11.

DUTIES OF DIRECTORS, TRUSTEES OR OFFICERS

Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his

duty, any interest adverse to the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes a disability upon him to deal
in his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.

Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413
(2009)1

1Construction Development Corporation of the Philippines (CDCP) was incorporated in 1966. It was granted a franchise
to construct, operate and maintain toll facilities in the North and South Luzon Tollways and Metro Manila Expressway.

CDCP Mining Corporation (CDCP Mining), an affiliate of CDCP, obtained loans from Marubeni Corporation of Japan
(Marubeni). A CDCP official issued letters of guarantee for the loans although there was no CDCP Board Resolution
authorizing the issuance of such letters of guarantee. CDCP Mining secured the Marubeni loans when CDCP and CDCP
Mining were still privately owned and managed.

In 1983, CDCPs name was changed to Philippine National Construction Corporation (PNCC) in order to reflect that the
Government already owned 90.3% of PNCC and only 9.70% is under private ownership. Meanwhile, the Marubeni loans
to CDCP Mining remained unpaid.

On 20 October 2000 and 22 November 2000, the PNCC Board of Directors (PNCC Board) passed Board Resolutions
admitting PNCCs liability to Marubeni. Previously, for two decades the PNCC Board consistently refused to admit any
liability for the Marubeni loans.

In January 2001, Marubeni assigned its entire credit to Radstock Securities Limited (Radstock), a foreign corporation.
Radstock immediately sent a notice and demand letter to PNCC.

PNCC and Radstock entered into a Compromise Agreement. Under this agreement, PNCC shall pay Radstock the
reduced amount of P6,185,000,000.00 in full settlement of PNCCs guarantee of CDCP Minings debt allegedly totaling
P17,040,843,968.00 (judgment debt as of 31 July 2006). To satisfy its reduced obligation, PNCC undertakes to (1) "assign to
a third party assignee to be designated by Radstock all its rights and interests" to the listed real properties of PNCC; (2)
issue to Radstock or its assignee common shares of the capital stock of PNCC issued at par value which shall comprise
20% of the outstanding capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of PNCCs 6% share, for the
next 27 years, in the gross toll revenues of the Manila North Tollways Corporation.

Strategic Alliance Development Corporation (STRADEC) moved for reconsideration. STRADEC alleged that it has a claim
against PNCC as a bidder of the National Governments shares, receivables, securities and interests in PNCC.

Issue

Whether or not the Compromise Agreement between PNCC and Radstock is valid in relation to the Constitution, existing
laws, and public policy

Held

The Compromise Agreement is contrary to the Constitution, existing laws and public policy.
The PNCC Board Acted in Bad Faith and with Gross Negligence
in Directing the Affairs of PNCC
In this jurisdiction, the members of the board of directors have a three-fold duty: duty of
obedience, duty of diligence, and duty of loyalty.33 Accordingly, the members of the
board of directors (1) shall direct the affairs of the corporation only in accordance with
the purposes for which it was organized;34 (2) shall not willfully and knowingly vote
for or assent to patently unlawful acts of the corporation or act in bad faith or with
gross negligence in directing the affairs of the corporation;35 and (3) shall not acquire
any personal or pecuniary interest in conflict with their duty as such directors or
trustees.36
In the present case, the PNCC Board blatantly violated its duty of diligence as it
miserably failed to act in good faith in handling the affairs of PNCC.
First. For almost two decades, the PNCC Board had consistently refused to admit
liability for the Marubeni loans because of the absence of a PNCC Board resolution
authorizing the issuance of the letters of guarantee.
There is no dispute that between 1978 and 1980, Marubeni Corporation extended two
loans to Basay Mining (later renamed CDCP Mining): (1) US$5 million to finance the
purchase of copper concentrates by Basay Mining; and (2) Y5.46 billion to finance the
completion of the expansion project of Basay Mining including working capital.
There is also no dispute that it was only on 20 October 2000 when the PNCC Board
approved a resolution expressly admitting PNCCs liability for the Marubeni loans. This
was the first Board Resolution admitting liability for the Marubeni loans, for PNCC
never admitted liability for these debts in the past.2

PNCCs toll fees are public funds. PNCC cannot use public funds like toll fees that indisputably form part of the General
Fund, to pay a private debt of CDCP Mining to Radstock. Such payment cannot qualify as expenditure for a public
purpose. The toll fees are merely held in trust by PNCC for the National Government, which is the owner of the toll fees.
Considering that there is no appropriation law passed by Congress for the compromise amount, the Compromise
Agreement is void for being contrary to law, specifically Section 29(1), Article VI of the Constitution. And since the
payment pertains to CDCP Minings private debt to Radstock, the Compromise Agreement is also void for being contrary
to the fundamental public policy that government funds or property shall be spent or used solely for public purposes.

Radstock is not qualified to own land in the Philippines. Consequently, Radstock is also disqualified to own the rights to
ownership of lands in the Philippines. Radstock cannot own the rights to ownership of any land in the Philippines
because Radstock cannot lawfully own the land itself. Otherwise, there will be a blatant circumvention of the
Constitution, which prohibits a foreign private corporation from owning land in the Philippines. In addition, Radstock
cannot transfer the rights to ownership of land in the Philippines if it cannot own the land itself. It is basic that an assignor
or seller cannot assign or sell something he does not own at the time the ownership, or the rights to the ownership, are to
be transferred to the assignee or buyer. The third party assignee under the Compromise Agreement who will be
designated by Radstock can only acquire rights duplicating those which its assignor is entitled by law to exercise. Thus,
the assignee can acquire ownership of the land only if its assignor owns the land. Clearly, the assignment by PNCC of the
real properties to a nominee to be designated by Radstock is a circumvention of the Constitutional prohibition against a
private foreign corporation owning lands in the Philippines. The said circumvention renders the Compromise Agreement
void.
2 Even Radstock admitted that PNCCs 1994 Financial Statements did not reflect the Marubeni loans. 37 Also, former PNCC

Chairman Arthur Aguilar stated during the Senate hearings that "the Marubeni claim was never in the balance sheet x x x
nor was it in a contingent account."38 Miriam M. Pasetes, SVP Finance of PNCC, and Atty. Herman R. Cimafranca of the
Office of the Government Corporate Counsel, confirmed this fact, thus:
SEN. DRILON. x x x And so, PNCC itself did not recognize this as an obligation but the board suddenly recognized it as
an obligation. It was on that basis that the case was filed, is that correct? In fact, the case hinges on they knew that this
claim has prescribed but because of that board resolution which recognized the obligation they filed their complaint, is
that correct?
MR. CIMAFRANCA. Apparently, it's like that, Senator, because the filing of the case came after the acknowledgement.
SEN. DRILON. Yes. In fact, the filing of the case came three months after the acknowledgement.
MR. CIMAFRANCA. Yes. And that made it difficult to handle on our part.
SEN. DRILON. That is correct. So, that it was an obligation which was not recognized in the financial statements of

2
PNCC but revived in the financial statements because it has prescribed but revived by the board effectively. That's
the theory, at least, of the plaintiff. Is that correct? Who can answer that?
Ms. Pasetes, yes.
MS. PASETES. It is not an obligation of PNCC that is why it is not reflected in the financial statements.39 (Emphasis
supplied)
In short, after two decades of consistently refuting its liability for the Marubeni loans, the PNCC Board suddenly and
inexplicably reversed itself by admitting in October 2000 liability for the Marubeni loans. Just three months after the
PNCC Board recognized the Marubeni loans, Radstock acquired Marubeni's receivable and filed the present collection
case.
Second. The PNCC Board admitted liability for the Marubeni loans despite PNCCs total liabilities far exceeding its assets.
There is no dispute that the Marubeni loans, once recognized, would wipe out the assets of PNCC, "virtually emptying
the coffers of the PNCC."40 While PNCC insists that it remains financially viable, the figures in the COA Audit Reports tell
otherwise.41 For 2006 and 2005, "the Corporation has incurred negative gross margin of 84.531 Million and 80.180
Million, respectively, and net losses that had accumulated in a deficit of 14.823 Billion as of 31 December 2006."42 The
COA even opined that "unless [PNCC] Management addresses the issue on net losses in its financial rehabilitation
plan, x x x the Corporation may not be able to continue its operations as a going concern."
Notably, during the oral arguments before this Court, the Government Corporate Counsel admitted the PNCCs huge
negative net worth, thus:
JUSTICE CARPIO
x x x what is the net worth now of PNCC? Negative what? Negative 6 Billion at least[?]
ATTY. AGRA
Yes, your Honor.43 (Emphasis supplied)
Clearly, the PNCC Boards admission of liability for the Marubeni loans, given PNCCs huge negative net worth of at
least 6 billion as admitted by PNCCs counsel, or 14.823 billion based on the 2006 COA Audit Report, would leave
PNCC an empty shell, without any assets to pay its biggest creditor, the National Government with an admitted
receivable of 36 billion from PNCC.
Third. In a debilitating self-inflicted injury, the PNCC Board revived what appeared to have been a dead claim by
abandoning one of PNCCs strong defenses, which is the prescription of the action to collect the Marubeni loans.
Settled is the rule that actions prescribe by the mere lapse of time fixed by law. 44 Under Article 1144 of the Civil Code, an
action upon a written contract, such as a loan contract, must be brought within ten years from the time the right of action
accrues. The prescription of such an action is interrupted when the action is filed before the court, when there is a written
extrajudicial demand by the creditor, or when there is any written acknowledgment of the debt by the debtor.45
In this case, Basay Mining obtained the Marubeni loans sometime between 1978 and 1981. While Radstock claims that
numerous demand letters were sent to PNCC, based on the records, the extrajudicial demands to pay the loans appear to
have been made only in 1984 and 1986. Meanwhile, the written acknowledgment of the debt, in the form of Board
Resolution No. BD-092-2000, was issued only on 20 October 2000.
Thus, more than ten years would have already lapsed between Marubenis extrajudicial demands in 1984 and 1986 and
the acknowledgment by the PNCC Board of the Marubeni loans in 2000. However, the PNCC Board suddenly passed
Board Resolution No. BD-092-2000 expressly admitting liability for the Marubeni loans. In short, the PNCC Board
admitted liability for the Marubeni loans despite the fact that the same might no longer be judicially collectible. Although
the legal advantage was obviously on its side, the PNCC Board threw in the towel even before the fight could begin.
During the Senate hearings, the matter of prescription was discussed, thus:
SEN. DRILON. ... the prescription period is 10 years and there were no payments the last demands were made, when?
The last demands for payment?
MS. OGAN. It was made January 2001 prior to the filing of the case.
SEN. DRILON. Yes, all right. Before that, when was the last demand made? By the time they filed the complaint more
than 10 years already lapsed.
MS. OGAN. On record, Mr. Chairman, we have demands starting from - - a series of demands which started from May
23, 1984, letter from Marubeni to PNCC, demand payment. And we also have the letter of September 3, 1986, letter of
Marubeni to then PNCC Chair Mr. Jaime. We have the June 24, 1986 letter from Marubeni to the PNCC Chairman. Also
the March 4, 1988 letter...
SEN. DRILON. The March 4, 1988 letter is not a demand letter.
MS. OGAN. It is exactly addressed to the Asset Privatization Trust.
SEN. DRILON. It is not a demand letter? Okay.
MS. OGAN. And we have also...
SEN. DRILON. Anyway...
THE CHAIRMAN. Please answer when you are asked, Ms. Ogan. We want to put it on the record whether it is "yes" or
"no".
MS. OGAN. Yes, sir.
SEN. DRILON. So, even assuming that all of those were demand letters, the 10 years prescription set in and it should have
prescribed in 1998, whatever is the date, or before the case was filed in 2001.
MR. CIMAFRANCA. The 10-year period for if the contract is written, it's 10 years and it should have prescribed in 10
years and we did raise that in our answer, in our motion to dismiss.

3
SEN. DRILON. I know. You raised this in your motion to dismiss and you raised this in your answer. Now, we are not
saying that you were negligent in not raising that. What we are just putting on the record that indeed there is basis to
argue that these claims have prescribed.
Now, the reason why there was a colorable basis on the complaint filed in 2001 was that somehow the board of PNCC
recognized the obligation in a special board meeting on October 20, 2000. Hindi ba ganoon 'yon?
MS. OGAN. Yes, that is correct.
SEN. DRILON. Why did the PNCC recognize this obligation in 2000 when it was very clear that at that point more than
10 years have lapsed since the last demand letter?
MR. AGUILAR. May I volunteer an answer?
SEN. DRILON. Please.
MR. AGUILAR. I looked into that, Mr. Chairman, Your Honor. It was as a result of and I go to the folder letter "N." In our
own demand research it was not period, Your Honor, that Punongbayan in the big folder, sir, letter "N" it was the period
where PMO was selling PNCC and Punongbayan and Araullo Law Office came out with an investment brochure that
indicated liabilities both to national government and to Marubeni/Radstock. So, PMO said, "For good order, can you
PNCC board confirm that by board resolution?" That's the tone of the letter.
SEN. DRILON. Confirm what? Confirm the liabilities that are contained in the Punongbayan investment prospectus both
to the national government and to PNCC. That is the reason at least from the record, Your Honor, how the PNCC board
got to deliberate on the Marubeni.
THE CHAIRMAN. What paragraph? Second to the last paragraph?
MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po 'yong that"s to our recollection, in the records, that was the reason.
SEN. DRILON. Is that the only reason why ...
MR. AGUILAR. From just the records, Mr. Chairman, and then interviews with people who are still around.
SEN. DRILON. You mean, you acknowledged a prescribed obligation because of this paragraph?
MR. AGUILAR. I dont know what legal advice we were following at that time, Mr. Chairman.46 (Emphasis supplied)
Besides prescription, the Office of the Government Corporate Counsel (OGCC) originally believed that PNCC had
another formidable legal weapon against Radstock, that is, the lack of authority of Alfredo Asuncion, then Executive Vice-
President of PNCC, to sign the letter of guarantee on behalf of CDCP. During the Senate hearings, the following exchange
reveals the OGCCs original opinion:
THE CHAIRMAN. What was the opinion of the Office of the Government Corporate Counsel?
MS. OGAN. The opinion of the Office of the Government Corporate Counsel is that PNCC should exhaust all means to
resist the case using all defenses available to a guarantee and a surety that there is a valid ground for PNCC's refusal to
honor or make good the alleged guarantee obligation. It appearing that from the documents submitted to the OGCC that
there is no board authority in favor or authorizing Mr. Asuncion, then EVP, to sign or execute the letter of guarantee in
behalf of CDCP and that said letter of guarantee is not legally binding upon or enforceable against CDCP as principals,
your Honors.47
xxxx
SEN. DRILON. Now that we have read this, what was the opinion of the Government Corporate Counsel, Mr.
Cimafranca?
MR. CIMAFRANCA. Yes, Senator, we did issue an opinion upon the request of PNCC and our opinion was that there
was no valid obligation, no valid guarantee. And we incorporated that in our pleadings in court. 48 (Emphasis supplied)
Clearly, PNCC had strong defenses against the collection suit filed by Radstock, as originally opined by the OGCC. It is
quite puzzling, therefore, that the PNCC Board, which had solid grounds to refute the legitimacy of the Marubeni loans,
admitted its liability and entered into a Compromise Agreement that is manifestly and grossly prejudicial to PNCC.
Fourth. The basis for the admission of liability for the Marubeni loans, which was an opinion of the Feria Law Office, was
not even shown to the PNCC Board.
Atty. Raymundo Francisco, the APT trustee overseeing the proposed privatization of PNCC at the time, was responsible
for recommending to the PNCC Board the admission of PNCCs liability for the Marubeni loans. Atty. Francisco based his
recommendation solely on a mere alleged opinion of the Feria Law Office. Atty. Francisco did not bother to show this
"Feria opinion" to the members of the PNCC Board, except to Atty. Renato Valdecantos, who as the then PNCC Chairman
did not also show the "Feria opinion" to the other PNCC Board members. During the Senate hearings, Atty. Francisco
could not produce a copy of the "Feria opinion." The Senators grilled Atty. Francisco on his recommendation to recognize
PNCCs liability for the Marubeni loans, thus:
THE CHAIRMAN. x x x You were the one who wrote this letter or rather this memorandum dated 17 October 2000 to
Atty. Valdecantos. Can you tell us the background why you wrote the letter acknowledging a debt which is non-existent?
MR. FRANCISCO. I was appointed as the trustee in charge of the privatization of the PNCC at that time, sir. And I was
tasked to do a study and engage the services of financial advisors as well as legal advisors to do a legal audit and financial
study on the position of PNCC. I bidded out these engagements, the financial advisership went to Punongbayan and
Araullo. The legal audit went to the Feria Law Offices.
THE CHAIRMAN. Spell it. Boy Feria?
MR. FRANCISCO. Feria-- Feria.
THE CHAIRMAN. Lugto?
MR. FRANCISCO. Yes. Yes, Your Honor. And this was the findings of the Feria Law Office that the Marubeni account
was a legal obligation.

4
So, I presented this to our board. Based on the findings of the legal audit conducted by the Ferial Law Offices, sir.
THE CHAIRMAN. Why did you not ask the government corporate counsel? Why did you have to ask for the opinion of
an outside counsel?
MR. FRANCISCO. That was the that was the mandate given to us, sir, that we have to engage the ...
THE CHAIRMAN. Mandate given by whom?
MR. FRANCISCO. That is what we usually do, sir, in the APT.
THE CHAIRMAN. Ah, you get outside counsel?
MR. FRANCISCO. Yes, we...
THE CHAIRMAN. Not necessarily the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. So, on the basis of the opinion of outside counsel, private, you proceeded to, in effect, recognize an
obligation which is not even entered in the books of the PNCC? You probably resuscitated a non-existing obligation
anymore?
MR. FRANCISCO. Sir, I just based my recommendation on the professional findings of the law office that we engaged,
sir.
THE CHAIRMAN. Did you not ask for the opinion of the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. Why?
MR. FRANCISCO. I felt that the engagements of the law office was sufficient, anyway we were going to raise it to the
Committee on Privatization for their approval or disapproval, sir.
THE CHAIRMAN. The COP?
MR. FRANCISCO. Yes, sir.
THE CHAIRMAN. Thats a cabinet level?
MR. FRANCISCO. Yes, sir. And we did that, sir.
THE CHAIRMAN. Now... So you sent your memo to Atty. Renato B. Valdecantos, who unfortunately is not here but I
think we have to get his response to this. And as part of the minutes of special meeting with the board of directors on
October 20, 2000, the board resolved in its Board Resolution No. 092-2000, the board resolved to recognize, acknowledge
and confirm PNCCs obligations as of September 30, 1999, etcetera, etcetera. (A), or rather (B), Marubeni Corporation in
the amount of 10,740,000.
Now, we asked to be here because the franchise of PNCC is hanging in a balance because of the on the questions on this
acknowledgement. So we want to be educated.
Now, the paper trail starts with your letter. So, thats it thats my kuwan, Frank.
Yes, Senator Drilon.
SEN. DRILON. Thank you, Mr. Chairman.
Yes, Atty. Francisco, you have a copy of the minutes of October 20, 2000?
MR. FRANCISCO. Im sorry, sir, we dont have a copy.
SEN. DRILON. May we ask the corporate secretary of PNCC to provide us with a copy?
Okay naman andiyan siya.
(Ms. Ogan handing the document to Mr. Francisco.)
You have familiarized yourselves with the minutes, Atty. Francisco?
MR. FRANCISCO. Yes, sir.
SEN. DRILON. Now, mention is made of a memorandum here on line 8, page 3 of this boards minutes. It says, "Director
Francisco has prepared a memorandum requesting confirmation, acknowledgement, and ratification of this indebtedness
of PNCC to the national government which was determined by Bureau of Treasury as of September 30, 1999 is
36,023,784,751. And with respect to PNCCs obligation to Marubeni, this has been determined to be in the total amount of
10,743,103,388, also as of September 30, 1999; that there is need to ratify this because there has already been a
representation made with respect to the review of the financial records of PNCC by Punongbayan and Araullo, which
have been included as part of the package of APTs disposition to the national governments interest in PNCC."
You recall having made this representation as found in the minutes, I assume, Atty. Francisco?
MR. FRANCISCO. Yes, sir. But Id like to be refreshed on the memorandum, sir, because I dont have a copy.
SEN. DRILON. Yes, this memorandum was cited earlier by Senator Arroyo, and maybe the secretary can give him a
copy? Give him a copy?
MS. OGAN. (Handing the document to Mr. Francisco.)
MR. FRANCISCO. Your Honor, I have here a memorandum to the PNCC board through Atty. Valdecantos, which says
that in the last paragraph, if I may read? "May we request therefore, that a board resolution be adopted, acknowledging
and confirming the aforementioned PNCC obligations with the national government and Marubeni as borne out by the
due diligence audit."
SEN. DRILON. This is the memorandum referred to in these minutes. This memorandum dated 17 October 2000 is the
memorandum referred to in the minutes.
MR. FRANCISCO. I would assume, Mr. Chairman.
SEN. DRILON. Right.
Now, the Punongbayan representative who was here yesterday, Mr...
THE CHAIRMAN. Navarro.

5
SEN. DRILON. ... Navarro denied that he made this recommendation.
THE CHAIRMAN. He asked for opinion, legal opinion.
SEN. DRILON. He said that they never made this representation and the transcript will bear us out. They said that they
never made this representation that the account of Marubeni should be recognized.
MR. FRANCISCO. Mr. Chairman, in the memorandum, I only mentioned here the acknowledgement and confirmation of
the PNCC obligations. I was not asking for a ratification. I never mentioned ratification in the memorandum. I just based
my memo based on the due diligence audit of the Feria Law Offices.
SEN. DRILON. Can you say that again? You never asked for a ratification...
MR. FRANCISCO. No. I never mentioned in my memorandum that I was asking for a ratification. I was just in my
memo it says, "acknowledging and confirming the PNCC obligation." This was what ...
SEN. DRILON. Isnt it the same as ratification? I mean, whats the difference?
MR. FRANCISCO. I well, my memorandum was meant really just to confirm the findings of the legal audit as ...
SEN. DRILON. In your mind as a lawyer, Atty. Francisco, theres a difference between ratification and whats your
term? -- acknowledgment and confirmation?
MR. FRANCISCO. Well, I guess theres no difference, Mr. Chairman.
SEN. DRILON. Right.
Anyway, just of record, the Punongbayan representatives here yesterday said that they never made such representation.
In any case, now youre saying its the Feria Law Office who rendered that opinion? Can we you know, yesterday we
were asking for a copy of this opinion but we were never furnished one. The ... no less than the Chairman of this
Committee was asking for a copy.
THE CHAIRMAN. Well, copy of the opinion...
MS. OGAN. Yes, Mr. Chairman, we were never furnished a copy of this opinion because its opinion rendered for the
Asset Privatization Trust which is its client, not the PNCC, Mr. Chairman.
THE CHAIRMAN. All right. The question is whether but you see, this is a memorandum of Atty. Francisco to the
Chairman of the Asset Privatization Trust. You say now that you were never furnished a copy because thats supposed to
be with the Asset ...
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. ... but yet the action of or rather the opinion of the Feria Law Offices was in effect adopted by the
board of directors of PNCC in its minutes of October 20, 2000 where you are the corporate secretary, Ms. Ogan.
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. So, what I am saying is that this opinion or rather the opinion of the Feria Law Offices of which you
dont have a copy?
MS. OGAN. Yes, sir.
THE CHAIRMAN. And the reason being that, it does not concern the PNCC because thats an opinion rendered for APT
and not for the PNCC.
MS. OGAN. Yes, Mr. Chairman, that was what we were told although we made several requests to the APT, sir.
THE CHAIRMAN. All right. Now, since it was for the APT and not for the PNCC, I ask the question why did PNCC
adopt it? That was not for the consumption of PNCC. It was for the consumption of the Asset Privatization Trust. And
that is what Atty. Francisco says and its confirmed by you saying that this was a memo you dont have a copy because
this was sought for by APT and the Feria Law Offices just provided an opinion provided the APT with an opinion. So,
as corporate secretary, the board of directors of PNCC adopted it, recognized the Marubeni Corporation.
You read the minutes of the October 20, 2000 meeting of the board of directors on Item V. The resolution speaks of .. so,
go ahead.
MS. OGAN. I gave my copies. Yes, sir.
THE CHAIRMAN. In effect the Feria Law Offices opinion was for the consumption of the APT.
MS. OGAN. That was what we were told, Mr. Chairman.
THE CHAIRMAN. And you were not even provided with a copy.
THE CHAIRMAN. Yet you adopted it.
MS. OGAN. Yes, sir.
SEN DRILON. Considering you were the corporate secretary.
THE CHAIRMAN. She was the corporate secretary.
SEN. DRILON. She was just recording the minutes.
THE CHAIRMAN. Yes, she was recording.
Now, we are asking you now why it was taken up?
MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned in the memorandum of Atty. Francisco, memorandum to the
board.
SEN. DRILON. Mr. Chairman, Mr. Francisco represented APT in the board of PNCC. And is that correct, Mr. Francisco?
THE CHAIRMAN. Youre an ex-officio member.
SEN. DRILON. Yes.
MR. FRANCISCO. Ex-officio member only, sir, as trustee in charge of the privatization of PNCC.
SEN. DRILON. With the permission of Mr. Chair, may I ask a question...
THE CHAIRMAN. Oh, yes, Senator Drilon.
SEN. DRILON. Atty. Francisco, you sat in the PNCC board as APT representative, you are a lawyer, there was a legal

6
opinion of Feria, Feria, Lugto, Lao Law Offices which you cited in your memorandum. Did you discuss first, did you
give a copy of this opinion to PNCC?
MR. FRANCISCO. I gave a copy of this opinion, sir, to our chairman who was also a member of the board of PNCC, Mr.
Valdecantos, sir.
SEN. DRILON. And because he was...
MR. FRANCISCO. Because he was my immediate boss in the APT.
SEN. DRILON. Apparently, [it] just ended up in the personal possession of Mr. Valdecantos because the corporate
secretary, Glenda Ogan, who is supposed to be the custodian of the records of the board never saw a copy of this.
MR. FRANCISCO. Well, sir, my the copy that I gave was to Mr. Valdecantos because he was the one sitting in the PNCC
board, sir.
SEN. DRILON. No, you sit in the board.
MR. FRANCISCO. I was just an ex-officio member. And all my reports were coursed through our Chairman, Mr.
Valdecantos, sir.
SEN. DRILON. Now, did you ever tell the board that there is a legal position taken or at least from the documents it is
possible that the claim has prescribed?
MR. FRANCISCO. I took this up in the board meeting of the PNCC at that time and I told them about this matter, sir.
SEN. DRILON. No, you told them that the claim could have, under the law, could have prescribed?
MR. FRANCISCO. No, sir.
SEN. DRILON. Why? You mean, you didnt tell the board that it is possible that this liability is no longer a valid liability
because it has prescribed?
MR. FRANCISCO. I did not dwell into the findings anymore, sir, because I found the professional opinion of the Feria
Law Office to be sufficient.49 (Emphasis supplied)
Atty. Franciscos act of recommending to the PNCC Board the acknowledgment of the Marubeni loans based only on an
opinion of a private law firm, without consulting the OGCC and without showing this opinion to the members of the
PNCC Board except to Atty. Valdecantos, reflects how shockingly little his concern was for PNCC, contrary to his claim
that "he only had the interest of PNCC at heart." In fact, if what was involved was his own money, Atty. Francisco would
have preferred not just two, but at least three different opinions on how to deal with the matter, and he would have
maintained his non-liability.
SEN. OSMEA. x x x
All right. And lastly, just to clear our minds, there has always been this finger-pointing, of course, whenever this is
typical Filipino. When they're caught in a bind, they always point a finger, they pretend they don't know. And it just
amazes me that you have been appointed trustees, meaning, representatives of the Filipino people, that's what you were
at APT, right? You were not Erap's representatives, you were representative of the Filipino people and you were tasked to
conserve the assets that that had been confiscated from various cronies of the previous administration. And here, you are
asked to recognize the P10 billion debt and you point only to one law firm. If you have cancer, don't you to a second
opinion, a second doctor or a third doctor? This is just a question. I am just asking you for your opinion if you would take
the advice of the first doctor who tells you that he's got to open you up.
MR. FRANCISCO. I would go to three or more doctors, sir.
SEN. OSMEA. Three or more. Yeah, that's right. And in this case the APT did not do so.
MR. FRANCISCO. We relied on the findings of the
SEN. OSMEA. If these were your money, would you have gone also to obtain a second, third opinion from other law
firms. Kung pera mo itong 10 billion na ito. Siguro you're not gonna give it up that easily ano, 'di ba?
MR. FRANCISCO. Yes, sir.
SEN. OSMEA. You'll probably keep it in court for the next 20 years.
x x x x50 (Emphasis supplied)
This is a clear admission by Atty. Francisco of bad faith in directing the affairs of PNCC - that he would not have
recognized the Marubeni loans if his own funds were involved or if he were the owner of PNCC.
The PNCC Board admitted liability for the 10.743 billion Marubeni loans without seeing, reading or discussing the "Feria
opinion" which was the sole basis for its admission of liability. Such act surely goes against ordinary human nature, and
amounts to gross negligence and utter bad faith, even bordering on fraud, on the part of the PNCC Board in directing the
affairs of the corporation. Owing loyalty to PNCC and its stockholders, the PNCC Board should have exercised utmost
care and diligence in admitting a gargantuan debt of 10.743 billion that would certainly force PNCC into insolvency, a
debt that previous PNCC Boards in the last two decades consistently refused to admit.
Instead, the PNCC Board admitted PNCCs liability for the Marubeni loans relying solely on a mere opinion of a private
law office, which opinion the PNCC Board members never saw, except for Atty. Valdecantos and Atty. Francisco. The
PNCC Board knew that PNCC, as a government owned and controlled corporation (GOCC), must rely "exclusively" on
the opinion of the OGCC. Section 1 of Memorandum Circular No. 9 dated 27 August 1998 issued by the President states:
SECTION 1. All legal matters pertaining to government-owned or controlled corporations, their subsidiaries, other
corporate off-springs and government acquired asset corporations (GOCCs) shall be exclusively referred to and handled
by the Office of the Government Corporate Counsel (OGCC). (Emphasis supplied)
The PNCC Board acted in bad faith in relying on the opinion of a private lawyer knowing that PNCC is required to rely
"exclusively" on the OGCCs opinion. Worse, the PNCC Board, in admitting liability for 10.743 billion, relied on the
recommendation of a private lawyer whose opinion the PNCC Board members have not even seen.

7
During the oral arguments, Atty. Sison explained to the Court that the intention of APT was for the PNCC Board merely
to disclose the claim of Marubeni as part of APT's full disclosure policy to prospective buyers of PNCC. Atty. Sison stated
that it was not the intention of APT for the PNCC Board to admit liability for the Marubeni loans, thus:
x x x It was the Asset Privatization Trust A-P-T that was tasked to sell the company. The A-P-T, for purposes of disclosure
statements, tasked the Feria Law Office to handle the documentation and the study of all legal issues that had to be
resolved or clarified for the information of prospective bidders and or buyers. In the performance of its assigned task the
Feria Law Office came upon the Marubeni claim and mentioned that the APTC and/or PNCC must disclose that there is a
claim by Marubeni against PNCC for purposes of satisfying the requirements of full disclosure. This seemingly innocent
statement or requirement made by the Feria Law Office was then taken by two officials of the Asset Privatization Trust
and with malice aforethought turned it into the basis for a multi-billion peso debt by the now government owned and/or
controlled PNCC. x x x.51 (Emphasis supplied)
While the PNCC Board passed Board Resolution No. BD-099-2000 amending Board Resolution No. BD-092-2000, such
amendment merely added conditions for the recognition of the Marubeni loans, namely, subjecting the recognition to a
final determination by COA of the amount involved and to the declaration by OGCC of the legality of PNCCs liability.
However, the PNCC Board reiterated and stood firm that it "recognizes, acknowledges and confirms its obligations" for
the Marubeni loans. Apparently, Board Resolution No. BD-099-2000 was a futile attempt to "revoke" Board Resolution No.
BD-092-2000. Atty. Alfredo Laya, Jr., a former PNCC Director, spoke on his protests against Board Resolution No. BD-092-
2000 at the Senate hearings, thus:
MR. LAYA. Mr. Chairman, if I can
THE CHAIRMAN. Were you also at the board?
MR. LAYA. At that time, yes, sir.
THE CHAIRMAN. Okay, go ahead.
MR. LAYA. That's why if maybe this can help clarify the sequence. There was this meeting on October 20. This matter of
the Marubeni liability or account was also discussed. Mr. Macasaet, if I may try to refresh. And there was some
discussion, sir, and in fact, they were saying even at that stage that there should be a COA or an OGCC audit. Now, that
was during the discussion of October 20. Later on, the minutes came out. The practice, then, sir, was for the minutes to
come out at the start of the meeting of the subsequent. So the minutes of October 20 came out on November 22 and then
we were going over it. And that is in the subsequent minutes of the meeting
THE CHAIRMAN. May I interrupt. You were taking up in your November 22 meeting the October 20 minutes?
MR. LAYA. Yes, sir.
THE CHAIRMAN. This minutes that we have?
MR. LAYA. Yes, sir.
THE CHAIRMAN. All right, go ahead.
MR. LAYA. Now, in the November 22 meeting, we noticed this resolution already for confirmation of the board
proceedings of October 20. So immediately we made actually, protest would be a better term for that we protested the
wording of the resolution and that's why we came up with this resolution amending the October 20 resolution.
SEN. DRILON. So you are saying, Mr. Laya, that the minutes of October 20 did not accurately reflect the decisions that
you made on October 20 because you were saying that this recognition should be subject to OGCC and COA? You seem
to imply and we want to make it and I want to get that for the record. You seem to imply that there was no decision to
recognize the obligation during that meeting because you wanted it to subject it to COA and OGCC, is that correct?
MR. LAYA. Yes, your Honor.
SEN. DRILON. So how did...
MR. LAYA. That's my understanding of the proceedings at that time, that's why in the subsequent November 22 meeting,
we raised this point about obtaining a COA and OGCC opinion.
SEN. DRILON. Yes. But you know, the November 22 meeting repeated the wording of the resolution previously adopted
only now you are saying subject to final determination which is completely of different import from what you are saying
was your understanding of the decision arrived at on October 20.
MR. LAYA. Yes, sir. Because our thinking then...
SEN. DRILON. What do you mean, yes, sir?
MR. LAYA. It's just a claim under discussion but then the way it is translated, as the minutes of October 20 were not
really verbatim.
SEN. DRILON. So, you never intended to recognize the obligation.
MR. LAYA. I think so, sir. That was our personally, that was my position.
SEN. DRILON. How did it happen, Corporate Secretary Ogan, that the minutes did not reflect what the board
THE CHAIRMAN. Ms. Pasetes
MS. PASETES. Yes, Mr. Chairman.
THE CHAIRMAN. you are the chief financial officer of PNCC.
MS. PASETES. Your Honor, before that November 22 board meeting, management headed by Mr. Rolando Macasaet,
myself and Atty. Ogan had a discussion about the recognition of the obligations of 10 billion of Marubeni and 36 billion of
the national government on whether to recognize this as an obligation in our books or recognize it as an obligation in the
pro forma financial statement to be used for the privatization of PNCC because recognizing both obligations in the books
of PNCC would defeat our going concern status and that is where the position of the president then, Mr. Macasaet,
stemmed from and he went back to the board and moved to reconsider the position of October 20, 2000, Mr. Chair. 52

8
a. DUTY OF OBEDIENCE - The directors or trustees and officers to be elected shall
perform the duties enjoined on them by law and the by-laws of the corporation.

b. DUTY OF DILIGENCE- Directors or trustee who (1) willfully and knowingly

vote for or assent to patently unlawful acts of the corporation or (ii) who are guilty of
gross negligence or (iii) bad faith in directing the affairs of the corporation, trustees shall
be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.

(Emphasis supplied)
In other words, despite Atty. Layas objections to PNCCs admitting liability for the Marubeni loans, the PNCC Board still
admitted the same and merely imposed additional conditions to temper somehow the devastating effects of Board
Resolution No. BD-092-2000.
The act of the PNCC Board in issuing Board Resolution No. BD-092-2000 expressly admitting liability for the Marubeni
loans demonstrates the PNCC Boards gross and willful disregard of the requisite care and diligence in managing the
affairs of PNCC, amounting to bad faith and resulting in grave and irreparable injury to PNCC and its stockholders. This
reckless and treacherous move on the part of the PNCC Board clearly constitutes a serious breach of its fiduciary duty to
PNCC and its stockholders, rendering the members of the PNCC Board liable under Section 31 of the Corporation Code,
which provides:
SEC. 31. Liability of directors, trustees or officers. -- Directors or trustees who willfully and knowingly vote for or assent
to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members
and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
Soon after the short-lived Estrada Administration, the PNCC Board revoked its previous admission of liability for the
Marubeni loans. During the oral arguments, Atty. Sison narrated to the Court:
x x x After President Estrada was ousted, I was appointed as President and Chairman of PNCC in April of 2001, this
particular board resolution was brought to my attention and I immediately put the matter before the board. I had no
problem in convincing them to reverse the recognition as it was illegal and had no basis in fact. The vote to overturn that
resolution was unanimous. Strange to say that some who voted to overturn the recognition were part of the old board
that approved it. Stranger still, Renato Valdecantos who was still a member of the Board voted in favor of reversing the
resolution he himself instigated and pushed. Some of the board members who voted to recognize the obligation of
Marubeni even came to me privately and said "pinilit lang kami." x x x. 53 (Emphasis supplied)
In approving PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board caused undue injury to the
Government and gave unwarranted benefits to Radstock, through manifest partiality, evident bad faith or gross
inexcusable negligence of the PNCC Board. Such acts are declared under Section 3(e) of RA 3019 or the Anti-Graft and
Corrupt Practices Act, as "corrupt practices xxx and xxx unlawful." Being unlawful and criminal acts, these PNCC Board
Resolutions are void ab initio and cannot be implemented or in any way given effect by the Executive or Judicial branch
of the Government.
Not content with forcing PNCC to commit corporate suicide with the admission of liability for the Marubeni loans under
Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board drove the last nail on PNCCs coffin when the
PNCC Board entered into the manifestly and grossly disadvantageous Compromise Agreement with Radstock. This time,
the OGCC, headed by Agnes DST Devanadera, reversed itself and recommended approval of the Compromise
Agreement to the PNCC Board. As Atty. Sison explained to the Court during the oral arguments:
x x x While the case was pending in the Court of Appeals, Radstock in a rare display of extreme generosity, conveniently
convinced the Board of PNCC to enter into a compromise agreement for the amount of the judgment rendered by the
RTC or 6.5 Billion Pesos. This time the OGCC, under the leadership of now Solicitor General Agnes Devanadera,
approved the compromise agreement abandoning the previous OGCC position that PNCC had a meritorious case and
would be hard press to lose the case. What is strange is that although the compromise agreement we seek to stop
ostensibly is for 6.5 Billion only, truth and in fact, the agreement agrees to convey to Radstock all or substantially all of
the assets of PNCC worth 18 Billion Pesos. There are three items that are undervalued here, the real estate that was
turned over as a result of the controversial agreement, the toll revenues that were being assigned and the value of the new
shares of PNCC the difference is about 12 Billion Pesos. x x x (Emphasis supplied)

9
c. DUTY OF LOYALTY- shall not acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees.

Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his

duty, any interest adverse to the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes a disability upon him to deal
in his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.

a. Duty of Obedience

EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25

(2008)3

The above conclusion would still hold even if petitioner Roxas-del Castillo, at
the time ESHRI defaulted in paying BFs monthly progress bill, was still a director, for,
before she could be held personally liable as corporate director, it must be shown that
she acted in a manner and under the circumstances contemplated in Sec. 31 of the
Corporation Code, which reads:

Section 31. Directors or trustees who willfully or

knowingly vote for or assent to patently unlawful acts of the
corporation or acquire any pecuniary interest in conflict with
their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
(Emphasis ours.)
We do not find anything in the testimony of one Crispin Balingit to indicate that
Roxas-del Castillo made any misrepresentation respecting the payment of the bills in
question. Balingit, in fact, testified that the submitted but unpaid billings were still being
evaluated. Further, in the said testimony, in no instance was bad faith imputed on
Roxas-del Castillo.

Carag v. NLRC, 520 SCRA 28 (2007)

3Both petitions stemmed from a construction contract denominated as Agreement for the Execution of Builders Work for the
EDSA Shangri-la Hotel Project[if !supportFootnotes][4][endif] that ESHRI and BF executed for the construction of the EDSA Shangri-la
Hotel starting May 1, 1991. Among other things, the contract stipulated for the payment of the contract price on the basis
of the work accomplished as described in the monthly progress billings. Under this arrangement, BF shall submit a
monthly progress billing to ESHRI which would then re-measure the work accomplished and prepare a Progress
Payment Certificate for that months progress billing.[if !supportFootnotes][5]

10
On the Liability of Directors for Corporate Debts

This case also raises this issue: when is a director personally liable for the debts of the
corporation? The rule is that a director is not personally liable for the debts of the
corporation, which has a separate legal personality of its own. Section 31 of the
Corporation Code lays down the exceptions to the rule, as follows:

Liability of directors, trustees or officers. - Directors or trustees who

wilfully and knowingly vote for or assent to patently unlawful acts
of the corporation or who are guilty of gross negligence or bad faith
in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members
and other persons. x x x x

Section 31 makes a director personally liable for corporate debts if he wilfully and
knowingly votes for or assents to patently unlawful acts of the corporation. Section 31
also makes a director personally liable if he is guilty of gross negligence or bad faith in
directing the affairs of the corporation.

Complainants did not allege in their complaint that Carag wilfully and knowingly voted
for or assented to any patently unlawful act of MAC. Complainants did not present any
evidence showing that Carag wilfully and knowingly voted for or assented to any
patently unlawful act of MAC. Neither did Arbiter Ortiguerra make any finding to this
effect in her Decision.

Complainants did not also allege that Carag is guilty of gross negligence or bad faith in
directing the affairs of MAC. Complainants did not present any evidence showing that
Carag is guilty of gross negligence or bad faith in directing the affairs of MAC. Neither
did Arbiter Ortiguerra make any finding to this effect in her Decision.

Arbiter Ortiguerra stated in her Decision that:

In instances where corporate officers dismissed employees in bad

faith or wantonly violate labor standard laws or when the company
had already ceased operations and there is no way by which a
judgment in favor of employees could be satisfied, corporate officers
can be held jointly and severally liable with the company.

After stating what she believed is the law on the matter, Arbiter Ortiguerra stopped

11
there and did not make any finding that Carag is guilty of bad faith or of wanton
violation of labor standard laws. Arbiter Ortiguerra did not specify what act of bad faith
Carag committed, or what particular labor standard laws he violated.

To hold a director personally liable for debts of the corporation, and thus pierce the veil
of corporate fiction, the bad faith or wrongdoing of the director must be established
clearly and convincingly. Bad faith is never presumed. Bad faith does not connote bad
judgment or negligence. Bad faith imports a dishonest purpose. Bad faith means breach
of a known duty through some ill motive or interest. Bad faith partakes of the nature of
fraud. In Businessday Information Systems and Services, Inc. v. NLRC, we held:

There is merit in the contention of petitioner Raul Locsin that the

complaint against him should be dismissed. A corporate officer is not
personally liable for the money claims of discharged corporate employees
unless he acted with evident malice and bad faith in terminating their
employment. There is no evidence in this case that Locsin acted in bad
faith or with malice in carrying out the retrenchment and eventual
closure of the company (Garcia vs. NLRC, 153 SCRA 640), hence, he may
not be held personally and solidarily liable with the company for the
satisfaction of the judgment in favor of the retrenched employees.

Neither does bad faith arise automatically just because a corporation fails to comply
with the notice requirement of labor laws on company closure or dismissal of
employees. The failure to give notice is not an unlawful act because the law does not
define such failure as unlawful. Such failure to give notice is a violation of procedural
due process but does not amount to an unlawful or criminal act. Such procedural defect
is called illegal dismissal because it fails to comply with mandatory procedural
requirements, but it is not illegal in the sense that it constitutes an unlawful or criminal
act.

For a wrongdoing to make a director personally liable for debts of the corporation, the
wrongdoing approved or assented to by the director must be a patently unlawful act.
Mere failure to comply with the notice requirement of labor laws on company closure or
dismissal of employees does not amount to a patently unlawful act. Patently unlawful
acts are those declared unlawful by law which imposes penalties for commission of
such unlawful acts. There must be a law declaring the act unlawful and penalizing the
act.

An example of a patently unlawful act is violation of Article 287 of the Labor Code (on
Retirement Pay), which states that [V]iolation of this provision is hereby declared
unlawful and subject to the penal provisions provided under Article 288 of this Code.
Likewise, Article 288 of the Labor Code on Penal Provisions and Liabilities, provides
that any violation of the provision of this Code declared unlawful or penal in nature
shall be punished with a fine of not less than One Thousand Pesos (P1,000.00) nor more
than Ten Thousand Pesos (P10,000.00), or imprisonment of not less than three months
nor more than three years, or both such fine and imprisonment at the discretion of the
court.

12
In this case, Article 283 of the Labor Code, requiring a one-month prior notice to
employees and the Department of Labor and Employment before any permanent
closure of a company, does not state that non-compliance with the notice is an unlawful
act punishable under the Code. There is no provision in any other Article of the Labor
Code declaring failure to give such notice an unlawful act and providing for its penalty.
Complainants did not allege or prove, and Arbiter Ortiguerra did not make any finding,
that Carag approved or assented to any patently unlawful act to which the law attaches
a penalty for its commission. On this score alone, Carag cannot be held personally liable
for the separation pay of complainants.

This leaves us with Arbiter Ortiguerras assertion that when the company had already
ceased operations and there is no way by which a judgment in favor of employees could
be satisfied, corporate officers can be held jointly and severally liable with the company.
This assertion echoes the complainants claim that Carag is personally liable for MACs
debts to complainants on the basis of Article 212(e) of the Labor Code, as amended,
which says:

Employer includes any person acting in the interest of an employer,

directly or indirectly. The term shall not include any labor organization
or any of its officers or agents except when acting as employer. (Emphasis
supplied)

Indeed, complainants seek to hold Carag personally liable for the debts of MAC based
solely on Article 212(e) of the Labor Code. This is the specific legal ground cited by
complainants, and used by Arbiter Ortiguerra, in holding Carag personally liable for the
debts of MAC.

We have already ruled in McLeod v. NLRC and Spouses Santos v. NLRC that Article 212(e)
of the Labor Code, by itself, does not make a corporate officer personally liable for
the debts of the corporation.

Sanchez v. Republic, 603 SCRA 229 (2009)4

4 In resolving the issue of whether or not petitioner Sanchez, a director and chief executive officer of ULFI, can be held
liable in damages under Section 31 of the Corporation Code for bad faith or gross neglect in directing the corporation's
affairs, the Court will consider only the Court of Appeals' findings of facts. This Court's jurisdiction in a Petition for
Review on Certiorari under Rule 45 is limited to reviewing only errors of law. It is bound by the findings of fact of the
Court of Appeals.
The Court of Appeals found that from January 1992 to January 1996, after ULFI's authority to manage the Complex
expired and despite the ejectment suit that the DECS filed against it, petitioner Sanchez and Kahn still continued to lease
spaces in those facilities to third persons. And they collected and kept all the rents although they knew that these
primarily belonged to the DECS. ULFI had merely managed the facilities and collected earnings from them for the DECS.
What is more, Sanchez and Kahn were aware that they had to submit written accounts of those rents and remit the net
earnings from them to the Bureau of Treasury, through the DECS, at the end of the year. Yet, Sanchez and Kahn, acting in
bad faith or with gross neglect did not turn over even one centavo of rent to the DECS nor render an accounting of their
collections. Nor did they account for the money they collected by submitting to the Securities and Exchange Commission
the required financial statements covering such collections.
Parenthetically, a witness for the defense, Evangeline Naniong, ULFI's bookkeeper, testified that the revenues from the
rents were deposited in the bank in the names of Sanchez and ULFI's accountant. And so only they could withdraw and
spend those revenues

13
The case before this Court presents the following issues:

1. Whether or not petitioner Sanchez, a director and chief executive officer of ULFI, can
be held liable in damages under Section 31 of the Corporation Code for gross neglect or
bad faith in directing the corporation's affairs; and

Petitioner Sanchez claims that there is no ground for the courts below to pierce the veil
of corporate identity and hold him and Kahn, who were mere corporate officers,
personally liable for ULFI's obligations to the DECS. But this is not a case of piercing the
veil of corporate fiction. The DECS brought its action against Sanchez and Kahn under
Section 31 of the Corporation Code, which should not be confused with actions intended
to pierce the corporate fiction.

Section 31 of the Corporation Code makes directors-officers of corporations jointly and

severally liable even to third parties for their gross negligence or bad faith in directing
the affairs of their corporations.

The DECS does not have to invoke the doctrine of piercing the veil of corporate fiction.
Section 31 above expressly lays down petitioner Sanchez and Kahn's liability for
damages arising from their gross negligence or bad faith in directing corporate affairs.
The doctrine mentioned, on the other hand, is an equitable remedy resorted to only
when the corporate fiction is used, among others, to defeat public convenience, justify
wrong, protect fraud or defend a crime.13

Moreover, in a piercing case, the test is complete control or domination, not only of
finances, but of policy and business practice in respect of the transaction attacked.14 This
is not the case here. Section 31, under which this case was brought, makes a corporate
director who may or may not even be a stockholder or member accountable for his
management of the affairs of the corporation.

Bad faith implies breach of faith and willful failure to respond to plain and well
understood obligation. It does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it
means breach of a known duty through some motive or interest or ill will. It partakes of
the nature of fraud.

Gross negligence, on the other hand, is the want of even slight care, acting or omitting to
act in a situation where there is duty to act, not inadvertently but willfully and
intentionally, with a conscious indifference to consequences insofar as other persons
may be affected. It evinces a thoughtless disregard of consequences without exerting any
effort to avoid them; the want or absence of or failure to exercise slight care or diligence,
or the entire absence of care.

Filipinas Port Services v. NLRC, 177 SCRA 203 (1989)

14
Meaning of Bad Faith- If the cause of the losses is merely in business judgment, not
amounting to bad faith or negligence, directors and/or officers are not liable. To be held
accountable, the mismanagement and resulting losses on account thereof are not the
only matters to be proven; it is necessary to show that the directors and/or officers acted
in bad faith and with malice in doing the assailed acts. Bad faith does not simply
connote bad judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing or wrong, a breach of a known duty through some motice
or interest or ill-will, thereby partaking of the nature of fraud.

Aratea v. Suico, 518 SCRA 2007 (2007)5

Considering that the veil of corporate fiction cannot be pierced in this case but
the evidence indisputably established that Suico released loans and cash advances in
favor of SAMDECO, which loans and cash advances remain unpaid to the present, to
Suicos damage and prejudice, may Aratea and Canonigo, as SAMDECOs controlling
stockholders and/or representatives, be nonetheless held personally and solidarily liable
with SAMDECO and its successors-in-interest for obligations the corporation incurred
under the facts herein obtaining?

We rule in the affirmative.

In MAM Realty Development Corporation v. NLRC, the Court stated:

A corporation is a juridical entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. The general

5 Petitioners Aratea and Canonigo are the controlling stockholders of Samar Mining Development

Corporation (SAMDECO), a domestic corporation engaged in mining operations in San Isidro, Wright, Western Samar.
On the other hand, private respondent Suico is a businessman engaged in export and general merchandise.
Sometime in 1989, Suico entered into a Memorandum of Agreement (MOA) with SAMDECO. Armed with the
proper board resolution, Aratea and Canonigo signed the MOA as the duly authorized representatives of the corporation.
Under the MOA, Suico would extend loans and cash advances to SAMDECO in exchange for the grant of the exclusive
right to market fifty percent (50%) of the total coal extracted by SAMDECO from its mining sites in San Isidro, Wright,
Western Samar.
Suico was enticed into the aforementioned financing scheme because Aratea and Canonigo assured him that
the money he would lend to SAMDECO would easily be paid with five percent (5%) monthly interest as the coals in said
sites is easier to gather because it is excavated from open-pit mines. Aratea and Canonigo also promised to Suico that the
loan the latter would extend to SAMDECO could easily be paid from the profits of his fifty percent (50%) share of the coal
produced. Also reserved in favor of Suico was the right of first priority to operate the mining facilities in the event
SAMDECO becomes incapable of coping with the work demands. By way of further incentive, Suico was actually
appointed SAMDECOs Vice-President for Administration.
Pursuant to the same MOA, Suico started releasing loans and cash advances to SAMDECO, still through
Aratea and Suico. SAMDECO started operations in its mining sites to gather the coal. As agreed in the MOA, fifty percent
(50%) of the coals produced were offered by Suico to different buyers. However, SAMDECO, again through Aratea and
Canonigo, prevented the full implementation of the marketing arrangement by not accepting the prices offered by Suicos
coal buyers even though such prices were competitive and fair enough, giving no other explanation for such refusal other
than saying that the price was too low. Aratea and Canonigo did not also set any criterion or standard with which any
price offer would be measured against. Because he failed to close any sale of his 50% share of the coal-produce and gain
profits therefrom, Suico could not realize payment of the loans and advances he extended to SAMDECO.
SAMDECO, on the other hand, successfully disposed of its 50% share of the coal-produce. Even with said
coal sales, however, SAMDECO absolutely made no payment of its loan obligations to Suico, despite demands.
Aratea and Canonigo eventually sold the mining rights and passed on the operations of SAMDECO to Southeast Pacific
Marketing, Inc. (SPMI). They also sold their shares in SAMDECO to SPMIs President, Arturo E. Dy without notice to, or
consent of Suico, in violation of the MOA.

15
rule is that obligations incurred by the corporation, acting through its directors, officers
and employees, are its sole liabilities. There are times, however, when solidary liabilities
may be incurred but only when exceptional circumstances warrant such as in the
following cases:
1. When directors and trustees or, in appropriate cases, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons;
xxx

Petitioners Aratea and Canonigo acted in bad faith when they, as officers of SAMDECO,
unreasonably prevented Suico from selling his part of the coal-produce of the mining
site, in gross violation of their MOA. This resulted in Suico not being unable to realize
profits from his 50% share of the coal-produce, from which Suico could obtain part of
the payment for the loans and advances he made in favor of SAMDECO. Moreover,
petitioners also acted in bad faith when they sold, transferred and assigned their
proprietary rights over the mining area in favor of SPMI and Dy, thereby causing
SAMDECO to grossly violate its MOA with Suico. Suico suffered grave injustice because
he was prevented from acquiring the opportunity to obtain payment of his loans and
cash advances, while petitioners Aratea and Canonigo profited from the sale of their
shareholdings in SAMDECO in favor of SPMI and Dy. These facts duly established
Aratea and Canonigos personal liability as officers/stockholders of SAMDECO and
their solidary liability with SAMDECO for its obligations in favor of Suico for the loans
and cash advances received by the corporation.

Magaling V. Ong, 562 SCRA 152 (2008)

To hold a director, a trustee or an officer personally liable for the debts of the
corporation and, thus, pierce the veil of corporate fiction, bad faith or gross negligence
by the director, trustee or officer in directing the corporate affairs must be established
clearly and convincingly. Bad faith is a question of fact and is evidentiary. Bad faith does
not connote bad judgment or negligence. It imports a dishonest purpose or some moral
obliquity and conscious wrongdoing. It means breach of a known duty through some ill
motive or interest. It partakes of the nature of fraud.

In the present case, there is nothing substantial on record to show that Reynaldo
Magaling, as President of Termo Loans, has, indeed, acted in bad faith in inviting Ong to
invest in Termo Loans and/or in obtaining a loan from Ong for said corporation in
order to warrant his personal liability. From all indications, the proceeds of the
investment and/or loan were indeed utilized by Termo Loans. Likewise, bad faith does
not arise just because a corporation fails to pay its obligations, because the inability to
pay ones obligation is not synonymous with fraudulent intent not to honor the
obligations.

The foregoing discussion notwithstanding, this Court still cannot totally absolve
Reynaldo Magaling from any liability considering his gross negligence in directing the

16
affairs of Termo Loans; thus, he must be made personally liable for the debt of Termo
Loans to Ong.

In order to pierce the veil of corporate fiction, for reasons of negligence by the
director, trustee or officer in the conduct of the transactions of the corporation, such
negligence must be gross. Gross negligence is one that is characterized by the want of
even slight care, acting or omitting to act in a situation where there is a duty to act, not
inadvertently but willfully and intentionally with a conscious indifference to
consequences insofar as other persons may be affected; and must be established by clear
and convincing evidence. Parenthetically, gross or willful negligence could amount to
bad faith.
Reynaldo Magalings foregoing testimony only convincingly displayed his gross
negligence in the conduct of the affairs of Termo Loans. From our standpoint, his casual
manner, insouciance and nonchalance, nay, indifference, to the predicament of the
distressed corporation glaringly exhibited a lackadaisical attitude from a top office of a
corporation, a conduct totally abhorrent in the corporate world.

c. DUTY OF LOYALTY- When a director, trustee or officer attempts to acquire or

acquires, in violation of his duty, any interest adverse to the corporation in respect of
any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued to the
corporation (Sec. 31).

Section 34. Disloyalty of a director. - Where a director, by virtue of his office,

acquires for himself a business opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such corporation, he must account to the
latter for all such profits by refunding the same, unless his act has been ratified by a vote
of the stockholders owning or representing at least two-thirds (2/3) of the outstanding
capital stock. This provision shall be applicable, notwithstanding the fact that the
director risked his own funds in the venture.

Sec. 34 applies only to a director (and not to a trustee or officer as in the case of
Sec. 31), and the implication is that only ratificatory vote of the stockholders would
allow a director who violates his duty of loyalty to keep the profits from the venture;
while for the trustees or officers who violate such duties, it is within the business
judgment of the Board to ratify the act. Secs. 31 and 34 contain the doctrine of corporate
opportunity. In case of such conflicts-of-interests, and the director and acts against the
good of the corporation, he shall be accountable for the profits he obtained, even if he
had risked his own funds.

Gokongwei v. SEC, 86 SCRA 336 (1979)

Whether or not the amended by-laws of SMC of disqualifying a competitor from

nomination or election to the Board of Directors of SMC are valid and reasonable

It is also well established that corporate officers "are not permitted to use their position

17
of trust and confidence to further their private interests." In a case where directors of a
corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered into a new
contract themselves with the foreign firm for exclusive sale of its products, the court
held that equity would regard the new contract as an offshoot of the old contract and,
therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the
fruits of his misconduct to the exclusion of his principal.
The doctrine of "corporate opportunity" is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities
with competing interests. This doctrine rests fundamentally on the unfairness, in
particular circumstances, of an officer or director taking advantage of an opportunity for
his own personal profit when the interest of the corporation justly calls for protection.
It is not denied that a member of the Board of Directors of the San Miguel Corporation
has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c)
research and development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director to promote his
individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively his
duty, to satisfy his loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.

12. RULES ON LIABILITY of DIRECTORS or TRUSTEES and OFFICERS

Business Judgment Rule

Lowe, Inc. v. Court of Appeals, 596 SCRA 140 (2009)

It is settled that in the absence of malice, bad faith, or specific provision of law,
[or when they exceed their authority], a director or an officer of a corporation cannot be
made personally liable for corporate liabilities. Corporate officers have personalities
distinct and separate from that of the corporations. In the absence evidence showing
that they acted with malice or in bad faith in pursuing corporate affairs (in this case
declining a position redundant), the acting officers are not personally liable for the
monetary awards adjudged against the corporation.

Section 118

Tramat Mercantile v. Court of Appeals, 238 SCRA 14 (1994)

Personal liability of a corporate director, trustee or officer along (although not

necessarily) with the corporation may so validly attach, as a rule, only when

18
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;4
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate
action.

Valley Golf and Country Club v. Vda. De Caram, 585 SCRA 218 (2009)

Valley Golf acted in clear bad faith when it sent the final notice to Caram under the
pretense they believed him to be still alive, when in fact they had very well known that
he had already died. That it was in the final notice that Valley Golf had perpetrated the
duplicity is especially blameworthy, since it was that notice that carried the final threat
that his Golf Share would be sold at public auction should he fail to settle his account on
or before 31 May 1987.

Valley Golf could have very well addressed that notice to the estate of Caram, as it had
done with the third and fourth notices. That it did not do so signifies that Valley Golf
was bent on selling the Golf Share, impervious to potential complications that would
impede its intentions, such as the need to pursue the claim before the estate proceedings
of Caram. By pretending to assume that Caram was then still alive, Valley Golf would
have been able to capitalize on his previous unresponsiveness to their notices and
proceed in feigned good faith with the sale. Whatever the reason Caram was unable to
respond to the earlier notices, the fact remains that at the time of the final notice, Valley
Golf knew that Caram, having died and gone, would not be able to settle the
obligation himself, yet they persisted in sending him notice to provide a color of
regularity to the resulting sale.

That reason alone, evocative as it is of the absence of substantial justice in the sale of the
Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC and the
Court of Appeals.

Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the
final notice to Caram on the deliberate pretense that he was still alive could bring into
operation Articles Articles 19, 20 and 21 under the Chapter on Human Relations of the
Civil Code. These provisions enunciate a general obligation under law for every person
to act fairly and in good faith towards one another. Non-stock corporations and its
officers are not exempt from that obligation.

Cebu Country Club v. Elizagaque, 542 SCRA 65 (2008)6

6 rejecting respondents application for proprietary membership, we find that petitioners violated the rules

governing human relations, the basic principles to be observed for the rightful relationship between human beings and
for the stability of social order. The trial court and the Court of Appeals aptly held that petitioners committed fraud and
evident bad faith in disapproving respondents applications. This is contrary to morals, good custom or public policy.

19
Lastly, petitioners argument that they could not be held jointly and severally liable for
damages because only one (1) voted for the disapproval of respondents application lacks
merit.
Section 31 of the Corporation Code provides:
SEC. 31. Liability of directors, trustees or officers. Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors,
or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons. (Emphasis
ours)

Palay, Inc. v. Clave, 124 SCRA 638 (1983)

Petitioner Onstott was made liable because he was then the President of the corporation
and he was the controlling stockholder. No sufficient proof exists on record that said
petitioner used the corporation to defraud private respondent. He cannot, therefore, be
made personally liable just because he "appears to be the controlling stockholder". Mere
ownership by a single stockholder or by another corporation is not of itself sufficient
ground for disregarding the separate corporate personality.

National Power Corp. v. Court of Appeals, 273 SCRA 419 (1997)

The finding solidarity liability among the NPC and its officers and Members of the
Board of Directors, is patently baseless. The decision of the trial court contains no such
allegation, finding or conclusion regarding particular acts committed by said officers
and members of the Board of Directors that show them to have individually guilty of
unmistakable malice, bad faith, or ill-motive in their personal dealings with Growth
Link. In fact, it was only in the dispositive portion of the decision of the court a quo that
solidary liability as such was first mentioned.

NPCs officers and members of the Board of Directors were sued merely as nominal
parties in their official capacities as such. They were impleaded by Growth Link not in

Hence, petitioners are liable for damages pursuant to Article 19 in relation to Article 21 of the same Code.
It bears stressing that the amendment to Section 3(c) of CCCIs Amended By-Laws requiring the unanimous vote of the
directors present at a special or regular meeting was not printed on the application form respondent filled and submitted
to CCCI. What was printed thereon was the original provision of Section 3(c) which was silent on the required number of
votes needed for admission of an applicant as a proprietary member.
Petitioners explained that the amendment was not printed on the application form due to economic reasons.
We find this excuse flimsy and unconvincing. Such amendment, aside from being extremely significant, was introduced
way back in 1978 or almost twenty (20) years before respondent filed his application. We cannot fathom why such a
prestigious and exclusive golf country club, like the CCCI, whose members are all affluent, did not have enough money to
cause the printing of an updated application form.
It is thus clear that respondent was left groping in the dark wondering why his application was disapproved. He was not
even informed that a unanimous vote of the Board members was required. When he sent a letter for reconsideration and
an inquiry whether there was an objection to his application, petitioners apparently ignored him. Certainly, respondent
did not deserve this kind of treatment. Having been designated by San Miguel Corporation as a special non-proprietary
member of CCCI, he should have been treated by petitioners with courtesy and civility. At the very least, they should
have informed him why his application was disapproved.

20
their personal capacities as individuals but in their official capacities as officers and
members of the Board of Directors through whom the NPC conducts business and
undertakes its operations pursuant to its avowed corporate purposes. Therefore, as a
bonafide government corporation, NPC should alone be liable for its corporate acts as
duly authorized by its officers and directors.

Toh v. Solid Bank Corp., 408 SCRA 544 (2003)

Regarding the petitioners claim that he is liable only as a corporate officer of WMC, the
surety agreement shows that he signed the same not in representation of WMC or as its
president but in his personal capacity. He is therefore personally bound. There is no law
that prohibits a corporate officer from binding himself personally to answer for a
corporate debt. While the limited liability doctrine is intended to protect the stockholder
by immunizing him from personal liability for the corporate debts, he may nevertheless
divest himself of this protection by voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has
by his own acts effectively waived.

Security Bank and Trust Co. v. Cuenca, 341 SCRA 781 (2000)
It is a common banking practice to require the JSS (joint and solidary signature) of
a major stockholder or corporate officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First, in case of default, the creditors
recourse, which is normally limited to the corporate properties under the veil of separate
corporate personality, would extend to the personal assets of the surety. Second, such
surety would be compelled to ensure that the loan would be used for the purpose
agreed upon, and that it would be paid by the corporation.

Paradise Sauna Massage v. Ng, 181 SCRA 719 (1990)

Thus, being a party to a simulated contract of management, petitioner Uy cannot be

permitted to escape liability under the said contract by using the corporate entity theory.
This is one instance when the veil of corporate entity has to be pierced to avoid injustice
and inequity.

Heirs of Trinidad de Leon Vda. De Roxas v. Court of Appeals, 422 SCRA

101 (2004)

The general rule is that a corporation and its officers and agents may be held liable for
contempt. A corporation and those who are officially responsible for the conduct of its
affairs may be punished for contempt in disobeying judgments, decrees, or orders of a
court made in a case within its jurisdiction.

Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010)

We see no competent and convincing evidence of any wrongful, fraudulent or

unlawful act on the part of PRISMA to justify piercing its corporate veil. While
Pantaleon [Chairman and President] denied personal liability in his Answer, he made

21
himself accountable in the promissory note in his personal capacity and as authorized by the
Board Resolution of PRISMA. With this statement of personal liability and in the absence
of any representation on the part of PRISMA that the obligation is all its own because of
its separate corporate identity, we see no occasion to consider piercing the corporate veil
as material to the case.

a. Corporate Officers Liability for Labor Claims

(1) Majority School: Directors and Senior Officers Cannot Be Held

Personally Liable for Labor Claims

Santos v. NLRC, 254 SCRA 674 (1996)

It is not even shown that petitioner has had a direct hand in the dismissal of private
respondent enough to attribute to him (petitioner) a patently unlawful act while acting
for the corporation. Neither can Article 289 of the Labor Code be applied since this law
specifically refers only to the imposition of penalties under the Code. It is undisputed
that the termination of petitioners employment has, instead, been due, collectively, to
the need for a further mitigation of losses, the onset of the rainy season, the insurgency
problem in Sorsogon and the lack of funds to further support the mining operation in
Gatbo.

It is true, there were various cases when corporate officers were themselves held by the
Court to be personally accountable for the payment of wages and money claims to its
employees. In A.C. Ransom Labor Union-CCLU vs. NLRC,[ for instance, the Court ruled
that under the Minimum Wage Law, the responsible officer of an employer corporation
could be held personally liable for nonpayment of backwages for (i)f the policy of the
law were otherwise, the corporation employer (would) have devious ways for evading
payment of backwages. In the absence of a clear identification of the officer directly
responsible for failure to pay the backwages, the Court considered the President of the
corporation as such officer. The case was cited in Chua vs. NLRC in holding personally
liable the vice-president of the company, being the highest and most ranking official of
the corporation next to the President who was dismissed for the latters claim for unpaid
wages.
A review of the above exceptional cases would readily disclose the attendance of facts
and circumstances that could rightly sanction personal liability on the part of the
company officer. In A.C. Ransom, the corporate entity was a family corporation and
execution against it could not be implemented because of the disposition posthaste of its
leviable assets evidently in order to evade its just and due obligations. The doctrine of
piercing the veil of corporate fiction was thus clearly appropriate. Chua likewise
involved another family corporation, and this time the conflict was between two
brothers occupying the highest ranking positions in the company. There were
incontrovertible facts which pointed to extreme personal animosity that resulted,
evidently in bad faith, in the easing out from the company of one of the brothers by the
other.

Uichico v. NLRC, 273 SCRA 35 (1997)

22
In labor cases, particularly, corporate directors and officers are solidarily liable with the
corporation for the termination of employment of corporate employees done with
malice or in bad faith. In this case, it is undisputed that petitioners have a direct hand in
the illegal dismissal of respondent employees. They were the ones, who as high-ranking
officers and directors of Crispa, Inc., signed the Board Resolution retrenching the private
respondents on the feigned ground of serious business losses that had no basis apart
from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no
evidentiary value whatsoever. This is indicative of bad faith on the part of petitioners for
which they can be held jointly and severally liable with Crispa, Inc. for all the money
claims of the illegally terminated respondent employees in this case.

Asionics Philippines, Inc. v. NLRC, 290 SCRA 198 (1998)

The basic rule is still that which can deduced from the Courts pronouncement in Sunio
vs. National Labor Relations Commission (127 SCRA 390), thus:
We come now to the personal liability of petitioner, Sunio, who was made jointly and
severally responsible with petitioner company and CIPI for the payment of the
backwages of private respondents. This is reversible error. The Assistant Regional
Directors Decision failed to disclose the reason why he was made personally liable.
Respondents, however, alleged as grounds thereof, his being the owner of one-half (1/2)
interest of said corporation, and his alleged arbitrary dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of
petitioner corporation. There appears to be no evidence on record that he acted
maliciously or in bad faith in terminating the services of private respondents. His act,
therefore, was within the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct
from those of the persons composing it as well as from that of any other legal entity to
which it may be related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality. Petitioner Sunio,
therefore, should not have been made personally answerable for the payment of private
respondents back salaries.
The Court, to be sure, did appear to have deviated somewhat in Gudez vs. NLRC (183
SCRA 644), however, it should be clear from our recent pronouncement in Mam Realty
Development Corporation and Manuel Centeno vs. NLRC (244 SCRA 797), that the
Sunio doctrine still prevails.
Nothing on record is shown to indicate that Frank Yih has acted in bad faith or with
malice in carrying out the retrenchment program of the company. His having been held
by the NLRC to be solidarily and personally liable with API is thus legally unjustified.

(2) Minority School: The Highest Officer of the Company Becomes

Personally Liable for Labor Claims

A.C. Ransom Labor Union v. NLRC, 142 SCRA 269 (1986)

"(c) Employer includes any person acting in the interest of an employer, directly or
indirectly. The term shall not include any labor organization or any of its officers or

23
agents except when acting as employer."

The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since
RANSOM is an artificial person, it must have an officer who can be presumed to be the
employer, being the "person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer.

The responsible officer of an employer corporation can be held personally, not to say
even criminally, liable for non-payment of back wages. That is the policy of the law. In
the Minimum Wage Law, Section 15(b) provided:

"(b) If any violation of this Act is committed by a corporation, trust, partnership or

association, the manager or in his default, the person acting as such when the violation
took place, shall be responsible. In the case of a government corporation, the managing
head shall be made responsible, except when shown that the violation was due to an act
or commission of some other person, over whom he has no control, in which case the
latter shall be held responsible."cralaw virtua1aw library

In PD 525, where a corporation fails to pay the emergency allowance therein provided,
the prescribed penalty "shall be imposed upon the guilty officer or officers" of the
corporation.

(c) If the policy of the law were otherwise, the corporation employer can have devious
ways for evading payment of back wages. In the instant case, it would appear that
RANSOM, in 1969, foreseeing the possibility or probability of payment of back wages to
the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be
eventually phased out if the 22 strikers win their case. RANSOM actually ceased
operations on May 1, 1973, after the December 19, 1972 Decision of the Court of
Industrial Relations was promulgated against RANSOM.

(d) The record does not clearly identify "the officer or officers" of RANSOM directly
responsible for failure to pay the back wages of the 22 strikers. In the absence of definite
proof in that regard, we believe it should be presumed that the responsible officer is the
President of the corporation who can be deemed the chief operation officer thereof.
Thus, in RA 602, criminal responsibility is with the "Manager or in his default, the
person acting as such." In RANSOM, the President appears to be the Manager.

Chua v. NLRC, 182 SCRA 253 (1990)

Vice-President may be held personally liable for being the highest and most
ranking officer of the corporation for the claims of the President who had been
dismissed.

Reahs Corp. v. NLRC, 271 SCRA 247 (1997)

The Solicitor General, in behalf of private respondents, argues that the doctrine laid
down in the case of A.C. Ransom Labor Union - CCLU v. NLRC should be applied to the

24
case at bar. In that case, a judgment against a corporation (A.C. Ransom) to reinstate its
dismissed employees with back wages was declared to be a continuing solidary liability
of the company president and all who may have thereafter succeeded to said office after
the records failed to identify the officer or agents directly responsible for failure to pay
the back wages of its employees. The Court noted Ransom's subterfuge in organizing
another family corporation while the case was on litigation with the intent to phase out
the existing corporation in case of an adverse decision, as what actually happened when
it ceased operations a few months after the labor arbiter ruled in favor of Ransom's
employees.
The basis, said the Court, is found in Article 212(c) of the Labor Code which provides
that "an employer includes any person acting in the interest of an employer, directly or
indirectly." "Since Ransom is an artificial person, it must have an officer who can be
presumed to be the employer, x x x. The corporation only in the technical sense is the
employer."
This ruling was eventually applied by the Court in the following cases: Maglutac v.
NLRC] an illegal dismissal case, where the most ranking officer of Commart, petitioner
therein, was held solidarily liable with the corporation which thereafter became
insolvent and suspended operations; Chua v. NLRC, also an illegal dismissal case, where
the vice-president of a corporation was held solidarily liable with the corporation for the
payment of the unpaid salaries of its president; and in Gudez v. NLRC, where the
president and treasurer were held solidarily liable with the corporation which had
ceased operations but failed to pay the wage and money claims of its employees.
These cases, however, should be construed still as exceptions to the doctrine of separate
personality of a corporation which should remain as the guiding rule in determining
corporate liability to its employees. At the very least, as what we held in Pabalan v.
NLRC,[ to justify solidary liability, "there must be an allegation or showing that the
officers of the corporation deliberately or maliciously designed to evade the financial
obligation of the corporation to its employees", or a showing that the officers
indiscriminately stopped its business to perpetrate an illegal act, as a vehicle for the
evasion of existing obligations, in circumvention of statutes, and to confuse legitimate
issues.
In the case at bar, the thrust of petitioners' arguments was aimed at confining liability
solely to the corporation, as if the entity were an automaton designed to perform
functions at the push of a button. The issue, however, is not limited to payment of
separation pay under Article 283 but also payment of labor standard benefits such as
underpayment of wages, holiday pay and 13th month pay to two of the private
respondents. While there is no sufficient evidence to conclude that petitioners have
indiscriminately stopped the entity's business, at the same time, petitioners have opted
to abstain from presenting sufficient evidence to establish the serious and adverse
financial condition of the company.
As the NLRC aptly stated:
"Neither did respondents (petitioners) present any evidence to prove that Reah's closure
was really due to SERIOUS business losses or financial reverses. We only have
respondents mere say-so on the matter."
This uncaring attitude on the part of the officers of Reah's gives credence to the
supposition that they simply ignored the side of the workers who, more or less, were
only demanding what is due them in accordance with law. In fine, these officers were

25
conscious that the corporation was violating labor standard provisions but they did not
act to correct these violations; instead, they abruptly closed business. Neither did they
offer separation pay to the employees as they conveniently resorted to a lame excuse
that they suffered serious business losses, knowing fully well that they had no
substantial proof in their hands to prove such losses.
The findings of the NLRC did not indicate whether or not Reah's Corporation has
continued its personality after it had stopped operations when it closed its sing-along,
coffee shop, and massage clinic in November 1990. But in its petition, petitioners aver,
among others, that the "company totally folded for lack of patrons, (disconnection of)
light and discontinuance of the leased premises [sic] for failure to pay the increased
monthly rentals from P8,000 to P20,000."[if Under the Rules of Evidence, petitioners are
bound by the allegations contained in their pleading. Since petitioners themselves have
admitted that they have dissolved the corporation de facto, the Court presumes that
Reah's Corporation had become insolvent and therefore would be unable to satisfy the
judgment in favor of its employees. Under these circumstances, we cannot allow labor to
go home with an empty victory. Neither would it be oppressive to capital to hold
petitioners Castulo, Pascua and Valenzuela solidarily liable with Reah's Corporation
because the law presumes that they have acted in the latter's interest when they
obstinately refused to grant the labor standard benefits and separation pay due private
respondent-employees.

Restaurante Las Conchas v. Llego, 314 SCRA 24 (1996)

In the present case, the employees can no longer claim their separation benefits and 13th
month pay from the corporation because it has already ceased operation. To require
them to do so would render illusory the separation and 13th month pay awarded to
them by the NLRC. Their only recourse is to satisfy their claim from the officers of the
corporation who were, in effect, acting in behalf of the corporation. It would appear that,
originally, Restaurante Las Conchas was a single proprietorship put up by the parents of
Elizabeth Anne Gonzales, who together with her husband, petitioner David Gonzales,
later took over its management. Private respondents claim, and rightly so, that the
former were the real owners of the restaurant. The conclusion is bolstered by the fact
that petitioners never revealed who were the other officers of the Restaurant Services
Corporation, if only to pinpoint responsibility in the closure of the restaurant that
resulted in the dismissal of private respondents from employment. Petitioners David
Gonzales and Elizabeth Anne Gonzales are, therefore, personally liable for the payment
of the separation and 13th month pay due to their former employees.

(3) Reiteration of the A.C. Ransom Doctrine

NYK International Knitwear Corp. Phil. v. NLRC, 397 SCRA 607 (2003)

In this case Cathy Ng, admittedly, is the manager of NYK. Conformably with our ruling
in A. C. Ransom, she falls within the meaning of an employer as contemplated by the
Labor Code, who may be held jointly and severally liable for the obligations of the
corporation to its dismissed employees. Pursuant to prevailing jurisprudence, Cathy Ng,

26
in her capacity as manager and responsible officer of NYK, cannot be exonerated from
her joint and several liability in the payment of monetary award to private respondent.

(4) Rulings Contrary to the A.C. Ransom Doctrine

Carag v. NLRC, 520 SCRA 28 (2007)

Article 212(c) of the Labor Code, by itself, does not make a corporate officer personally
liable for the debts of the corporation. The governing law on personal liability of
directors for debts of the corporation is still Section 31 of the Corporation Code.

Acesite Corp. v. NLRC, 449 SCRA 360 (2005)

Unless they have exceeded their authority, corporate officers are, as a general rule, not
personally liable for their official acts, because a corporation, by legal fiction, has a
personality separate and distinct from its officers, stockholders and members. However,
this fictional veil may be pierced whenever the corporate personality is used as a means
of perpetuating fraud or an illegal act, evading an existing obligation, or confusing a
legitimate issue. In cases of illegal dismissal, corporate directors and officers are
solidarily liable with the corporation, where terminations of employment are done with
malice or in bad faith. (Underscoring supplied, citations omitted)
In holding Angerbauer and Kennedy solidarily liable, the NLRC intended to deter other
foreign employer[s] from repeating the inhuman treatment of their Filipino employees
who should be treated with equal respect especially in their own land and prevent
further violation of their human rights as employees.
The records of the case do not, however, show any inhuman treatment of Gonzales. His
superiors just happen to be foreigners. Moreover, as previously discussed, bad faith or
malice was not proven. Angerbauer, acting on behalf of Acesite, was, like Gonzales,
perhaps also too presumptuous in thinking that the telegrams ordering the latter to
report for work were all received on time, drawing him to hastily conclude that
Gonzales intentionally disobeyed the orders contained therein.

b. Dealings of Directors, Trustees or Officers with Corporation

Section 32

Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the
option of such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.

27
Where any of the first two conditions set forth in the preceding paragraph is absent, in
the case of a contract with a director or trustee, such contract may be ratified by the vote
of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two- thirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees involved
is made at such meeting: Provided, however, That the contract is fair and reasonable
under the circumstances.

Yao Ka Sin Trading v. Court of Appeals, 209 SCRA 763 (1992)

When a distributorship agreement for the cement company, covering a long

period under a fixed amount, has been entered into with one of the directors, which was
not authorized by the Board of Directors, and which in fact disapproved the contract
subsequently, cannot be binding on the corporation, being essentially a disadvantageous
contract involving a director.

Westmont Bank v. Inland Construction and Dev. Corp., 582 SCRA 230 (2009)

In Yao Ka Sin Trading, the therein respondent cement company has shown by
clear and convincing evidence that its president was not authorized to undertake a
particular transaction. It presented it by-laws stating its board of directors has the power
to enter into an agreement or contract of any kind. The companys board of directors
even forthwith issued a resolution to repudiate the contract. Thus, it was only after the
company successfully discharged its burden that the other party, the therein petitioner
Yao Ka Sin Trading, had to prove that indeed the cement company had clothed its
president with apparent power to execute the contract by evidence of similar acts
executed in its favor or in favor of other parties.

Unmistakably, the Courts directive in Yao Ka Sin Trading is a corporation should

first prove by clear evidence that its corporate officer is not in fact authorized to act on
its behalf the burden of evidence shifts to the other party to prove, by previous specific
acts, that an officer was clothed by the corporation with apparent authority.

c. Contracts Between Corporation with Interlocking Directors

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

cases of fraud, and provided the contract is fair and reasonable under the circumstances,
a contract between two or more corporations having interlocking directors shall not be
invalidated on that ground alone:

Provided, That if the interest of the interlocking director in one corporation is substantial
and his interest in the other corporation or corporations is merely nominal, he shall be

28
subject to the provisions of the preceding section insofar as the latter corporation or
corporations are concerned.7

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

V. POWERS OF CORPORATION

1. Underlying Theory on Power of Corporation

Reynoso IV v. Court of Appeals, 345 SCRA 355 (2000)

Precisely because the corporation is such a prevalent and dominating factor in the
business life of the country, the law has to look carefully into the exercise of powers by
these artificial persons it has created.

2. Express Powers of Corporations

Section 36. Corporate powers and capacity. - Every corporation incorporated under this
Code has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

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

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;

7Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following
conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or of at least two- thirds (2/3) of the members in a meeting called for the purpose: Provided,
That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the circumstances.

29
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code;
and to admit members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;

8. To enter into merger or consolidation with other corporations as provided in this

Code;

9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;

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

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

Section 45. Ultra vires acts of corporations. - No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by its
articles of incorporation and except such as are necessary or incidental to the exercise of
the powers so conferred.

Montelibano v. Bacolod Murcia Milling Co., 5 SCRA 36 (1962)

The rule is that in each case it is a question of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in itself, and
not otherwise, and is reasonably tributary and to promotion of those end, in a
substantial, and not in a remote and fanciful sense, it may be fairly considered within a
charter powers. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporations business, fairly incidental to the express
powers and reasonably necessary to their exercise. If so, the corporation has the power
to do it; otherwise no.

a. Power to Sue and Be Sued

Shipside, Inc. v. Court of Appeals, 352 SCRA 334 (2001)

The power of the corporation to sue and to be sued in any court is lodged with
the Board of Directors that exercise its corporate powers. No person, not even its

30
officers, could validly sue it behalf of a corporation in the absence of any resolution from
the Board authorizing the filing of such suit.

Umale v. ABS Realty Corp., 652 SCRA 215 (2011)

As a creature of the law, the powers and attributes of a corporation are those set
out, expressly or implied, in the law. Among the general powers granted by law to a
corporation is the power to use in its own name. This power is granted to a duly-
organized corporation, unless specifically revoked by another law. There is nothing in
the concept of corporation rehabilitation that would deprive the corporation from suing
to recover its property.

DBP v. Court of Appeals, 440 SCRA 200 (2004)

The failure of petitioner to attach a certified copy of the board resolution

authorizing the filing of the petition for certiorari in the Court of Appeals is fatal to the
case. Courts are not expected to take judicial notice of corporate board resolutions or a
corporate officers authority to represent a corporation.

Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620 (2009)

When a corporate officer has been granted express power by the Board of
Directors to institute a suit, the same is considered broad enough to include the power of
said corporate officer to execute verification and certification against forum shopping
required in initiatory pleadings under the Rules of Court.

Bitong v. Court of Appeals, 292 SCRA 304 (1998)8

In the absence of a special authority from the Board of Directors to institute a

derivative suit, the president of Managing Director is disqualified by law to sue in her
own or on behalf of the corporation. The power to sue and be sued in any court by a

8 A careful perusal of the records shows that neither the alleged endorsement of Certificate of Stock No. 001 in the

name of JAKA nor the alleged deed of sale executed by Senator Enrile directly in favor of petitioner could have legally
transferred or assigned on 25 July 1983 the shares of stock in favor of petitioner because as of 10 May 1983 Certificate of
Stock No. 001 in the name of JAKA was already cancelled and a new one, Certificate of Stock No. 007, issued in favor of
respondent Apostol by virtue of a Declaration of Trust and Deed of Sale.
It should be emphasized that on 10 May 1983 JAKA executed a deed of sale over 1,000 Mr. & Ms. shares in favor
of respondent Eugenio D. Apostol. On the same day, respondent Apostol signed a declaration of trust stating that she was
the registered owner of 1,000 Mr. & Ms. shares covered by Certificate of Stock No. 007.
The declaration of trust further showed that although respondent Apostol was the registered owner, she held the
shares of stock and dividends which might be paid in connection therewith solely in trust for the benefit of JAKA, her
principal. It was also stated therein that being a trustee, respondent Apostol agreed, on written request of the principal, to
assign and transfer the shares of stock and any and all such distributions or dividends unto the principal or such other
person as the principal would nominate or appoint.
Petitioner was well aware of this trust, being the person in charge of this documentation and being one of the
witnesses to the execution of this document.[if !supportFootnotes][24][endif] Hence, the mere alleged endorsement of Certificate of
Stock No. 001 by Senator Enrile or by a duly authorized officer of JAKA to effect the transfer of shares of JAKA to
petitioner could not have been legally feasible because Certificate of Stock No. 001 was already canceled by virtue of the
deed of sale to respondent Apostol.

31
corporation even as a stockholder is lodged in the Board of Directors that exercises its
corporate powers and not in the President.

b. Power to Sell Land

Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003)

SEC. 36. Corporate powers and capacity. Every corporation incorporated under this Code
has the power and capacity:
xxx
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of a lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by the law and
the Constitution.
xxx
Under these provisions, the power to purchase real property is vested in the board of
directors or trustees. While a corporation may appoint agents to negotiate for the
purchase of real property needed by the corporation, the final say will have to be with
the board, whose approval will finalize the transaction. A corporation can only exercise
its powers and transact its business through its board of directors and through its
officers and agents when authorized by a board resolution or its by-laws. As held in AF
Realty & Development, Inc. v. Dieselman Freight Services, Co.:

Section 23 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. Just as a natural person may
authorize another to do certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual officers or agents
appointed by it. Thus, contracts or acts of a corporation must be made either by the
board of directors or by a corporate agent duly authorized by the board. Absent such
valid delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or connected
with, the performance of authorized duties of such director, are held not binding on the
corporation. (Emphasis supplied)

In this case, Aviles, who negotiated the purchase of the Property, is neither an officer of
Bukal Enterprises nor a member of the Board of Directors of Bukal Enterprises. There is
no Board Resolution authorizing Aviles to negotiate and purchase the Property for
Bukal Enterprises. There is also no evidence to prove that Bukal Enterprises approved
whatever transaction Aviles made with the Spouses Firme. In fact, the president of
Bukal Enterprises did not sign any of the deeds of sale presented to the Spouses Firme.
Even De Castro admitted that he had never met the Spouses Firme. Considering all
these circumstances, it is highly improbable for Aviles to finalize any contract of sale
with the Spouses Firme.

AF Realty & Dev. v. Dieselman Freight Services, 373 SCRA 385 (2002)

32
Involved in this case is a sale of land through an agent. Thus, the law on agency under
the Civil Code takes precedence. This is well stressed in Yao Ka Sin Trading vs. Court of
Appeals:
Since a corporation, such as the private respondent, can act only through its officers and
agents, all acts within the powers of said corporation may be performed by agents of its
selection; and, except so far as limitations or restrictions may be imposed by special
charter, by-law, or statutory provisions, the same general principles of law which govern
the relation of agency for a natural person govern the officer or agent of a corporation, of
whatever status or rank, in respect to his power to act for the corporation; and agents
when once appointed, or members acting in their stead, are subject to the same rules,
liabilities, and incapacities as are agents of individuals and private persons. (Emphasis
supplied)

Pertinently, Article 1874 of the same Code provides:

ART. 1874. When a sale of piece of land or any interest therein is through an agent, the
authority of the latter shall be in writing; otherwise, the sale shall be void. (Emphasis
supplied)

Considering that respondent Cruz, Jr., Cristeta Polintan and Felicisima Ranullo were not
authorized by respondent Dieselman to sell its lot, the supposed contract is void.

San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998)

When the corporations primary purpose is to market, distribute, export and

import merchandise, the sale of land is not within the actual or apparent authority of the
corporation acting through its officers, much less when acting through the treasurer.
Likewise, Arts. 1874 and 1878 of Civil Code require that when land is sold through an
agent, the agents authority must be in writing, otherwise the sale is void.

c. Power to Obtain Bank Loans

China Bank v. Court of Appeals, 270 SCRA 503 (1997)

The power to borrow money is one of those cases where even a special power of
attorney is required under Art. 1878 of Civil Code. There is invariably a need of an
enabling act of the corporation to be approved by its Board of Directors. The argument
that the obtaining of loan was in accordance with the ordinary course of business usages
and practices of the corporation is devoid of merit, because the prevailing practice in the
corporation was explicitly authorize an officer to contract loans in behalf of the
corporation.

d. Power to Hire Employees and Appoint Agents

Yu Chuck v. Kong Li Po, 46 Phil. 608 (1924)

The principal question presented by the assignments of error is whether Chen

had the power to bind the corporation by a contract of the character indicated. It is
conceded that he had no express authority to do so, but the evidence is conclusive that

33
he, at the time the contract was entered into, was in effect the general business manager
of the newspaper Kong Li Po and that he, as such, had charge of the printing of the
paper, and the plaintiff maintain that he, as such general business manager, had implied
authority to employ them on the terms stated and that the defendant corporation is
bound by his action. The general rule is that the power to bind a corporation by contract
lies with its board of directors or trustees, but this power may either expressly or
impliedly be delegated to other officers or agents of the corporation, and it is well settled
that except where the authority of employing servants and agent is expressly vested in
the board of directors or trustees, an officer or agent who has general control and
management of the corporation's business, or a specific part thereof, may bind the
corporation by the employment of such agent and employees as are usual and necessary
in the conduct of such business. But the contracts of employment must be reasonable

3. Ultra Vires Doctrine

a. Court Attitude Towards the Ultra Vires Doctrine

Zomer Dev. Corp. v. International Exchange Bank, 581 SCRA 115 (2009)9

The plea of ultra vires will not be allowed to prevail, whether interposed for or against a
corporation, when it will not advance justice but, on the contrary, will accomplish a legal
wrong to the prejudice of another who acted in good faith.

b. Types of Ultra Vires Act

(1) First Type: Those which are outside of the express, implied or incidental powers
of the corporation;

9 The Petitioners shrill incantations that the Resolution, approved by its Board of Directors, authorizing its

Treasurer and General Manager to execute a Real Estate Mortgage as security for the payment of the account of Prime
Aggregates, a sister corporation, is not for its best interest, is a puzzlement xxx. Since when is a private corporation,
going to the aid of a sister corporation, not for the best interest of both corporation? For in doing so, the two (2)
corporations are enhancing, boosting and promoting a common interest, the interest of family having ownership of both
corporations. In the second place, Courts are loathe to overturn decisions of the management of a corporation in the
conduct of its business via its Board of Directors x x x. x x x xThere is no evidence on record that the Real Estate
Mortgage was executed by the Petitioner and the Private Respondent to prejudice corporate creditors of the Petitioner or
will result in the infringement of the trust fund doctrine or hamper the continuous business operation of the Petitioner
or that the Prime Aggregates was insolvent or incapable of paying the Private Respondent. Indeed, the latter approved
Prime Aggregates loan availments and credit facilities after its investigation of the financial capability of Prime
Aggregates and its capacity to pay its account to the Private respondent. As it was, the Petitioner finally awoke from its
slumber when the Private Respondent filed its Petition for the extra-judicial foreclosure of the Real Estate Mortgage,
with the Sheriff, and assailed the authority of its Board of Directors to approve the said Resolution and of its Treasurer
and General Manager to execute the deed and brand the said Resolution and the said deed as ultra vires and hence, not
binding on the Petitioner, and hurried off to the Respondent Court and prayed for injunctive relief. Before then, the
Petitioner maintained a stoic silence and adopted a hands off stance. We find the Petitioners stance grossly inequitable.

34
(2) Second Type: Those which are effected by corporate representative who act
without authority (even though the contract is within the express/implied/incidental
powers of the corporation they represent),

(3) Third Type: Those which are contrary to laws or public policy.

Woodchild Holdings v. Roxas Electric Construction Co., 436 SCRA 235 (2004)10

Generally, the acts of the corporate officers within the scope of their authority are
binding on the corporation. However, under Article 1910 of the New Civil Code, acts
done by such officers beyond the scope of their authority cannot bind the corporation
unless it has ratified such acts expressly or tacitly, or is estopped from denying them:

Art. 1910. The principal must comply with all the obligations which the agent
may have contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.
Thus, contracts entered into by corporate officers beyond the scope of authority are
unenforceable against the corporation unless ratified by the corporation.

Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001)11

It is, however, our view that there is basis to rule that the act of issuing the checks
was well within the ambit of a valid corporate act, for it was for securing a loan to
finance the activities of the corporation, hence, not an ultra vires act.
An ultra vires act is one committed outside the object for which a corporation is created
as defined by the law of its organization and therefore beyond the power conferred
upon it by law. The term ultra vires is distinguished from an illegal act for the former is

10 Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor of the
petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof. The authority of Roxas,
under the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion
of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may such authority be implied
from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner on such terms and conditions which he
deems most reasonable and advantageous. Under paragraph 12, Article 1878 of the New Civil Code, a special power of
attorney is required to convey real rights over immovable property. Article 1358 of the New Civil Code requires that
contracts which have for their object the creation of real rights over immovable property must appear in a public
document. The petitioner cannot feign ignorance of the need for Roxas to have been specifically authorized in writing by
the Board of Directors to be able to validly grant a right of way and agree to sell a portion of Lot No. 491-A-3-B-1. The rule
is that if the act of the agent is one which requires authority in writing, those dealing with him are charged with notice of
that fact.
11 ourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were authorized to issue the

checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium
and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that
the checks were strictly endorsed for deposit only to the payees account and not to be further negotiated. What is more,
the confirmation letter contained a clause that was not true, that is, that the checks issued to E.T. Henry were in payment
of Hydro oil bought by Hi-Cement from E.T. Henry. Her negligence resulted in damage to the corporation. Hence, Ms. de
Leon may be held personally liable therefor.

35
merely voidable which may be enforced by performance, ratification, or estoppel, while
the latter is void and cannot be validated.

BA Finance Corp. v. Court of Appeals, 211 SCRA 112 (1992)12

Petitioner contends that the letter guaranty is ultra vires, and therefore unenforceable;
that said letter-guaranty was issued by an employee of petitioner corporation beyond
the scope of his authority since the petitioner itself is not even empowered by its articles
of incorporation and by-laws to issue guaranties. Petitioner also submits that it is not
guilty of estoppel to make it liable under the letter-guaranty because petitioner had no
knowledge or notice of such letter-guaranty; that the allegation of Philip Wong, credit
administrator, that there was an audit was not supported by evidence of any audit
report or record of such transaction in the office files.
We find the petitioner's contentions meritorious. It is a settled rule that persons dealing
with an assumed agent, whether the assumed agency be a general or special one are
bound at their peril, if they would hold the principal liable, to ascertain not only the fact
of agency but also the nature and extent of authority, and in case either is controverted,
the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19).
Hence, the burden is on respondent bank to satisfactorily prove that the credit
administrator with whom they transacted acted within the authority given to him by his
principal, petitioner corporation. The only evidence presented by respondent bank was
the testimony of Philip Wong, credit administrator, who testified that he had authority
to issue guarantees as can be deduced from the wording of the memorandum given to
him by petitioner corporation on his lending authority.

Tuason & Co. v. Bolanos, 95 Phil. 106 (1954)

Tuason & Co. as owner of large tract of real estate entered into a contract with Araneta,
Inc. for the development and subdivision of its real property. The two corporations
brought an action to oust Bolanos, a squatter on the land. Bolanos questioned the
capacity to sue alleging that the two corporations have formed a partnership, which is
an ultra vires act.
It is true that the complaint also states that the plaintiff is "represented herein by its
Managing Partner Gregorio Araneta, Inc.", another corporation, but there is nothing
against one corporation being represented by another person, natural or juridical, in a
suit in court. The contention that Gregorio Araneta, Inc. can not act as managing partner
for plaintiff on the theory that it is illegal for two corporations to enter into a partnership
is without merit, for the true rule is that "though a corporation has no power to enter
into a partnership, it may nevertheless enter into a joint venture with another where the
nature of that venture is in line with the business authorized by its charter." (Wyoming-
Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp., 1082.)
There is nothing in the record to indicate that the venture in which plaintiff is
represented by Gregorio Araneta, Inc. as "its managing partner" is not in line with the
corporate business of either of them.

12Although Wong was clearly authorized to approve loans even up to P350,000.00 without any security requirement,
which is far above the amount subject of the guaranty in the amount of P60,000.00, nothing in the said memorandum
expressly vests on the credit administrator power to issue guarantees.

36
c. Doctrine of Ratification
Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006)
The corporation can also act through its corporate officers who may be authorized either
expressly by the by-laws or board resolutions or impliedly such as by general practice or
policy or as are implied from express powers. The general principles of agency govern
the relation between the corporation and its officers or agents. When authorized, their
acts can bind the corporation. Conversely, when unauthorized, their acts cannot bind it.

However, the corporation may ratify the unauthorized act of its corporate
officer. Ratification means that the principal voluntarily adopts, confirms and gives
sanction to some unauthorized act of its agent on its behalf. It is this voluntary choice,
knowingly made, which amounts to a ratification of what was theretofore unauthorized
and becomes the authorized act of the party so making the ratification. The substance of
the doctrine is confirmation after conduct, amounting to a substitute for a prior
authority. Ratification can be made either expressly or impliedly. Implied ratification
may take various forms like silence or acquiescence, acts showing approval or adoption
of the act, or acceptance and retention of benefits flowing therefrom.

The power to borrow money is one of those cases where corporate officers as
agents of the corporation need a special power of attorney. In the case at bar, no special
power of attorney conferring authority on de Villa was ever presented. The promissory
notes evidencing the loans were signed by de Villa (who was the president of
respondent corporation) as borrower without indicating in what capacity he was signing
them. In fact, there was no mention at all of respondent corporation. On their face, they
appeared to be personal loans of de Villa.

National Power Corp. v. Alonzo -Legasto, 433 SCRA 342 (2004)

Petitioners argument that it is not bound by the acts of its officials who acted beyond the
scope of their authority in allowing the blasting works is correct. Petitioner is a
government agency with a juridical personality separate and distinct from the
government. It is not a mere agency of the government but a corporate entity
performing proprietary functions. It has its own assets and liabilities and exercises
corporate powers, including the power to enter into all contracts, through its Board of
Directors.
In this case, petitioners officials exceeded the scope of their authority when they
authorized FUCC to commence blasting works without an extra work order properly
approved in accordance with P.D. 1594. Their acts cannot bind petitioner unless it has
ratified such acts or is estopped from disclaiming them.
However, the Compromise Agreement entered into by the parties, petitioner being
represented by its President, Mr. Guido Alfredo A. Delgado, acting pursuant to its Board
Resolution No. 95-54 dated April 3, 1995, is a confirmatory act signifying petitioners
ratification of all the prior acts of its officers. Significantly, the parties agreed that [t]his
Compromise Agreement shall serve as the Supplemental Agreement for the payment of
plaintiffs blasting works at the Botong site[27] in accordance with CI 1(6) afore-quoted. In

37
other words, it is primarily by the force of this Compromise Agreement that the Court is
constrained to declare FUCC entitled to payment for the blasting works it undertook.
Moreover, since the blasting works were already rendered by FUCC and accepted by
petitioner and in the absence of proof that the blasting was done gratuitously, it is but
equitable that petitioner should make compensation therefor, pursuant to the principle
that no one should be permitted to enrich himself at the expense of another.

Pirovano v. Dela Rama Steamship, 96 Phil. 335 (1954)13

For valid ratification of an ultra vires act, the following requisites must concur:

(a) Act or contract must be consummated, not merely executory;

(b) The creditors are not prejudiced, or all of them have given their consent;

(c) The rights of the public or the State are not involved; and
(d) All the stockholders must give their consent.

Ayala Corp. v. Rosa-Diana Realty, 346 SCRA 663 (2000)

13 1.CORPORATIONS; DONATIONS; DONATION GlVEN "OUT OF GRATITUDE FOR SERVICES RENDERED" Is

REMUNERATIVE.A donation given by the corporation to the minor children of its late president because he "was to a
large extent responsible for the rapid and very successful development and expansion of the activities of this company" is
remunerative in nature in contemplation of law.

2.ID.; ID.; PERFECTED DONATION CAN ONLY BE RESCINDED ON LEGAL GROUNDS.Where the donation made by
the corporation has not only been granted in several resolutions duly adopted by its board of directors but also it has been
formally ratified by its stockholders, with the concurrence of its only creditor, and accepted by the donee, the donation -
has reached the stage of perfection which is valid and binding upon the corporation and as such cannot be rescinded
unless there exist legal grounds for doing so.

3.ID.; ID.; DONATION DISTINGUISHED FROM GRATUITY.While a donation may technically be different from a
gratuity, in substance they are the same. They are even similar to a pension. Thus, it was said that "A pension is a gratuity
only when it is granted for services previously rendered, and which at the time they were rendered gave rise to no legal
obligation." (Words and Phrases, Permanent Edition, p. 675; O'Dea vs. Ck, 169 Pac., 306, 176 Cal., 659.) [Pirovano, et al.
vs. De la Rama Steamship Co., 96 Phil. 335(1954)]

4.ID.; POWERS OF A CORPORATION; ACTS PERFORMED WITHIN THE POWERS GRANTED ARE NOT "ULTRA
VIRES".Where the corporation was given broad and almost unlimited powers to carry out the purposes for which it
was organized among them, to aid in any other manner any person in the affairs and prosperity of whom it has a lawful
interest, a donation made to the heirs of its late president in recognition of the valuable services rendered by the latter
which had immensely contributed to its growth, comes within this broad grant of power and can not be considered an
ultra vires act.

5.ID.; ID.; "ULTRA VIRES" ILLEGAL ACTS DISTINGUISHED; EFFECT OF RATIFICATION BY STOCKHOLDERS.
Illegal acts of a corporation contemplate the doing of an act which is contrary to law, morals, or public order, or
contravene some rules of public policy or public duty, and are, like similar transactions between individuals, void. They
can not serve as basis of a court action, nor acquire validity by performance, ratification, or estoppel. On the other hand,
ultra vires acts or those which are not illegal and void ab initio but are merely within the scope of the article of
incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders.

6.ID.; ID.; "ULTRA VIRES" ACTS; RATIFICATION BY STOCKHOLDERS OF "ULTRA VIRES" ACTS CURES
INFIRMITY.The ratification by the stockholders of an ultra vires act which is not illegal cures the infirmity of the
corporate act and makes it perfectly valid and enforceable, specially so if it is not mere y within the scope of the article of
incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders.

38
We agree with petitioner Ayalas observation that respondent Rosa-Dianas special and
affirmative defenses before the trial court never mentioned any allegation that its
president and chairman were not authorized to execute the Undertaking. It was
inappropriate therefore for the trial court to rule that in the absence of any authority or
confirmation from the Board of Directors of respondent Rosa-Diana, its Chairman and
the President cannot validly enter into an undertaking relative to the construction of the
building on the lot within one year from July 27, 1989 and in accordance with the deed
restrictions. Curiously, while the trial court stated that it cannot be presumed that the
Chairman and the President can validly bind respondent Rosa-Diana to enter into the
aforesaid Undertaking in the absence of any authority or confirmation from the Board of
Directors, the trial court held that the ordinary presumption of regularity of business
transactions is applicable as regards the Deed of Sale which was executed by Manuel Sy
and Sy Ka Kieng and respondent Rosa-Diana. In the light of the fact that respondent
Rosa-Diana never alleged in its Answer that its president and chairman were not
authorized to execute the Undertaking, the aforesaid ruling of the trial court is without
factual and legal basis and surprising to say the least.

Lao v. Court of Appeals, 325 SCRA 694 (2000)

Under procedural law, the lack of authority of an officer to bind the corporation should
be specifically pleaded by the corporation. Failure of the corporation to interpose such
defense could only mean that the action, transaction or representation was with its
consent and authority.

San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998)14

As a general rule, the acts of corporate officers within the scope of their authority are
binding on the corporation. But when these officers exceed their authority, their actions
cannot bind the corporation, unless it has ratified such acts or is estopped from
disclaiming them. The officer acting without proper authority cannot by his act be the
basis upon which to bind the corporation of ratification. Such ratification can only come
from the act or omission of the Board of Directors.

14 In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it appear

to any third person that she had the authority, to sell its land or to receive the earnest money. Neither was there any proof
that Motorich ratified, expressly or impliedly, the contract. Petitioner rests its argument on the receipt, which, however,
does not prove the fact of ratification. The document is a hand-written one, not a corporate receipt, and it bears only
Nenita Gruenbergs signature. Certainly, this document alone does not prove that her acts were authorized or ratified by
Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and perfected contract: (1) consent of the contracting
parties; (2) object certain which is the subject matter of the contract; (3) cause of the obligation which is established. As
found by the trial court and affirmed by the Court of Appeals, there is no evidence that Gruenberg was authorized to
enter into the contract of sale, or that the said contract was ratified by Motorich. This factual finding of the two courts is
binding on this Court. As the consent of the seller was not obtained, no contract to bind the obligor was perfected.
Therefore, there can be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of land, we
hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void under Article 1874 of the Civil
Code. Being inexistent and void from the beginning, said contract cannot be ratified.

39
d. Doctrine of Estoppel

Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003)15

The principle of estoppel precludes petitioners from denying the validity of the
transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied
on the authority of the former as manager to act on behalf of petitioner Estelita Lipat and
both BET and BEC. While the power and responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is lodged in its
board of directors, subject to the articles of incorporation, by-laws, or relevant provisions
of law, yet, just as a natural person may authorize another to do certain acts for and on
his behalf, the board of directors may validly delegate some of its functions and powers
to officers, committees, or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate by-laws, or authorization from the
board, either expressly or impliedly by habit, custom, or acquiescence in the general
course of business. Apparent authority, is derived not merely from practice. Its existence
may be ascertained through (1) the general manner in which the corporation holds out
an officer or agent as having the power to act or, in other words, the apparent authority
to act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.

Peoples Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered
into the First Contract without first securing board approval. Despite such lack of board
approval, petitioner did not object to or repudiate said contract, thus clothing its
president with the power to bind the corporation. The grant of apparent authority to
Punsalan is evident in the testimony of Yong -- senior vice president, treasurer and
major stockholder of petitioner.

The First Contract was consummated, implemented and paid without a hitch.

15 Petitioners contend further that the mortgaged property should not bind the loans and credit lines obtained by BEC as
they were secured without any proper authorization or board resolution. They also blame the bank for its laxity and
complacency in not requiring a board resolution as a requisite for approving the loans. Such contentions deserve scant
consideration.
Firstly, it could not have been possible for BEC to release a board resolution since per admissions by both petitioner
Estelita Lipat and Alice Burgos, petitioners rebuttal witness, no business or stockholders meetings were conducted nor
were there election of officers held since its incorporation. In fact, not a single board resolution was passed by the
corporate board and it was Estelita Lipat and/or Teresita Lipat who decided business matters.
In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a special power of attorney
executed by Estelita Lipat. Recall that Teresita Lipat acted as the manager of both BEC and BET and had been deciding
business matters in the absence of Estelita Lipat. Further, the export bills secured by BEC were for the benefit of Mystical
Fashion owned by Estelita Lipat. Hence, Pacific Bank cannot be faulted for relying on the same authority granted to
Teresita Lipat by Estelita Lipat by virtue of a special power of attorney. It is a familiar doctrine that if a corporation
knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds him out
to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agents authority.

40
Hence, private respondent should not be faulted for believing that Punsalans conformity
to the contract in dispute was also binding on petitioner. It is familiar doctrine that if a
corporation knowingly permits one of its officers, or any other agent, to act within the
scope of an apparent authority, it holds him out to the public as possessing the power to
do those acts; and thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agents authority.

Republic v. Acoje Mining, 3 SCRA 361 (1963)

e. Doctrine of Apparent Authority

Soler v. Court of Appeals, 358 SCRA 57 (2001)16

It is familiar doctrine that if a corporation knowingly permits one of its officers, or any
other agent, to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from
denying the agents authority.

Woodchild Holdings v. Roxas Electric Construction Co., 436 SCRA 235 (2004)17

It bears stressing that apparent authority is based on estoppel and can arise from
two instances: first, the principal may knowingly permit the agent to so hold himself out
as having such authority, and in this way, the principal becomes estopped to claim that
the agent does not have such authority; second, the principal may so clothe the agent
with the indicia of authority as to lead a reasonably prudent person to believe that he
actually has such authority. There can be no apparent authority of an agent without acts
or conduct on the part of the principal and such acts or conduct of the principal must
have been known and relied upon in good faith and as a result of the exercise of
reasonable prudence by a third person as claimant and such must have produced a
change of position to its detriment. The apparent power of an agent is to be determined
by the acts of the principal and not by the acts of the agent.

For the principle of apparent authority to apply, the petitioner was burdened
to prove the following: (a) the acts of the respondent justifying belief in the agency by

16 We see that the issues raised boil down to whether or not there was a perfected contract between petitioner

Jazmin Soler and respondents COMBANK and Nida Lopez, and whether or not Nida Lopez, the manager of the bank
branch, had authority to bind the bank in the transaction.
The discussions between petitioner and Ms. Lopez was to the effect that she had authority to engage the services
of petitioner. During their meeting, she even gave petitioner specifications as to what was to be renovated in the branch
premises and when petitioners requested for the blueprints of the building, Ms. Lopez supplied the same.
Ms. Lopez was aware that petitioner hired the services of people to help her come up with the designs for the December,
1986 board meeting of the bank. Ms. Lopez even insisted that the designs be rushed in time for presentation to the bank.
With all these discussion and transactions, it was apparent to petitioner that Ms. Lopez indeed had authority to engage
the services of petitioner.
17 In this case, there is no evidence on record of specific acts made by the respondent showing or indicating

that it had full knowledge of any representations made by Roxas to the petitioner that the respondent had authorized him
to grant to the respondent an option to buy a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, or to create a
burden or lien thereon, or that the respondent allowed him to do so.

41
the petitioner; (b) knowledge thereof by the respondent which is sought to be held; and,
(c) reliance thereon by the petitioner consistent with ordinary care and prudence.

Peoples Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

Apparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an officer
or agent as having the power to act or, in other words, the apparent authority to act in
general, with which it clothes him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof, whether within or beyond the
scope of his ordinary powers. It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other parties. It is not the quantity of similar
acts which establishes apparent authority, but the vesting of a corporate officer with the
power to bind the corporation.

(1) Application of the Doctrine of Apparent Authority

Lapulapu Foundation, Inc. v. Court of Appeals, 421 SCRA 328 (2004)

The evidence shows that Tan has been representing himself as the President of Lapulapu
Foundation, Inc. He opened a savings account and a current account in the names of the
corporation, and signed the application form as well as the necessary specimen
signature cards (Exhibits A, B and C) twice, for himself and for the foundation. He
submitted a notarized Secretarys Certificate (Exhibit G) from the corporation, attesting
that he has been authorized, inter alia, to sign for and in behalf of the Lapulapu
Foundation any and all checks, drafts or other orders with respect to the bank; to
transact business with the Bank, negotiate loans, agreements, obligations, promissory
notes and other commercial documents; and to initially obtain a loan for P100,000.00
from any bank (Exhibits G-1 and G-2). Under these circumstances, the defendant
corporation is liable for the transactions entered into by Tan on its behalf.
Per its Secretarys Certificate, the petitioner Foundation had given its President,
petitioner Tan, ostensible and apparent authority to inter alia deal with the respondent
Bank. Accordingly, the petitioner Foundation is estopped from questioning petitioner
Tans authority to obtain the subject loans from the respondent Bank. It is a familiar
doctrine that if a corporation knowingly permits one of its officers, or any other agent, to
act within the scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation will, as against anyone
who has in good faith dealt with it through such agent, be estopped from denying the
agents authority.

Inter-Asia Investment, Inc. v. Court of Appeals, 403 SCRA 452 (2003)

A corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that [the] authority to do so has been conferred upon him,
and this includes powers as, in the usual course of the particular business, are incidental
to, or may be implied from, the powers intentionally conferred, powers added by

42
custom and usage, as usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused person dealing with the officer or agent
to believe that it has conferred.

Safic Alcan & Cie v. Imperial Vegetable Co., 355 SCRA 559 (2001)

Every person dealing with an agent is put upon inquiry and must discover upon his
peril the authority of the agent. If he does not make such inquiry, he is chargeable with
knowledge of the agents authority, and his ignorance of that authority will not be any
excuse. Persons dealing with an assumed agent, whether the assumed agency be a
general or special one, are bound at their peril, if they would hold the principal, to
ascertain not only the fact of the agency but also the nature and extent of the authority,
and in case either is controverted, the burden of proof is upon them to establish it.
The most prudent thing petitioner should have done was to ascertain the extent of
the authority of Dominador Monteverde. Being remiss in this regard, petitioner can not
seek relief on the basis of a supposed agency.
Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his
authority do not bind the principal unless the latter ratifies the same expressly or
impliedly. It also bears emphasizing that when the third person knows that the agent
was acting beyond his power or authority, the principal can not be held liable for the
acts of the agent. If the said third person is aware of such limits of authority, he is to
blame, and is not entitled to recover damages from the agent, unless the latter undertook
to secure the principals ratification.

There was no such ratification in this case. When Monteverde entered into the
speculative contracts with Safic, he did not secure the Boards approval. He also did not
submit the contracts to the Board after their consummation so there was, in fact, no
occasion at all for ratification. The contracts were not reported in IVOs export sales book
and turn-out book. Neither were they reflected in other books and records of the
corporation. It must be pointed out that the Board of Directors, not Monteverde,
exercises corporate power. Clearly, Monteverdes speculative contracts with Safic never
bound IVO and Safic can not therefore enforce those contracts against IVO.

Aguenza v. Metropolitan, 271 SCRA 1 (1997)

In the case at bench, we find that the respondent Court of Appeals committed an error in
appreciating the "Answer" filed by the lawyer of Intertrade as an admission of corporate
liability for the subject loan. A careful study of the responsive pleading filed by Atty.
Francisco Pangilinan, counsel for Intertrade, would reveal that there was neither express
nor implied admission of corporate liability warranting the application of the general
rule. Thus, the alleged judicial admission may be contradicted and controverted because
it was taken out of context and no admission was made at all.
In any event, assuming arguendo that the responsive pleading did contain the aforesaid
admission of corporate liability, the same may not still be given effect at all. As correctly
found by the trial court, the alleged admission made in the answer by the counsel for
Intertrade was "without any enabling act or attendant ratification of corporate act," as

43
would authorize or even ratify such admission. In the absence of such ratification or
authority, such admission does not bind the corporation.
Second, the respondent appellate court likewise adjudged Intertrade liable because of
the two letters emanating from the office of Mr. Arrieta which the respondent court
considered "as indicating the corporate liability of the corporation." These documents
and admissions cannot have the effect of a ratification of an unauthorized act. As we
elucidated in the case of Vicente v. Geraldez, "ratification can never be made on the part
of the corporation by the same persons who wrongfully assume the power to make the
contract, but the ratification must be by the officer as governing body having authority
to make such contract." In other words, the unauthorized act of respondent Arrieta can
only be ratified by the action of the Board of Directors and/or petitioner Aguenza jointly
with private respondent Arrieta.

Francisco v. GSIS, 7 SCRA 577 (1963)

Facts: Francisco, a government employee borrowed money from GSIS, secured by a

mortgage on her house. Upon failure to pay the installments due, GSIS threatened to
foreclose the security. Francisco answered that she could not keep up with the
installment and she submitted a proposal whereby she could liquidate the debt. Said
proposal was rejected by the GSIS Board. However, the Corporate Secretary erroneously
sent her a wire that the proposal was accepted. When she received summons for
foreclosure, she brought action for damages against GSIS.
Held:

The Corporate Secretary is the custodian of corporate records and if he certifies that a
certain action had been taken by the Board, such certification is binding upon the
corporation although the same may be erroneously made. The reason for this is that the
corporate secretary is clothed with apparent authority.

f. How Corporation Bound or Not Bound by its President

Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005)

Contracts entered into by a corporate officer or obligations or prestations assumed by

such officer for and in behalf of such corporation are binding on the said corporation
only if such officer acted within the scope of his authority or if such officer exceeded the
limits of his authority, the corporation has ratified such contracts or obligations.
In the present case, the petitioner relied principally on his testimony to prove that Lim
made a verbal promise to give him vacation and sick leave credits, as well as the
privilege of converting the same into cash upon retirement. The Court agrees that those
who belong to the upper corporate echelons would have more privileges. However, the
Court cannot presume the existence of such privileges or benefits. The petitioner was
burdened to prove not only the existence of such benefits but also that he is entitled to
the same, especially considering that such privileges are not inherent to the positions
occupied by the petitioner in the respondent corporation, son-in-law of its president or
not.

44
Woodchild Holdings v. Roxas-Electric Constructions Co., 463 SCRA 235 (2004)

Evidently, Roxas was not specifically authorized under the said resolution to grant a
right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to
sell to the petitioner a portion thereof. The authority of Roxas, under the resolution, to
sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a
portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights
thereon. Neither may such authority be implied from the authority granted to Roxas to
sell Lot No. 491-A-3-B-2 to the petitioner on such terms and conditions which he deems
most reasonable and advantageous. Under paragraph 12, Article 1878 of the New Civil
Code, a special power of attorney is required to convey real rights over immovable
property. Article 1358 of the New Civil Code requires that contracts which have for their
object the creation of real rights over immovable property must appear in a public
document. The petitioner cannot feign ignorance of the need for Roxas to have been
specifically authorized in writing by the Board of Directors to be able to validly grant a
right of way and agree to sell a portion of Lot No. 491-A-3-B-1. The rule is that if the act
of the agent is one which requires authority in writing, those dealing with him are
charged with notice of that fact.

Peoples Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

However, it is familiar doctrine that if a corporation knowingly permits one of its

officers, or any other agent, to act within the scope of an apparent authority, it holds him
out to the public as possessing the power to do those acts and thus, the corporation will,
as against anyone who has in good faith dealt with it through such agent, be estopped
from denying the agents authority. Thus private respondent shall not be faulted for
believing that Punsalans conformity to the contract in dispute was also binding on
petitioner. In the case at bar, petitioner, through its president Antonio Punsalan Jr.,
entered into the First Contract without first securing board approval. Despite such lack
of board approval, petitioner did not object to or repudiate said contract, thus "clothing"
its president with the power to bind the corporation. The grant of apparent authority to
Punsalan is evident in the testimony of Yong senior vice president, treasurer and
major stockholder of petitioner. Furthermore, private respondent prepared an
operations manual and conducted a seminar for the employees of petitioner in
accordance with their contract. Petitioner accepted the operations manual, submitted it
to the Bureau of Customs and allowed the seminar for its employees. As a result of its
aforementioned actions, petitioner was given by the Bureau of Customs a license to
operate a bonded warehouse. Granting arguendo then that the Second Contract was
outside the usual powers of the president, petitioner's ratification of said contract and
acceptance of benefits have made it binding, nonetheless. The enforceability of contracts
under Article 1403(2) is ratified "by the acceptance of benefits under them" under Article
1405.

Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991)

45
Finally, Nyco disowns its President's acts claiming that it never authorized Rufino Yao
(Nyco's President) to even apply to BA Finance for credit accommodation. It supports its
argument with the fact that it did not issue a Board resolution giving Yao such authority.
However, the very evidence on record readily belies Nyco's contention. Its corporate By-
Laws clearly provide for the powers of its President, which include, inter alia, executing
contracts and agreements, borrowing money, signing, indorsing and delivering checks,
all in behalf of the corporation. Furthermore, the appellate court correctly adopted the
lower court's observation that there was already a previous transaction of discounting of
checks involving the same personalities wherein any enabling resolution from Nyco was
dispensed with and yet BA Finance was able to collect from Nyco and Sanshell was able
to discharge its own undertakings. Such effectively places Nyco under estoppel in pais
which arises when one, by his acts, representations or admissions, or by his silence when
he ought to speak out, intentionally or through culpable negligence, induces another to
believe certain facts to exist and such other rightfully relies and acts on such belief, so
that he will be prejudiced if the former is permitted to deny the existence of such facts
(Panay Electric Co., Inc. v. Court of Appeals, G.R. No. 81939, June 29,1989). Nyco
remained silent in the course of the transaction and spoke out only later to escape
liability. This cannot be countenanced. Nyco is estopped from denying Rufino Yao's
authority as far as the latter's transactions with BA Finance are concerned.

g. Bank Bound by its Manager and Officer

BPI Family Bank v. First Metro Investments Corp., 429 SCRA 30 (2004)

Petitioner maintains that respondent should have first inquired whether the deposit of
P100 Million and the fixing of the interest rate were pursuant to its (petitioners) internal
procedures. Petitioners stance is a futile attempt to evade an obligation clearly
established by the intent of the parties. What transpires in the corporate board room is
entirely an internal matter. Hence, petitioner may not impute negligence on the part of
respondents representative in failing to find out the scope of authority of petitioners
Branch Manager. Indeed, the public has the right to rely on the trustworthiness of bank
managers and their acts. Obviously, confidence in the banking system, which necessarily
includes reliance on bank managers, is vital in the economic life of our society.

Significantly, the transaction was actually acknowledged and ratified by petitioner when
it paid respondent in advance the interest for one year. Thus, petitioner is estopped from
denying that it authorized its Branch Manager to enter into an agreement with
respondents Executive Vice President concerning the deposit with the corresponding
17% interest per annum.

Premiere Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004)18

If a private corporation intentionally or negligently clothes its officers or agents with
apparent power to perform acts for it, the corporation will be estopped to deny that the
apparent authority is real as to innocent third persons dealing in good faith with such

18Premiere Bank deviated from the terms of the credit line agreement when it unilaterally and arbitrarily downgraded the
credit line of Panacor from P4.1 million to P2.7 million.

46
officers or agents. As testified to by Martillano, after she received a copy of the credit
line agreement and affixed her signature in conformity thereto, she forwarded the same
to the legal department of the Bank at its Head Office. Despite its knowledge, Premiere
Bank failed to disaffirm the contract. When the officers or agents of a corporation exceed
their powers in entering into contracts or doing other acts, the corporation, when it has
knowledge thereof, must promptly disaffirm the contract or act and allow the other
party or third persons to act in the belief that it was authorized or has been ratified. If it
acquiesces, with knowledge of the facts, or fails to disaffirm, ratification will be implied
or else it will be estopped to deny ratification.

Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000)19

Likewise, Tena had previously transacted business on behalf of the bank, and the latter
had acknowledged her authority. A bank is liable to innocent third persons where
representation is made in the course of its normal business by an agent like Manager
Tena, even though such agent is abusing her authority.

If a corporation knowingly permits one of its officers or any other agent to act within the
scope of an apparent authority, it holds the agent out to the public as possessing the
power to do those acts; thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agents authority.

DBP v. Ong, 460 SCRA 170 (2005)

Bank cannot be bound by mere clerk because a clerk is not among the bank officers upon
whom putative authority may be reposed by a third party.

h. Doctrine of Laches or Stale Demands

Rovels Enterprises, Inc. v. Ocampo, 391 (2002)20

It was only on September 6, 1995, or almost twenty (20) years from the time Eduardo
Santos learned of the March 1, 1976 Resolution, that Rovels filed its petition in SEC Case

19In any event, the bank acknowledged, by its own acts or failure to act, the authority of Fe S. Tena to enter into binding
contracts. After the execution of the Deed of Sale, respondents occupied the properties in dispute and paid the real estate
taxes due thereon. If the bank management believed that it had title to the property, it should have taken some measures
to prevent the infringement or invasion of its title thereto and possession thereof. Unquestionably, petitioner has
authorized Tena to enter into the Deed of Sale. Accordingly, it has a clear legal duty to issue the board resolution sought
by respondents. Having authorized her to sell the property, it behooves the bank to confirm the Deed of Sale so that the
buyers may enjoy its full use.

20 However, Rovels, to whom the TTTDC shares of stock (worth P108,000.00) were transferred, claimed that it became
aware of the July 6, 1993 SEC Decision only in June of 1995. So on September 6, 1995, it filed a petition with the SEC,[if
docketed as SEC Case No. 09-95-5135, praying that it be declared the majority stockholder of TTTDC as against
respondents Ocampo, Silva, Leviste, Sr., Calalang and Carreon (belonging to the SILVA GROUP). The material
allegations of the petition state that: (1) TTTDC passed a Resolution dated December 29, 1975 authorizing the transfer of
its unissued shares to Rovels as the latters construction fee (2) Pursuant to that Resolution, TTTDC shares of stock worth
P692,000.00 were transferred to Rovels; (3) While TTTDC, in its March 1, 1976 Resolution, repealed the December 29, 1975
Resolution, such repeal does not bind Rovels for lack of notice; (4) Several interrelated cases (SEC Case Nos. 1322 and
3806) were filed with the SEC involving the SILVA and SANTOS GROUPS (5) Rovels is not bound by the SEC Decisions
since it was not impleaded as a party in said cases.

47
No. 09-95-5135. Within that long period of time, Rovels did nothing to contest the March
1, 1976 TTTDC Resolution to protect its rights, if any. Obviously, such inaction
constitutes estoppel, prescription and laches. As stated by Rovels itself, Article 1149 of
the New Civil Code limits the filing of actions, whose periods are not fixed therein or in
any other laws, to only five (5) years. In addition, the principle of laches or stale
demands provides that the failure or neglect, for an unreasonable and unexplained
length of time, to do that which by exercising due diligence could or should have been
done earlier, or the negligence or omission to assert a right within a reasonable time,
warrants a presumption that the party entitled to assert it either has abandoned it or
declined to assert it.

4. Power to Extend or Shorten Corporate Term

Section 37

Power to extend or shorten corporate term. - A private corporation may extend or shorten its
term as stated in the articles of incorporation when approved by a majority vote of the
board of directors or trustees and ratified at a meeting by the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of
the members in case of non-stock corporations. Written notice of the proposed action
and of the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally:
Provided, That in case of extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this code.

The requirements for extending or shortening corporate life:

(a) majority vote of the board of directors or trustees; and

(b) ratification at a meeting by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of
non-stock corporations.

In case of extension (not shortening) of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this code.

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair value of his shares in the following
instances:

1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;

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

48
3. In case of merger or consolidation.

a. Power to Temporary Cease Corporate Operations

Considering the critical nature of the issue, which is not mere exercise of management
prerogative, the two-thirds (2/3) vote of the outstanding capital stock is required either
prior to the voting of the board by subsequent ratification in a meeting of the
stockholders called for the purpose (SEC Opinion No. 04-03 dated 26 October 2004,
addressed to Ms. Shirly M. Malapote).

5. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded

Indebtedness21

21 Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall
increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority
vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing
of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the
chairman and the secretary of the stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of
no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of
capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of
making effective stock dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall
require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the
Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by
the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock
shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as
the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation

49
The requirements for the increase or decrease of the capital stock of a corporation are as
follows:

(a) majority vote of the board of directors;

(b) ratification by two-thirds (2/3) of the outstanding capital stock at a stockholder's
meeting duly called for the purpose;
(c) certificate of said corporate act shall be signed by a majority of the directors of
the corporation and countersigned by the chairman and the secretary of the
stockholders;
corporate act shall take effect from and after SEC approval.
(d) Certified must be accompanied by the Treasurers Affidavit certifying
compliance with the 25%-25% requirement as to stock subscription;

No decrease in capital stock shall be approved by SEC if it will prejudice

corporate creditors.
Bonds issued by the corporation shall be registered with SEC which is
given the power to determine the sufficiency of the terms of such bonds.

NOTE: (1) Where there corporation increases capital stock, stockholders are entitled
to pre-emptive to subscribe to a sufficient number of shares in order to maintain their
previous relative voting power.

(2) Dissenting stockholders cannot exercise the right of appraisal in this case.

6. Disposition or Encumbrance of All or Substantially All Corporate Assets22

lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock
shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority
vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof.

22Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms
and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of
money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by
the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.

50
The requirements:

(a) majority vote of the board of directors or trustees; and

(b) ratification at a meeting by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of
non-stock corporations.

dissenting stockholder may exercise his appraisal

despite approval by the stockholders or members it is not mandatory for the
Board to continue with the disposition

NOTE: (a) all or substantially all-render corporation incapable of continuing the

business or accomplishing purpose for which it was incorporated.
(b) disposition of properties in the regular course of business does not need
approval or authority of the board.

Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997)

The Tandang Sora property, it appears from the records, constitutes the only property of
the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate
property and assets of IDP falling squarely within the contemplation of the foregoing
section. For the sale to be valid, the majority vote of the legitimate Board of Trustees,
concurred in by the vote of at least 2/3 of the bona fide members of the corporation
should have been obtained. These twin requirements were not met as the Carpizo Group
which voted to sell the Tandang Sora property was a fake Board of Trustees, and those
whose names and signatures were affixed by the Carpizo Group together with the sham
Board Resolution authorizing the negotiation for the sale were, from all indications, not
bona fide members of the IDP as they were made to appear to be. Apparently, there are
only fifteen (15) official members of the petitioner corporation including the eight (8)
members of the Board of Trustees. All told, the disputed Deed of Absolute Sale executed

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was
incorporated.

After such authorization or approval by the stockholders or members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and
assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the
stockholders or members.

Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders
or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is
necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition
of such property and assets be appropriated for the conduct of its remaining business.

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

51
by the fake Carpizo Board and private respondent INC was intrinsically void ab initio.

Caltex (Phils.). Inc. v. PNOC Shipping, 498 SCRA 400 (2006)23

While the Corporation Code allows the transfer of all or substantially all the properties
and assets of a corporation, the transfer should not prejudice the creditors of the
assignor. The only way the transfer can proceed without prejudice to the creditors is to
hold the assignee liable for the obligations of the assignor. The acquisition by the
assignee of all or substantially all of the assets of the assignor necessarily includes the
assumption of the assignors liabilities, unless the creditors who did not consent to the
transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to
transfer all its business, properties and assets without the consent of its creditors and
without requiring the assignee to assume the assignors obligations will defraud the
creditors. The assignment will place the assignors assets beyond the reach of its
creditors.

Strategic Alliance Dev. Corp. v. Radstock Securites Ltd., 607 SCRA 413 (2009)
The Corporation Code defines a sale or disposition of substantially all assets and
property of a corporation as one by which the corporation "would be rendered incapable
of continuing the business or accomplishing the purpose for which it was incorporated"
- any sale or disposition short of this will not need stockholder ratification, and may be
pursued by the majority vote of the Board of Directors.

7. Power to Acquire Own Shares

Section 41. Power to acquire own shares. - A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

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

23Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of execution could not be satisfied
because LUSTEVECOs remaining properties had been foreclosed by lienholders. In addition, all of LUSTEVECOs
business, properties and assets pertaining to its tanker and bulk business had been assigned to PSTC without the
knowledge of its creditors. Caltex now has no other means of enforcing the judgment debt except against PSTC.

If PSTC refuses to honor its written commitment to assume the obligations of LUSTEVECO, there will be fraud on the
creditors of LUSTEVECO. PSTC agreed to take over, and in fact took over, all the assets of LUSTEVECO upon its express
written commitment to pay all obligations of LUSTEVECO pertaining to those assets, including specifically the claim of
Caltex. LUSTEVECO no longer informed its creditors of the transfer of all of its assets presumably because PSTC
committed to pay all such creditors. Such transfer, leaving the claims of creditors unenforceable against the debtor, is
fraudulent and rescissible. To allow PSTC now to welsh on its commitment is to sanction a fraud on LUSTEVECOs
creditors.

52
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code.

Turner v. Lorenzo Shipping Corp., 636 SCRA 13 (2010)

Under the common law, there were originally conflicting views on whether a
corporation had the power to acquire or purchase its own stocks. In England, it was held
invalid for a corporation to purchase its issued stocks because such purchase was an
indirect method of reducing capital (which was statutorily restricted), aside from being
inconsistent with the privilege of limited liability to creditors. Only a few American
jurisdictions adopted by decision or statute the strict English rule forbidding a
corporation from purchasing its own shares. In some American states where the English
rule used to be adopted, statutes granting authority to purchase out of surplus funds
were enacted, while in others, shares might be purchased even out of capital provided
the rights of creditors were not prejudiced The reason underlying the limitation of share
purchases sprang from the necessity of imposing safeguards against the depletion by a
corporation of its assets and against the impairment of its capital needed for the
protection of creditors.

Now, however, a corporation can purchase its own shares, provided payment is made
out of surplus profits and the acquisition is for a legitimate corporate purpose. In the
Philippines, this new rule is embodied in Section 41 of the Corporation Code.

a. Instances When Corporation May Buy its Own Stocks

(a) To complete fractional shares;

(b) To collect indebtedness or in case of delinquency; and
(c) To exercise right of appraisal.

b. Trust Fund Doctrine24

Under Section 43 of the Code, the corporation can declare dividends only out of
unrestricted retained earnings; 25 and that under Section 122, no corporation shall

24Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without
the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. (16a)

Sec. 122 Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of
its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.
25 Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-
in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or

53
distribute any of its assets or property except upon lawful dissolution and after
payment of all debts and liabilities.

These provisions in essence provide for the trust fund doctrine where the
subscription of capital of a corporation constitute a fund to which the creditors have a
right to look for satisfaction of their claims.

Ong Yiu v. Tiu, 401 SCRA 1 (2003)26

The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims. This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of the Articles of Incorporation
to reduce the authorized capital stock, (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings, and (3)
dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is
articulated in Section 41 on the power of a corporation to acquire its own shares and in
Section 122 on the prohibition against the distribution of corporate assets and property
unless the stringent requirements therefor are complied with.
The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and procedures for the protection
of corporate creditors are followed. Otherwise, the corporate peace laudably hoped for
by the court will remain nothing but a dream because this time, it will be the creditors
turn to engage in squabbles and litigations should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.

Steinberg v. Velasco, 52 Phil. 953 (1929)27

Creditors of a corporation have the right to assume that so long as there are outstanding
debts and liabilities, the board of directors will not use the assets of the corporation to

(3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable contingencies.
26 In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized

distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since rescission of a subscription agreement is not one of the instances when distribution of capital
assets and property of the corporation is allowed.

27It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in declaring the
dividends on the stock was all done at the same meeting of the board of directors, and it appears in those minutes that the
both Ganzon and Mendaros were formerly directors and resigned before the board approved the purchase and declared
the dividends, and that out of the whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300
shares out of the 330, which were purchased by the corporation, and for which it paid P3,300. In other words, that the
directors were permitted to resign so that they could sell their stock to the corporation. As stated, the authorized capital
stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and paid.
Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct
P3,000 paid in dividends, there would be left P4,000 only. In this situation and upon this state of facts, it is very apparent
that the directors did not act in good faith or that they were grossly ignorant of their duties.

54
purchase its own stock, and that it will not declare dividends to stockholders when the
corporation is insolvent.

Boman Environmental Devt Corp. v. Court of Appeals, 167 SCRA 540 (1988)

Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999)

Halley v. Printwell, Inc., 649 SCRA 116 (2011)

8. Power to Invest Funds in Another Corporation or Business for Non-Primary

Purpose
Section 42. Power to invest corporate funds in another corporation or business or for any other
purpose. - Subject to the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose other than the primary
purpose for which it was organized when approved by a majority of the board of
directors or trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in
the case of non-stock corporations, at a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That any dissenting stockholder
shall have appraisal right as provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary.

Dela Rama v. Ma-ao Central Co., Inc., 27 SCRA 247 (1969)

9. Power to Enter into Management Contract28

28 Section 44. Power to enter into management contract. - No corporation shall conclude a management contract with another
corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least
the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That
(1) where a stockholder or stockholders representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also
constitute a majority of the members of the board of directors of the managed corporation, then the management contract
must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a period longer than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage
or operate all or substantially all of the business of another corporation, whether such contracts are called service
contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements
which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such
periods as may be provided by the pertinent laws or regulations.

55
Requirements of management contract are as follows, for both the managed and
managing corporation:

(1) Resolution of the Board of Directors/Trustees; and

(2) Majority vote of the outstanding capital stock or members for a meeting called
for that purpose.

EXCEPT: That 2/3 votes shall be necessary if:

(1) where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third (1/3) of
the total outstanding capital stock entitled to vote of the managing corporation; or

(2) where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of directors of the
managed corporation.

VI. RIGHTS OF STOCKHOLDERS AND MEMBERS

Reyes v. RTC of Makati, Br. 142, 561 SCRA 593 (2008)

This status as co-owners, however, does not immediately and necessarily make them
stockholders of the corporation. Unless and until there is compliance with Section 63 of
the Corporation Code on the manner of transferring shares, the heirs do not become
registered stockholders of the corporation. 29
Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder
of Zenith with respect to the shareholdings originally belonging to Anastacia. First, he
must prove that there are shareholdings that will be left to him and his co-heirs, and this
can be determined only in a settlement of the decedents estate. No such proceeding has
been commenced to date. Second, he must register the transfer of the shares allotted to
him to make it binding against the corporation. He cannot demand that this be done
unless and until he has established his specific allotment (and prima facie ownership) of
the shares. Without the settlement of Anastacias estate, there can be no definite partition
and distribution of the estate to the heirs. Without the partition and distribution, there
can be no registration of the transfer. And without the registration, we cannot consider

29Section 63. Certificate of stock and transfer of shares. The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the certificate or certificates, and the number of
shares transferred.
No shares of stock against which the corporation holds any unpaid claimshall be transferable in the books of the
corporation.

56
the transferee-heir a stockholder who may invoke the existence of an intra-corporate
relationship as premise for an intra-corporate controversy within the jurisdiction of a
special commercial court.

Puno v. Puno Enterprises, Inc., 599 SCRA 585 (2009)30

Upon the death of a stockholder, the heirs do not automatically become stockholders of
the corporation; neither are they mandatorily entitled to the rights and privileges of a
stockholder. The stocks must be distributed first to the heirs in estate proceedings, and
the transfer of the stocks must be recorded in the books of the corporation. Section 63 of
the Corporation Code provides that no transfer shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation. During such
interim period, the heirs stand as the equitable owners of the stocks, the executor or
administrator duly appointed by the court being vested with the legal title to the stock.
Until a settlement and division of the estate is effected, the stocks of the decedent are
held by the administrator or executor. Consequently, during such time, it is the
administrator or executor who is entitled to exercise the rights of the deceased as
stockholder.

Asias Emerging Dragon Corp. v. Department of Transportation and Communications,

549 SCRA 44 (2007)

The interest of a stockholder, if any, is indirect, contingent and inchoate in so far as the
structure was built by the corporation is concerned. Consequently, the stockholders
cannot intervene in the case in which in the corporation is a party.

Lim Tay v. Court of Appeals, 293 SCRA 634

The rights that flow from stock ownership are as follows: (a) the registration of shares in
a stockholders name; (b) the issuance of stock certificates; and (c) the right to receive
dividends which pertain to the shares.

Mobilia Products, Inc. v. Umezawa, 452 SCRA 736 (2005)

The ownership of that property is in the corporation, and not in the holder of shares of
its stock. The interest of each stockholder consists in the right to a proportionate part of
the profits whenever dividends are declared by the corporation, during its existence
under its charter, and to a like proportion of the property remaining, upon the
termination or dissolution of the corporation, after payment of its debts.

1. Right to Attend Stockholders Meetings31

30Carlos L. Puno, who died on June 25, 1963, was an incorporator of respondent Puno Enterprises, Inc. On March 14,
2003, petitioner Joselito Musni Puno, claiming to be an heir of Carlos L. Puno, initiated a complaint for specific
performance against respondent. Petitioner averred that he is the son of the deceased with the latters common-law wife,
Amelia Puno. As surviving heir, he claimed entitlement to the rights and privileges of his late father as stockholder of
respondent. The complaint thus prayed that respondent allow petitioner to inspect its corporate book, render an
accounting of all the transactions it entered into from 1962, and give petitioner all the profits, earnings, dividends, or
income pertaining to the shares of Carlos L. Puno.

57
Price and Sulu Dev. Co. v. Martin, 58 Phil. 70 (1933)

Until challenged successfully in proper proceedings, a registered stockholders has a

right to participate in any meeting, and in the absence of fraud the action of the
stockholders meeting cannot be collaterally attacked on account of such participation,
even if it be shown later on that the shares had been previously sold (but not recorded).

a. Types of Meetings

(1) Regular Meetings. - Regular meetings of stockholders or members shall be held

annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every
year as determined by the board of directors or trustees:

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

(2) Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws:

31Section 50. Regular and special meetings of stockholders or members. - Regular meetings of stockholders or members shall be
held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the
board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws.

Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws:
Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless
otherwise provided in the by-laws.

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

Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon
petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning
stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or
by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or
members present have chosen one of their number as presiding officer. (24, 26)

Section 51. Place and time of meetings of stockholders of members. - Stockholder's or member's meetings, whether regular or
special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable
in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a
city or municipality.

Notice of meetings shall be in writing, and the time and place thereof stated therein.

All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or
authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders
or members of the corporation are present or duly represented at the meeting. (24 and 25)

Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of
the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-
stock corporations.

58
Provided: at least one (1) week written notice shall be sent to all stockholders or
members, unless otherwise provided in the by-laws.

NOTE: Notice of any meeting may be waived, expressly or impliedly, by any

stockholder or member.

b. Place and Time of Meetings

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

c. Who May Call Meetings

Whenever, for any cause, there is no person authorized to call a meeting, the Securities
and Exchange Commission, upon petition of a stockholder or member on a showing of
good cause therefor, may issue an order to the petitioning stockholder or member
directing him to call a meeting of the corporation by giving proper notice required by
this Code or by the by-laws. The petitioning stockholder or member shall preside thereat
until at least a majority of the stockholders or members present have chosen one of their
number as presiding officer.

d. Quorum in Meetings

Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of
the stockholders representing a majority of the outstanding capital stock or a majority of
the members in the case of non-stock corporations.

Tan v. Sycip, 499 SCRA 216 (2006)

For stock corporations, the quorum referred in Sec. 52 is based on the number of
outstanding voting stocks. For nonstock corporations, only those who are actual, living
members with voting rights shall be counted in determining the existence of a
quorum during members meetings. Dead members shall not be counted. As regards
the filling of vacancies in the board of trustees, Section 29 of the Corporation Code
provides:

SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy

occurring in the board of directors or trustees other than by removal by the
stockholders or members or by expiration of term, may be filled by the vote of at

59
least a majority of the remaining directors or trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the stockholders in a regular or special
meeting called for that purpose. A director or trustee so elected to fill a vacancy shall
be elected only for the unexpired term of his predecessor in office.

Undoubtedly, trustees may fill vacancies in the board, provided that those
remaining still constitute a quorum. The phrase may be filled in Section 29 shows
that the filling of vacancies in the board by the remaining directors or trustees
constituting a quorum is merely permissive, not mandatory. Corporations, therefore,
may choose how vacancies in their respective boards may be filled up -- either by the
remaining directors constituting a quorum, or by the stockholders or members in a
regular or special meeting called for the purpose.

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in
its board of directors; that is, by a majority vote of the remaining members of the
board.

While a majority of the remaining corporate members were present,

however, the election of the four trustees cannot be legally upheld for the obvious
reason that it was held in an annual meeting of the members, not of the board of
trustees. We are not unmindful of the fact that the members of GCHS themselves
also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which
specifically prescribes that vacancies in the board must be filled up by the remaining
trustees. In other words, these remaining member-trustees must sit as a board in order
to validly elect the new ones.

60
Indeed, there is a well-defined distinction between a corporate act to be done by the
board and that by the constituent members of the corporation. The board of trustees
must act, not individually or separately, but as a body in a lawful meeting. On the
other hand, in their annual meeting, the members may be represented by their
respective proxies, as in the contested annual members meeting of GCHS.
Lanuza v. Court of Appeals, 454 SCRA 54 (2005)

2. Right to Vote

a. Nature of the Right to Vote

COCOFED v. Republic, 612 SCRA 255 (2010)

By their very nature, shares of common stock, while giving the stockholder the right to
vote, do not guarantee that the vote of the stockholder will prevail.

Tan v. Sycip, 499 SCRA 216 (2006)

In stock corporations, shareholders may generally transfer their shares. If shareholder

dies, executor/administrator duly appointed by the Court is vested with the legal title to
the stock and entitled to vote it. Until a settlement of the estate is effected, stocks are
held by the administrator or executor.

Membership in and all rights arising from nonstick corporation are personal and
nontransferable, unless the articles of by-laws provide otherwise. Hence, determination
of whether or not dead members are entitled to exercise their voting rights (through
their executor or administrator), depends on those articles of incorporation or by-laws.

Castillo v. Balinghasay, 440 SCRA 442 (2004)

One of the rights of a stockholder is the right to participate in the control and
management of the corporation that is exercised through his vote. The right to vote is a
inherent right in and incidental to the ownership of corporate stock, as such is a
property right.

Cojuangco, Jr. v. Roxas, 195 SCRA 797 (1991)

The sequestration of shares does not entitle the government to exercise acts of
ownership over the shares; even sequestered shares may be voted upon by the
registered stockholder.

Republic v. COCOFED, 372 SCRA 462 (2001)

61
The right to vote sequestered shares of stock registered in the names of private
individuals or entitles and alleged to have been acquired with ill-gotten wealth shall, as a
rule, be exercised by the registered owner. The PCGG may, however, be granted such
voting right provided in can (1) show prima facie evidence that the wealth and/or the
shares are indeed ill-gotten; and (2) demonstrate imminent danger of dissipation of the
assets, thus necessitating their continued sequestration and voting by the government
until a decision, ruling with finality on their ownership, is promulgated by the proper
court.

However, the foregoing "two-tiered" test does not apply when the sequestered stocks are
acquired with funds that are prima facie public in character or, at least, are affected with
public interest. Inasmuch as the subject UCPB shares in the present case were
undisputably acquired with coco levy funds which are public in character, then the right
to vote them shall be exercised by the PCGG. In sum, the "public character" test, not the
"two-tiered" one, applies in the instant controversy.

Tan v. Sycip, 499 SCRA 216 (2006)32

32 Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in
the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued
as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always
be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par
value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-
par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock
may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may
fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value
may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire
consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available
for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal
in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

62
Only stock actually issued and outstanding may be voted-neither the stockholders nor
the corporation can vote or represent shares that have never passed to the ownership of
stockholders, or having so passed, have again purchased by the corporation.

b. Limitations That May be Placed on the Right to Vote

Under Section 6, although shares, by specific provision in the articles of incorporation,

may be deprived of voting rights, nevertheless:

(1) No share may be deprived of voting rights, except those classified and issued as
preferred or redeemable shares; and

(2) There shall always be a class or series of shares which must have complete voting
rights;

(3) Even shares classified as non-voting would have power to vote in the
following corporate acts:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all
of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as
provided in this Code shall be deemed to refer only to stocks with voting rights.

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6. Merger or consolidation of the corporation with another corporation or other
corporations;

7. Investment of corporate funds in another corporation or business in accordance with

this Code; and

8. Dissolution of the corporation.

c. Right to Vote of Pledgors, Mortgagors and Administrators33

Gochan v. Young, 354 SCRA 207 (2001)

For the protection of the interests of the decedent, this Court has in previous instances
recognized the heirs as proper representatives of the decedent, even when there is
already an administrator appointed by the court. When no administrator has been
appointed, as in this case, there is all the more reason to recognize the heirs as the proper
representatives of the deceased. Since the Rules do not specifically prohibit them from
representing the deceased, and since no administrator had as yet been appointed at the
time of the institution of the Complaint with the SEC, we see nothing wrong with the
fact that it was the heirs of John D. Young Sr. who represented his estate in the case filed
before the SEC.

Lim Tay v. Court of Appeals, 293 SCRA 634 (1998)

The duty of a corporate secretary to record transfers of stocks is ministerial. However, he

cannot be compelled to do so when the transferees title to said shares has no prima facie
validity or is uncertain. More specifically, a pledgee, prior to foreclosure and sale, does
not acquire ownership rights over the pledged shares and thus cannot compel the
corporate secretary to record his alleged ownership of such shares on the basis merely of
the contract of pledge. Similarly, the SEC does not acquire jurisdiction over a dispute
when a partys claim to being a shareholder is, on the face of the complaint, invalid or
inadequate or is otherwise negated by the very allegations of such complaint.
Mandamus will not issue to establish a right, but only to enforce one that is already
established.

d. Voting in Case of Joint Ownership of Stock

33Section 55 Right to vote of pledgors, mortgagors, and administrators. - In case of pledged or mortgaged shares in stock
corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the
pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the
appropriate corporate books. (n)

Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in
behalf of the stockholders or members without need of any written proxy.

64
Section 56. Voting in case of joint ownership of stock. - In case of shares of stock owned
jointly by two or more persons, in order to vote the same, the consent of all the co-
owners shall be necessary, unless there is a written proxy, signed by all the co-owners,
authorizing one or some of them or any other person to vote such share or shares:
Provided, That when the shares are owned in an "and/or" capacity by the holders
thereof, any one of the joint owners can vote said shares or appoint a proxy therefor.

e. Voting Right for Treasury Shares

Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as
long as such shares remain in the Treasury.

f. Proxies

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

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

GSIS v. Court of Appeals, 585 SCRA 679 (2009)

We now examine whether the SEC has jurisdiction over the petition filed by GSIS. To
recall, SEC has sought to enjoin the use and annul the validation, of the proxies issued in
favor of several of the private respondents, particularly in connection with the annual
meeting.
It is plain that proxy solicitation is a procedure that antecedes proxy validation. The
former involves the securing and submission of proxies, while the latter concerns the
validation of such secured and submitted proxies. GSIS raises the sensible point that
there was no election yet at the time it filed its petition with the SEC, hence no proper
election contest or controversy yet over which the regular courts may have jurisdiction.
And the point ties its cause of action to alleged irregularities in the proxy solicitation
procedure, a process that precedes either the validation of proxies or the annual meeting
itself.
Under Section 20.1, the solicitation of proxies must be in accordance with rules and
regulations issued by the SEC, such as AIRR-SRC Rule 4. And by virtue of Section 53.1,
the SEC has the discretion to make such investigations as it deems necessary to
determine whether any person has violated any rule issued by it, such as AIRR-SRC
Rule 4. The investigatory power of the SEC established by Section 53.1 is central to its
regulatory authority, most crucial to the public interest especially as it may pertain to
corporations with publicly traded shares.

However, when proxies are solicited in relation to the election of corporate directors, the
resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A.

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Lee v. Court of Appeals, 205 SCRA 752 (1992)34

Legal title to shares qualifies a person to be eligible as director. Beneficial owner is

disqualified.

g. Voting Trusts

Section 5935

Voting Trust Agreement36 -Stockholder transfers to transferor

34 The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981 disposed of all
their shares through assignment and delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to own at
least one share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code.
They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors.
Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective positions as directors of
ALFA
35 Sec. 59. Voting Trusts One or more stockholders of a stock corporation may create a voting trust for the purpose of

conferring upon a trustee or trustees the right to vote and other rights pertaining to the share for a period rights
pertaining to the shares for a period not exceeding five (5) years at any one time: Provided, that in the case of a voting
trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding (5) years but
shall automatically expire upon full payment of the loan.

A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified
copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise,
said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust
agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are
issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the
trustee or trustees is made pursuant to said voting trust agreement.

The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in
the same manner and with the same effect as certificates of stock.

The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the
corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee
or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of
this Code.
Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the
voting trust agreement, and thereupon shall be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the
agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors.

The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.

36B y its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder from his other
rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain
interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of
the corporation. However, in order to distinguish a voting trust agreement from proxies and other voting pools and
agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the other
attributes of ownership; (2) that the voting rights granted are intended to be irrevocable for a definite period of time; and
(3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation. (5 Fletcher,
Cyclopedia of the Law on Private Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not only the
stockholder's voting rights but also other rights pertaining to his shares as long as the voting trust agreement is not
entered "for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or
used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code) Thus, the traditional concept of a voting
trust agreement primarily intended to single out a stockholder's right to vote from his other rights as such and made

66
 Right to Vote
Stockholders rights
Not exceeding five years.
- in case required by Loan- not exceeding
five years; shall expire upon full payment.

Form

Examination Right

Prohibited VTA

Termination of VTA

3. Pre-emptive Right

Section 39. Power to deny pre-emptive right. All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied by the articles
of incorporation or an amendment thereto:
Provided: That such pre-emptive right shall not extend to:

(1) shares to be issued in compliance with laws requiring stock offerings or

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

a. Stock Transactions Covered by Right

Section 39

Stock transactions covered by Pre-emptive right: all issues and

disposition of shares

(1) increase in authorized capital stock

(2) opening of subscription on the unissued portion of existing capital
stock; and
(3) disposition of treasury shares.

Section 9. Treasury shares - Treasury shares are shares of stock which have been issued
and fully paid for, but subsequently reacquired by the issuing corporation by purchase,

irrevocable for a limited duration may in practice become a legal device whereby a transfer of the stockholder's shares is
effected subject to the specific provision of the voting trust agreement.

67
redemption, donation or through some lawful means. Such shares may be again be
disposed of for a reasonable price fixed by the board of directors.

Section 81

Section 81. Instances of appraisal right. Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)

Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 46137

The validity of issuance of additional shares may be questioned if done in breach of trust
by the controlling stockholders. Thus, even if the pre-emptive right does not exist, either
because the issue comes within the exceptions in Section 39 or because it is denied or
limited in the articles of incorporation, an issue of shares may still be objectionable if the
directors acted in breach of trust and their primary purpose is to perpetuate or shift
control of the corporation, or to "freeze out" the minority interest.

4. Right of First Refusal

PCGG v. SEC, G.R. No. 82188, 30 June 1998

Right of First Refusal is an attribute of ownership; can only arise by contract or

when it is provided in the AOI.

J. G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005)38

37 The Revised BENHAR/RUBY Plan had proposed the calling for subscription of unissued shares through a Board
Resolution from the P11.814 million of the P23.7 million ACS in order to allow the long overdue program of the REHAB
Program. RUBY will offer for subscription 118,140 shares of stocks at par value of P100 each to all stockholders on record,
payable within 15 days, or within a reasonable period from SEC approval of the revised plan.
no error was committed by the CA when it set aside the September 18, 2002 Order of the SEC and declared the nullity of
the acts of majority stockholders in implementing capital infusion through issuance of additional shares in October 1991,
the board resolution approving the extension of RUBYs corporate term for another 25 years, and any illegal assignment of
credit executed by RUBYs creditors in favor of third parties and/or conduits of the controlling stockholders. The CA
likewise correctly ordered the delivery of all documents relative to the said assignment of credits to the MANCOM or the
Liquidator, the unwinding of these void deeds of assignment, and their full accounting by the majority stockholders.
38 We uphold the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC. First of all,

the right of first refusal is a property right of PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their
JVA. This right allows them to purchase the shares of their co-shareholder before they are offered to a third party. The
agreement of co-shareholders to mutually grant this right to each other, by itself, does not constitute a violation of the
provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations. As PHILYARDS
correctly puts it, if PHILSECO still owns land, the right of first refusal can be validly assigned to a qualified Filipino entity
in order to maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy Laws,
absent proof of any fraudulent intent. The transfer could be made either to a nominee or such other party which the

68
 Right of first refusal over shares pertains to shareholders while capacity to own
land pertains to corporation.

Thomson v. Court of Appeals, 298 SCRA 280 (1988)39

By-laws should merely regulate the formalities in effecting transfer; By- laws
cannot restrict property rights of stockholders.

Rural Bank of Salinas v. Court of Appeals, 210 SCRA 510 (1992)40

Restrictions in By-laws are void.

Lambert v. Fox, 26 Phil. 588 (1914)41

holder of the right of first refusal feels it can comfortably do business with. Alternatively, PHILSECO may divest of its
landholdings, in which case KAWASAKI, in exercising its right of first refusal, can exceed 40% of PHILSECOs equity. In
fact, it can even be said that if the foreign shareholdings of a landholding corporation exceeds 40%, it is not the
foreign stockholders ownership of the shares which is adversely affected but the capacity of the corporation to own
land that is, the corporation becomes disqualified to own land. This finds support under the basic corporate law principle
that the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal over shares
pertains to the shareholders whereas the capacity to own land pertains to the corporation. Hence, the fact that PHILSECO
owns land cannot deprive stockholders of their right of first refusal. No law disqualifies a person from purchasing
shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies
is the corporation from owning land.

39 In this case, the petitioner was the nominee of the private respondent to hold the share and enjoy the privileges of the
club. But upon the expiration of petitioners employment as officer and consultant of AmCham, the incentives that go with
the position, including use of the MPC share, also ceased to exist. It now behooves petitioner to surrender said share to
private respondents next nominee, another natural person. Obviously this arrangement of trust and confidence cannot be
defeated by the petitioners citation of the MPC rules to shield his untenable position, without doing violence to basic
tenets of justice and fair dealing.
40 Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his

wife, private respondent Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise
dispose of and/or mortgage 473 shares of stock of the Bank registered in his name (represented by the Bank's stock
certificates nos. 26, 49 and 65), to execute the proper documents therefor, and to receive and sign receipts for the
dispositions.
On February 27, 1980, and pursuant to said Special Power of Attorney, private respondent Melania Guerrero, as
Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in favor of private respondents Luz
Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco Guerrero, Jr. (5 shares).
Almost four months later, or two (2) days before the death of Clemente Guerrero on June 24, 1980, private respondent
Melania Guerrero, pursuant to the same Special Power of Attorney, executed a Deed of Assignment for the remaining one
(1) share of stock in favor of private respondent Francisco Guerrero, Sr.
Subsequently, private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the two (2) Deeds of
Assignment for registration with a request for the transfer in the Bank's stock and transfer book of the 473 shares of stock
so assigned, the cancellation of stock certificates in the name of Clemente G. Guerrero, and the issuance of new stock
certificates covering the transferred shares of stocks in the name of the new owners thereof. However, petitioner Bank
denied the request of respondent Melania Guerrero.
Sec. 63. . . . Shares of stock so issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the
corporation . . .
On December 5, 1980, private respondent Melania Guerrero filed with the Securities and Exchange Commission" (SEC) an
action for mandamus against petitioners Rural Bank of Salinas, its President and Corporate Secretary. The case was
docketed as SEC Case No. 1979.
41 A few days after the incorporation was completed plaintiff and defendant entered into the following agreement:

Whereas the undersigned are, respectively, owners of large amounts of stock in John R. Edgar and

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 Suspension of right to dispose of shareholdings in a limited period and
penalty for violation is valid.

Fleisher v. Botica Nolasco, 47 Phil. 583 (1925)42

Restrictions in By-laws are void.

The particular provisions of the Corporation Law referring to transfer of shares of stock
are as follows:
SEC. 13. Every corporation has the power:
xxx xxx xxx
(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the
number of its officers and directors within the limits prescribed by law, and for
the transferring of its stock, the administration of its corporate affairs, etc.
xxx xxx xxx
SEC. 35. The capital stock of stock corporations shall de divided into shares for which
certificates signed by the president or the vice-president, countersigned by the secretary
or clerk and sealed with the seal of the corporation, shall be issued in accordance with
the by-laws. Shares of stock so issued are personal property and may be transferred by delivery
of the certificate indorsed by the owner or his attorney in fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the corporation so as to show the
names of the parties to the transaction, that date of the transfer, the number of the certificate, and
the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall be
transferable on the books of the corporation.
The holder of shares, as owner of personal property, is at liberty, under said section (Sec.
35), to dispose of them in favor of whomsoever he pleases, without any other limitation
in this respect, than the general provisions of law. Therefore, a stock corporation in
adopting a by-law governing transfer of shares of stock should take into consideration
the specific provisions of section 35 of Act No. 1459, and said by-law should be made to
harmonize with said provisions. It should not be inconsistent therewith.

Co, Inc; and,

Whereas it is recognized that the success of said corporation depends, now and for at least one year
next following, in the larger stockholders retaining their respective interests in the business of said
corporation:
Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise dispose
of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till after one year from
the date hereof.
Either party violating this agreement shall pay to the other the sum of one thousand (P1,000) pesos as
liquidated damages, unless previous consent in writing to such sale, transfer, or other disposition be
obtained.
Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said corporation to E. C.
McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & Co., Inc.

42Plaintiff filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of five shares of
stock of said corporation, by purchase from their original owner, one Manuel Gonzalez; that the said shares were fully
paid; and that the defendant refused to register said shares in his name in the books of the corporation. defendant,
pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said shares at the par value of P100 a
share, plus P90 as dividends corresponding to the year 1922, and that said offer was refused by the plaintiff.

70
The by-law now in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7, above quoted; but in adopting said by-law the
corporation has transcended the limits fixed by law in the same section, and has not
taken into consideration the provisions of section 35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation, and are not contradictory to
the general policy of the laws of the land.
On the other hand, it is equally well settled that by-laws of a corporation must be
reasonable and for a corporate purpose, and always within the charter limits. They must
always be strictly subordinate to the constitution and the general laws of the land.

Hodges v. Lezama, 62 O.G. 6823

A provision providing a right of first option to the corporation only is

invalid.

5. Right to Receive Dividends

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

(1) when justified by definite corporate expansion projects or programs approved by

the board of directors; or
(2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured; or
(3) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies (second paragraph, Section 43).

a. Form of Dividends: Cash, Property or Stock

a. Form of Dividends: Cash, Property or Stock

Section 43. Power to declare dividends. The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in:

(1) cash,
(2) in property, or
(3) in stock to all stockholders on the basis of outstanding stock held by them:

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

71
subscription is fully paid

Stock Dividends

No stock dividend shall be issued without the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)

Cyanamid Philippines, Inc. v. Court of Appeals, 322 SCRA 639 (2000)

Penalty tax on improper accumulation of surplus- to compel distribution of

dividends.

Lincoln Philippines Life v. Court of Appeals, 293 SCRA 92 (1998)

Stock dividends are in the nature of shares of stock- amount of unrestricted

retained earnings converted into equity.

Republic Planters Bank v. Agana, 269 SCRA 1 (1997)

Although stock certificates grant the stockholders the right to receive quarterly
dividends of 1% cumulative and participating, the stockholders does not become
entitled to the payment thereof as a matter of right without necessity of a prior
declaration of dividends.

Nelson v. Lepanto Consolidated Mines, 26 SCRA 540 (1968)

Stock dividends cannot be issued to non-stockholders even for services rendered.

BIR v. Lincoln Philippines Life Insurance Co., 379 SCRA 423 (2002)

DST on stock dividends based on book value in AFS not in par value.

6. RIGHT TO INSPECT and COPY CORPORATE RECORDS43

43Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal
office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the
notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done
or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar
demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest
of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by
any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

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 a. Books Required to be Kept

NATU v. Secretary of Labor, 109 SCRA 139 (1981)

b. Right of Inspection, Examination and Copying

Puno v. Puno Enterprises, 599 SCRA 585 (2009)

The stockholders right of inspection of the corporations books and records is based
upon his ownership of shares in the corporation and the necessity for self-protection.

Dee Ping Wee v. Lee Hiong Wee, 629 SCRA 145 (2010)

Civil cases involving the inspection of corporate books are governed by the rules of
procedure set forth in the Interim Rules of Procedure for Intra-Corporate Controversies.

The burden of proof lies with the corporation who refuses to grant to the stockholder the
right to inspect corporate books.

W.G. Philpotts v. Philippine Mfg. Co., 40 Phil 471 (1919)

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code,
shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution
or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination of the records or minutes of such corporation or
of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of
all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for
which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe.
The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent
and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a
stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable.
Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the
respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection, except to satisfy
himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to
inquire into their validity. The circumstances under which he acquired one share of stock in the respondent bank
purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. Admittedly he
sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a
stockholder. His obvious purpose was to arm himself with materials which he can use against the respondent bank for
acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a laudable
sense of civic consciousness, but it could not be said that his purpose is germane to his interest as a stockholder.

73
The right to inspect corporate books, which includes the right to copy or take notes, may
be done with the assistance of technical men and it may be delegated. However, the
right may not availed of it can be proven that the stockholder, in exercising the right, is
seeking information to be published to embarrass the business or assist a rival company.

The right to inspect cannot extend to a formula or process not generally known which
has proved of utility to the corporation.

Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932)

A wrongful denial of the right to inspect corporate books of a controlled subsidiary.

Gokongwei v. SEC, 89 SCRA 336 (1979)

A stockholder of a parent corporation has the power to inspect the corporate books of a
controlled subsidiary.

Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924)

c. Liability for Refusal to Allow Inspection

Section 144

If the director or officer unjustly refuses to allow stockholder to inspect the corporate
books, he can be held liable for damages for criminal offense punished under Section
144.

Section 144. Violations of the Code. Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of
not less than one thousand (P1,000.00) pesos but not more than ten thousand
(P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more
than five (5) years, or both, in the discretion of the court. If the violation is committed by
a corporation, the same may, after notice and hearing, be dissolved in appropriate
proceedings before the Securities and Exchange Commission: Provided, That such
dissolution shall not preclude the institution of appropriate action against the director,
trustee or officer of the corporation responsible for said violation: Provided, further,
That nothing in this section shall be construed to repeal the other causes for dissolution
of a corporation provided in this Code.

Gonzales v. PNB, 122 SCRA 489 (1983)44

44Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil action for
mandamus against the herein respondent praying that the latter be ordered to allow him to look into the books and
records of the respondent bank in order to satisfy himself as to the truth of the published reports that the respondent has
guaranteed the obligation of Southern Negros Development Corporation in the purchase of a US$ 23 million sugar-mill to
be financed by Japanese suppliers and financiers; that the respondent is financing the construction of the P 21 million
Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the
Honiron Philippines, Inc., as well as to inquire into the validity of Id transactions. The petitioner has alleged hat his

74
There must be good faith and demand for inspection must be for a legitimate purpose.

Ang-Abaya v. Ang, 573 SCRA 129 (2008)45

In order therefore for the penal provision under Section 144 of the Corporation Code to
apply in a case of violation of a stockholder or members right to inspect the corporate
books/records as provided for under Section 74 of the Corporation Code, the following
elements must be present:

First. A director, trustee, stockholder or member has made a prior demand in

writing for a copy of excerpts from the corporations records or minutes;

written request for such examination was denied by the respondent. The trial court having dismissed the petition for
mandamus, the instant appeal to review the said dismissal was filed.
45 Petitioners argue that Eduardos demand for an inspection of the corporations books is based on the latters

attempt in bad faith at having his more than P165 million advances from the corporations written off; that Eduardo is
unjustly demanding that he be given the office of Jason, or the Vice Presidency for Finance and Corporate Secretary; that
Eduardo is usurping rights belonging exclusively to the corporations; and Eduardos attempts at coercing the
corporations, their directors and officers into giving in to his baseless demands involving specific corporate assets.
Specifically, petitioners accuse Eduardo of the following:

1. He is a spendthrift, using the family corporations resources to sustain his extravagant lifestyle.
During his incumbency as officer of VMC and Genato (from 1984 to 2000), he was able to obtain
massive amounts by way of cash advances from these corporations, amounting to more than P165
million;
2. He is exercising undue pressure upon petitioners in order to acquire ownership, through the forced
execution of a deed of donation, over the VAG Building in San Juan, which building belongs to
Genato;

3. He is putting pressure on the corporations, through their directors and officers, for the latter to
disregard their respective policies which prohibit the grant of cash advances to stockholders.
4. At one time, he coerced Flordeliza for the latter to sell her Wack-Wack Golf Proprietary Share;
5. In May 2003, without the requisite authority, he called a stockholders meeting to demand an
increase in his P140,000.00 monthly allowance from the corporation to P250,000.00; demand a cash
advance of US$10,000; and to demand that the corporations shoulder the medical and educational
expenses of his family as well as those of the other stockholders;
6. In November 2003, he demanded that he be given an office within the corporations premises. In
December 2003, he stormed the corporations common office, ordered the employees to vacate the
premises, summoned the directors to a meeting, and there he berated them for not acting on his
requests. In January 2004, he returned to the office, demanding the transfer of the Accounting
Department and for Jason to vacate his office by the end of the month. He likewise left a letter which
contained his demands. At the end of January 2004, he returned, ordered the employees to leave the
premises and demanded that Jason surrender his office and vacate his desk. He did this no less than
four (4) times. As a result, the respective boards of directors of the corporations resolved to ban him
from the corporate premises;
7. He has been interfering in the everyday operations of VMC and Genato, usurping the duties,
rights and authority of the directors and officers thereof. He attempted to lease out a warehouse
within the VMC premises without the knowledge and consent of its directors and officers; during the
wake of the former President of VMC and Genato, he issued instructions for the employees to close
down operations for the whole duration of the wake, against the corporate officers instructions to
attend the wake by batch, so as not to hamper business operations; he has caused chaos and
confusion in VMC and Genato as a result;
8. He is out to sabotage the family corporations.
These serious allegations are supported by official and other documents, such as board resolutions, treasurers affidavits
and written communication from the respondent Eduardo himself, who appears to have withheld his objections to these
charges. His silence virtually amounts to an acquiescence. Taken together, all these serve to justify petitioners allegation
that Eduardo was not acting in good faith and for a legitimate purpose in making his demand for inspection of the
corporate books. Otherwise stated, there is lack of probable cause to support the allegation that petitioners violated
Section 74 of the Corporation Code in refusing respondents request for examination of the corporation books.

75
 Second. Any officer or agent of the concerned corporation shall refuse to allow
the said director, trustee, stockholder or member of the corporation to examine and copy
said excerpts;

Third. If such refusal is made pursuant to a resolution or order of the board of

directors or trustees, the liability under this section for such action shall be imposed
upon the directors or trustees who voted for such refusal; and,

Fourth. Where the officer or agent of the corporation sets up the defense that
the person demanding to examine and copy excerpts from the corporations records and
minutes has improperly used any information secured through any prior examination of
the records or minutes of such corporation or of any other corporation, or was not acting
in good faith or for a legitimate purpose in making his demand, the contrary must be
shown or proved.

Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the
defense of improper use or motive is in the nature of a justifying circumstance that
would exonerate those who raise and are able to prove the same. Accordingly, where the
corporation denies inspection on the ground of improper motive or purpose, the burden
of proof is taken from the shareholder and placed on the corporation.

Sy Tiong Shiou v. Sy Chim, 582 SCRA (2009)

Defense of Impoper Motive in Corporate Inspection Cases- In a criminal complaint for

violation of Section 74 of the Corporation Code, the defense of improper use or motive is
in the nature of a justifying circumstances that would exonerate those who raise and are
able to prove the same- where the corporation denies inspection on the ground of
improper motive or purpose, the burden of proof is taken from the shareholder and
placed on the corporation.

d. Right to Financial Statements

Section 75. Right to financial statements. Within ten (10) days from receipt of a written
request of any stockholder or member, the corporation shall furnish to him its most
recent financial statement, which shall include a balance sheet as of the end of the last
taxable year and a profit or loss statement for said taxable year, showing in reasonable
detail its assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members, the board of directors or trustees
shall present to such stockholders or members a financial report of the operations of the
corporation for the preceding year, which shall include financial statements, duly signed
and certified by an independent certified public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial
statements may be certified under oath by the treasurer or any responsible officer of the
corporation.

7. Right to File Derivative Suits

76
 A common law right.

Rule 8
DERIVATIVE SUITS, Interim Rules on Intracorporate Controversies

Section 1. Derivative action. A stockholder or member may bring an action in

the name of a corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the articles
of incorporation, by-laws, laws or rules governing the corporation or partnership
to obtain the relief he desires;
(3) No appraisal rights are available for the acts or acts complained of;
and
(4) The suits is not a nuisance or harassment suit.
In case of nuisance of harassment suit, the court shall forthwith dismiss the case.

Sec. 2. Discontinuance. - A derivative action shall not be discontinued,

compromised or settled without approval of the court. During the pendency of the
action, any sale of shares of the complaining stockholders shall be approved by the
court. If the court determines that the interest of the stockholders or members will be
substantially affected by the discontinuance, compromise or settlement, the court may
direct that notice, by publication or otherwise, be given to the stockholders or members
whose interest it determines will be so affected.

PD 902-A

a. Nature and Definition of Derivative Suit

Yu v. Yukayguan, 589 SCRA 588 (2009)46

The Court of Appeals converted the derivative suit between the parties into liquidation
proceedings.

The general rule is that where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. Nonetheless, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he holds

46Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are neither
part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals to
convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of
Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc.
While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already distribute the
assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents themselves
repudiated said amicable settlement before the RTC, even after the same had been partially implemented; and moved that
their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties before the Court of
Appeals were unsuccessful.

77
stocks in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a nominal party, with
the corporation as the real party in interest. A derivative action is a suit by a shareholder
to enforce a corporate cause of action. The corporation is a necessary party to the suit.
And the relief which is granted is a judgment against a third person in favor of the
corporation. Similarly, if a corporation has a defense to an action against it and is not
asserting it, a stockholder may intervene and defend on behalf of the corporation. By
virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code,
jurisdiction over intra-corporate disputes, including derivative suits, is now vested in
the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-03-SC
promulgated on 21 November 2000.

In contrast, liquidation is a necessary consequence of the dissolution of a corporation.

A stockholders right to institute a derivative suit is not based on any express provision
of the Corporation Code, even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their fiduciary duties.

Cua, Jr. v. Tan, 607 SCRA 645 (2009)

Where the majority of the board of directors wastes or dissipates the funds of the
corporation or fraudulently disposes of its properties, or performs ultra vires acts, the
court, in the exercise of its equity jurisdiction, and upon showing that intracorporate
remedy is unavailing, will entertain a suit filed by the minority members of the board of
directors, for and in behalf of the corporation, to prevent waste and dissipation and the
commission of illegal acts and otherwise redress the injuries of the minority
stockholders against the wrongdoing of the majority. The action in such a case is said to
be brought derivatively in behalf of the corporation to protect the rights of the minority
stockholders thereof.

It is well settled in this jurisdiction that where corporate directors are guilty of a breach
of trust not of mere error of judgment or abuse of discretion and intracorporate remedy
is futile or useless, a stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong
inflicted directly upon the corporation and indirectly upon the stockholders.
Corporation is the real party in interest in a derivative suit and the suing stockholder is
only a nominal party.

Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009)

A derivative action is a suit by a stockholder to enforce a corporate cause of action - an

individual stockholder may file a derivative suit on behalf of the corporation to protect
or vindicate corporate rights whenever the officials of the corporation refuse to sue or
the ones to be sued.

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 Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009) 47

Derivative suits are governed by a special set of rules under A.M. No. 01-2-04-SC
otherwise known as the Interim Rules of Procedure Governing Intra-Corporate
Controversies under R.A. 8799.

Filipinas Port Services v. Go, 518 SCRA 453 (2007)48

Under the Corporation Code, where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. But an individual stockholder may be
permitted to institute a derivative suit in behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or
when a demand upon them to file the necessary action would be futile because they are
the ones to be sued, or because they hold control of the corporation. In such actions, the
corporation is the real party-in-interest while the suing stockholder, in behalf of the
corporation, is only a nominal party.

47 In July 31, 2003, Roberto H. Torres (Roberto), for and on behalf of Honorio Torres & Sons, Inc. (HTSI), filed a Petition for
Annulment of Real Estate Mortgage and Foreclosure Sale over two parcels of land located in Marikina and Quezon City.
The suit was filed against Leonora, Ma. Theresa, Glenn and Stephanie, all surnamed Torres, the Register of Deeds of
Marikina and Quezon City, and petitioner Hi-Yield Realty, Inc. (Hi-Yield). It was docketed as Civil Case No. 03-892 with
Branch 148 of the Regional Trial Court (RTC) of Makati City.
On September 15, 2003, petitioner moved to dismiss the petition on grounds of improper venue and payment of
insufficient docket fees. The RTC denied said motion in an Order dated January 22, 2004. The trial court held that the case
was, in nature, a real action in the form of a derivative suit cognizable by a special commercial court pursuant to
Administrative Matter No. 00-11-03-SC. Petitioner sought reconsideration, but its motion was denied in an Order dated
April 27, 2004.
Thereafter, petitioner filed a petition for certiorari and prohibition before the Court of Appeals. In a Decision dated March
10, 2005, the appellate court agreed with the RTC that the case was a derivative suit. It further ruled that the prayer for
annulment of mortgage and foreclosure proceedings was merely incidental to the main action.
48 On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among which is herein co-

petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a petition which he describes
as a derivative suit against the herein respondents who were then the incumbent members of Filports Board of Directors,
for alleged acts of mismanagement detrimental to the interest of the corporation and its shareholders at large, namely:

1. creation of an executive committee in 1991 composed of seven (7) members of the board with compensation of P500.00
for each member per meeting, an office which, to Cruz, is not provided for in the by-laws of the corporation and whose
function merely duplicates those of the President and General Manager;

2. increase in the emoluments of the Chairman, Vice-President, Treasurer and Assistant General Manager which increases
are greatly disproportionate to the volume and character of the work of the directors holding said positions;

3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate Planning, Operations, Finance and
Administration, and the election thereto of board members Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and
Henry Chua, respectively; and

4. creation of the additional positions of Special Assistants to the President and the Board Chairman, with Fortunato V. de
Castro and Arsenio Lopez Chua elected to the same, the directors elected/appointed thereto not doing any work to
deserve the monthly remuneration of P13,050.00 each.

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite demands made upon the respondent
members of the board of directors to desist from creating the positions in question and to account for the amounts
incurred in creating the same, the demands were unheeded. Cruz thus prayed that the respondent members of the board
of directors be made to pay Filport, jointly and severally, the sums of money variedly representing the damages incurred
as a result of the creation of the offices/positions complained of and the aggregate amount of the questioned increased
salaries.

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R.N. Symaco Trading Corp. v. Santos, 467 SCRA 315 (2005)

The whole purpose of the law authorizing a derivative suit is to allow the
stockholder/members to enforce rights which are derivative (secondary) in nature, i.e.,
to enforce a corporate cause of action.

Chua v. Court of Appeals, 443 SCRA 259 (2004)

Relief granted is a judgment against a third person in favor of the corporation.

Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997)

A derivative suit is an action brought by minority shareholders in the name of the

corporation to redress wrongs committed against the corporation, for which the
directors refuse to sue. It is a remedy designed by equity and has been the principal
defense of the minority shareholders against abuses by the majority.

Commart (Phils.), Inc. v. SEC, 198 SCRA 73 (1991)

A derivative suit has been the principal defense of the minority shareholders against the
abuses of the majority. It is remedy designed by equity for those situations where the
mismanagement, through fraud, neglect of duty, or other cause, declines to take the
proper necessary steps to asset the corporations rights.

Principal defense of the minority against the majority.

Angeles v. Santos, 64 Phil. 697 (1937)49

The board of directors of a corporation is a creation of the stockholders and controls and
directs the affairs of the corporation by allegation of the stockholders. But the board of
directors, or the majority thereof, in drawing to themselves the power of the corporation,
occupies a position of trusteeship in relation to the minority of the stock in the sense that
the board should exercise good faith, care and diligence in the administration of the
affairs of the corporation and should protect not only the interest of the majority but also
those of the minority of the stock. Where a majority of the board of directors wastes or
dissipates the funds of the corporation or fraudulently disposes of its properties, or
performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon
showing that intracorporate remedy is unavailing, will entertain a suit filed by the
minority members of the board of directors, for and in behalf of the corporation, to
prevent waste and dissipation and the commission of illegal acts and otherwise redress

49On July 24, 1934, the plaintiffs-appellees renewed their petition for the appointment of a receiver pendente lite alleging,
among other things, that defendant Teodorico B. Santos was using the funds of the corporation for purely personal ends;
that said Teodorico B. Santos was managing to the interest of the Corporation and its stockholders; that said defendant
did not render any account of his management or for the condition of the business of the corporation; that since 1932 said
defendant called no meeting of the board of directors or of the stockholders thus enabling him to continue holding,
without any election, the position of present and, finally, that of manager; and that, without the knowledge and consent
of the stockholders and of the board of directors, the said defendant installed a small rice mill for converting rice husk
into "tiqui-tiqui", the income of which was never turned over or reported to the treasurer of the corporation.

80
the injuries of the minority stockholders against the wrongdoing of the majority. The
action in such a case is said to be brought derivatively in behalf of the corporation to
protect the rights of the minority stockholders thereof.

b. The Right to File Derivative Suit Cannot Override the Exercise of Business
Judgment by a Disinterested Board.

Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009)

Yu v. Yukayguan, 589 SCRA 588 (2009)

Bitong v. Court of Appeals, 292 SCRA 304 (1998)

Tam Wing Tak v. Makasiar, 350 SCRA 465 (2001)

Under Section 36 of the Corporation Code, read in relation to Section 23, it is clear that
where a corporation is an injured party, its power to sue is lodged with its board of
directors or trustees. Note that petitioner failed to show any proof that he was
authorized or deputized or granted specific powers by Concords board of director to sue
Victor Ang Siong for and on behalf of the firm. Clearly, petitioner as a minority
stockholder and member of the board of directors had no such power or authority to sue
on Concords behalf. Nor can we uphold his act as a derivative suit. For a derivative suit
to prosper, it is required that the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action
on behalf of the corporation and all other stockholders similarly situated who may wish
to join him in the suit. There is no showing that petitioner has complied with the
foregoing requisites.

Chua v. Court of Appeals, 443 SCRA 259 (2004)50

Not every suit filed in behalf of the corporation is a derivative suit. For a derivative suit
to prosper, it is required that the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action
on behalf of the corporation and all other stockholders similarly situated who may wish
to join him in the suit. It is a condition sine qua non that the corporation be impleaded as
a party because not only is the corporation an indispensable party, but it is also the
present rule that it must be served with process. The judgment must be made binding
upon the corporation in order that the corporation may get the benefit of the suit and
may not bring subsequent suit against the same defendants for the same cause of action.
In other words, the corporation must be joined as party because it is its cause of action
that is being litigated and because judgment must be a res adjudicata against it.

50 In Criminal Case No. 285721, the complaint was instituted by respondent against petitioner for falsifying corporate
documents whose subject concerns corporate projects of Siena Realty Corporation. Clearly, Siena Realty Corporation is an
offended party. Hence, Siena Realty Corporation has a cause of action. And the civil case for the corporate cause of action
is deemed instituted in the criminal action.
However, the board of directors of the corporation in this case did not institute the action against petitioner. Private
respondent was the one who instituted the action. Private respondent asserts that she filed a derivative suit in behalf of
the corporation. This assertion is inaccurate.

81
In the criminal complaint filed by herein respondent, nowhere is it stated that she is
filing the same in behalf and for the benefit of the corporation. Thus, the criminal
complaint including the civil aspect thereof could not be deemed in the nature of a
derivative suit.

c. Requisites for Filing of Derivative Suit

Yu v. Yukayguan, 589 SCRA 588 (2009)

A stockholder must comply with the essential requisites for the filing of a
derivative suit provided in Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies namely:

(a) That he was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;

(b) That he exerted all reasonable efforts to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules governing the
corporation to obtain the relief he desires, and alleges the same with
particularity in the complaint.

(c) No appraisal rights are available for the acts or acts complained of; and

(d) The suit is not a nuisance or harassment suit.

San Miguel Corp. v. Kahn, 176 SCRA 447 (1989)

It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent
only. 00001644% of the total number of outstanding shares (1 21,645,860), he cannot be
deemed to fairly and adequately represent the interests of the minority stockholders.
The implicit argument that a stockholder, to be considered as qualified to bring a
derivative suit, must hold a substantial or significant block of stock finds no support
whatever in the law. The requisites for a derivative suit 31 are as follows:
a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material; 32
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed
his plea; 33 and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.

(1) Who may file a derivative suit?

Bitong v. Court of Appeals, 292 SCRA 304 (1998)

82
 The basis of a stockholders suit is always one in equity. However, it cannot
prosper without first complying with the legal requisites for its institution. The most
important of these is the bona fide ownership by a stockholder of a stock in his own right
at the time of the transaction complained of which invests him with standing to institute
a derivative action for the benefit of the corporation. Bonafide ownership by a
stockholder.

R.N. Symaco Trading Corp. v. Santos, 467 SCRA 315 (2005)

The Court also agrees with the petitioners contention that as respondent Santos was not
a legitimate MFBAI member, he had no standing to file a derivative suit for and in its
behalf. One of the requisites of a derivative suit is that the party bringing the suit should
be a stockholder/member at the time of the action or transaction complained of. The
right to sue derivatively is an attribute of corporate ownership which, to be exercised,
requires that the injury alleged be indirect as far as the stockholders/members are
concerned, and direct only insofar as the corporation is concerned. The whole purpose
of the law authorizing a derivative suit is to allow the stockholder/member to enforce
rights which are derivative (secondary) in nature. A derivative action is a suit by a
shareholder/member to enforce a corporate cause of action.

Chua v. Court of Appeals, 443 SCRA 259 (2004)

Suing stockholder is a nominal party, corporation is the real party-in-interest.

It is a condition sine qua non that the corporation be impleaded as a party because not
only is the corporation an indispensable party, but it is also the present rule that it must
be served with process. The judgment must be made binding upon the corporation in
order that the corporation may get the benefit of the suit and may not bring subsequent
suit against the same defendants for the same cause of action. In other words, the
corporation must be joined as party because it is its cause of action that is being litigated
and because judgment must be a res adjudicata against it.

Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009)

Even then, not every suit filed on behalf of the corporation is a derivative suit. For a
derivative suit to prosper, the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action
on behalf of the corporation and all other stockholders similarly situated who may wish
to join him in the suit. The Court finds that Roberto had satisfied this requirement in
paragraph five (5) of his petition which reads:

5. Individual petitioner, being a minority stockholder, is instituting the instant

proceeding by way of a derivative suit to redress wrongs done to petitioner corporation
and vindicate corporate rights due to the mismanagement and abuses committed
against it by its officers and controlling stockholders, especially by respondent Leonora
H. Torres (Leonora, for brevity) who, without authority from the Board of Directors,

83
arrogated upon herself the power to bind petitioner corporation from incurring loan
obligations and later allow company properties to be foreclosed as hereinafter set forth;

Hornilla v. Salunat, 405 SCRA 220 (2003)

Having thus laid a suitable foundation of the basic legal principles pertaining to
derivative suits, we come now to the threshold question: can a lawyer engaged by a
corporation defend members of the board of the same corporation in a derivative suit?
On this issue, the following disquisition is enlightening:
The possibility for conflict of interest here is universally recognized. Although early
cases found joint representation permissible where no conflict of interest was obvious,
the emerging rule is against dual representation in all derivative actions. Outside
counsel must thus be retained to represent one of the defendants. The cases and ethics
opinions differ on whether there must be separate representation from the outset or
merely from the time the corporation seeks to take an active role. Furthermore, this
restriction on dual representation should not be waivable by consent in the usual way;
the corporation should be presumptively incapable of giving valid consent.
(underscoring ours)
In other jurisdictions, the prevailing rule is that a situation wherein a lawyer represents
both the corporation and its assailed directors unavoidably gives rise to a conflict of
interest. The interest of the corporate client is paramount and should not be influenced
by any interest of the individual corporate officials. The rulings in these cases have
persuasive effect upon us. After due deliberation on the wisdom of this doctrine, we are
sufficiently convinced that a lawyer engaged as counsel for a corporation cannot
represent members of the same corporations board of directors in a derivative suit
brought against them. To do so would be tantamount to representing conflicting
interests, which is prohibited by the Code of Professional Responsibility.
In the case at bar, the records show that SEC Case No. 05-97-5657, entitled Philippine
Public School Teachers Assn., Inc., et al. v. 1992-1995 Board of Directors of the Philippine Public
School Teachers Assn. (PPSTA), et al., was filed by the PPSTA against its own Board of
Directors. Respondent admits that the ASSA Law Firm, of which he is the Managing
Partner, was the retained counsel of PPSTA. Yet, he appeared as counsel of record for
the respondent Board of Directors in the said case. Clearly, respondent was guilty of
conflict of interest when he represented the parties against whom his other client, the
PPSTA, filed suit.

Gochan v. Young, 354 SCRA 207 (2001)

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal
standing to bring the suit before the SEC on February 8, 1994, because the latter were no
longer stockholders at the time. Allegedly, the stocks had already been purchased by the
corporation. Petitioners further assert that, being allegedly a simple contract of sale
cognizable by the regular courts, the purchase by Gochan Realty of Cecilia Gochan Uys
210 shares does not come within the purview of an intra-corporate controversy.
As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint. For purposes of resolving a motion to
dismiss, Cecilia Uys averment in the Complaint -- that the purchase of her stocks by the

84
corporation was null and void ab initio is deemed admitted. It is elementary that a void
contract produces no effect either against or in favor of anyone; it cannot create, modify
or extinguish the juridical relation to which it refers. Thus, Cecilia remains a stockholder
of the corporation in view of the nullity of the Contract of Sale. Although she was no
longer registered as a stockholder in the corporate records as of the filing of the case before
the SEC, the admitted allegations in the Complaint made her still a bona fide
stockholder of Felix Gochan & Sons Realty Corporation (FGSRC), as between said
parties.

Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001)

Nor can we uphold his act as a derivative suit. For a derivative suit to prosper, it is
required that the minority stockholder suing for and on behalf of the corporation must
allege in his complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish to join him in
the suit. There is no showing that petitioner has complied with the foregoing requisites.

Republic Bank v. Cuaderno, 19 SCRA 672 (1967)

Absence of corporate authority would seem to militate against making the corporation a
party plaintiff, while joining it as defendant places the entity in the awkward position of
resisting an action instituted for its benefit. What is important is that the corporation'
should be made a party, in order to make the Court's judgment binding upon it, and
thus bar future relitigation of the issues.

Pascual v. Del Saz Orozco, 19 Phil. 82 (1911)

In that case, the Banco Espaol-Filipino suffered heavy losses due to fraudulent
connivance between a depositor and an employee of the bank, which losses, it was
contended, could have been avoided if the president and directors had been more
vigilant in the administration of the affairs of the bank. The stockholders constituting the
minority brought a suit in behalf of the bank against the directors to recover damages,
and this over the objection of the majority of the stockholders and the directors. This
court held that the suit could properly be maintained.

(2) Exhaustion of Intra-Corporate Remedies:

Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 543, 557 (2009)
Further, while it is true that the complaining stockholder must satisfactorily show that
he has exhausted all means to redress his grievances within the corporation; such
remedy is no longer necessary where the corporation itself is under the complete control
of the person against whom the suit is being filed. The reason is obvious: a demand
upon the board to institute an action and prosecute the same effectively would have
been useless and an exercise in futility.
Here, Roberto alleged in his petition that earnest efforts were made to reach a
compromise among family members/stockholders before he filed the case. He also
maintained that Leonora Torres held 55% of the outstanding shares while Ma. Theresa,

85
Glenn and Stephanie excluded him from the affairs of the corporation. Even more
glaring was the fact that from June 10, 1992, when the first mortgage deed was executed
until July 23, 2002, when the properties mortgaged were foreclosed, the Board of
Directors of HTSI did nothing to rectify the alleged unauthorized transactions of
Leonora. Clearly, Roberto could not expect relief from the board.

Yu v. Yukayguan, 589 SCRA 588 (2009)

Derivative suit must be final recourse.

DBP v. Pundogar, 218 SCRA 118 (1993)

There is no allegation in the complaint that would show that a demand on the board of
directors of IISMI was in fact made. But even if the Jacintos and JSI omitted to make the
same, they can still file the instant case as a derivative suit. They have alleged that "at
this time, IISMI is without a duly or legally constituted board of directors and no
election of officers has been held." It would be futile for them to make a demand on the
board of directors whose very constitution is being questioned. Private respondents,
having the legal right to file the instant case, we find that the complaint states a cause of
action.

Reyes v. Tan, 3 SCRA 198 (1961)51

It is well settled in this jurisdiction that where corporate directors are guilty of a breach
of trust not of mere error of judgment or abuse of discretion and intracorporate
remedy is futile or useless, a stockholder may institute a suit in behalf of himself and
other stockholders and for the benefit of the corporation, to bring about a redress of the
wrong inflicted directly upon the corporation and indirectly upon the stockholders.

51In the complaint in said Civil Case No. 42375, it is alleged that the corporation, Roxas-Kalaw Textile Mills, Inc., was
organized on June 5, 1954 by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona and
Morris Wilson, for and on behalf of the following primary principals with the following shareholdings: Adelia K. Roxas,
1200 Class A shares; I. Sherman, 900 Class A shares; Robert W. Born, 450 Class A shares and Morris Wilson, 450 Class A
shares; that the plaintiff holds both Class A and Class B shares and number and value thereof are is follows: Class A 50
shares, Class B 1,250 shares; that on May 8, 1957, the Board of Directors approved a resolution designating one
Dayaram as co-manager with the specific understanding that he was to act as defendant Wadhumal Dalamal's designee,
Morris Wilson was likewise designated as co-manager with responsibilities for the management of the factory only, that
an office in New York was opened for the purpose of supervising purchases, which purchases must have the unanimous
agreement of Cesar K. Roxas, New York resident member of the board of directors, Robert Born and Wadhumal Dalamal
or their respective representatives; that several purchases aggregating $289,678.86 were made in New York for raw
materials such as greige cloth, rayon and grey goods for the textile mill and shipped to the Philippines, which shipment
were found out to consist not of raw materials but already finished products, such as, West Point Khaki rayon suiting
materials dyed in the piece, finished rayon tafetta in cubes, cotton eyelets, etc., for which reasons the Central Bank of the
Philippines stopped all dollar allocations for raw materials for the corporation which necessarily led to the paralyzation of
the operation of the textile mill and its business; that the supplier of the aforesaid finished goods was the United
Commercial Company of New York in which defendant Dalamal had interests and the letter of credit for said goods were
guaranteed by the Indian Commercial Company and the Indian Traders in which firms defendant Dalamal likewise held
interests; that the resale of the finished goods was the business of the Indian Commercial Company of Manila, which
company could not obtain dollar allocations for importations of finished goods under the Central Bank regulations; that
plaintiff and some members of the board of directors urged defendants to proceed against Dalamal, exposing his offense
to the Central Bank, and to initiate suit against Dalamal for his fraud against the corporation; that defendants refused to
proceed against Dalamal and instead continued to deal with the Indian Commercial Company to the damage and
prejudice of the corporation. The prayer asks for the appointment of a receiver and a judgment marking defendants
jointly and severally liable for the damages.

86
 Everett v. Asia Banking Corp., 49 Phil 512 (1927)

Teal and Company is under the complete control of the principal defendants in the case,
and, in these circumstances, it is obvious that a demand upon the Board of Directors to
institute an action and prosecute the same effectively would have been useless, and the
law does not require litigants to perform useless acts.

Gochan v. Young, 345 SCRA 207 (2001)52

In the present case, the Complaint alleges all the components of a derivative suit. The
allegations of injury to the Spouses Uy can coexist with those pertaining to the
corporation. The personal injury suffered by the spouses cannot disqualify them from
filing a derivative suit on behalf of the corporation. It merely gives rise to an additional
cause of action for damages against the erring directors. This cause of action is also
included in the Complaint filed before the SEC.

(3) Grounds or Basis for Filing Derivative Suit; Nature of the Reliefs Prayed for

R.N. Symaco Trading Corp. v. Santos, 467 SCRA 31 (2005)

In a derivative suit, any monetary benefit in the courts decision shall pertain to
the corporation and not to the stockholders or members.

Lim v. Lim-Yu, 352 SCRA 216 (2001)

We hold, however, that the suit of respondent cannot be characterized as derivative,

because she was complaining only of the violation of her preemptive right under Section
39 of the Corporation Code. She was merely praying that she be allowed to subscribe to
the additional issuances of stocks in proportion to her shareholdings to enable her to
preserve her percentage of ownership in the corporation. She was therefore not acting
for the benefit of the corporation. Quite the contrary, she was suing on her own behalf,
out of a desire to protect and preserve her preemptive rights. Unquestionably, the TRO
did not prevent her from pursuing that action.

52 Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit, because the spouses

and not the corporation were the injured parties. The Court is not convinced. The following quoted portions of the
Complaint readily shows allegations of injury to the corporation itself:
16. That on information and belief, in further pursuance of the said conspiracy and for the fraudulent purpose of
depressing the value of the stock of the Corporation and to induce the minority stockholders to sell their shares of stock
for an inadequate consideration as aforesaid, respondent Esteban T. Gochan . . ., in violation of their duties as directors
and officers of the Corporation . . ., unlawfully and fraudulently appropriated [for] themselves the funds of the
Corporation by drawing excessive amounts in the form of salaries and cash advances. . . and by otherwise charging their
purely personal expenses to the Corporation.
xxxxxxxxx
41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy for her shares of stock
constituted an unlawful, premature and partial liquidation and distribution of assets to a stockholder, resulting in the
impairment of the capital of the Corporation and prevented it from otherwise utilizing said amount for its regular and
lawful business, to the damage and prejudice of the Corporation, its creditors, and of complainants as minority
stockholders;

87
 Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001)53

Second, it is not disputed in the instant case that Concord, a domestic corporation, was
the payee of the bum check, not petitioner. Therefore, it is Concord, as payee of the
bounced check, which is the injured party. Since petitioner was neither a payee nor a
holder of the bad check, he had neither the personality to sue nor a cause of action
against Vic Ang Siong. Under Section 36 of the Corporation Code, read in relation to
Section 23, it is clear that where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. Note that petitioner failed to show any
proof that he was authorized or deputized or granted specific powers by Concords
board of director to sue Victor Ang Siong for and on behalf of the firm. Clearly,
petitioner as a minority stockholder and member of the board of directors had no such
power or authority to sue on Concords behalf. Nor can we uphold his act as a derivative
suit. For a derivative suit to prosper, it is required that the minority stockholder suing
for and on behalf of the corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other stockholders
similarly situated who may wish to join him in the suit. There is no showing that
petitioner has complied with the foregoing requisites.

Evangelista v. Santos, 86 SCRA 387 (1950)54

In the present case, the plaintiff stockholders have brought the action not for the benefit
of the corporation but for their own benefit, since they ask that the defendant make good
the losses occasioned by his mismanagement and pay to them the value of their
respective participation in the corporate assets on the basis of their respective holdings.
Clearly, this cannot be done until all corporate debts, if there be any, are paid and the
existence of the corporation terminated by the limitation of its charter or by lawful
dissolution in view of the provisions of section 16 of the Corporation Law.

(4) Venue for Derivate Suits

53 On November 11, 1992, petitioner, in his capacity as director of Concord-World Properties, Inc., (Concord for
brevity), a domestic corporation, filed an affidavit-complaint with the Quezon City Prosecutors Office, charging Vic Ang
Siong with violation of B.P. Blg. 22. Docketed by the prosecutor as I.S. No. 93-15886, the complaint alleged that a check for
the amount of P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was dishonored when presented for
encashment.
Vic Ang Siong sought the dismissal of the case on two grounds: First, that petitioner had no authority to file the
case on behalf of Concord, the payee of the dishonored check, since the firms board of directors had not empowered him
to act on its behalf. Second, he and Concord had already agreed to amicably settle the issue after he made a partial
payment of P19,000,000.00 on the dishonored check.
On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-15886 on the following grounds: (1) that petitioner lacked
the requisite authority to initiate the criminal complaint for and on Concords behalf; and (2) that Concord and Vic Ang
Siong had already agreed upon the payment of the latters balance on the dishonored check
54 The complaint alleges that plaintiffs are minority stockholders of the Vitali Lumber Company, Inc., a Philippine

corporation organized for the exploitation of a lumber concession in Zamboanga, Philippines; that defendant holds more
than 50 per cent of the stocks of said corporation and also is and always has been the president, manager, and treasurer
thereof; and that defendant, in such triple capacity, through fault, neglect, and abandonment allowed its lumber
concession to lapse and its properties and assets, among them machineries, buildings, warehouses, trucks, etc., to
disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks. The complaint therefore
prays for judgment requiring defendant: (1) to render an account of his administration of the corporate affairs and assets:
(2) to pay plaintiffs the value of t heir respective participation in said assets on the basis of the value of the stocks held by
each of them; and (3) to pay the costs of suit. Plaintiffs also ask for such other remedy as may be and equitable.

88
 Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009)
As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04-SC states:
SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the
Regional Trial Court which has jurisdiction over the principal office of the corporation,
partnership, or association concerned. Where the principal office of the corporation,
partnership or association is registered in the Securities and Exchange Commission as
Metro Manila, the action must be filed in the city or municipality where the head office
is located.
Thus, the Court of Appeals did not commit grave abuse of discretion when it found that
respondents correctly filed the derivative suit before the Makati RTC where HTSI had its
principal office.

Principal office of the corporation.

d. Corporations Retained Counsel Disqualified to Defend the Directors

Hornilla v. Salunat, 405 SCRA 220 (2003)

A lawyer engaged by corporation cannot represent directors in a derivative suit

brought against them.

Heirs of Santiago C. Divina-Gracia v. Hon. Cruz, 624 SCRA 655 (2010)

Award for damages not immediately executory.

Westmont Investment Corp. v. Farmix Fertilizer Corp., 632 SCRA 50

Derivative Suits now subject to summary proceedings under the interim rules.

e. Provisions of the Interim Rules on Intracorporate Controversies -

P.D. 902-A

8. APPRAISAL RIGHT55

55 Section 81

Section 81. Instances of appraisal right. Any stockholder of a corporation shall have the right to dissent and demand
payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any
class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
3. In case of merger or consolidation.
Section 82. How right is exercised. The appraisal right may be exercised by any stockholder who shall have voted against
the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on
which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within
such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected,
the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his

89
a. When Rights of Appraisal May be Exercised

(1) Extend or shorten corporate term56

(2) Restriction of rights or privileges of shares through the amendment of the

articles of incorporation;57

shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the
withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and
appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation,
and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be
paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and
Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith
transfer his shares to the corporation.
Section 83. Effect of demand and termination of right. From the time of demand for payment of the fair value of a
stockholders shares until either the abandonment of the corporate action involved or the purchase of the said shares by
the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance
with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof:
Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting
and dividend rights shall immediately be restored.
Section 84. When right to payment ceases. No demand for payment under this Title may be withdrawn unless the
corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or
if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and
Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that
such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his
shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would
have accrued on his shares shall be paid to him.
Section 85. Who bears costs of appraisal. The costs and expenses of appraisal shall be borne by the corporation, unless the
fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to
pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all
costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was
unjustified. (n)
Section 86. Notation on certificates; rights of transferee. Within ten (10) days after demanding payment for his shares, a
dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon
that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights
under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates
consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the
transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on
such shares shall be paid to the transferee. (n)

56Section 11
Section 11. Corporate term. A corporation shall exist for a period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the
articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made
earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the Securities and Exchange Commission. (6)

57Section 16. Amendment of Articles of Incorporation. Unless otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of
the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the
provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock
corporation.
The original and amended articles together shall contain all provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that

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 (3) Sale of all substantially all corporate assets;58

(4) Equity investment in non-primary purpose business enterprise;59

(5) Merger or consolidation.

NOTE: (a) All the above instances require the 2/3 votes of the outstanding
capital stock;
(b) The appraisal right pertains only to stockholders who have
actually dissented from the enumerated transactions.

TITLE XI

said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be
submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of
filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable
to the corporation.

58 Section 40
Section 40. Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms
and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of
money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by
the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholders or members meeting duly called
for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the stockholders or members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and
assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the
stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders
or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is
necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition
of such property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in
office will be sufficient authorization for the corporation to enter into any transaction authorized by this section.

59Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. Subject to the
provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was organized when approved by a majority of the board of
directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholders or members
meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting
shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting
stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the
approval of the stockholders or members shall not be necessary.

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b. Outline on Exercise of Appraisal Right

c. Summary of Instances When Right of Appraisal is Lost

d. Cost of Appraisal shall be Borne

Turner v. Lorenzo Shipping Corp., 636 SCRA 13 (2010)

Appraisal right may be exercised when there is a fundamental change in the

charter or articles of incorporation substantially prejudicing the rights of the
corporation, i.e., amendment of articles of incorporation to remove pre-emptive rights.

9. Right to Receive Proportionately the Net Assets of the Corporation After

Dissolution

Section 122. Corporate liquidation. x x x Except by decrease of capital stock and

as otherwise allowed by this Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its debts and liabilities.

a. Stockholders and Stock Corporation

President of PDIC v. Reyes, 460 SCRA 473 (2005)

The share of each stockholder in the assets upon liquidation as what is known as
liquidating dividend.

Ong Yong v. Tiu, 401 SCRA 1 (2003)

Stockholders of Guanson v. Register of Deeds of Manila, 6 SCRA 373 (1962)

A share of stock only typifies an aliquot part of the corporations property, or the right to
share in its proceeds to that extent when distributed according to law and equity, but the
holder is not the owner of any part of the capital of the corporation.

b. Members and Foundations60

60 CHAPTER IIIDISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS

Section 94. Rules of distribution. In case dissolution of a non-stock corporation in accordance with the provisions of this
Code, its assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be
made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs
by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by
reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged
in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws,
determine the distributive rights of members, or any class or classes of members, or provide for distribution; and

92
Upon dissolution of the non-stock corporation:
(1) all liabilities and obligations must first be paid, and
(2) assets received and held subject to limitations permitting their use for specified
eleemosynary purposes shall be properly transferred or returned,
(3) then the assets remaining, if any, shall be distributed to the members, or any
class or classes of members, to the extent that the articles of incorporation or by-
laws provide for a plan of distribution.

OTHERWISE: A plan for distribution may be adopted in the process of dissolution by:
(i) Majority vote of the Board of Trustees; and (ii) Adopted by at least 2/3 of the
members having voting rights.

VII. SHARE OF STOCKS, STOCK CERTIFICATES and SUBSCRIPTION

AGREEMENTS

The shares of stock held by registered stockholders represents property rights: their
right to dispose, encumber, or deal with them as owner thereof, and their right to receive
a covering certificate of stock, the right to vote and the right to receive dividends
declared.

Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer (Sec. 63).

Free transferability of the Units of Ownership.

Forest Hills Golf & Country Club v. Vertex Sales and Trading, 692 SCRA 706 (2013)

Shares of stock of a corporation are not owned or are the assets of the corporation
- they are owned by the stockholders of record. However, to bind the corporation as well
as third parties, it is necessary that the transfer is recorded in the books of the
corporation.

1. Principles on Shares under Code61

5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not
organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n)

Section 95. Plan of distribution of assets. A plan providing for the distribution of assets, not inconsistent with the
provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner:
The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the
submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth
the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to
each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of
meetings to members. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the
members having voting rights present or represented by proxy at such meeting. (n)

61
Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in
the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued

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(a) Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share
(Section 6)

as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always
be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par
value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-
par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock
may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may
fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value
may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire
consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available
for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal
in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as
provided in this Code shall be deemed to refer only to stocks with voting rights.

94
(b) Any additional right, privilege or even disadvantageous feature or restrictions
pertaining to any share or class of shares, shall be valid only if expressly
provided for in the articles of incorporation.

Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer.

Section 12
Section 12. Minimum capital stock required of stock corporations. Stock corporations
incorporated under this Code shall not be required to have any minimum authorized
capital stock except as otherwise specifically provided for by special law, and subject to
the provisions of the following section.

President of PDIC v. Reyes, 460 SCRA 473 (2005)

An investment, being in the nature of equity, and unlike a deposit of money or a loan
that earns interest, cannot be assured of a dividend or an interest in the amount
invested, for dividends on investments are granted only after profits or gains are
generated.

Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999)

Preferred and common shareholders participate in the same venture, willing to share in
the profits and losses of the enterprise. Under the doctrine of equality of shares- all
stocks issued by the corporation are presumed equal with the same privileges and
liabilities, provided that the articles of incorporation is silent on such differences.

Garcia v. Lim Chu Sing, 59 Phil. 562 (1934)

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

Lu v. Lu Ym, 525 SCRA 79 (2009)

An action for nullification of the transfer of shares of stock, to the extent o the damage or
injury to the complaining minority stockholders allegedly had suffered from such sale of
the shares of stock, can be characterized as one capable of pecuniary estimation- the
shares of stock have a definite value-accordingly, the docket fees should be computed
based on such value.

2. Subscription Agreement62

62Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract.

95
 Section 60

a. Not Governed by Ordinary Sales Contract Doctrine

(1) Unlike in an ordinary sale, any condition or clause with effectively

renders unenforceable the obligation of the subscriber to pay his subscription would be
considered void;

(2) Mutual withdrawal allowed in sale is not allowed for a subscription

agreement;

(3) Upon insolvency of the corporation, which under sale would allow buyer
of shares to rescind contract, but in a subscription agreement, the insolvency makes all
the subscription receivables due and demandable.

Ong Yong v. Tiu, 401 SCRA 1 (2003)

Subscription contract necessarily involves the corporation as one of the contracting

parties since the subject matter of the transaction is property owned by the corporation
its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-
Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of
stock was, from the viewpoint of the law, one between the Ongs and FLADC, not
between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their
personal capacities with the Ongs since they were not selling any of their own shares to
them. It was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement
were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of
contract filed by the Tius in their personal capacities will not prosper. Assuming it had
valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality
to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the
real party in interest therein. Article 1311 of the Civil Code provides that contracts take
effect only between the parties, their assigns and heirs. Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest affected thereby.

All this notwithstanding, granting but not conceding that the Tius possess the legal
standing to sue for rescission based on breach of contract, said action will nevertheless
still not prosper since rescission will violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation

Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent
to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer
period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be
revoked after the submission of the articles of incorporation to the Securities and Exchange Commission.

96
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims.
This doctrine is the underlying principle in the procedure for the distribution of capital
assets, embodied in the Corporation Code, which allows the distribution of corporate
capital only in three instances: (1) amendment of the Articles of Incorporation to reduce
the authorized capital stock63, (2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained earnings, and (3) dissolution and
eventual liquidation of the corporation. Furthermore, the doctrine is articulated in
Section 41 on the power of a corporation to acquire its own shares and in Section 122 on
the prohibition against the distribution of corporate assets and property unless the
stringent requirements therefor are complied with.

The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and procedures for the protection
of corporate creditors are followed. Otherwise, the corporate peace laudably hoped for
by the court will remain nothing but a dream because this time, it will be the creditors
turn to engage in squabbles and litigations should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively
result in the unauthorized distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since
rescission of a subscription agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed.

b. Contractual Nature of a Subscription Agreement

3. Pre-incorporation Subscription

Section 61
A subscription for shares of stock of a corporation still to be formed shall be irrevocable
for a period of at least six (6) months from the date of subscription.

UNLESS:

(a) All the other subscribers consent to the revocation; or

(b) Incorporation of said corporation fails to materialize within said period or

within a longer period as may be stipulated in the contract of subscription;

PROVIDED:

No pre-incorporation subscription may be revoked after the submission of articles of

incorporation to SEC.

63 Section 37

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4. Consideration for Stocks

Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration for the issuance of stock may be any
or a combination of any two or more of the following:

1. Actual cash paid to the corporation;

2. Property, tangible or intangible, actually received by the corporation and necessary or

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

3. Labor performed for or services actually rendered to the corporation;

4.Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

Where the consideration is other than actual cash, or consists of intangible property such
as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.

Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable,
may be used for the issuance of bonds by the corporation.

(a) Advances for Future Subscription

Central Textile Mills, Inc. v. National Wages and Productivity Commission,

260 SCRA 386 (1996)

It is undisputed that petitioner incurred a net loss of P68,844,222.49 in 1990, and its
authorized capital stock as of that time stood at P128,000,000.00. On August 15, 1990, a
Board resolution increasing the capital stock of the corporation was affirmed by the
requisite number of stockholders. Although no petition to that effect was ever submitted
to the SEC for its approval, petitioner already started receiving subscriptions and
payments on the proposed increase, which it allegedly held conditionally, that is,
pending approval of the same by the SEC. In its Memorandum, however, petitioner
admitted, without giving any reason therefor, that it indeed received subscriptions and
payments to the said proposed increase in capital stock, even in the absence of SEC
approval of the increase as required by the Corporation Code. Thus, by the end of 1990,
the corporation had a subscribed capital stock of P482,748,900.00 and, after deducting
P176,981,000.00 in subscriptions receivables, a total paid-up capital of P305,767,900.00.
P177,767,900.00 of this sum constituted the unauthorized increase in its subscribed

98
capital stock, which are actually payments on future issues of shares.
These payments cannot as yet be deemed part of petitioners paid-up capital, technically
speaking, because its capital stock has not yet been legally increased. Thus, its
authorized capital stock in the year when exemption from WO No. NCR-02 was sought
stood at P128,000,000.00, which was impaired by losses of nearly 50%. Such payments
constitute deposits on future subscriptions, money which the corporation will hold in
trust for the subscribers until it files a petition to increase its capitalization and a
certificate of filing of increase of capital stock is approved and issued by the SEC. As a
trust fund, this money is still withdrawable by any of the subscribers at any time before
the issuance of the corresponding shares of stock, unless there is a pre-subscription
agreement to the contrary, which apparently is not present in the instant case.
Consequently, if a certificate of increase has not yet been issued by the SEC, the
subscribers to the unauthorized issuance are not to be deemed as stockholders possessed
of such legal rights as the rights to vote and dividends.

BIR v. First Express Pawnshop Company, 589 SCRA 253 (2009)

Clearly, the deposit on stock subscription as reflected in respondents Balance Sheet as of

1998 is not a subscription agreement subject to the payment of DST. There is no P800,000
worth of subscribed capital stock that is reflected in respondents GIS. The deposit on
stock subscription is merely an amount of money received by a corporation with a view
of applying the same as payment for additional issuance of shares in the future, an event
which may or may not happen. The person making a deposit on stock subscription does
not have the standing of a stockholder and he is not entitled to dividends, voting rights
or other prerogatives and attributes of a stockholder. Hence, respondent is not liable for
the payment of DST on its deposit on subscription for the reason that there is yet no
subscription that creates rights and obligations between the subscriber and the
corporation.

5. Issued Price or Par Value

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

(1) in the articles of incorporation or
(2) by the board of directors pursuant to authority conferred upon it by the articles
of incorporation or
(3) the by-laws, or in the absence thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly called for the
purpose. (Sec. 62)

Issuance of shares of stock pertain to the corporation, while subscription pertains to

the stockholders, but represent the same transaction.

a. Shares are personal property

Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer (Section 63).

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6. Certificate of Stock

The capital stock of stock corporations shall be divided into shares for which certificates
signed by the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in accordance with
the by-laws (Section 63).

a. Rule on Issuance of Certificate of Stock

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

When a corporation unjustifiably refuses to issue a certificate of stock to the

registered stockholder, mandamus is the proper remedy. Tan v. SEC, 206 SCRA 740
(1992)

b. Certificates Only Evidence of the Shares Covered

Pacific Basin Securities v. Oriental Petroleum & Minerals, 531 SCRA 667
(2007)

Clearly, the right of a transferee/ assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks. The Court had ruled in Rural
Bank of Salinas, Inc. v. Court of Appeals that the corporations obligation to register is
ministerial, citing Fletcher, to wit:

In transferring stock, the secretary of a corporation acts in purely ministerial capacity,

and does not try to decide the question of ownership.

The duty of the corporation to transfer is a ministerial one and if it refuses to make such
transaction without good cause, it may be compelled to do so by mandamus.
The Court further held in Rural Bank of Salinas that the only limitation imposed by
Section 63 of the Corporation Code is when the corporation holds any unpaid claim
against the shares intended to be transferred.

Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005)

Parenthetically, the fact that the stock certificates covering the shares registered under
the names of Campos, Cojuangco and Zalamea were found in Menzis possession does
not necessarily prove that the latter owned the shares. A stock certificate is merely a
tangible evidence of ownership of shares of stock. Its presence or absence does not affect
the right of the registered owner to dispose of the shares covered by the stock certificate.
Hence, as registered owners, Campos and Zalamea validly ceded their shares in favor of
the Government. This assignment is now a fait accompli for the benefit of the entire

100
nation. Parenthetically, the fact that the stock certificates covering the shares registered
under the names of Campos, Cojuangco and Zalamea were found in Menzis possession
does not necessarily prove that the latter owned the shares. A stock certificate is merely
a tangible evidence of ownership of shares of stock. Its presence or absence does not
affect the right of the registered owner to dispose of the shares covered by the stock
certificate. Hence, as registered owners, Campos and Zalamea validly ceded their shares
in favor of the Government. This assignment is now a fait accompli for the benefit of the
entire nation.

Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002)

One may own shares of corporate stock without possessing a stock certificate. In Tan vs.
SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is not
necessary to render one a stockholder in a corporation. But a certificate of stock is the
tangible evidence of the stock itself and of the various interests therein. The certificate is
the evidence of the holders interest and status in the corporation, his ownership of the
share represented thereby. The certificate is in law, so to speak, an equivalent of such
ownership. It expresses the contract between the corporation and the stockholder, but it
is not essential to the existence of a share in stock or the creation of the relation of
shareholder to the corporation. In fact, it rests on the will of the stockholder whether he
wants to be issued stock certificates, and a stockholder may opt not to be issued a
certificate. In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466 (1958), we held
that considering that the law does not prescribe a period within which the registration
should be effected, the action to enforce the right does not accrue until there has been a
demand and a refusal concerning the transfer. In the present case, petitioners complaint
for mandamus must fail, not because of laches or estoppel, but because he had alleged
no cause of action sufficient for the issuance of the writ.

Lao v. Lao, 567 SCRA 558 (2008)

A certificate of stock is the evidence of a holders interest and status in a corporation- it

is prima facie evidence that the holder is a shareholder of a corporation. As between the
General Information Sheet and the corporate books, it is the latter that is controlling.

Makati Sports Club, Inc. v. Cheng, 621 SCRA 103 (2010)

Mc Foods was already an owner of a Class A share by virtue of its payment on

November 28, 1995, and the Deed of Absolute Share dated December 15, 1995,
notwithstanding the fact that the stock certificate was issued only on January 5, 1996.

A certificate of stock is the paper representative or tangible evidence of the stock itself
and of the various interests therein. The certificate is not a stock in the corporation but is
merely evidence of the holders interest and status in the corporation, his ownership of
the share represented thereby. It is not in law the equivalent of such ownership. It
expresses the contract between the corporation and the stockholder, but is not essential

101
to the existence of a share of stock or the nature of the relation of shareholder to the
corporation.

Mc Foods properly complied with the requirement of Section 30(e) of the Amended By-
Laws on MSCIs pre-emptive rights. On December 27, 1995, Mc Foods offered for sale
one Class A share of stock to MSCI for the price of P2,800,000.00 for the latter to exercise
its pre-emptive right as required by Section 30(e) of MSCIs Amended By-Laws.64

c. Quasi-Negotiable Character of Stock Certificate

Bitong v. Court of Appeals, 292 SCRA 503 (1998)65

The rule is that the endorsement of the certificate of stock by the owner or his
attorney-in-fact or any other person legally authorized to make the transfer shall be
sufficient to effect the transfer of shares only if the same is coupled with delivery. The
delivery of the stock certificate duly endorsed by the owner is the operative act of
transfer of shares from the lawful owner to the new transferee.
Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be
delivery of the stock certificate; (b) The certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to make the transfer; and, (c) to be
valid against third parties, the transfer must be recorded in the books of the corporation.
At most, in the instant case, petitioner has satisfied only the third requirement.
Compliance with the first two requisites has not been clearly and sufficiently shown.

Rural Bank of Lipa City v. Court of Appeals, 366 SCRA 188 (2001)
Petitioners argue that by virtue of the Deed of Assignment, private respondents
had relinquished to them any and all rights they may have had as stockholders of the

64MSCI failed to repurchase Mc Foods Class A share within the thirty (30) day pre-emptive period as provided by the
Amended By-Laws. It was only on January 29, 1996, or 32 days after December 28, 1995, when MSCI received Mc Foods
letter of offer to sell the share, that Mc Foods and Hodreal executed the Deed of Absolute Sale over the said share of stock.
While Hodreal had the right to demand the immediate execution of the Deed of Absolute Sale after his full payment of
Mc Foods Class A share, he did not do so. Perhaps, he wanted to wait for Mc Foods to first comply with the pre-emptive
requirement as set forth in the Amended By-Laws. Neither can MSCI argue that Mc Foods was not yet a registered owner
of the share of stock when the latter offered it for resale, in order to void the transfer from Mc Foods to Hodreal. The
corporations obligation to register is ministerial upon the buyers acquisition of ownership of the share of stock. The
corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers.

65 And, there is nothing in the records which shows that JAKA had revoked the trust it reposed on respondent

Eugenia D. Apostol. Neither was there any evidence that the principal had requested her to assign and transfer the shares
of stock to petitioner. If it was true that the shares of stock covered by Certificate of Stock No. 007 had been transferred to
petitioner, the person who could legally endorse the certificate was private respondent Eugenia D. Apostol, she being the
registered owner and trustee of the shares of stock covered by Certificate of Stock No. 007. It is a settled rule that the
trustee should endorse the stock certificate to validate the cancellation of her share and to have the transfer recorded in
the books of the corporation.
In fine, the records are unclear on how petitioner allegedly acquired the shares of stock of JAKA. Petitioner being
the chief executive officer of JAKA and the sole person in charge of all business and financial transactions and affairs of
JAKA was supposed to be in the best position to show convincing evidence on the alleged transfer of shares to her, if
indeed there was a transfer. Considering that petitioners status is being questioned and several factual circumstances
have been presented by private respondents disproving petitioners claim, it was incumbent upon her to submit rebuttal
evidence on the manner by which she allegedly became a stockholder. Her failure to do so taken in the light of several
substantial inconsistencies in her evidence is fatal to her case.

102
Bank. While it may be true that there was an assignment of private respondents shares
to the petitioners, said assignment was not sufficient to effect the transfer of shares since
there was no endorsement of the certificates of stock by the owners, their attorneys-in-
fact or any other person legally authorized to make the transfer. Moreover, petitioners
admit that the assignment of shares was not coupled with delivery, the absence of which
is a fatal defect. The rule is that the delivery of the stock certificate duly endorsed by the
owner is the operative act of transfer of shares from the lawful owner to the transferee.
Thus, title may be vested in the transferee only by delivery of the duly indorsed
certificate of stock.

We have uniformly held that for a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law. The requirements are: (a) There
must be delivery of the stock certificate; (b) The certificate must be endorsed by the
owner or his attorney-in-fact or other persons legally authorized to make the transfer;
and (c) To be valid against third parties, the transfer must be recorded in the books of
the corporation. As it is, compliance with any of these requisites has not been clearly and
sufficiently shown.

It may be argued that despite non-compliance with the requisite endorsement and
delivery, the assignment was valid between the parties, meaning the private
respondents as assignors and the petitioners as assignees. While the assignment may be
valid and binding on the petitioners and private respondents, it does not necessarily
make the transfer effective. Consequently, the petitioners, as mere assignees, cannot
enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled to
dividends, insofar as the assigned shares are concerned. Parenthetically, the private
respondents cannot, as yet, be deprived of their rights as stockholders, until and unless
the issue of ownership and transfer of the shares in question is resolved with finality.

Bachrach Motors v. Lacson Ledesma, 64 Phil. 682 (1937)

Once a certificate of stock is issued, it is quasi-negotiable in character because it is

payable to a specified person, but ownership over the shares passes by indorsement
coupled with delivery of the certificate.

d. Manner of Dealing with Transfer or Assignment of Shares of Stock and Stock

Certificates

Raquel-Santos v. Court of Appeals, 592 SCRA 169 (2009)

In the sale of shares of stock, physical delivery of a stock certificate is one of the essential
requisites for the transfer of ownership of the stocks purchased.

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

103
For a valid transfer of stocks, the requirements are as follows: (a) there must be delivery
of the stock certificate; (b) the certificate must be endorsed by the owner or his attorney-
in-fact or other persons legally authorized to make the transfer; and (c) to be valid
against third parties, the transfer must be recorded in the books of the corporation.

Clearly, Finvests failure to deliver the stock certificates representing the shares of stock
purchased by TMEI and Garcia amounted to a substantial breach of their contract which
gave rise to a right to rescind the sale.

Ponce v. Aisons Cement Corp., 393 SCRA 602 (2002)

Absent an allegation that the transfer of shares is recorded in the stock and transfer book
of respondent ALSONS, there appears no basis for a clear and indisputable duty or clear
legal obligation that can be imposed upon the respondent corporate secretary, so as to
justify the issuance of the writ of mandamus to compel him to perform the transfer of
the shares to petitioner. The test of sufficiency of the facts alleged in a petition is whether
or not, admitting the facts alleged, the court could render a valid judgment thereon in
accordance with the prayer of the petition. This test would not be satisfied if, as in this
case, not all the elements of a cause of action are alleged in the complaint. Where the
corporate secretary is under no clear legal duty to issue stock certificates because of the
petitioners failure to record earlier the transfer of shares, one of the elements of the
cause of action for mandamus is clearly missing.
From the corporations point of view, the transfer is not effective until it is recorded.
Unless and until such recording is made the demand for the issuance of stock certificates
to the alleged transferee has no legal basis. As between the corporation on the one hand,
and its shareholders and third persons on the other, the corporation looks only to its
books for the purpose of determining who its shareholders are. In other words, the stock
and transfer book is the basis for ascertaining the persons entitled to the rights and
subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a
stockholder, the corporation is under no specific legal duty to issue stock certificates in
the transferees name.

Rural Bank of Lipa City, Inc. v. Court of Appeals, 366 SCRA 188 (2001)

While it may be true that there was an assignment of private respondents shares to the
petitioners, said assignment was not sufficient to effect the transfer of shares since there
was no endorsement of the certificates of stock by the owners, their attorneys-in-fact or
any other person legally authorized to make the transfer. Moreover, petitioners admit
that the assignment of shares was not coupled with delivery, the absence of which is a
fatal defect. The rule is that the delivery of the stock certificate duly endorsed by the
owner is the operative act of transfer of shares from the lawful owner to the transferee.
Thus, title may be vested in the transferee only by delivery of the duly indorsed
certificate of stock.

e. Limits of Value of Certificate of Stock on Determining Stockholders

104
 Rural Bank of Lipa City v. Court of Appeals, 366 SCRA 188 (2001)

In a suit that seeks to render the meeting of the stockholders as void for failure to
recognize and give notice to a stockholder of record who has already assigned the
shares, but not endorsed nor delivered the covering stock certificates, the assignment of
shares cannot be recognized as valid and binding.

It may be argued that despite non-compliance with the requisite endorsement and
delivery, the assignment was valid between the parties, meaning the private
respondents as assignors and the petitioners as assignees. While the assignment may be
valid and binding on the petitioners and private respondents, it does not necessarily
make the transfer effective. Consequently, the petitioners, as mere assignees, cannot
enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled to
dividends, insofar as the assigned shares are concerned. Parenthetically, the private
respondents cannot, as yet, be deprived of their rights as stockholders, until and unless
the issue of ownership and transfer of the shares in question is resolved with finality.

Bitong v. Court of Appeals, 292 SCRA 304 (1998)66

The certificate of stock itself once issued is a continuing affirmation or

representation that the stock described therein is valid and genuine and is at least prima
facie evidence that it was legally issued in the absence of evidence to the contrary.
However, this presumption may be rebutted. Similarly, books and records of a
corporation which include even the stock and transfer book are generally admissible in
evidence in favor of or against the corporation and its members to prove the corporate
acts, its financial status and other matters including ones status as a stockholder. They
are ordinarily the best evidence of corporate acts and proceedings.
However, the books and records of a corporation are not conclusive even against
the corporation but are prima facie evidence only. Parol evidence may be admitted to
supply omissions in the records, explain ambiguities, or show what transpired where no

66
As found by the Hearing Panel and affirmed by respondent Court of Appeals, there is overwhelming evidence
that despite what appears on the certificate of stock and stock and transfer book, petitioner was not a bona fide stockholder
of Mr. & Ms. before March 1989 or at the time the complained acts were committed to qualify her to institute a
stockholders derivative suit against private respondents. Aside from petitioners own admissions, several corporate
documents disclose that the true party-in-interest is not petitioner but JAKA.
Thus, while petitioner asserts in her petition that Certificate of Stock No. 008 dated 25 July 1983 was issued in her
name, private respondents argue that this certificate was signed by respondent Eugenia D. Apostol as President only in
1989 and was fraudulently antedated by petitioner who had possession of the Certificate Book and the Stock and Transfer
Book. Private respondents stress that petitioners counsel entered into a stipulation on record before the Hearing Panel
that the certificate was indeed signed by respondent Apostol only in 1989 and not in 1983.
In her reply, petitioner admits that while respondent Eugenia D. Apostol signed the Certificate of Stock No. 008 in
petitioners name only in 1989, it was issued by the corporate secretary in 1983 and that the other certificates covering
shares in Mr. & Ms. had not yet been signed by respondent Eugenia D. Apostol at the time of the filing of the complaint
with the SEC although they were issued years before.
Based on the foregoing admission of petitioner, there is no truth to the statement written in Certificate of Stock No. 008
that the same was issued and signed on 25 July 1983 by its duly authorized officers specifically the President and
Corporate Secretary because the actual date of signing thereof was 17 March 1989. Verily, a formal certificate of stock
could not be considered issued in contemplation of law unless signed by the president or vice-president and
countersigned by the secretary or assistant secretary.

105
records were kept, or in some cases where such records were contradicted.The effect of
entries in the books of the corporation which purport to be regular records of the
proceedings of its board of directors or stockholders can be destroyed by testimony of a
more conclusive character than mere suspicion that there was an irregularity in the
manner in which the books were kept.
The foregoing considerations are founded on the basic principle that stock issued
without authority and in violation of law is void and confers no rights on the person to
whom it is issued and subjects him to no liabilities. Where there is an inherent lack of
power in the corporation to issue the stock, neither the corporation nor the person to
whom the stock is issued is estopped to question its validity since an estoppel cannot
operate to create stock which under the law cannot have existence.

f. Assignment of Stock Certificate by Way of Security (Equitable Mortgage)

Asset Privatization Trust v. Sandiganbayan, 341 SCRA 560 (2000)

The Deed of Assignment is very clear that what was assigned to DBP (APT) were voting
shares as distinguished from non-voting shares. Obviously, it meant that the assignees
of the shares had the right as though they were owners of the shares. It is true that the
assignment was predicated on the intention that it would serve as security vis--vis DBPs
financial accommodation extended to PJI, but it was a valid and duly executed
assignment, subject to a resolutory condition, which was the settlement of PJIs loan
obligation with DBP.

7. Transfer of Shares

Section 6367

Cojuangco v. Sandiganbayan, 586 SCRA 790 (2009)

Respecting petitioners argument that the Republic has yielded its right to the
fruits of the shares when it sold them to Metro Pacific Assets Holdings, Inc., (Metro
Pacific), the same does not lie.

Dividends are payable to the stockholders of record as of the date of the

declaration of dividends or holders of record on a certain future date, as the case may be,
unless the parties have agreed otherwise. And a transfer of shares which is not recorded

67Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

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

106
in the books of the corporation is valid only as between the parties, hence, the transferor
has the right to dividends as against the corporation without notice of transfer but it
serves as trustee of the real owner of the dividends, subject to the contract between the
transferor and transferee as to who is entitled to receive the dividends.

It is thus clear that the Republic is entitled to the dividends accruing from the
subject 111,415 shares since 1986 when they were sequestered up to the time they were
transferred to Metro Pacific via the Sale and Purchase Agreement of February 28, 2007;
and that the Republic has since the latter date been serving as trustee of those dividends
for the Metro Pacific up to the present, subject to the terms and conditions of the said
agreement they entered into.

Bitong v. Court of Appeals, 292 SCRA 304 (1998)

Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations
shall be divided into shares for which certificates signed by the president or vice
president, countersigned by the secretary or assistant secretary, and sealed with the seal
of the corporation shall be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer however shall be valid except as between
the parties until the transfer is recorded in the books of the corporation showing the
names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred x x x x.

This provision above quoted envisions a formal certificate of stock which can be issued
only upon compliance with certain requisites. First, the certificates must be signed by the
president or vice-president, countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation. A mere typewritten statement advising a
stockholder of the extent of his ownership in a corporation without qualification and/or
authentication cannot be considered as a formal certificate of stock. Second, delivery of
the certificate is an essential element of its issuance. Hence, there is no issuance of a
stock certificate where it is never detached from the stock books although blanks therein
are properly filled up if the person whose name is inserted therein has no control over
the books of the company. Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully paid. Fourth, the original
certificate must be surrendered where the person requesting the issuance of a certificate
is a transferee from a stockholder.

China Bank v. Court of Appeals, 270 SCRA 503 (1997)

Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against
which the corporation holds any unpaid claim shall be transferable in the books of the
corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any
unpaid claim arising from unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising from any other transaction."
In the case at bar, the subscription for the share in question has been fully paid as

107
evidenced by the issuance of Membership Certificate No. 1219. What Calapatia owed the
corporation were merely the monthly dues. Hence, the aforequoted provision does not
apply.

Ponce v. Aisons Cement Corp., 393 SCRA 602 (2002)

Absent an allegation that the transfer of shares is recorded in the stock and transfer book
of respondent ALSONS, there appears no basis for a clear and indisputable duty or clear
legal obligation that can be imposed upon the respondent corporate secretary, so as to
justify the issuance of the writ of mandamus to compel him to perform the transfer of
the shares to petitioner.

Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001)

A transfer of shares is not valid unless recorded in the books of the corporation. A person who
has purchased stock, and who desires to recognized as a stockholder who has purchased stock,
and who desires to be recognized as a stockholder for the purpose of voting, must secure such
standing by having the transfer recorded on the corporate books-until the transfer is registered,
the transferee is not a stockholder but an outsider. Until registration is accomplished, the transfer,
though valid between the parties, cannot be effective as against the corporation.

Nava v. Peerless Marketing, 74 SCRA 65 (1976)

In the stock and transfer book, only transfer of stock certificates can be recorded.
The sale of subscription agrements cannot be recorded in the stock and transfer book.

Fernandez v. De Tagle, CA 61 O.G. 541

Chua Guan v. Samahang Magsaksaka, 63 Phil. 472 (1935)

It is not alleged that the said attaching creditors had actual notice of the said mortgage
and the question therefore narrows itself down to this: Did the registration of said
chattel mortgage in the registry of chattel mortgages in the office of the register of deeds
of Manila, under date of July 23, 1931, give constructive notice to the said attaching
creditors?

The property in the shares may be deemed to be situated in the province in which the
corporation has its principal office or place of business.

If this province is also the province of the owner's domicile, a single registration
sufficient. If not, the chattel mortgage should be registered both at the owner's domicile
and in the province where the corporation has its principal office or place of business. In
this sense the property mortgaged is not the certificate but the participation and share of
the owner in the assets of the corporation.

Registration on the stock and transfer book of the corporation would be no effect.

Tayag v. Benguet Consolidated, 26 SCRA 242 (1968)

108
The situs of shares of a domestic corporation is the Philippines. Thus, if a stockholder
resides in New York and has certificates of stock issued in her favor and these
certificates are with her, in the event that these shares form part of an intestacy which is
being liquidated in a Philippines court and there is a need to sell some of these shares for
the payment of debts of the deceased in the Philippines, the administrator may petition
the probate court to order the cancellation of these certificates and order the corporation
in the Philippines to issue duplicate certificates of stocks.

Garcia v. Jomouad, 323 SCRA 424 (2000)

a. Non-exclusivity of Section 63 of Modes of Registration

Rural Bank of Lipa City v. Court of Appeals, 362 SCRA 635 (2001)

Torres v. Court of Appeals, 278 SCRA 798 (1997)

Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001)

Rural Bank of Lipa v. Court of Appeals, 362 SCRA 635 (2001)

Stockholders of Guanson v. Register of Deeds of Manila, 6 SCRA 373 (1962)

b. Members and Foundations

Section 94

Section 95

8. STOCK and TRANSFER BOOK

Provident International Resources Corp. v. Venus, 554 SCRA 540 (2008)

SEC has the primary competence to determine whether the stock and transfer book (STB)
was authentic and duly registered with SEC.

Lanuza v. Court of Appeals, 454 SCRA 54 (2005)

STB is not a public record; is merely prima facie evidence.

Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997)

Entries made on STB other than the Corporate Secretary cannot be given any valid effect.

Lanuza v. Court of Appeals, 454 SCRA (2005)

109
 Since the AOI show that at the time of the incorporation there were 776 shares
outstanding, no proof of transactions effecting these shares, then figures in AOI shall
prevail over STB. AOI binding on corporation and stockholders.

Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001)

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

Ponce v. Aisons Cement Corp., 393 SCRA 602 (2002)

It is only when the transfer has been recorded in the stock and transfer book that a
corporation may rightfully regard the transferee as one of its stockholders.

9. SHARES HELD IN TRUST

Bitong v. Court of Appeals, 292 SCRA 304 (1998)

Neugene Marketing v. Court of Appeals (1999)

Guy vs. Guy, 680 SCRA 214 (2012)

When a stock certificate is endorsed in black by the owner thereof, it is a

street certificate, such that holder is entitled to demand its from transfer
into his name from the issuing corporation.

10. Liability of Directors for Watered Stocks

Section 65

Section 65. Liability of directors for watered stocks. Any director or officer of a corporation consenting to the
issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other
than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the
stockholder concerned to the corporation and its creditors for the difference between the fair value received at
the time of issuance of the stock and the par or issued value of the same. (n)

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

11. Liability for Unpaid Subscription

110
 Section 66
Section 66. Interest on unpaid subscriptions. Subscribers for stock shall pay to the corporation interest on all
unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-
laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37)

Section 67

Section 67. Payment of balance of subscription. Subject to the provisions of the contract of subscription, the board
of directors of any stock corporation may at any time declare due and payable to the corporation unpaid
subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with
accrued interest, if any, as it may deem necessary.

Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall
be made on the date specified in the contract of subscription or on the date stated in the call made by the board.
Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws,
computed from such date until full payment. If within thirty (30) days from the said date no payment is made,
all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as
hereinafter provided, unless the board of directors orders otherwise. (38)

Yu v. Yukayguan, 589 SCRA 588 (2009)

12. Share Deliquency

Section 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully preserve at its principal office a
record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or
trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given,
whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered
done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director,
trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the
yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any
director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by
any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code,
shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution
or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the corporations records and minutes has
improperly used any information secured through any prior examination of the records or minutes of such corporation or
of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.
Stock corporations must also keep a book to be known as the stock and transfer book, in which must be kept a record of
all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for
which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe.
The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent
and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a
stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable.
(51a and 32a; P.B. No. 268.)

a. Delinquency Sale

111
 Section 67

Section 68

Section 69

Section 70

Section 71

Section 68. Delinquency sale. The board of directors may, by resolution, order the sale of delinquent stock and shall
specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by
registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of
general circulation in the province or city where the principal office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent
stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the
board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to
pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses
of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a
certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be
credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be
vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the
provisions of this Code. (39a-46a)
Section 69. When sale may be questioned. No action to recover delinquent stock sold can be sustained upon the ground of
irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain
such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from
the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a
complaint within six (6) months from the date of sale. (47a)
Section 70. Court action to recover unpaid subscription. Nothing in this Code shall prevent the corporation from collecting
by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and
expenses. (49a)
Section 71. Effect of delinquency. No delinquent stock shall be voted for or be entitled to vote or to representation at any
stockholders meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to
dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription
with accrued interest, and the costs and expenses of advertisement, if any. (50a)

b. When Sale May Be Questioned

c. Judicial Remedy
Section 73. Lost or destroyed certificates. The following procedure shall be followed for the issuance by a corporation of
new certificates of stock in lieu of those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation
an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed,
the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation
which issued the same. He shall also submit such other information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation
shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal
office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which
has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner
and the serial number of said certificate, and the number of shares represented by such certificate, and that after the

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expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation
regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its
books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock,
unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one
(1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in
which case a new certificate may be issued even before the expiration of the one (1) year period provided herein:
Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the
ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock
in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed.

13. Lost of Destroyed Certificates

Section 73

VII. ACQUISITIONS AND TRANSFERS, MERGERS AND

CONSOLIDATIONS

1. ACQUISITIONS and TRANSFERS

a. General Rule on Obligation of Transferee for Debts and

Obligations or Transferor

Edward J. Nell Co. v. Pacific, 15 SCRA 415 (1965)

b. Assets-Only Transfers

The sale of assets by a seller corporation to the buyer corporation would not make the
buyer liable for the obligations incurred by the seller in acquiring the asset.

Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 (1989)

A bonafide purchaser of assets of an ongoing concern is not required to absorb in its

employ the employees of the latter.

MDII Supervisor & Confidential Employees Assn. v. Pres. Assistance of

Legal Affairs, 79 SCRA 40 (1997)

c. Business Enterprise Transfers

Section 40

(1) Rationale for the Business Enterprise Rule

Business enterprise - ability to earn profit or the ongoing concern.

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(2) Nature of Business Enterprise; Application of Doctrine

Caltex (Phils.), Inc. v. PNOC Shipping and Transport, 498 SCRA 400 (2006)

Garcia v. Social Security Commission Legal and Collection, 540 SCRA 459
(2007)

Cagayan Valley Enterprises v. Court of Appeals, 179 SCRA 218 (1969)

Buan v. Alcantara, 127 SCRA 854 (1984)

Oromeca Lumber Co. v. Social Security System, 4 SCRA 1188 (1962)

Rivera v. Litam & Company, Inc., 4 SCRA 1077 (1962)

(3) Employees have no Equity Claim against the Business Enterprise

Penafrancia Tours and Travel Trans. V. Sarmiento, 634 SCRA 279 (2010)

Barayoga v. Asset Privatization Trust, 473 SCRA 690 (2005)

Sunio v. NLRC, 127 SCRA 390 (1984)

Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992)

National Federation of Labor Union v. Ople, 143 SCRA 124 (1986)

Central Azucarera del Danao v. Court of Appeals, 137 SCRA 295 (1985)

Pepsi Cola Distributors v. NLRC, 210 SCRA 277 (1992)

Penafrancia Tours and Travel Transport v. Sarmiento, 634 SCRA 279

(2010)

Philippine Veterans Investment Dev. Corpo. v. Court of Appeals, 181

SCRA 669 (1990)

(1) Special Rules Pertaining to Termination of Employee

DBP v. NLRC, 186 SCRA 841 (1990)

Manlimos v. NLRC, 242 SCRA 145 (1995)

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 SME Bank, Inc. v. De Guzman, 707 SCRA 35 (2013)

2. MERGERS and CONSOLIDATIONS

a. Outline on Consolidation or Merger

Section 76. Plan or merger of consolidation. Two or more corporations may merge into a single corporation which shall be
one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated
corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of
merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent
corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and,
with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the
articles of incorporation for corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n)
Section 77. Stockholders or members approval. Upon approval by majority vote of each of the board of directors or trustees
of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice
of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior
to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and
shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations
or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of
such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code:
Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan,
the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority
vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote
of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the
members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the
agreement of merger or consolidation. (n)
Section 78. Articles of merger or consolidation. After the approval by the stockholders or members as required by the
preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations,
to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation
setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of
members; and
3. As to each corporation, the number of shares or members voting for and against such plan, respectively. (n)
Section 79. Effectivity of merger or consolidation. The articles of merger or of consolidation, signed and certified as
herein above required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval:
Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations,
trust companies, insurance companies, public utilities, educational institutions and other special corporations governed
by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the
Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the
provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the
merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or
consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give
the corporations concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be
given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed
as provided in this Code. (n)
Section 80. Effects of merger or consolidation. The merger or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving
corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated
corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall

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be subject to all the duties and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables
due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of,
or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of
the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such
liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent
corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens
upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (n)

Bank of P.I. v. BPI Employees Union-Davao Chapter, 627 SCRA 590 (2010)

A merger becomes effective upon approval by the SEC of the articles of merger.

Mindanao Savings and Loan Association v. WIllkom, 634 SCRA 291

(2010)

Pharmacia and Upjohn v. Albayda, Jr., 682 SCRA 544 (2010)

Polland Industrial Ltd. v. NDC, 467 SCRA 500 (2005)

b. Effects of Merger of Consolidation

Pharmacia and Upjohn v. Albayda, Jr., 628 SCRA 544 (2010)

Mindanao Savings and Loan Association v. Willkom, 634 SCRA 291 (2010)

b. Effects of Merger and Consolidation

Global Business Holdings v. Surecompsoftware B.V., 633 SCRA 94 (2010)

NPC Drivers and Mechanics Assn. v. NPC, 606 SCRA 409 (2009)

Polland Industrial Ltd. v. NDC, 467 SCRA 500 (2005)

PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002)

Babst v. Court of Appeals, 350 SCRA 341 (2001)

Associated Bank v. Court of Appeals, 291 SCRA 511 (1998)

1) Rulings Involving Employees

Filipinas Port Services v. NLRC, 177 SCRA 203 (1989)

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 No break in the employer-employee relationship from merged corporation to
surviving corporation.

National Union Bank Employees v. Lazaro, 156 SCRA 123 (1988)

3. SPIN-OFFS

SMC- Employees Union-PGTWO v. Confessor, 262 SCRA 81 (1996)

IX. NON-STOCK CORPORATION

Section 87
NON-STOCK CORPORATIONS

Section 87. Definition. For the purposes of this Code, a non-stock corporation is one where no part of its income is
distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution:
Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized,
subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may
be covered by specific provisions of this Title. (n)

Manila Sanitarium v. Gabuco, 7 SCRA 14 (1963)

Collector of Internal Revenue v. Club Filipino, 5 SCRA 321 (1962)

Collector v. University of Visayas, 1 SCRA 669 (1961)

The mere realization of profits out of the operations of a non-stock corporation does not automatically result in the loss of
its exemption from income taxation as long as no part of its profits inures to the benefit of any stockholder or individual.

2. Eleemosynary Purpose

a. Eleemosynary Purpose and Non-Distribution of Profits

Section 88
Section 88. Purposes. Non-stock corporations may be formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing
particular classes of non-stock corporations. (n)

People v. Menilu, G.R. Nos. 115054066, 12 September 1999 (unrep.)

SEC Opinion No. 12, series of 2002, 21 November 2002

3. Right to Vote

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Section 89

Section 89. Right to vote. The right of the members of any class or classes to vote may be limited, broadened or denied to
the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member,
regardless of class, shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance
with the provisions of this Code. (n)
Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-
stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and
Exchange Commission.
Republic v. COCOFED, 372 SCRA 462 (2001)

4. Non-transferability of Membership

Section 90

Section 90. Non-transferability of membership. Membership in a non-stock corporation and all rights arising therefrom
are personal and non-transferable, unless the articles of incorporation or the by-laws otherwise provide. (n)

5. Termination of Membership

Section 91

Section 91. Termination of membership. Membership shall be terminated in the manner and for the causes provided in
the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of
a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws.

Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009)

Section 69 refers to unpaid subscriptions to capital stock, the sale of which is governed by Section
68. Sale of membership sale for non-payment of membership dues is governed by Art. 1140 of the
Civil Code, which provides that an action to recover movables shall prescribe in eight years.

It is lawful for a non-stock corporation to provide in its by-laws for rules of forfeiture of fully-
paid membership shares on the basis of delinquency by the member to pay monthly membership
dues. Membership shall be terminated in the manner and for the causes provided in the articles
of incorporation or the by-laws.

Valley Golf & Country Club v. Vda. De Caram, 585 SCRA 218 (2009)

The right of a non-stock corporation to expel a member through the forfeiture of

such members share may be established in the by-laws alone, and need not be
embodied in the articles of incorporation.

Tan V. Sycip, 499 SCRA 216 (2006)

6. Election and Term of Trustees

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7. Place of Meetings

Section 93

Section 93. Place of meetings. The by-laws may provide that the members of a non-stock corporation may hold their
regular or special meetings at any place even outside the place where the principal office of the corporation is located:
Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided,
further, That the place of meeting shall be within the Philippines.

8. Rules of Distribution of Assets in Case of Dissolution

CHAPTER IIIDISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS

Section 94. Rules of distribution. In case dissolution of a non-stock corporation in accordance with the provisions of this
Code, its assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be
made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs
by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by
reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged
in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws,
determine the distributive rights of members, or any class or classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not
organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n)

a. debts
b. return of assets held under condition of being returned in case of dissolution
c. assets subject to specific use must be transferred to corporation of same purpose
d. assets not included above shall be distributed to members pursuant to BL or AOI
e. remaining assets may be distributed to entities as may be specified in the plan of
distribution.

9. Procedure for Plan for Distribution

Section 95. Plan of distribution of assets. A plan providing for the distribution of assets, not inconsistent with the
provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner:
The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the
submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth
the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to
each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of
meetings to members. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the
members having voting rights present or represented by proxy at such meeting.

10. Conversion of Non-Stock Corporation to Stock Corporation

SEC Opinion dated 24 February 2003, addressed to Benedicta P. Bello; SEC

Opinion dated 10 December 1992, Mr. Efren Valiente

The conversion of a non-stock educational institution into a stock corporation is not legally
feasible. The non-stock corporation shall be dissolved first.

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Assets shall be distributed in accordance with the rules as provided for under Sections 94 and 95
of the Corporation Code.

11. Foundations

SEC Memorandum Circular No. 1, Series of 2004

X. CLOSE CORPORATIONS

Section 97. Articles of incorporation. The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their
transfers as may be stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a
particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by
the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the
purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees
shall be elected or appointed by the stockholders, instead of by the board of directors.
4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively
presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the
corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the
number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of
stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of
stock in the name of the transferee.
5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to subsections (1), (2) or
(3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its
articles of incorporation in accordance with this Title.
6. The term transfer, as used in this section, is not limited to a transfer for value.
7. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to
recover under any applicable warranty, express or implied.

1. Concept of Close Corporation

Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003)

2. Requirements for Close Corporation

Section 96
TITLE XII
CLOSE CORPORATIONS
Section 96. Definition and applicability of Title. A close corporation, within the meaning of this Code, is one whose articles
of incorporation provide that: (1) All the corporations issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all
classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this
Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks,
insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest

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in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this
Code shall apply suppletorily except insofar as this Title otherwise provides.

a. Special Rule on Stock Ownership

Section 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise, any action by the
directors of a close corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing;
or
3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of them makes prompt
objection thereto in writing.
If a directors meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed
ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the
corporation after having knowledge thereof.

Manuel R. Dulay Ent. v. Court of Appeals, 225 SCRA 678 (1993)

San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998)

3. Restrictions of Transfers

Section 98

Section 98. Validity of restrictions on transfer of shares. Restrictions on the right to transfer shares must appear in the
articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding
on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders
or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms,
conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails
to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.

Section 99

Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions.

1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the
articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice
of the fact of his ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are
entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if
the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the
person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation,
the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the
restriction, if such acquisition violates the restriction.

4. Pre-emptive Rights in Close Corporations

Section 102

Section 102. Pre-emptive right in close corporations. The pre-emptive right of stockholders in close corporations shall
extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services,
or in payment of corporate debts, unless the articles of incorporation provide otherwise.

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5. Management by Stockholders

6. Agreement by Stockholders

Section 100

Section 100. Agreements by stockholders.

1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed
by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with
the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required
by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in
exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall
be invalidated as between the parties on the ground that its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the
ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the
discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are
parties thereto the liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a
close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said
stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate
liability insurance.

7. When Board Meeting is Unnecessary

8. Corporate Tort for Close Corporations

Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997)

9. Deadlocks

Section 104

Section 104. Deadlocks. Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement
of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the
corporations business and affairs that the votes required for any corporate action cannot be obtained, with the
consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the
stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the
power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as
it deems appropriate, including an order: (1) cancelling or altering any provision contained in the articles of
incorporation, by-laws, or any stockholders agreement; (2) cancelling, altering or enjoining any resolution or act of the
corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its
board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value
of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its
books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting
such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any
subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission.
A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or
receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation,
including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the
Commission or by all the stockholders. His compensation shall be determined by agreement between him and the

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corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the
event of disagreement between the provisional director and the corporation.

Section 105
Section 105. Withdrawal of stockholder or dissolution of corporation. In addition and without prejudice to other rights and
remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel
the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when
the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That
any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the
dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is
illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or
whenever corporate assets are being misapplied or wasted.

10. Amendment of Articles of Incorporation

Section 103

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

XI SPECIAL CORPORATIONS

1. Educational Corporations

Barayuga v. Adventist University of the Philippines, 655 SCRA 640 (2011)

Section 108
Section 108. Board of trustees. Trustees of educational institutions organized as non-stock corporations shall not be less
than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools,
colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-
fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the
expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on
stock corporations. (169a)

2. Religious Corporations

a. Classes of Religious Corporation

Section 109
CHAPTER IIRELIGIOUS CORPORATIONS
Section 109. Classes of religious corporations. Religious corporations may be incorporated by one or more persons. Such
corporations may be classified into corporations sole and religious societies.

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Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar
as they may be applicable. (n)

Long v. Basa, 366 SCRA 112 (2001)

b. Corporation Sole

Section 110
Section 110. Corporation sole. For the purpose of administering and managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a)

(1) Articles of Incorporation

Iglesia Evangelica Metodista en las Islas Filipinas (IEMELIF) v. Lazaro,

624 SCRA 224 (2010)

(ii) Acquisition and Alienation of Property

Section 113. Acquisition and alienation of property. Any corporation sole may purchase and hold real estate and personal
property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such
purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the
Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that
notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for
such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage
should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief
archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any
member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where
the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned
represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and
personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be
necessary. (159a)

(iii) Filing of Vacancies

Section 114. Filling of vacancies. The successors in office of any chief archbishop, bishop, priest, minister, rabbi or
presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted
to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission,
certificate of election, or letters of appointment, duly certified by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious
denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the
rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to
administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall
exercise all the powers and authority of the corporation sole during such vacancy. (158a)

(iv) Dissolution

Section 115. Dissolution. A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the
Securities and Exchange Commission a verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation.

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Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease
to carry on its operations except for the purpose of winding up its affairs. (n)

Section 115

c. Religious Societies

Religious Society may incorporate by 2/3 vote of membership

Section 116. Religious societies. Any religious society or religious order, or any diocese, synod, or district organization of
any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the
religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or
by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for
the administration of its temporalities or for the management of its affairs, properties and estate by filing with the
Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary,
or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the
religious denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a
religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly
convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to
incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious
denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the
administration of its affairs, properties and estate;
5. The place where the principal office of the corporation is to be established and located, which place must be within the
Philippines; and The names, nationalities, and residences of the trustees elected by the religious society or religious order,
or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the
laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be
not less than five (5) nor more than fifteen (15). (160a)

3. Condominium Corporations

a. Condominium Corporations Not Per Se Engaged in For- Profit

Activities

Yamane v. BA Lepanto Condominium Corp., 475 SCRA 2005

b. Master Deed of Restrictions

Twin Towers Condominium Corp. v. Court of Appeals, 398 SCRA 203

(2003)

c. Association Dues

Twin Towers Condominium Corp. v. Court of Appeals, 398 SCRA 203

(2003)

d. Validity of House Rules

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 e. Agency With Proper Jurisdiction over Condominium Matters

Manila Bankers Life Insurance Corp. v. Ng Kok Wei, 418 SCRA 454 (2003)

XII. DISSOLUTION, LIQUIDATION and REINCORPORATION

1. CORPORATE DISSOLUTION

DISSOLUTION
Section 117. Methods of dissolution. A corporation formed or organized under the provisions of this Code may be
dissolved voluntarily or involuntarily. (n)
Section 118. Voluntary dissolution where no creditors are affected. If dissolution of a corporation does not prejudice the
rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors
or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3)
of the outstanding capital stock or of at least two-thirds (2/3) of the members of a meeting to be held upon call of the
directors or trustees after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks
in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is
published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each
stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A
copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the
certificate of dissolution. (62a)
Section 119. Voluntary dissolution where creditors are affected. Where the dissolution of a corporation may prejudice
the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The
petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its
affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands
against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders
or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition,
fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30)
days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at
least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or
city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of
general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public
places in such municipality or city.
Upon five (5) days notice, given after the date on which the right to file objections as fixed in the order has expired, the
Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is
sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and
directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the
debts of the corporation. (Rule 104, RCa)
Section 120. Dissolution by shortening corporate term. A voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of
incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon
approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the
corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on
liquidation. (n)
Section 121. Involuntary dissolution. A corporation may be dissolved by the Securities and Exchange Commission upon
filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and
regulations. (n)
Section 122. Corporate liquidation. Every corporation whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for
the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of
and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was
established.
At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other persons in interest.

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Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets
or property except upon lawful dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)

a. Nature of Dissolution

Republic v. Tancinco, 394 SCRA 386 (2002)

Vesagas v. Court of Appeals, 371 SCRA 516 (2002)

Aguirre II v. FOBQ+7, Inc., 688 SCRA 242 (2013)

Gonzales v. Sugar Regulatory Administration, 174 SCRA 377 (1989)

b. Methods of Corporate Dissolution

Section 121

Section 122

Section 120

Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461

(2011)

c. Voluntary Dissolution

(1) Without Debts: Administrative Proceeding

(2) With Debts: Quasi-judicial proceedings

Section 119

(3) Shorten Corporate Term

Section 120

SEC Opinion, 5 July 1979, the XII SEC Quarterly Bulletin 3 (No. 4,
October 1979)

d. Final Returns for Dissolving Corporations

e. Involuntary Dissolution

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 Section 121

(1) Grounds for Involuntary Dissolution

2. CORPORATE LIQUIDATION

Section 122

a. Nature of Corporate Liquidation

PVBANK Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001)

Chua v. NLRC, 190 SCRA 588 (1990)

A liquidation proceeding is a proceeding in rem.

Alhambra Cigar v. SEC, 24 SCRA 269 (1968)

Virgilla v. Philippine College of Criminology, 698 SCRA 247 (2013)

b. Methods of Corporate Liquidation

Ong v. Philippine Deposit Insurance Corp., 682 SCRA 415 (2010)

c. Liquidation Effected by the Board of Directors and Officers of the

Dissolved Corporation

De Guzman v. NLRC, 211 SCRA 723 (1992)

Republic v. Marsman Dev. Co., 44 SCRA 418 (1972)

National Abaca Corp. v. Pore, 2 SCRA 89 (1961)

Tan Tiong Bio v. BIR, 100 Phil 86 (1956)

China Bank v. M. Michelin & Cie, 58 Phil. 261 (1993)

d. Liquidation Effected by Transferring the Corporate Assets to a

Trustee or Receiver

Sec. 122

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 Metropolitan Bank v. Board of Trustees of Riverside Mills Provident and
Retirement Fund, 630 SCRA 350 (2010)

Pepsi- Coca Cola Products Phils., Inc. v. Court of Appeals, 443 SCRA 571
(2004)

Republic v. Tancinco, 394 SCRA 386 (2002)

Knecht v. United Cigarette Corp., 382 SCRA 48 (2002)

Reburiano v. Court of Appeals, 301 SCRA 342 (1999)

Gelano v. Court of Appeals, 103 SCRA 90 (1981)

e. Escheat to the Government

Section 122

3. REINCORPORATION

Chung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534 (1998)

XII. FOREIGN CORPORATIONS

1. DEFINTION

TITLE XV
FOREIGN CORPORATIONS
Section 124. Application to existing foreign corporations. Every foreign corporation which on the date of the effectivity of
this Code is authorized to do business in the Philippines under a license therefore issued to it, shall continue to have such
authority under the terms and condition of its license, subject to the provisions of this Code and other special laws. (n)
Section 125. Application for a license. A foreign corporation applying for a license to transact business in the Philippines
shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in
accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be
under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the principal office of the corporation in the country or state of
incorporation;
3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and,
pending the establishment of a local office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the
Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by
the appropriate government agency;
6. The names and addresses of the present directors and officers of the corporation;
7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to
issue, itemized by classes, par value of shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued,
itemized by classes, par value of shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and

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10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange
Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to
determine and assess the fees payable.
Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials
of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow
Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good
standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be
attached thereto.
The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under
oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and
Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound
financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year
immediately prior to the filing of the application.
Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the
provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to
transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous
authority from the appropriate government agency, whenever required by law. (68a)
Section 126. Issuance of a license. If the Securities and Exchange Commission is satisfied that the applicant has complied
with all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license
to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon
issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do
so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation,
unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special
laws.
Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except foreign
banking or insurance corporation, shall deposit with the Securities and Exchange Commission for the benefit of present
and future creditors of the licensee in the Philippines, securities satisfactory to the Securities and Exchange Commission,
consisting of bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or controlled corporations and entities, shares of stock in registered
enterprises as this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the
stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of
securities, with an actual market value of at least one hundred thousand (P100,000.) pesos; Provided, however, That
within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the
licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by which the
licensees gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities and Exchange
Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has
decreased by at least ten (10%) percent of their actual market value at the time they were deposited. The Securities and
Exchange Commission may at its discretion release part of the additional securities deposited with it if the gross income
of the licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than
ten (10%) percent of the actual market value of the securities at the time they were deposited. The Securities and Exchange
Commission may, from time to time, allow the licensee to substitute other securities for those already on deposit as long
as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities deposited. In
the event the licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be returned,
upon the licensees application therefor and upon proof to the satisfaction of the Securities and Exchange Commission
that the licensee has no liability to Philippine residents, including the Government of the Republic of the Philippines. (n)
Section 127. Who may be a resident agent. A resident agent may be either an individual residing in the Philippines or a
domestic corporation lawfully transacting business in the Philippines: Provided, That in the case of an individual, he
must be of good moral character and of sound financial standing. (n)
Section 128. Resident agent; service of process. The Securities and Exchange Commission shall require as a condition
precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such
corporation file with the Securities and Exchange Commission a written power of attorney designating some person who
must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or
other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted
and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such
foreign corporation shall likewise execute and file with the Securities and Exchange Commission an agreement or
stipulation, executed by the proper authorities of said corporation, in form and substance as follows:
The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the Securities
and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease
to transact business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons
or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which
occurred in the Philippines, service of any summons or other legal process may be made upon the Securities and
Exchange Commission and that such service shall have the same force and effect as if made upon the duly-authorized
officers of the corporation at its home office.
Whenever such service of summons or other process shall be made upon the Securities and Exchange Commission, the
Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the

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corporation at its home or principal office. The sending of such copy by the Commission shall be necessary part of and
shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the
party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the
Securities and Exchange Commission of the new address. (72a; and n)
Section 129. Law applicable. Any foreign corporation lawfully doing business in the Philippines shall be bound by all
laws, rules and regulations applicable to domestic corporations of the same class, except such only as provide for the
creation, formation, organization or dissolution of corporations or those which fix the relations, liabilities, responsibilities,
or duties of stockholders, members, or officers of corporations to each other or to the corporation. (73a)
Section 130. Amendments to articles of incorporation or by-laws of foreign corporations. Whenever the articles of incorporation
or by-laws of a foreign corporation authorized to transact business in the Philippines are amended, such foreign
corporation shall, within sixty (60) days after the amendment becomes effective, file with the Securities and Exchange
Commission, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles
of incorporation or by-laws, as amended, indicating clearly in capital letters or by underscoring the change or changes
made, duly certified by the authorized official or officials of the country or state of incorporation. The filing thereof shall
not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the
Philippines. (n)
Section 131. Amended license. A foreign corporation authorized to transact business in the Philippines shall obtain an
amended license in the event it changes its corporate name, or desires to pursue in the Philippines other or additional
purposes, by submitting an application therefor to the Securities and Exchange Commission, favorably endorsed by the
appropriate government agency in the proper cases. (n)
Section 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. One or more foreign
corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation
or corporations if such is permitted under Philippine laws and by the law of its incorporation: Provided, That the
requirements on merger or consolidation as provided in this Code are followed.
Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or
consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall,
within sixty (60) days after such merger or consolidation becomes effective, file with the Securities and Exchange
Commission, and in proper cases with the appropriate government agency, a copy of the articles of merger or
consolidation duly authenticated by the proper official or officials of the country or state under the laws of which merger
or consolidation was effected: Provided, however, That if the absorbed corporation is the foreign corporation doing
business in the Philippines, the latter shall at the same time file a petition for withdrawal of its license in accordance with
this Title. (n)
Section 134. Revocation of license. Without prejudice to other grounds provided by special laws, the license of a foreign
corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a
statement of such change as required by this Title;
4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of
incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such
corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or
any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized
under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not
duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines. (n)
Section 135. Issuance of certificate of revocation. Upon the revocation of any such license to transact business in the
Philippines, the Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a
copy thereof to the appropriate government agency in the proper cases.
The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a
notice of such revocation accompanied by a copy of the certificate of revocation. (n)
Section 136. Withdrawal of foreign corporations. Subject to existing laws and regulations, a foreign corporation licensed to
transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal
of license. No certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the
following requirements are met;
1. All claims which have accrued in the Philippines have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies
or political subdivisions have been paid; and
3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper
of general circulation in the Philippines.

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European Resources and Technologies v. Ingenieuburo Birkhanh + Nolte, 435
SCRA 246 (2004)

2. NECESSITY TO OBTAIN LICENSE TO DO BUSINESS

Section 123
Section 123. Definition and rights of foreign corporations. For the purposes of this Code, a foreign corporation is one
formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens
and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines
after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of
authority from the appropriate government agency. (n)

Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304

Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997)

3. SUABILITY OF FOREIGN CORPORATION

Section 133

Section 133. Doing business without a license. No foreign corporation transacting business in the Philippines without a
license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. (69a)

B. Van Zuiden Bros. Ltd. v. GTVL Manufacturing Industries, 523 SCRA 233
(2007)

MR Holdings, Ltd. v. Bajar, 380 SCTRA 617 (2002)

Rimbunan Hjau Group of Companies v. Oriental Wood Processing Corp., 470

SCRA 650 (2005)

4. DEFINTION OF DOING BUSINESS IN THE PHILIPPINES

MR Holdings, Ltd. v. Bajar, 380 SCRA 617 (2002)

a. Jurisprudential Definition of Doing Business in the Philippines

Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 524 (1941)

Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil.

Corp., 427 SCRA 593 (2004)

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Substance test- foreign corporation doing business for which it was organized

the continuity test- continuity of dealings x x in progressive prosecution of the

purpose and object of its organization.

b. Definition of Doing Business

Section 3 (d) of FIA 91

Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010)

Steetcase, Inc. v. Design International Selections, 670 SCRA 62 (2012)

(1) Opening of Liason Office or Domestic Branch is Doing Business

Mavest (U.S.A.), Inc. v. Sampaguita Garment Corp., 470 SCRA 440 (2005)

(2) Mere ownership of Local Properties or Rights Not Necessarily Doing

Business

MR Holdings Ltd. v. Bajar, 380 SCRA 617 (2002)

(3) Activities in the Philippines Must be Profit Making

Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil.

Corp., 427 SCRA 597 (2004)

Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010)

(4) Territoriality Test: Significant Segments of the Activities Must Take Place
within Philippine Territory

General Corp. of Phil. v. Union Insurance Society, 87 Phil. 313 (1950)

Pacific Vegetable Oil Corp. v. Singzon Advanced SC Decisions (April 1955)

Columbia Pictures, Inc. v. Court of Appeals, 261 SCRA 144 (1996)

B. Van Zuiden Bros. v. GTVL Manufacturing Industries, 523 SCRA 233 (2007)

South African Airways v. BIR, 612 SCRA 665 (2010)

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(5) Reinsurance Does not Per Se Constitute Doing Business

Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997)

5. ISSUANCE OF LICENSE

Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997)

6. CONSEQUENCES OF NOT OBTAINING LICENSE WHEN DOING

BUSINESS

Section 133

a. Status of Contracts Entered Into Without Requisites License to Do

Business

Home Insurance Eastern Shipping Lines, 123 SCRA 424 (1983)

Top-Weld Manufacturing Co. v. ECED, S.A., 138 SCRA 118 (1985)

b. Doctrine of Estoppel

Merrill Lynch Futures, Inc. v. Court of Appeals, 211 SCRA 824 (1992)

Communication Materials and Design, Inc. v. Court of Appeals, 360 SCRA

673 (1996)

Global Business Holdings, Inc. v. Surecomptsoftware, B.V., 633 SCRA 94

(2010)

c. Attracting Foreign Investment Ruling

Steelcase, Inc. v. Design International Selections, Inc., 670 SCRA 64, 82

(2012)

d. Legal Standing of Foreign Corporations to Sue on Corporate Names,

Trade Names and Trademarks

General Garments v. Director of Patents, 41 SCRA 50 (1971)

Converse Rubber v. Universal Rubber Products, 147 SCRA 154 (1987)

e. Proper Allegations in Pleadings Filed by Foreign Corporations

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 Atlantic Mutual Insurance v. Cebu Stevedoring, 17 SCRA 1037 (1966)

French Oil Mills Machinery v. Court of Appeals, 295 SCRA 462 (1998)

7. ISOLATED TRANSACTIONS DOCTRINE

MR Holdings, Ltd. v. Bajar, 380 SCRA 617 (2002)

Lorenzo Shipping v. Chubb and Sons, Inc., 431 SCRA 266 (2004)

Commissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990)

a. Suits Against Foreign Corporation Not Doing Business in Philippines (i.e.,

On their isolated transactions)

(1) General Rule: Courts have no jurisdiction over foreign corporations

not doing business in the Philippines

Times, Inc. v. Reyes, 39 SCRA 303 (1971)

Hahn v. Court of Appeals, 266 SCRA 537 (1997)

(2) Consent or Voluntary Surrender of Personal Jurisdiction to Local

Courts

Avon Insurance PLC v. Court of Appeals, 278 SCRA 312, 327 (1997)

General Corp. of the Phil. v. Union Insurance Society of Canton, 87 Phil.

313 (1950)

Far East Intl Import v. Nankai Kogyo Co., Ltd., 6 SCRA 725 (1962)

Linger & Fisher GMBH v. IAC, 125 SCRA 522 (1983)

(3) Doctrine of Equity Evaluated

Facilities Management Corp. v. De Law Osa, 89 SCRA 131 (1979)

Signetics Corp. v. Court of Appeals, 255 SCRA 737 (1993)

Avon Insurance PLC v. Court of Appeals, 278 SCRA 312, 324 (1997)

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 (4) Attaching Local Properties to Obtain Jurisdiction

FBA Aircraft v. Zosa, 110 SCRA 1 (1981)

8. DOMICILE and RESIDENCE of FOREIGN CORPORATION

Northwest Orient Airlines v. Court of Appeals, 241 SCRA 192 (1995)

9. RESIDENT AGENT

a. Designation of Resident Agent

New York Marine Managers v. Court of Appeals, 249 SCRA 416 (1995)

b. Service of Summons and Other Legal Processes

Expertravel & Tours, Inc. v. Court of Appeals, 459 SCRA 147 (2005)

H.B. Zachry Co. Intl v. Court of Appeals, 232 SCRA 329 (1994)

10. LAWS APPLICABLE to FOREIGN CORPORATIONS

Section 129

11. AMENDMENT OF ARTICLES OF INCORPORATION

Section 130

12. MERGER and CONSOLIDATION

Section 132

13. REVOCATION/SUSPENSION of LICENSE TO DO BUSINESS

Section 134

Section 135

14. WITHDRAWAL

- THE END -

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