to an agreement Q:Whataretherulesonproxysolicitationwith
made between or among the person regardtobrokerordealer?
andoneormoresellers.
2. The person intends to acquire 35% or 1. No broker or dealer shall give any
more of the equity shares of a public proxy, consent or authorization, in
companywithinaperiodof12months. respect of any security carried for the
3. The person intends to acquire equity account of a customer, to a person
shares of a public company that would other than the customer, without the
resultinownershipofmorethan51%of express written authorization of such
thesaidshares. customer.

Note: Tender offer applies to both direct and 2. A broker or dealer who holds or
indirectacquisition. acquires the proxy for at 10% or such
percentage as the Commission may
Q: What may be considered as a public prescribe of the outstanding share of
company? the issuer, shall submit a report
identifying the beneficial owner within
A: 10 days after such acquisition, for its
1. Thoselistedonanexchange;or ownaccountorcustomer,totheissuer
2. Thosewithassetsofatleast50Mpesos of the security, to the Exchange where
andhaving200shareholdersowningat the security is traded and to the
least100shareseach. Commission.(Sec.20)

180
MERCANTILELAWTEAM:
C.DISCLOSURERULE securityistraded,andtotheCommission
aswornstatementcontaining:
Q:Whendoesdisclosurebegin?
a. Hispersonalcircumstances
A: It begins at registration and continues b. The nature of such beneficial
periodicallythruperiodicreport. ownership
c. If the purpose was to acquire control
Q:Mayitbesuspended? of the business, any plans the
recipient may have affecting a major
A:Yes.Itmaybesuspendedwhenonthefirstday changein
of the fiscal year if it has less than 100 d. thebusiness
shareholders(Rule17.1,SRCIRR). e. The number of shares beneficially
owned,andthenumberofsharesfor
Q:Whendoesthedisclosurerequirementend? whichthereisarighttoacquire
f. granted to such person or his
A: associates
GR: Disclosure does not end because once a g. Informationastoanyagreementwith
reporting company, it remains as such even athirdpersonregardingthesecurities
when registration of securities has been (Sec.18)
revoked(Rule13SCRIRR).
3. Persons that has beneficial ownership of
XPN:Iftheprimarylicenseisrevoked. 10%ormore:

XPN to the XPN: In case of hospitals and Every person who is directly or indirectly
educationalinstitutionsiftheprimarylicense thebeneficialownerofmorethan10%of
is revoked, disclosure requirement still anyclassofanyequitysecurity,orwhois
continuesbecauseofpublicinterest. directororanofficeroftheissuerofsuch
security,shallfile:
Q:Givethereportorialrequirements.
a. Statement with the SEC and, if such
A: security is listed for trading on an
1. Issuers: Exchange, also with the Exchange, of
a. Within135days,aftertheend ofthe the amount of all equity securities of
issuers fiscal year, an annual report such issuer of which he is the
which shall include, a balance sheet, beneficialowner,
profit and loss statement and b. Within10daysafterthecloseofeach
statementofcashflows,forsuchlast calendarmonth,ifthereisachangein
fiscal year, certified by an ownership during such month, a
independent certified public statementindicatinghisownershipat
accountant, and a management the close of the calendar month and
discussion and analysis of results of suchchangesinhisownershipashave
operations; occurredduringsuchcalendarmonth.
b. Other periodical reports for interim (Sec.23)
fiscal periods and current reports on
significantdevelopmentsoftheissuer VII.CIVILLIABILITIES
(Sec.17)
Q: What are the grounds for civil liability to
2. PersonsAcquiringSecurities: arise?
If the issuer is one that has to make a
report, any person who acquires directly A:
or indirectly the beneficial ownership of 1. FalseRegistrationStatement.(Sec.56)
more than 5% of such class, or in excess 2. Fraud with connection to prospectus,
of such lesser per centum as the communicationsandreports.(Sec.57)
Commission may prescribe, shall, within 3. Fraud in connection with security
10 days after such acquisition or such transactions.(Sec.58)
reasonable time as fixed by the 4. Manipulation of security prices. (Sec.
Commission, submit to the issuer of the 60)
security, to the Exchange where the 5. Insidertrading.(Sec.61)
181

the reading of the registration statement by
Q: Who are the persons that may be liable in suchperson(Sec.56).
caseoffalseregistrationstatement?
Q: Who are the persons liable with regard to
1. Theissuerandeverypersonwhosigned fraud with connection to prospectus,
theregistrationstatement communicationsandreports?
2. Every person who was a director of, or A:
any other person performing similar 1. Anypersonwhoofferstosellsorsells
functions, or a partner in, the issuer at a. in violation any provisions on
thetimeofthefilingoftheregistration registrationofsecurities;and
statement or any part, supplement or b. by the use of any means or
amendment thereof with respect to instruments of transportation or
whichhisliabilityisasserted communication, by means of a
3. Every person who is named in the prospectusorotherwrittenororal
registration statement as being or communication.
about to become a director of, or a
person performing similar functions, or Q: Who are the persons liable with regard to
a partner in, the issuer and whose fraudinconnectionwithsecuritytransactions?
writtenconsenttheretoisfiledwiththe
registrationstatement A: Any personwho engages in any act or
4. Everyauditororauditingfirmnamedas transactioninviolationofSections19.2,20or26
having certified any financial ofSRC.
statementsusedinconnectionwiththe
registrationstatementorprospectus Q: Who are the persons liable for the
5. Every person who, with his written manipulationofsecurityprices?
consent, which shall be filed with the
registrationstatement,hasbeennamed A:Anypersonwhowillfullyparticipatesinanyact
ashavingpreparedorcertifiedanypart or transaction in violation of Section 24 shall be
of the registration statement, or as liabletoanypersonwhoshallpurchaseorsellany
having prepared or certified any report securityatapricewhichwasaffectedbysuchact
orvaluationwhichisusedinconnection ortransaction.
with the registration statement, with
respect to the statement, report, or Q: Who are the persons liable with regard to
valuation,whichpurportstohavebeen insidertrading?
preparedorcertifiedbyhim
6. Every selling shareholder who A:Anypersonincaseoflegaltenderwho:
contributed to and certified as to the 1. Purchases or sells a security while in
accuracyofaportionoftheregistration possession of material information not
statement,withrespecttothatportion generallyavailabletothepublic.
of the registration statement which 2. Communicates material nonpublic
purports to have been contributed by information
him
7. Every underwriter with respect to such Q:Howarethepersonsenumeratedliable?
security
A:Jointlyandseverally
Note: If the person who acquired the security
did so after the issuer has made generally Q: What is the prescriptive period for filing of
available to its security holders an income action?
statement covering a period of at least twelve
months beginning from the effective date of A: 2 years after the discovery of the facts
the registration statement, then the right of constituting the cause of action and within 5
recovery under this subsection shall be yearsaftersuchcauseofactionaccrued
conditionedonproofthatsuchpersonacquired
the security relying upon such untrue Q: What court has the jurisdiction over civil
statement in the registration statement or
liabilities?
relyingupontheregistrationstatementandnot

knowing of such income statement, but such
reliance may be established without proof of
A:RegionalTrialCourt

182
MERCANTILELAWTEAM:
Q:Whatisthelimitationforawardingdamages?
A:
1. The court can award not exceeding
triple theamount of the transaction
plusactualdamage

2. The court is also authorized to award
attorneysfeesnotexceeding30%ofthe
award
Q: When may the court award exemplary

damages?

A:Incasesof:
1. BadFaith
2. Fraud
3. Malevolenceor
4. Wantonness in the violation of SRC or the
rulesandregulationspromulgated
183

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CORPORATION LAW

CORPORATIONLAW participated in the business affairs of the

corporation like entering into a

the same manner as natural persons. XPN:Ifthepenaltyofthecrimeisonlyfineor

the New Civil Code because said

Q: What is the doctrine of piercing the veil of

(1)NUMBERANDQUALIFICATIONSOF cooperatives are allowed to be incorporators

corporation by purchase, donation, and

F.INCORPORATIONANDORGANIZATION 2. Firm Commitment the underwriter

Q:WhatarethecontentsofAOI? 5. Certification under oath by corporate

(7)REGISTRATIONANDISSUANCEOF present either in person or by

d. Copythereof,dulycertifiedby the owners of at least a majority of the

by a majority vote of the directors of

(c)POWERTODENYPREEMPTIVERIGHT issues of shares made by the corporation in

corporation and they can also vote on g. To adopt/amend/repeal the by

the SEC, otherwise, it is ineffective and Q:Whatarethedistinctionsbetweenavoting

contractualstipulation,orwhenitisprovidedfor 2. There must remain other shares with full

(14)INSIDEINFORMATION with respect to the corporation in which he has

votes in favor of the action (Sec 7211, United 2. Thecertificatemustbesealedwiththe

A: No. Since the shares were already transferred (D)ISSUANCE

1. Book for the minutes of SH and BOD

has unrestricted earnings to cover the 2. To afford the corporation the

2. Wherecreditorsareaffected consolidation, except the surviving or

nationalizationlaws,nationalityisdeterminednot 4. Names and addresses of the persons

for the administration and management of its

Q: What are the considered as doing or A:Foreigncorporationsneedlicenseto:

corporations merge into an entirely new c. Statementofchanges,ifany,inthe

SECURITIESREGULATIONCODE registration statements, and

2. The sale or offering for sale of the Q:Aresecuritymarketprofessionalsrequiredto

prior to the public dissemination of such Q:Whenisinformationmaterialnonpublic?

Q: When may the court award exemplary

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