Professional Documents
Culture Documents
CHAPTER 1: INTRODUCTION law is necessary for its creation such that the mere agreement of the
persons composing it or intending to organize it does not warrant the
KINDS OF BUSINESS ORGANIZATION grant of its independent existence as a juridical entity;
1. SOLE PROPRIETORSHIP – one conducted for profit by a lone or 2. ARTIFICIAL BEING – it has a juridical personality, separate and
single individual who owns all assets, personally owes and answers all distinct from the persons composing it.
the liabilities or suffers all the losses and enjoys all the profits to the
exclusion of others. 3. RIGHT OF SUCCESSION – unlike in a partnership, the death,
incapacity or civil interdiction of one or more of its stockholder does not
ADVANTAGES DISADVANTAGES result in its dissolution;
Eliminates the bureaucratic process Unlimited personal liability of the
common in corporations where the proprietor 4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY
board of directors must sit as a AUTDHORIZED BY LAW – it can exercise only such powers and can
body to have a valid transaction. hold only such properties as are granted to it by the enabling statutes
The proprietor makes his own unlike natural persons who can do anything as they please.
decisions and can act without delay.
Proprietor owns all the profits Capital is limited by the proprietor’s LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602 [Sept. 21,
without having to share the same personal resources 1994]) – Private respondent Carloto, incumbent President-Manager of private
respondent Rural Bank of Labason, alleged that he was instructerd to go to
2. PARTNERSHIP – a contract where two or more persons bind Manila to follow up on the Bank’s plan of payment of rediscounting
themselves to contribute money, property or industry to a common fund obligations with Central Bank’s main office, where he purchased a round trip
with the intention of dividing the profits among themselves (Art. 1767, ticket and phone his sister to send him P1,000 for his pocket money which
Civil Code). LBC failed to deliver and eventually Carloto was not able to submit the
rediscounting documents and the Bank was made to pay the Central Bank
3. JOINT VENTURE – a one-time grouping of two or more persons, P32,000 s penalty interest and alleged that he suffered embarrassment and
natural or juridical, in a specified undertaking. humiliation. Respondent Rural Bank was later on joined as one of the plaintiff
and prayed for the reimbursement of P32,000. Carloto and the Bank was
PARTNERSHIP JOINT VENTURE awarded moral and exemplary damages of P10,000 and P5,000, respectively.
Has a personality separate and Does not acquire a separate and
distinct from the partners distinct personality from the ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should be
venturers awarded moral damages?
Has for its object a general business Object is an undertaking of a
of particular kind, although there particular or single transaction HELD: No. Moral damages are granted in recompense for physical suffering,
may be partnership for a single mental anguish, fright, serious anxiety, besmirched reputation, wounded
transaction feelings, oral shock, social humiliation and social injury. A corporation, being
an artificial person and having existence only in legal contemplation, has no
Corporations, generally are not Corporations may enter joint
allowed to enter into partnerships* ventures feelings, no emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills, sorrows and grieves
*A corporation is generally not allowed to enter into partnerships because (1)
of life – all of which cannot be suffered by respondent bank as an artificial
the identity of the corporation is lost or merged with that of another; and (2)
person.
the discretion of the officials is placed in other hands other than those
permitted by the law in its creation.
BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of libel,
slander and other forms of defamation, a corporation is entitled to moral
EXCEPTION to the rule is when the following conditions are met:
damages.
a. The articles of incorporation expressly authorized the corporation to enter
into contracts of partnership;
C. ADVANTAGES OF THE CORPORATE FORM OF BUSINESS
b. The agreement or articles of partnership must provide that all the partners
will manage the partnership; and
1. CAPACITY TO ACT AS A SINGLE UNIT – any number of persons
c. The articles of partnership must stipulate that all the partners are and shall
may unite in a single enterprise without using their names, without
be jointly and severally liable for all obligations of the partnership
difficulty or inconvenience, and with the valuable right to contract, to
sue and be sued, and to hold or convey property, in the corporate
4. CORPORATION – an artificial being created by operation of law,
name;
having the right of succession and the powers, attributes and properties
2. LIMITED SHAREHOLDER’S LIABILITY – the limit of his liability since
expressly authorized by law or incident to its existence (Sec. 1,
stockholders are not personally liable for the debts of the corporation;
Corporation Code [CC])
3. CONTINUITY OF EXISTENCE – rights and obligations of a
corporation are not affected by the death, incapacity or replacement of
the individual members;
CHAPTER 2: DEFINITION AND ATTRIBUTES
4. FEASIBILITY OF GREATER UNDERTAKING – it enables the
individuals to cooperate in order to furnish the large amounts of capital
A. DEFINITION
necessary to finance large scale enterprises;
5. TRANSFERABILITY OF SHARES – unless reasonably restricted,
Sec. 2. Corporation Defined – A corporation is an artificial being created
shares of stocks, being personal properties, can be transferred by the
by operation of law, having the right of succession and the powers, attributes
owner without the consent of the other stockholders;
and properties expressly authorized by law or incident to its existence.
6. CENTRALIZED MANAGEMENT – the vesting of powers of
management and appointing officers and agents in board of directors
B. ATTRIBUTES (CARP)
gives to a corporation the benefit of a centralized administration which
is a practical business necessity in any large organization; and
1. CREATED BY OPERATION OF LAW – the formal requirement of the
7. STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT
State’s consent through compliance with the requirements imposed by
AND FINANCE – which are provided under a well-drawn general
HELD: No. The fact that the capital of the Club is divided into shares does
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
not detract from the finding of the trial court that it is not engaged in the
business of operator of bar and restaurant. What is determinative of whether PUBLIC CORPORATION: those formed or organized for the government of
or not the Club is engaged in such business is its object or purpose as stated a portion of the State or any of its political subdivisions and which have for
in its articles and by-laws. their purpose the general good and welfare.
Moreover, for a stock corporation to exists, two requisites must be It is to be observed, however, that the mere fact that the undertaking in
complied with: (1) a capital stock divided into shares; and (2) an which a corporation is engaged in is one which the State itself might enter
authority to distribute to the holders of such shares, dividends or into as part of its public work does not make it a public one. Nor is the fact
allotments of surplus profits on the basis of the shares held. In the that the State has granted property or special privileges to a corporation
case at bar, nowhere it its AOI or by-laws could be found an authority for the render it public. Likewise, the fact that some or all of the stocks in the
distribution of its dividends or surplus profits. Strictly speaking, it cannot corporation are held by the government does not make it a public
therefore, be considered as stock corporation, within the contemplation of corporation.
the Corporation Code.
The TRUE TEST to determine the nature of a corporation is found in the
B. CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER relation of the body to the State. Strictly speaking, a public corporation is
one that is created, formed or organized for political or governmental
Sec. 4. Corporations created by special laws or charters. - purposes with political powers to be exercised for purposes connected with
Corporations created by special laws or charters shall be governed primarily the public good in the administration of the civil government.
by the provisions of the special law or charter creating them or applicable to
them, supplemented by the provisions of this Code, insofar as they are The GOCCs are regarded as private corporations despite common
applicable. misconceptions.
HELD: Yes. Employees of GOCCs, whether created by special law or formed LAY CORPORATIONS: are those organized for purposes other than
as subsidiaries under the Corporation Law are governed by the Civil Service religion. They may further be classified as:
Law and not the Labor Code, under the 1973 Constitution has been a. ELEEMOSYNARY: created for charitable and benevolent purposes such
supplanted by the present Constitution. as those organized for the purpose of maintaining hospitals and houses for
the sick, aged or poor.
Thus, under the present state of the law, the test in determining b. CIVIL: organized not for the purpose of public charity but for the benefit,
whether a GOCC is subject to the Civil Service Law is the manner of pecuniary or otherwise, of its members.
its creation, such that government corporations created by special
charter are subject to its provisions while those incorporated under 3. AGGREGATE AND SOLE CORPORATIONS
the General Corporation Law are not within its coverage.
AGGREGATE CORPORATIONS: are those composed of a number of
PNOC has its special charter, but its subsidiary, PNOC-EDC, having been individuals vested with corporate powers.
incorporated under the General Corporation Law was held to be a GOCC
whose employees are subject to the provisions of the Labor Code. CORPORATION SOLE: those consist of one person or individual only and
who are made as bodies corporate and politic in order to give them some
C. OTHER CLASSES OF CORPORATIONS legal capacity and advantage which, as natural persons, they cannot have.
Under the Code, a corporation sole may be formed by the chief archbishop,
1. PUBLIC AND PRIVATE CORPORATIONS bishop, priest, minister, rabbi, or other presiding elder or religious
FOREIGN CORPORATIONS: are those formed, organized or existing under 1. PROMOTIONAL STAGE
any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state (Sec. 123, This is undertaken by the organizers or promoters who bring together
Corporation Code). persons interested in the business venture. They enter into contract either in
their own names or in the name of the proposed corporation.
The second part of the definition is, however, somehow misplaced since any
corporation for that matter, which is not registered under Philippine laws is a LIABILITY OF PROMOTERS:
foreign corporation. Such second part was inserted only for the purpose of GENERAL RULE: a promoter, although he may assume to act for and on
qualifying a foreign corporation to secure a license and to do business in the behalf of a projected corporation and not for himself, will be held personally
Philippines. liable on contracts made by him for the benefit of a corporation he intends to
organize. The personal liability continues even after the formation of the
6. PARENT OR HOLDING COMPANIES AND SUBSIDIARIES AND corporation unless there is novation or other agreement to release him from
AFFILIATES liability. As such, the promoter may do either of the following options:
PARENT OR HOLDING COMPANY: a corporation who controls another a. He may make a continuing offer on behalf of the corporation, which, if
corporation, or several other corporations known as its subsidiaries. Holding accepted after incorporation, will become a contract. In this case, the
companies have been defined as corporations that confine their activities to promoter does not assume any personal liability, whether or not the
owning stock in, and supervising management of other companies. A holding corporation will accept the offer;
company usually owns a controlling interest (more than 50% of the voting b. He may make a contract at the time binding himself, with the
stock) in the companies whose stocks it holds. As may be differentiated from understanding that if the corporation, once formed, accepts or adopts the
investment companies which are active in the sale or purchase of shares of contract, he will be relieved of responsibility; or
stock or securities, parent or holding companies have a passive portfolio and c. He may bind himself personally and assume responsibility of looking to the
hold the securities merely for purposes of control and management. proposed corporation, when formed, for reimbursement.
Moreover, Given Private Respondent's underlined primary purpose in its AOI, The reasons for requiring a statement of the purposes or objects:
nothing could prevent it from dealing in the same line of business of electrical 1. In order that the stockholder who contemplates on an investment in a
devices, products or supplies which fall under its primary purposes. Besides, business enterprise shall know within what lines of business his money is to
there is showing that Private Respondent not only manufactured and sold be put at risks;
ballasts for fluorescent lamps with their corporate name printed thereon but 2. So that the board of directors and management my now within what
also advertised the same as, among others, Standard Philips (TSN, before the lines of business they are authorized to act; and
SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As 3. So that anyone who deals with the company may ascertain whether a
aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as contract or transaction into which he contemplates entering is one within the
part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to general authority of the management.
show said respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" (Rollo, p. 137). SECONDARY PURPOSE: Although the Corporation Code does not restrict
The subsequent appropriator of the name or one confusingly similar thereto nor limit the number of purpose or purposes which a corporation may have,
usually seeks an unfair advantage, a free ride of another's goodwill (American Sec. 14 thereof, requires that if it has more than one purpose, the primary
Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC purpose as well as the secondary ones must be indicated therein.
269, 191 F 2d 488).
PROHIBITION: The following are prohibited by special laws for having any
In allowing Private Respondent the continued use of its corporate name, the other purpose not peculiar to them:
SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL 1. Educational, religious, and other non-stock corporations cannot include any
LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least other purpose which would change or contradict its nature or to engage in
two words different from that of the corporate name of respondent any enterprise to make profits for is members;
STANDARD PHILIPS CORPORATION, which words will readily identify Private 2. Insurance companies cannot engage in commercial banking at the same
Respondent from Petitioners and vice-versa. time, and vice-versa; and
3. Stock brokers can have no other line of business not peculiar to them.
True, under the Guidelines in the Approval of Corporate and Partnership
Names formulated by the SEC, the proposed name "should not be similar to RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:
one already used by another corporation or partnership. If the proposed 1. As a general rule, the purpose or purposes must be lawful. Hence, the SEC
name contains a word already used as part of the firm name or style of a is duty bound to determine the legality of the corporate purpose/s before it
registered company; the proposed name must contain two other issues the certificate of registration;
words different from the company already registered" (Emphasis 2. A corporation may not be formed for the purpose of practicing a profession
ours). It is then pointed out that Petitioners Philips Electrical and Philips like law, medicine or accountancy, either directly or indirectly. These are
Industrial have two words different from that of Private Respondent's name. reserved exclusively for professional partnerships;
3. The retail trade, where the corporate capital is less than $2.5M, or its peso
What is lost sight of, however, is that PHILIPS is a trademark or trade name equivalent are reserved exclusively for Filipinos, or for corporations or
which was registered as far back as 1922. Petitioners, therefore, have the partnerships wholly owned by such citizen.
exclusive right to its use which must be free from any infringement by 4. As a general rule, corporations with foreign equity are not allowed to
similarity. A corporation has an exclusive right to the use of its name, engage in restaurant business but corporations with such foreign equity can
which may be protected by injunction upon a principle similar to purse such undertaking if it is incidental or in connection with hotel or inn-
that upon which persons are protected in the use of trademarks and keeping business.
tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it 5. Management consultants, advisers and/or specialists, must submit the
is a fraud on the corporation which has acquired a right to that name and personal information sheet of the incorporators and directors in order that
perhaps carried on its business thereunder, that another should attempt to the SEC may be able to find out or determine whether or not the applicant
use the same name, or the same name with a slight variation in such a way corporation is qualified to act as such.
as to induce persons to deal with it in the belief that they are dealing with the 6. As a matter of policy, financing companies are required by the SEC to
corporation which has given a reputation to the name (6 Fletcher [Perm Ed], submit certain additional documents together with their applications for
pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 registration to verify compliance with RA 8556.
F 510). Notably, too, Private Respondent's name actually contains only a 7. For bonded warehousing companies, an undertaking to comply with the
single word, that is, "STANDARD", different from that of Petitioners inasmuch General Bonded Warehousing Act must be submitted along with the AOI.
as the inclusion of the term "Corporation" or "Corp." merely serves the 8. In case the applicant proposes to engage in the business of hospital
Purpose of distinguishing the corporation from partnerships and other and/or clinic, the purpose clause must contain the following proviso:
business organizations. “Provided that purely medical or surgical services in connection therewith
shall be performed by duly qualified physician and surgeon who may or may
The fact that there are other companies engaged in other lines of business not be freely and individually contracted by the parties.”
using the word "PHILIPS" as part of their corporate names is no defense and 9. In the case of Customs Brokerage business, the applicant must submit the
does not warrant the use by Private Respondent of such word which license of at least two customs broker connected with the applicant
constitutes an essential feature of Petitioners' corporate name previously corporation;
adopted and registered and-having acquired the status of a well-known mark 10. Transfer Agents, Broker and Clearing Houses must submit the certificate
in the Philippines and internationally as well (Bureau of Patents Decision No. of admission to the profession of the CPA of any officer of the corporation;
88-35 [TM], June 17, 1988, SEC Records). 11. Carriage of mails cannot be a purpose of a corporation unless a special
franchise has been granted to it.
c. PURPOSE CLAUSE 12. If the corporate purpose or objective includes any purpose under the
supervision of another government agency, prior clearance and/or
xxx approval of the concerned government agencies or instrumentalities
SECOND: That the purpose or purposes for which such corporation will be required pursuant to the last paragraph of Sec. 17 of the Code.
is incorporated are: (If there is more than one purpose, indicate
primary and secondary purposes); GENERAL LIMITATIONS:
xxx 1. The purpose or purposes must be lawful;
CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379; Feb. 18,
1967) – The New Cagayan Grocery filed a complaint against CRS for some CORPORATORS apply to all who compose the corporation at any given time
irregularities in the transmission of a message which changed the context and need not be among those who executed the AOI at the start of its
and purport causing damages. The complaint was filed in the City Court of formation or organization.
Cagayan de Oro.
INCORPORATORS are those mentioned in the AOI as originally forming
ISSUE: WON the action will prosper? the corporation and who are signatories in the AOI.
HELD: No. The action was based on tort and not upon a written contract and An incorporator may be considered as a corporator as long as he continues to
as such, under the Rules of Court, it should be filed in the municipality where be a stockholder or a member, but not all corporators are incorporators.
the defendant or any of the defendants resides or may be served with
summons. Sec. 10. Number and qualifications of incorporators. - Any number of
natural persons not less than five (5) but not more than fifteen (15), all of
Settled is the principle in corporation law that the residence of a legal age and a majority of whom are residents of the Philippines, may form
corporation is the place where the principal office is established. a private corporation for any lawful purpose or purposes. Each of the
Since it is not disputed that CRS has its principal office in Manila, it follows incorporators of a stock corporation must own or be a subscriber to at least
that the suit against it may properly be filed in the City of Manila. one (1) share of the capital stock of the corporation.
The fact that CRS maintains branch office in some parts of the country does QUALIFICATIONS OF INCORPORATORS:
not mean that it can be sued in any of these places. To allow such would 1. Must be natural persons. It implies that a corporation or a partnership
create confusion and work untold inconveniences to the corporation. cannot become incorporators. EXCEPTION: (1) cooperatives; (2)
corporations primarily organized to hold equities in rural banks and may
e. TERM OF EXISTENCE rightfully become incorporators thereof. It must be noted likewise that the
xxx law does not preclude firms and other entities from becoming stockholders or
FOURTH: That the term for which said corporation is to exist subscribers to the shares of a stock corporation. Thus, while they cannot
is............... years from and after the date of issuance of the qualify as incorporators, they can become corporators or stockholders.
certificate of incorporation; 2. Of Legal Age. Minors cannot be incorporators. They may, however,
xxx become stockholders provided they are legally represented by parents,
guardians or administrators.
Sec. 11. Corporate term. - A corporation shall exist for a period not 3. Must own at least 1 share.
exceeding fifty (50) years from the date of incorporation unless sooner 4. Majority must be residents of the Philippines. The law does not provide for
dissolved or unless said period is extended. The corporate term as originally citizenship requirements. EXCEPT: in certain areas of activity or industry
stated in the articles of incorporation may be extended for periods not wherein ownership of shares of stock are reserved wholly or partially to
exceeding fifty (50) years in any single instance by an amendment of the Filipino citizens. Hence, all incorporators may be foreigners provided majority
articles of incorporation, in accordance with this Code; Provided, That no of them are residents. Note that the requirement is residence and not
extension can be made earlier than five (5) years prior to the original or citizenship.
subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and Exchange Commission g. DIRECTORS/TRUSTEES
xxx
The corporate term is necessary in determining at what point in time the SIXTH: That the number of directors or trustees of the corporation
corporation will cease to exist or have lost its juridical personality. Once it shall be............; and the names, nationalities and residences of the
ceases to exist, its legal personality also expires and could not thereafter, act first directors or trustees of the corporation are as follows:
in its own name for the purpose of prosecuting it business.
NAME NATIONALITY RESIDENCE
EXTENSION: can be made not earlier than 5 years prior to the expiry date ..................... ............................. ............................
unless there are justifiable reasons. ..................... ............................. ............................
..................... ............................. ............................
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
..................... ............................. ............................ law, the qualifications of directors. It has the inherent power to adopt by-
..................... ............................. ............................ laws for its internal government, and to regulate the conduct and prescribe
xxx the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. A corporation, under the
DIRECTORS is the governing board in stock corporations. TRUSTEES refer Corporation law, may prescribe in its by-laws the qualifications,
to non-stock corporations. duties and compensation of directors, officers, and employees. Any
person who buys stock in a corporation does so with the knowledge that its
There must be at least 5 but not more than 15 directors in a private affairs are dominated by a majority of the stockholders and he impliedly
corporation. EXCEPTIONS: contracts that the will of the majority shall govern in all matters within the
1. Educational corporations registered as non-stock corporations whose limits of the acts of incorporation and lawfully enacted by-laws and not
number of trustees, though not less than 5 and not more than 15 should be forbidden by law. Any corporation may amend its by-laws by the owners of
divisible by 5. the majority of the subscribed stock. It cannot thus be said that petitioners
2. In close corporations where all stockholders are considered as members of has the vested right, as a stock holder, to be elected director, in the face of
the board of directors (Sec. 97) thereby effectively allowing 20 members in the fact that the law at the time such stockholder's right was acquired
the board. contained the prescription that the corporate charter and the by-laws shall be
subject to amendment, alteration and modification. A Director stands in a
The by-laws of a corporation may provide for additional qualifications and fiduciary relation to the corporation and its shareholders, which is
disqualifications of its members of the board of directors or trustees. characterized as a trust relationship. An amendment to the
However, it may not do away with the minimum disqualifications laid down corporate by-laws which renders a stockholder ineligible to be
by the Code. The minimum qualifications of directors and trustees in a director, if he be also director in a corporation whose business is in
domestic corporation are provided under the 2nd par. Of Sec. 23: competition with that of the other corporation, has been sustained
as valid. This is based upon the principle that where the director is
Sec. 23. The board of directors or trustees employed in the service of a rival company, he cannot serve both, but must
xxx betray one or the other. The amendment in this case serves to advance the
Every director must own at least one (1) share of the capital stock of the benefit of the corporation and is good. Corporate officers are also not
corporation of which he is a director, which share shall stand in his name on permitted to use their position of trust and confidence to further their private
the books of the corporation. Any director who ceases to be the owner of at needs, and the act done in furtherance of private needs is deemed to be for
least one (1) share of the capital stock of the corporation of which he is a the benefit of the corporation. This is called the doctrine of corporate
director shall thereby cease to be a director. Trustees of non-stock opportunity.
corporations must be members thereof. a majority of the directors or trustees
of all corporations organized under this Code must be residents of the h. CAPITALIZATION
Philippines. xxx
SEVENTH: That the authorized capital stock of the corporation
QUALIFICATIONS OF DIRECTORS/TRUSTEES: is................................................ (P......................) PESOS in lawful
1. Must own at least 1 share in their own names or a member (in the case of money of the Philippines, divided into.............. shares with the par
trustees); value of.................................. (P.......................) Pesos per share.
2. Majority must be resident of the Philippines. Even aliens may be elected as (In case all the share are without par value):
directors, provided that the majority of such directors are residents of the
Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens like That the capital stock of the corporation is.......................... shares
the management of educational institutions and those governed by the Retail without par value. (In case some shares have par value and some
Trade Law. are without par value): That the capital stock of said corporation
consists of....................... shares of which...................... shares are of
the par value of............................. (P.....................) PESOS each, and
Sec. 27. Disqualification of directors, trustees or officers. - No person
of which............................... shares are without par value.
convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this Code committed within
EIGHTH: That at least twenty five (25%) per cent of the authorized
five (5) years prior to the date of his election or appointment, shall qualify as
capital stock above stated has been subscribed as follows:
a director, trustee or officer of any corporation.
Name of Subscriber Nationality No of Shares Amount
DISQUALIFICATIONS:
Subscribed
1. Imprisonment for a period exceeding 6 years;
........................ .............. ................ ...........................
2. Violation of the Corporation Code within 5 years prior to the date of
........................ .............. ................ ...........................
election or appointment;
........................ .............. ................ ...........................
3. Such other disqualifications that may be provided in the by-laws.
........................ .............. ................ ...........................
........................ .............. ................ ...........................
JOHN GOKONGWEI, JR., Petitioner,
vs.
NINTH: That the above-named subscribers have paid at least
SECURITIES AND EXCHANGE COMMISSION, SAN MIGUEL
twenty-five (25%) percent of the total subscription as follows:
CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL,
ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
Name of Subscriber Amount Subscribed Total Paid-Up
ORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA, Respondents
.............................. .............................. ....................
(GR No. L-52129; April 21, 1980)
.............................. .............................. ....................
.............................. .............................. ....................
FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the
.............................. .............................. ....................
SEC for the declaration of nullity of the by-laws etc. against the majority
.............................. .............................. ....................
members of the BOD and San Miguel. The amended by-laws provided for the
disqualification of competitors from nomination and election in the Board of
(Modify Nos. 8 and 9 if shares are with no par value. In case the
irectors of SMC. This was denied by the SEC.
corporation is non-stock, Nos. 7, 8 and 9 of the above articles may
be modified accordingly, and it is sufficient if the articles state the
ISSUE: Is the disqualification valid?
amount of capital or money contributed or donated by specified
persons, stating the names, nationalities and residences of the
HELD: Yes. The Court held that a corporation has authority prescribed, by
contributors or donors and the respective amount given by each.)
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
xxx
Sec. 6. Classification of shares. - The shares of stock of stock
The Corporation Code requires the AOI to state the authorized capital stock, corporations may be divided into classes or series of shares, or both, any of
the number of shares and/or kind of shares into which the authorized capital which classes or series of shares may have such rights, privileges or
is divided, the par value of each share, if there by any, the names, restrictions as may be stated in the articles of incorporation: Provided, That
nationalities and residences of the original subscribers, and the amount no share may be deprived of voting rights except those classified and issued
subscribed and paid by each. At least 25% of the subscribed capital must be as "preferred" or "redeemable" shares, unless otherwise provided in this
paid and in no case may the paid-up capital be less than P5,000. 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
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles may have a par value or have no par value as may be provided for in the
to be subscribed and paid-in or secured to be paid by the subscribers. It may articles of incorporation: Provided, however, That banks, trust companies,
also refer to the maximum number of shares that a corporation can issue. insurance companies, public utilities, and building and loan associations shall
not be permitted to issue no-par value shares of stock.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total
value for which there are contracts for their acquisition or subscription. It is Preferred shares of stock issued by any corporation may be given preference
in effect, the stockholder’s equity account showing that part of the authorized in the distribution of the assets of the corporation in case of liquidation and in
capital stock which has been paid or promised to be paid, or that portion of the distribution of dividends, or such other preferences as may be stated in
the authorized capital stock which has been subscribed by the subscribers or the articles of incorporation which are not violative of the provisions of this
stockholders. 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
PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value incorporation, may fix the terms and conditions of preferred shares of stock
which has been actually contributed or paid to the corporation in or any series thereof: Provided, That such terms and conditions shall be
consideration of the subscriptions made thereon. It may be in the form of effective upon the filing of a certificate thereof with the Securities and
cash, property or in the form of services actually rendered to the corporation Exchange Commission.
as provided under Sec. 62 of the Corporation Code:
Shares of capital stock issued without par value shall be deemed fully paid
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a and non-assessable and the holder of such shares shall not be liable to the
consideration less than the par or issued price thereof. Consideration for the corporation or to its creditors in respect thereto: Provided; That shares
issuance of stock may be any or a combination of any two or more of the without par value may not be issued for a consideration less than the value
following: 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
1. Actual cash paid to the corporation; treated as capital and shall not be available for distribution as dividends.
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation A corporation may, furthermore, classify its shares for the purpose of insuring
equal to the par or issued value of the stock issued; compliance with constitutional or legal requirements.
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation; Except as otherwise provided in the articles of incorporation and stated in the
5. Amounts transferred from unrestricted retained earnings to stated capital; certificate of stock, each share shall be equal in all respects to every other
and share.
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion. 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
Where the consideration is other than actual cash, or consists of intangible entitled to vote on the following matters:
property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval 1. Amendment of the articles of incorporation;
by the Securities and Exchange Commission. 2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
Shares of stock shall not be issued in exchange for promissory notes or substantially all of the corporate property;
future service. 4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
The same considerations provided for in this section, insofar as they may be 6. Merger or consolidation of the corporation with another corporation or
applicable, may be used for the issuance of bonds by the corporation. other corporations;
7. Investment of corporate funds in another corporation or business in
The issued price of no-par value shares may be fixed in the articles of accordance with this Code; and
incorporation or by the board of directors pursuant to authority conferred 8. Dissolution of the corporation.
upon it by the articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a majority of the Except as provided in the immediately preceding paragraph, the vote
outstanding capital stock at a meeting duly called for the purpose. necessary to approve a particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights.
SHARES OF STOCKS AND THEIR CLASSIFICATIONS
PURPOSE OF CLASSIFICATION:
SHARES OF STOCK designate the units into which the proprietary interest 1. To specify and define the rights and privileges of the stockholders;
in a corporation is divided. They represent the proportionate integers or 2. For regulation and control of the issuance of sale of corporate securities
units, the sum of which constitutes the capital stock of the corporation. It is for the protection of purchasers and stockholders.
likewise the interest or right which the owner, called the stockholders or 3. As a management control device.
shareholder, has in the management of the corporation, and in the surplus 4. To comply with statutory requirements particularly those which provide for
profits and in case of distribution, in all of its assets remaining after the certain limitations on foreign ownership.
payment of its debts. 5. To better insure return on investment which can be affected through the
issuance of redeemable shares or preferred shares, i.e., granting the holders
CERTIFICATE OF STOCK is a document or instrument evidencing the thereof, preference as to dividends and/or distribution of assets in case of
interest of a stockholder in the corporation. liquidation; and
6. For flexibility in price, particularly, no par shares may be issued or sold
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
from time to time at different prices depending on the net worth of the shareholders have the right to vote in matters enumerated in the penultimate
company since they do not purport to represent an actual or fixed value. paragraph of Sec. 6.
COMMON STOCKS are the most commonly issued shares of stock of a c. Preference Upon Liquidation
corporation. Although no clear cut definition can be found, it has been Such preference must also be stated in the contract, accordingly giving tem
described as one which entitles it owner to an equal or pro-rata division of the preference to the distribution of corporate assets upon liquidation or
profits, if there are any, but without any preference or advantage in that termination of corporate existence. If the preferred shares are cumulative,
respect over any other stockholder or class of stockholders. they have the right to any arrears in arrears in priority to any distribution of
assets to the common stockholders.
A common share usually carries with it the right to vote, and frequently, the
exclusively right to do so. However, where the AOI is silent, all issued and PAR AND NON-PAR VALUE SHARES
outstanding shares shall be considered to have the right to vote and be voted
for. Par Value Shares are those whose values are fixed in the AOI. Its par value is
the minimum subscription or original issue price of the shares and indicates
PREFERRED STOCKS is a stock that gives the holder preference over the the amount which the original subscribers are supposed to contribute to the
holder of common stocks with respect to the payment of dividends and/or capital, which, however, may not reflect the true value of the shares because
with respect to distribution of capital upon liquidation. LIMITATIONS imposed the same may fluctuate depending on the liability and networth of the
by the Code in the issuance of preferred stocks: (1) They can be issued only enterprise.
with a stated par value; and (2) The preference must be stated in the AOI
and in the certificate of stock otherwise each share shall be, in all respect, Watered Stocks are those issued at less than par value where the
equal to every other share. stockholders will remain liable for the difference between what he paid and
the actual par value thereof (Sec. 65).
a. PREFERENCE AS TO DIVIDENDS
They have the privilege of being paid dividends first before any other No Par Value Shares are those whose issued price are not stated in the
stockholders are paid theirs. The guaranty is not absolute so as to create a certificate of stock but may be fixed in the AOI, or by the BOD when so
relation of debtor and creditor between the corporation and the holders of authorized the articles or the by-laws, or in the absence thereof, the
such stock. The amount of preference is stated in the contract of subscription stockholders themselves. They do not purport to represent ay stated
and is usually a fixed percentage or by specified amount indicated therein. proportionate interest in the capital measured by value, but only an aliquot
part of the whole number of shares of the corporation issuing it.
Participating and Non-Participating Preferred Shares
If the preferred shares is participating, they are entitled to participate in The Code allows the issuance of no par value shares, subject to the following
dividends with the common shareholders beyond their stated preference. limitations provided in Sec. 6:
Non-participating preferred shares on the other hand are entitled to its fixed 1. Such shares once issued, are deemed fully paid and thus, non-assessable;
priority or preference only. 2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for
Cumulative and Non-cumulative Preference Shares dividend declaration;
Cumulative preferred shares are those that entitle the owner thereof to 4. They cannot be issued as preferred stock; and
payment not only of current dividends but also back dividends not previously 5. They cannot be issued by banks, trust companies, insurance companies,
paid whether or not, during the pas years, dividends were declared or paid. public utilities and building and loans associations.
In light of the provision of the Code stating that all shares are equal in all
respects unless otherwise stated in the AOI, a preferred share to be Advantages of no-par value shares:
considered cumulative, the same must be provided for and specified in the 1. Flexibility in price – no par shares may be issued from time to time at
certificate. different prices with the exception only that it shall not be issued at less than
P5;
Non-cumulative preferred shares are those which grant the holders of such 2. The issuance thereof practically results to the evasion of the danger of
shares only to the payment of current dividends but not back dividends, liability upon watered stock in case of overvaluation of the consideration paid
when and if dividends are paid, to the extent agreed upon before any other for it;
stockholders are paid the same. This type may be divided into three groups: 3. There is a disappearance of personal liability on the part of the holder for
1. Discretionary dividend type – depends on the judgment or discretion of the unpaid subscription since they are already deemed fully paid and non-
board of directors. Unless there is grave abuse of discretion as to result in assessable.
oppression, fraud or unfair discrimination, the dividend right of stockholders
of a particular year cannot be made up in subsequent years; VOTING AND NON-VOTING SHARES
2. Mandatory if earned – impose a positive duty on directors to declare Voting shares as the name suggests, gives the holder thereof the right to
dividends every year when profits are earned. In effect, directors cannot vote and participate in the management of the corporation, through the
withhold dividends if there are profits. election of the BOD, or in any matter requiring stockholders’ approval.
3. Earned cumulative or dividend credit type – gives the holder the right to
arrears in dividends if there were profits earned during the previous years. In However, voting shares may practically be denied the right to vote where
effect, their right to receive dividends is merely postponed on a later date. there exist founders’ shares.
The moment dividends are declared, back dividends earned in previous years
but not declared as such must first be paid to this type of preferred Non-voting shares do not grant the holder thereof, a voice in the election of
shareholders before the common shareholders receive theirs. directors and some other matter requiring stockholders’ vote.
DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are Only preferred and redeemable shares may be denied the right to vote. But,
entitled to dividends whether or not there are profits. Earned cumulative or even if denied such right, they may still vote on the following matters:
dividend credit type is entitled only to arrears if there are profits in those
years. 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
b. Voting Right of Preferred Shares substantially all of the corporate property;
Preferred shares, along with redeemable shares, are usually denied voting 4. Incurring, creating or increasing bonded indebtedness;
rights as they are allowed to be denied of such as provided in Sec. 6, but this 5. Increase or decrease of capital stock;
right must clearly be withheld. However, even if deprived, preferred
TREASURY SHARES The 25% minimum paid-in capital can be paid by any shareholder, meaning
that it is not particularly required that each subscriber pay 25% of their
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have subscription.
been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful There are instances where the SEC, by virtue of an existing law, rules and
means. Such shares may again be disposed of for a reasonable price fixed by regulations or policies, requires the payment of more than the amount
the board of directors. provided in the Code, such as Financing Companies where the required
minimum paid-up capital be P10,000,000 (within Metro Manila), P5,000,000
Treasury shares, as provided in Sec. 9, are reacquired but not retired. They (other cities), and P2,000,000 (municipalities).
may be issued for a price, even less than par, and the purchaser will not be
liable to the creditors of the corporation for the difference of the purchase i. RESTRICTIONS AND PREFERENCES
price and its par value. They may also be declared as dividends since they
Corporations are not required to provide for certain restrictions and
are properties of the corporation.
preferences regarding the transfer, sale or assignment of shares in the AOI
except in close corporations which would subject their shares to specific
Such shares do not have the right to share in dividends nor the right to vote.
restrictions as required in Sec. 96 of the Code. They are not, however,
restrained or prohibited from doing so
COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66 SCRA 14;
Aug. 6, 1975) – Julius Reese owned 24,700 of the 25,000 authorized capital
If the corporation desires to grant such options, restrictions and/or
stock of Manta Trading and Supply Co., the rest are owned by herein
respondents. Upon Reese’ death, his shares was held in trust by the law firm preferences, the same must be indicated in the AOI AND in all of the stock
certificates. Failure to provide the same in the AOI would not bind the
Ross, Carrascoso and Janda for the private respondent, who were to continue
management of the corporation. These shares considered by the respondents purchasers in good faith despite the fact that the said restriction and/or
as treasury shares, prior to full payment, were declared as stock dividends. preference is indicated in the by-laws of the corporation.
Such declaration was assessed by the BIR as distribution of assets subject to
income tax. In a close corporation, however, such restrictions and preferences must not
only appear in the articles of incorporation and in the stock certificates BUT
ISSUE: WON the subject shares are treasury shares? ALSO be embodied in the by-laws of that close corporation otherwise it may
not bind purchasers in good faith.
"No transfer of stock or interest which shall reduce the ownership Sec. 17. Grounds when articles of incorporation or amendment may
of Filipino citizens to less than the required percentage of the be rejected or disapproved. - The Securities and Exchange Commission
capital stock as provided by existing laws shall be allowed or may reject the articles of incorporation or disapprove any amendment thereto
permitted to recorded in the proper books of the corporation and if the same is not in compliance with the requirements of this Code: Provided,
this restriction shall be indicated in all stock certificates issued by That the Commission shall give the incorporators a reasonable time within
the corporation." which to correct or modify the objectionable portions of the articles or
xxx amendment. The following are grounds for such rejection or disapproval:
This indicates the treasurer who has been elected as such until his successor 1. That the articles of incorporation or any amendment thereto is not
has been elected and qualified and who is authorized to receive for and in substantially in accordance with the form prescribed herein;
the name of the corporation all subscriptions, contributions or donations paid 2. That the purpose or purposes of the corporation are patently
or given by the subscribers or members. unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
l. THE EXECUTION CLAUSE 3. That the Treasurer's Affidavit concerning the amount of capital stock
xxx subscribed and/or paid if false;
IN WITNESS WHEREOF, we have hereunto signed these Articles of 4. That the percentage of ownership of the capital stock to be owned by
Incorporation, this..............day of....................., 19.......... in the citizens of the Philippines has not been complied with as required by existing
City/Municipality of......................................., Province laws or the Constitution.
of................................................, Republic of the Philippines.
No articles of incorporation or amendment to articles of incorporation of
(Names and signatures of the incorporators) banks, banking and quasi-banking institutions, building and loan associations,
xxx trust companies and other financial intermediaries, insurance companies,
public utilities, educational institutions, and other corporations governed by
special laws shall be accepted or approved by the Commission unless
The signatures are important as the AOI serves as a contract between the accompanied by a favorable recommendation of the appropriate government
signatories thereof, by and among themselves, with the corporation, and the agency to the effect that such articles or amendment is in accordance with
latter with the State. law.
m. TREASURER’S AFFIDAVIT After filing of the AOI, the SEC will examine and process them to determine
xxx compliance with the requirements enumerated in Sec. 14 and if the form
TREASURER'S AFFIDAVIT prescribed under Sec. 15 is complied with. Only substantial and not strict
compliance is required.
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S. The above grounds are not exclusive. There may be other reasons for
PROVINCE OF ) rejection or disapproval such as the corporate name is not legally permissible
or that the minimum capital requirement is not sufficient.
I,..................................., being duly sworn, depose and say:
That I have been elected by the subscribers of the corporation as 3. COMMENCEMENT OF CORPORATE EXISTENCE
Treasurer thereof, to act as such until my successor has been duly
elected and qualified in accordance with the by-laws of the Corporate existence is reckoned from the time of the issuance of its
corporation, and that as such Treasurer, I hereby certify under oath CERTIFICATE OF INCORPORATION or registration. It is only from this
that at least 25% of the authorized capital stock of the corporation time that it acquires juridical personality and legal existence, EXCEPT:
has been subscribed and at least 25% of the total subscription has a. Corporations by Estoppel;
been paid, and received by me, in cash or property, in the amount of b. Those created by special laws;
not less than P5,000.00, in accordance with the Corporation Code. c. Those organized as Cooperatives covered by Bureau of Cooperatives and
....................................... Home Owners’ Associations covered by Home Insurance Guaranty
Corporation.
(Signature of Treasurer) d. Corporation Sole – which is reckoned from the filing of verified articles.
xxx (Sec. 112)
HELD: No. A duly organized corporation has the power to purchase and hold FACTS: The Municipality of Balabagan was created from the barrios and
real property as the purpose for which such corporation was formed may sitios of the Municipality of Malabang by virtue of EO No 386 issued by
permit and for this purpose may enter into such contract as may be President Garcia by virtue of Sec. 68 of the Revised Administrative Code.
necessary. But before a corporation may be said to be lawfully Following the decision of the Court in Pelaez vs. Auditor General, which
organized many thing have to be done. Among which, the law declared Sec. 68 unconstitutional and that the President had no power to
requires the filing of the AOI. create a municipality, herein petitioners sought to nullify EO 386 and to
restrain the respondents, who are officers of Balabagan, to vacate said their
It cannot be denied that the plaintiff was not incorporated when it entered office and desist from performing their functions.
into the contract of sale. It was not even a de facto corporation at that time.
Not being in legal existence then, it did not possess juridical personality to Respondents argue that it is at least a de facto corporation and the ruling in
enter into the contract. Pelaez is not applicable to it, having been organized under color of a statute
before it was declared unconstitutional, its officers having been either elected
Corporations are creatures of the law, and can only come into existence in or appointed, and the municipality itself having discharged corporate
the manner prescribed by the law. That a corporation should have a full and functions for the past five years. That as a de facto corporation, its existence
complete organization and existence as an entity before it can enter into a cannot be collaterally attacked.
contract or transact any business, would seem to be self-evident. A
corporation, until organized, has no being, franchises or faculties. Nor do ISSUE: WON the Municipality of Balabagan is a de facto corporation?
those engaged in bringing it into being have any power to bind it by contract,
unless so authorized by the charter, there is no corporation, nr does it HELD: No. In cases where a de facto municipal corporation was recognized
possess franchise or faculties for it to exercise, until it acquires complete as such despite the fact that the statute creating it was later invalidated, the
existence. decision could be fairly made to rest on the consideration that there was
some other valid law giving validity to the organization. Hence, in the
If the company could not and did not acquire the four parcels of and here case at bar, the mere fact that Balabagan was organized at the time when
involved, it follows that it did not have the resultant right to dispose the same the statute had not been invalidated cannot conceivably make it a de facto
to the defendant. corporation, as independently of the Administrative Code provision in
question, there is no other valid statute to give color of authority for its
D. DEFECTIVELY FORMED CORPORATIONS creation.
A corporation de jure is one created in strict or substantial compliance to the An unconstitutional act is not a law; it confers no rights; it imposes no duties;
governing corporation statutes and whose right to exist and act as such could it affords no protection; it creates no office; it is, in legal contemplation, as
not be attacked in a either collaterally or through a direct proceeding for that inoperative as though it had never been passed.
purpose even by the State.
HALL VS. PICCIO (86 Phil 603 June 29, 1950) – Petitioner, together with
1. DE FACTO CORPORATIONS private respondents signed and acknowledged the AOI of Far East Lumber
and Commercial Co., Inc., after the execution of which the corporation
A de facto corporation is one that is so defectively created as not to be a de proceeded to do business by adopting its by-laws and election of its officers.
jure corporation but nevertheless exists, for all practical purposes, as a Subsequently, pending action on the AOI, the respondents filed with the CFI
corporate body, by virtue of its bona fide attempt to incorporate under alleging the corporation to be an unregistered partnership and praying for its
existing statutory authority, coupled with the exercise of corporate powers. dissolution, which was granted.
REQUISITES: Herein petitioner claims that the corporation is a de facto corporation, that its
a. There is a valid statute under which the corporation could have been dissolution may be ordered only in a quo warranto proceedings instituted by
created as a de jure corporation (or according to some, an apparently the State.
valid statute);
b. An attempt, in good faith, to form a corporation according to the ISSUE: WON it is a de facto corporation?
requirements of law which goes far enough to amount to a “colourable
compliance” with the law;; HELD: No. First, not having obtained a certificate of incorporation, the
c. A user of corporate powers, the transaction of business in some way as company, even its stockholders, may not probably claim “in good faith” to be
if it were a corporation; a corporation.
d. Good faith in claiming to be and doing business as a corporation.
Such claim is compatible with the existence of errors and irregularities, but
Sec. 20. De facto corporations. - The due incorporation of any not with a total or substantial disregard of the law. UNnless there has been
corporation claiming in good faith to be a corporation under this Code, and its an evident attempt to comply with the law the claim to be a corporation
right to exercise corporate powers, shall not be inquired into collaterally in “under this Act” (Sec. 19) could not be made in good faith.
any private suit to which such corporation may be a party. Such inquiry may
be made by the Solicitor General in a quo warranto proceeding Second, this is not a suit where the corporation is a party. This is a litigation
between a stockholder of the alleged corporation, for the purpose of
Sec. 21. Corporation by estoppel. - All persons who assume to act as a HELD: Yes. On account of non-registration, University cannot be considered
corporation knowing it to be without authority to do so shall be liable as a corporation, not even a corporation de facto. It has therefore, no
general partners for all debts, liabilities and damages incurred or arising as a personality separate from Aruego it cannot be sued independently.
result thereof: Provided, however, That when any such ostensible corporation
is sued on any transaction entered by it as a corporation or on any tort The doctrine of corporation by estoppel is inapplicable. Aruego represented a
committed by it as such, it shall not be allowed to use as a defense its lack of non-existent entity and induced not only the plaintiff but even the court of
corporate personality. belief of such representation. He signed the contract as “President” of
University and obviously misled plaintiff in to believing that University is a
On who assumes an obligation to an ostensible corporation as such, cannot “corporation duly organized and existing under the laws of the Philippines”.
resist performance thereof on the ground that there was in fact no One who has induced another to act upon his wilful
corporation. misrepresentation that a corporation was duly organized and
existing under the law, cannot, thereafter, set up against his victim
From the above provision, it is clear that the doctrine of estoppel may apply the principle of corporation by estoppel.
to the alleged corporation or to a third party transacting with the former.
SALVATIERRA VS. GARLITOS, ET AL. (103 Phil. 757; May 23, 1958) –
As to the Corporation – the members who purported to be a corporate body Petitioner Manuel T. Vda de Salvatierra, owner of a parcel of land, entered
cannot deny their purported existence as a corporation in an action against into a contract of lease with Philippine Fibers Processing Co., Inc., allegedly a
them on the contract, where the third persons were induced to deal with the corporation. For failure to comply with the obligations under the lease,
supposed corporation. They cannot avoid liability on the ground of lack of petitioner filed a complaint in the CFI where the company was declared in
personality to be sued. default and decision was rendered in favor of petitioner. Defendant Refuerzo
filed a motion claiming that he should not be made personally liable in the
As to third persons – they are estopped from denying the existence of the decision which was granted by the Court. Hence, this petition.
alleged corporation in a suit to enforce a contract. However, the association
of persons must have purported or acted, and were treated by the third ISSUE: WON Refuerzon can be made personally liable?
persons, as corporations. The doctrine also applies when the third person
tries to escape liability on a contract from which he has benefited on the HELD: Yes. While as a general rule, a person who has contracted or dealt
irrelevant ground of defective incorporation. with an association in such a way as to recognize its existence as a corporate
body is estopped from denying the same in an action arising out of such
LOZANO VS. DE LOS SANTOS (274 SCRA 452; June 19, 1977) – Petitioner transaction or dealing, yet this doctrine may not be held applicable
Reynaldo Lozano and respondent Antontio Anda agreed to consolidate their where fraud takes part in the said transaction. In the instant case, on
respective Jeepney Associations, to which they are presidents. They plaintiff’s charge that she was unaware of the fact that the company had no
conducted an election for one set of officers of the consolidated association, juridical personality, defendant Refuerzo gave no confirmation or denial and
where petitioner was the winner. Respondent, however, refused to abide by the circumstances surrounding the execution of the contract led to the
the agreement which prompted petitioner to institute an action for damages inescapable conclusion that plaintiff Salvatierra was really made to believe
in the trial court which was denied for being intra-corporate, and was held to that such corporation was duly organized in accordance with law.
be within the jurisdiction of the SEC.
The rule on the separate personality of a corporation is understood to refer
ISSUE: WON there is corporation by estoppel placing the case within SEC merely to registered corporations and cannot be made applicable to the
jurisdiction? liability of members of an unincorporated association. The reason behind this
doctrine is obvious – since an organization which before the law is
HELD: None. The unified association was still a proposal and had not been non-existent has no personality and would be incompetent to act on
approved by the SEC, neither had its officers and members submitted their its behalf; thus, those who act or purport to act as its
AOI. Their respective associations are distinct and separate entities, representatives or agent do so without authority and at their own
petitioner and private respondent does not have an intra-corporate relation risk. And, as is it elementary principle of law that a person who acts as an
much less do they have an intra-corporate dispute. The SEC has no agent without authority or without principal is himself regarded as
jurisdiction over the complaint. the principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges
The doctrine of corporation by estoppel advance by privte respondent cannot and obligations and becomes personally liable for contracts entered
override jurisdictional requirements. Jurisdiction is fixed by law and is not into or for other acts performed as such agents.
subject to the agreement of the parties.
In acting on behalf of a corporation which he knew to be unregistered, the
Corporation by estoppel is founded on principle of equity and is designated to president of the unregistered corporation Refuerzo, assumed the risk of
prevent injustice and unfairness. It applies when persons assume to form a reaping the con the consequential damages of resultant right, if any, arising
corporation and exercise corporate functions and enter into business relations out of such transaction.
with third persons. Where there is no third person involved and the
conflict arises only among those assuming to form a corporation, CHANG KAI SHEK SCHOOL VS. CA (172 SCRA 389; April 18, 1989) –
who therefore know that it has not been registered, there is no Private respondent Faustina Oh has been teaching in the herein petitioner
HELD: Yes. Even though the school failed to incorporate as mandated by The recognition of Philippine Amateur Athletic Federation required under RA
law, it cannot now invoke such non-compliance with the law to immunize it 3135 and the Department of Youth and Sports Development under 604,
from the private respondent’s complaint. There should also be no question extended to the PFF was not substantiated by Kahn. Accordingly, the PFF is
that having contracted with the private respondent every year for 32 years not a national sports association within the purview of the aforementioned
and thus represented itself possessed of juridical personality to defeat her laws and does not have corporate existence of its own.
claim against it. According to Art. 1431 of the Civil Code: “through estoppel
an admission or representation is rendered conclusive upon the person This being said, it follows that private respondent Kahn should be held liable
making it and it cannot be denied as against the person relying on it”. for the unpaid obligations of the unincorporated PFF. It is a settled principle
in corporation law that any person acting or purporting to act on behalf of a
As the school itself may be sued in its own name, there is no need to apply corporation which has no valid existence assumes such privileges and
Rule 3, Sec. 15 ,under which the persons joined in an association without any obligations and becomes personally liable for contracts entered into or for
juridical personality may be sued with such an association. Besides, it has other acts performed as such agents.
been shown that the individual members of the board of trustees are not
liable, having been appointed only after the private respondent’s dismissal. We cannot subscribe to the position taken by the appellate court that even
assuming that the PFF was defectively incorporated, the petitioner cannot
ASIA BANKING CORP., plaintiff-appelle VS. STANDARD PRODUCTS deny the corporate existence of the PFF because it had contracted and dealt
CO., INC., defendant-appellant (46 Phil. 144; Sept. 11, 1924) – This action with the PFF in such a manner as to recognize and in effect admits its
was brought to recover the balance due of a promissory note executed by existence. The doctrine of corporation by estoppel is mistakenly applied by
herein appellant. The court rendered judgment in favor of the plaintiff. the respondent court to the petitioner. The application of the doctrine
applies to a third party only when he tries to escape liability on a
At the trial of the case the plaintiff failed to prove affirmatively the corporate contract from which he has benefited on the irrelevant ground of
existence of the parties and the appellant insists that under these defective incorporation. In the case at bar, the petitioner is not trying to
circumstances the court erred in finding that the parties were corporations escape liability from the contract but rather is the one claiming from the
with juridical personality and assigns same as reversible error. contract.
ISSUE: WON parties herein are corporations with juridical personality? GEORG GROTJAHN GMBH & CO. VS. ISNANI (235 SCRA 216; Aug. 10,
1994) – Petitioner is a German company who was granted a license to
HELD: Yes. There is no merit whatever in the appellant's contention. The establish a regional or area headquarters in the Philippines. Private
general rule is that in the absence of fraud a person who has respondent Romana Lanchinebre was a sales representative of petitioner who
contracted or otherwise dealt with an association in such a way as made advances totalling P35,000 which were left unpaid. Petitioner filed a
to recognize and in effect admit its legal existence as a corporate complaint for the collection of a sum of money which was dismissed by the
body is thereby estopped to deny its corporate existence in any judge holding, among others, that the license of petitioner does not include
action leading out of or involving such contract or dealing, unless its the license to do business in the Philippines.
existence is attacked for cause which have arisen since making the
contract or other dealing relied on as an estoppel and this applies to ISSUE: WON petitioner has capacity to sue?
foreign as well as to domestic corporations. (14 C. J., 227; Chinese
Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.) HELD: Yes. Private respondent is estopped from assailing the personality of
petitioner. “The rule is that the party is estopped to challenge the personality
The defendant having recognized the corporate existence of the plaintiff by of a corporation after having acknowledged the same by entering into a
making a promissory note in its favor and making partial payments on the contract with it. And the doctrine of estoppel to deny corporate existence
same is therefore estopped to deny said plaintiff's corporate existence. It is, applies to foreign as well as domestic corporation; one who has dealt with a
of course, also estopped from denying its own corporate existence. Under corporation of foreign origin as a corporate entity is estopped to deny its
these circumstances it was unnecessary for the plaintiff to present other corporate existence and capacity. The principle will be applied to prevent a
evidence of the corporate existence of either of the parties. It may be noted person contracting with a foreign corporation from later taking advantage f
that there is no evidence showing circumstances taking the case out of the its non-compliance with the statutes chiefly in case where such person has
rules stated. received the benefits of the contract” (Merill Lynch Futures, Inc. vs. CA).
INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC. VS. CA In the case of Merill Lynch Futures, the SC held that a foreign corporation
(343 SCRA 674; Oct. 19, 2000) – Petitioner International Express Travel & doing business in the Philippines may sue in Philippine courts although not
Tours Services, Inc. entered into an agreement with the Philippine Football authorized to do business here against the Philippine citizen who had
Federation through its president Henry Kahn, herein private respondent, contracted with and been benefited by said corporation. Citing and applying
where the former supplied tickets for the trips of the athletes to the the doctrine laid down in Asia Banking Corp. vs. Standard Products Co., Inc.
Southeast Asian Games and other various trips. The Federation failed to pay
a balance of P265,894.33 which led petitioner to file a civil case in the RTC of IN SUMMARY: it appears that if a corporation by estoppel exist and enters
Manila which decided in its favor and holding Henry Kahn personally liable. into a contract and transact business with a third party, the latter has three
On appeal, the CA reversed the decision of the RTC absolving Kahn from possible remedies:
personal liability holding that the Federation had a separate and distinct 1. He may file a suit against the ostensible corporation to recover from the
personality. corporate properties;
2. He may file the case directly against the associates personally liable who
ISSUE: WON Henry Kahn can be made personally liable? held out the association as a corporation; and
3. Against both the ostensible corporation and persons forming it, jointly
HELD: Yes. While we agree with the appellate court that associations may be and severally. The last two remedies may not, however, be availed of if
accorded corporate status, such does not automatically take place by the the third party by his conduct is estopped from denying the existence of
WHO SHOULD BEAR THE LOSS: The better view is that those who actively CORPORATE CHARTER signifies an instrument or authority from the
participated in holding out the association as a corporation should be held sovereign power, bestowing rights or power, and is often used convertibly
personally liable by virtue of the express provision of Sec. 21 which provides with the term “act of incorporation”, where the corporation was formed under
that “all persons who assume to act as a corporation knowing it to be a special act of the legislature, and with the “articles of incorporation”, when
without authority to do so shall be liable as general partners for all debts, the corporation was formed under a general law.
liabilities and damages incurred or arising” therefrom.
THREE-FOLD CONTRACT:
4. ORGANIZATION AND COMMENCEMENT OF BUSINESS 1. Between the corporation and the state insofar as it concerns its primary
franchise to be and act as a corporation’
a. CORPORATE ORGANIZATION 2. Between the corporation and the stockholders or members insofar as it
governs their respective rights and obligations;
Sec. 22. Effects on non-use of corporate charter and continuous 3. Between and among the stockholders or members themselves as far as
inoperation of a corporation.- If a corporation does not formally organize their relationship with one another is concerned.
and commence the transaction of its business or the construction of its works
within two (2) years from the date of its incorporation, its corporate powers FRANCHISE: appropriately applies to the right or privilege itself to be and
cease and the corporation shall be deemed dissolved. However, if a act as a corporation or to do a certain act while charter applies to the
corporation has commenced the transaction of its business but subsequently instrument by which the state vests such right or privilege. Franchise may
becomes continuously inoperative for a period of at least five (5) years, the either be: (1) Primary – nothing more than the right or privilege of being a
same shall be a ground for the suspension or revocation of its corporate corporation; or (2) Secondary – the powers and privileges vested in, and to
franchise or certificate of incorporation. be exercised by the corporate body as such. Example: Employment Agencies,
primary franchise is the certificate of incorporation from the SEC, the
This provision shall not apply if the failure to organize, commence the secondary franchise is the license issued by the POEA.
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the corporation B. CORPORATE ENTITY THEORY
as may be determined by the Securities and Exchange Commission.
As a legal entity, the corporation is possessed with a juridical personality
Once the certificate of incorporation has been issued, the corporation MUST separate and distinct from the individual stockholders or members and is not
formally organize and commence its business. affected by the personal rights, obligations or transactions of the latter. The
properties it possesses belongs to it exclusively as a separate juridical entity
NON-USE OF CORPORATE CHARTER: Apparent from the above provision such that the personal creditors of its stockholders or members cannot attach
is that the failure of the corporation to organize within 2 years would corporate properties to satisfy their claims.
result in it automatic dissolution, unless, of course, its failure to do so is
due to causes beyond its control. On the other hand, the corporation is not likewise liable for the debts,
obligations or liabilities of its stockholders. Neither may it properties be made
FORMAL ORGANIZATION: refers to the process of structuring the answerable to satisfy the claim of creditors against its stockholders or
corporation to enable it to effectively pursue the purpose for which it was member even if the stockholder concerned is its president.
organized. It includes:
a. Organizational meeting of the stockholders to elect the BOD; SULO NG BAYAN, INC., plaintiff-appellant VS. GREGORIO ARANETA,
b. Adoption of by-laws, if not simultaneously filed with the AOI, and its INC. ET AL., defendant-appelle (72 SCRA 347; Aug. 17, 1976) – Plaintiff-
subsequent filing with the SEC which must be within 1 month from the appellant Sulo ng Bayan, Inc. instituted a reinvindicatory action for the
issuance of the certificate of incorporation; recovery of 28,000 square meters of land for and in behalf of it members,
c. Organizational meeting of the BOD to elect the corporate officers, who were themselves and their predecessors-in-interest pioneered in the
adoption of corporate seal, accepting pre-incorporation subscriptions, clearing of the land and cultivated the same since the Spanish Regime and
establishing the principal office and such other steps necessary to have been in continuous possession of the same. The action was dismissed
transact the legitimate business for which the corporation was formed. on the ground that there is no cause of action. On appeal, the CA certified
the case to the SC for the legal issues involved.
Strict compliance is not required. Substantial compliance therewith is
sufficient. Thus, it has been held in the case of Perez vs. Balmaceda that a ISSUED: WON Sulo ng Bayan, Inc. may institute the action for recovery of
corporation is deemed to have formally organized if it had a governing board property of it individual members?
which direct its affairs, as well as a treasurer and a clerk, and that through
these instrumentalities, it actually functioned and engaged in the business for HELD: No. It is a doctrine well-established and obtains both at law and in
which it was organized. It cannot be held to have forfeited its charter simply equity that a corporation is a distinct legal entity to be considered as separate
because it has not been shown that is also had a president and a secretary. and apart from the individual stockholders or members who compose it, and
is not affected by the personal rights, obligations and transactions of its
b. COMMENCEMENT OF BUSINESS/TRANSACTION stockholders or members. The property of a corporation is its property and
not that of the stockholders, as owners, although they have equities in it.
This means that the corporation has actually functioned and engaged in Properties registered in the name of the corporation are owned by it as an
business for which it was organized which must be done within two years entity separate and distinct from its members. Conversely, a corporation
from the issuance of the certificate of incorporation lest it is ordinarily has no interest in the individual property of it stockholders unless
deemed dissolved. This may take the form of entering into contracts which transferred to the corporation, “even in the case of a one-man corporation”.
tend to pursue its business undertaking or other acts related thereto.
Absent any showing of interest, therefore, a corporation, like plaintiff-
The most that can be said is that they benefited from the services, but that ISSUE: WON the corporate president is liable to refund the amount state in
surely is no justification t hold them personally liable therefor. Otherwise, all the NHA ruling?
other stockholders of the corporation, including those who came in later, and
regardless of the amount of their stockholdings would be equally and HELD: No. As a general rule, a corporation may not be made to answer for
personally liable also with the petitioners for the claims of the private acts or liabilities of its stockholders or those of the legal entities to which it
respondents. may be connected and vice versa. However, the veil of corporate fiction may
be pierced when it is used as a shield to further an end subversive of justice;
Petitioners are not liable under the challenged decision. or for purposes that could not have been intended by the law that created it;
or to defeat public convenience, justify wrong, protect fraud, or defend
RUSTAN PULP AND PAPER MILLS, INC. VS. IAC (214 SCRA 665; Oct. crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent
19, 1992) – Petitioner Rustan entered into a conract of sale with respondent the law or perpetuate deception; or as an alter ego, adjunct or business
Lluch which was later on stopped by Rustan through a letter. Lluch sent a conduit for the sole benefit of the stockholders.
letter to clarify whether the letter sent by Rustan was for the stoppage of
delivery or termination of the contract of sale. Unanswered, respondent Lluch We find no badges of fraud on petitioners’ part. They had literally relied,
resumed devliveries and later on filed a complaint for contractual breach albeit mistakenly, on its contract with private respondent when it rescinded
which was dimissed. On appeal, the CA modified the decision of the trial the contract to sell extrajudicially and had sold it to another person.
court directing petitioner including Tantoco, president and general manager,
and Vergara, resident manager, to pay private respondents. No sufficient proof exists on record that said petitioner used the corporation
to defraud private respondent. He cannot, therefore, be made personally
ISSUE: WON individual petitioners may be held liable? liable just because he “appears to be the controlling stockholder”. Mere
ownership by a single stockholder or by another corporation of all
HELD: No. The president and manager of a corporation, who entered or nearly all of the capital stock of a corporation is not, of itself,
into and signed a contract in his official capacity, cannot be made sufficient ground for disregarding the separate corporate
liable thereunder in his individual capacity in the absence of personality.
stipulation to that effect due to the personality of a corporation
being separate and distinct from the person composing it. And PAULINO SORIANO, NENITA C. ESPERANZA and JANDRO G.
because of this precept, Vergara’s supposed non-participation in the contract MACADANGDANG, petitioners,
of sale although he signed the letter terminating it is completely immaterial. vs.
HON. COURT OF APPEALS (Former Sixth Division) and GERVACIO CU,
CRUZ VS. DALISAY (152 SCRA 482; July 31, 1987) – Adelio Cruz charged respondents
Quiterio Dalisay, Senior Deputy Sheriff of Manila, with malfeasance in office, (GR No. L-49834; June 22, 1989)
corrupt practices and serious irregularities when the respondent sheriff
attached and/or levied the money belonging to complainant Cruz when he FACTS: Petitioners were held solidarily liable by the appellate court in their
was not himself the judgment debtor in the final judgment of NLRC sought to personally capacity to the private respondent for non-payment of tobacco
be enforced but rather the company known as Qualitrans Limousine Service, under an agreement between them embodied in a receipt which states as
Inc., a duly registered corporation. follows:
Done this 10th day of August 1964 at Bacarra, Ilocos Norte. PALACIO VS. FELY TRANSPORTATION COMPANY (5 SCRA 1011; Aug.
31, 1962) – Alfredo Carillo, a driver of herein respondent corporation, ran
(Sgd.) Paulino Soriano over the child of herein petitioner Mario Palacio, and was found guilty of the
PAULINO SORIANO criminal case filed against him. Isabelo Calingasan, the employer, was held
President subsidiarily liable and not the defendant corporation. Plaintiffs now contend
that the defendant corporation should be made subsidiarily liable for
(Sgd.) Nenita C. Esperanza damages in the criminal case because the sale to it of the jeep in question,
NENITA C. ESPERANZA after the conviction of Carillo was merely an attempt on the part of
Sec. Treasurer Calingasan, its president and general manager, to evade his subsidiary civil
liability.
by:
(Sgd.) Erlinda V. Acosta BIENVENIDO ISSUE: WON the corporation can be held liable for the subsidiary civil
E. ACOSTA Director, Official liability of Isabelo Calingasan?
Representative
HELD: Yes. It is evident that Calingasan’s main purpose in forming the
(Sgd.) A. Macadangdang corporation was to evade his subsidiary civil liability resulting from the
A.G. MACADANGDANG conviction of his driver. This conclusion is borned out by the fact that the
Manager incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his
son, Dr. Calingasan, and his two daughters. We believe that this one case
ISSUE: WON petitioners are liable? where the defendant corporation should not be heard to say that it
has a personality separate and distinct from its members when to
HELD: No. We cannot accept the conclusion that the official designations of allow it to do so would be to sanction the use of the fiction of
petitioners were written on the document merely as meaningless and hollow corporate entity as a shield to further an end of subversive of
decorations or as mere descripto personae without any relevance to the justice. Furthermore, the failure of the defendant corporation to prove that
liability of the corporation these officers obviously represented. Indeed, it has other property other than the jeep strengthens the conviction that its
taking in conjunction with the other obtaining circumstances, the receipt formation was for the purpose above indicated.
discloses the capacity by which the petitioners entered into the “deal” with
private respondent. MARVEL BUILDING CORPORATION, et al. VS. DAVID (94 Phil. 376;
Feb. 24, 1954) – Plaintiffs, as stockholders of Marvel Building Corporation
The subject receipt itself states tht the conditions contained therein were sought to enjoin the defendant Collector of Internal Revenue from selling at a
between the private respondent and the “Association”. The lower court held public auction properties which were said to be registered in the name of said
that the “Association” referred only to the signatories. We disagree. It is quite corporation. Said properties were seized and distrained by defendant to
plain and we are convinced that the “Association is none other than the collect war profits taxes against Maria Castro who the former claims to be the
Bacarra (I.N.) Facoma, Inc. which is a farmer’s cooperative marketing sole owner of the said corporation. Maria Castro owns P250,000 of the
association. Not only that , we cannot find any cogent reason why the P1,025,000 capital of the corporation, of the rest of the incorporators were
petitioners used the word “Association” when they could have more easily her half-brothers, half-sister and a brother-in-law.
and conveniently placed “the undersigned” or words to the same effect in its
stead. ISSUE: WON Maria Castro is the sole owner of the Corporation?
In light of the foregoing, it is clear that the liability of the petitioners under HELD: Yes. Circumstantial pieces of evidence presented were: (1)
the document subject of the instant case is not personal but corporate, and Endorsement in blank of the certificates of stock issued in the name of the
therefore attached to the Bacarra (I.N.) Facoma, Inc. which being a incorporators and the possession thereof by Maria Castro; (2) The other
corporation, has a personality distinct and separate from that of the incorporators did not have incomes in such amount, during the time of the
petitioners who are only its officers. It is the general rule that the organization of the corporation or immediately thereto, as to enable them to
protective mantle of a corporation’s separate and distinct pay in full their supposed subscriptions; and (3) It should have been the
personality could only be pierced and liability attached directly to its supposed subscribers who should have come to court to assert that they
officers and/or member-stockholders, when the same is used for actually paid for their subscriptions and are not mere dummies.
fraudulent, unfair or illegal purpose.
The circumstantial evidence is not only convincing, it is conclusive. In
C. PIERCING THE VEIL OF CORPORATE FICTION addition to the above, the fact that the stockholders or directors never
appeared to hae ever met to discuss the business of the corporation and the
The notion of corporate legal entity is not, at all ties respected. This is fact that Maria Castro advanced big sums of money to the corporation
because the applicability of the corporate entity theory is confined to without any previous arrangements or account, and the fact that the books of
In our opinion, the facts and circumstances duly set forth, all of which have FACTS: Herein respondent entered into an agreement with Jackbilt where
been proved to our satisfaction, prove conclusively and beyond reasonable the former was made the sole and exclusive distributor of concrete blocks
doubt that Maria Castro is the sole and exclusive owner of all the shares of manufactured by Jackbilt and accordingly every order of a customer of
stock of the corporation and that the other partners are her dummies. Norton was transmitted to Jackbilt which delivered the merchandise directly
to the customer. Payment of the goods, however, is made to Norton, which
YUTIVO & SONS CO. VS. CTA (1 SCRA 160; Jan. 28, 1961) – Herein in turn pays Jackbilt the amount charged the customer less a certain amount,
petitioner Yutivo purchased its cars and trucks from General Motors Overseas as its compensation or profit.
Corporation (GM), the latter paying the sales tax once on original sales,
Yutivo no longer paid sales tax on its sales to the public. Later no, GM During the existence of the agreement, Norton acquired by purchase all the
withdrew from the Philippines and appointed Yutivo as importer. Yutivo in outstanding stocks of Jackbilt. Due to this, the Commissioner of Internal
turn exclusively sold to Southern Motors, Inc. (SM), a corporation where the Revenue, assess respondent Norton for deficiency taxes making the basis of
incorporators are sons fo the founders of Yutivo. Under this arrangement, sales tax the sales of Norton to the public, which is the higher price compare
Yutivo paid the sales tax on original sale, while SM did not subject to sales to the sale of Jackbilt to Norton. The CTA decided in favor of Norton.
tax its sales to the public.
ISSE: WON the two corporations may be merged into a single corporation?
The Collector of Internal Revenue assessed Yutivo for deficiency sales taxes
which the CTA affirmed. HELD: Yes. It has been settled that the ownership of all the stocks of a
corporation by another corporation does not necessarily breed an
ISSUE: WON Yutivo is liable for the deficiency taxes? identity of corporate interest between the two companies and be
considered as a sufficient ground for disregarding distinct
HELD: No. It is elementary rule and fundamental principle of corporation law personalities. However, in the case at bar, we find sufficient grounds to
that a corporation is an entity separate and distinct from its stockholders and support the theory that the separate identities of the two companies should
from other corporations to which it may be connected. However, when the be disregarded.
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud or defend crime, the law will regard the corporation as an (a) Norton owned all the outstanding stocks of Jackbilt;
association of persons, or in case of two corporations merge them into one. (b) Norton constituted Jackbilt’s directors;
Another rule is that, when the corporation is a mere alter-ego or business (c) Norton financed the operations of Jackbilt;
conduit of a person, it may disregarded. (d) Norton treats Jackbilt’s employees as its own;
(e) Compensation given to board members of Jackbilt indicate that Jackbilt is
The sales tax liability of Yutivo did not arise until it became the importer and merely a department of Norton;
simply continued its practice of selling to SM. The decision, therefore, of the (f) The offices of Norton and Jackbilt are located in the same compound;
Tax Court that SM was organized purposely as a tax evasion device runs (g) Payments were effected by Norton of accounts for Jackbilt and vice versa;
counter to the fact that there was no tax to evade. (h) Payments were also made to Norton of accounts due or payable to
Jackbilt and vice versa.
We are, however, inclined to agree with the court below that SM was actually
owned and controlled by petitioner as to make it a mere subsidiary or branch The circumstances presented by the facts of the case, yields to the
of the latter created for the purpose of selling the vehicles at retail and conclusion that Jackbiltis merely an adjunct, business conduit or alter-ego of
maintaining stores for spare parts as well as service repair shops. It is not Norton and that the fiction of corporate entities, separate and distinct from
disputed that the petitioner, which is engaged principally in hardware each other should be disregarded.
supplies and equipment, is completely controlled by the Yutivo, Young and Yu
family. The founders of the corporation are closely related to each other LA CAMPANA COFFEE FACTORY, INC. VS. KAISAHAN NG MGA
either by blood or affinity and most of its stockholders are members of the Yu MANGGAGAWA SA LA CAMPANA (KKM) (93 Phil. 160; May 25, 1953) –
(Yutivo or Young) family. Tan Tong, one of herein petitioners, is engaged in the buying and selling of
guagua under the trade name La Campana Guagua Packing. Later on, Tong
According to the AOI, the amount of P62,500 was actually advanced by and his family organized a family corporation known as La Campana Coffee
Yutivo. The additional subscriptions to SM were paid by Yutivo. The Factory Co, Inc. with its principal office located at the same place as that of
shareholders in SM are mere nominal stockholders holding the share for and La Campana Guagua Packing.
in behalf of Yutivo, so even conceding that the original subscribers were bona
fide stockholders, Yutivo was at all tie in control of the stock of SM and that Tan Tong’s employees later on formed a union (herein respondent) through
the latter was a mere subsidiary of the former. which they demanded (from both companies) higher salaries and more
privileges. As the demand was not granted and an attempt at a settlement
SM is under the management control of Yutivo by virtue of the management through mediation had given no result, the Department of Labor certified the
contract entered into between the two parties. In fact, the controlling dispute to the Court of Industrial Relations (CIR). Petitioners filled a motion
majority of the BOD of Yutivo is also the controlling majority of the Board of to dismiss which was denied. Hence, this present petition for certiorari.
SM. At the same time, the principal officers of both corporations are identical.
In addition, both corporations have a common comptroller. There is therefore ISSUE: WON the corporate entity of La Campana Coffee Factory, Inc. may
no doubt that by virtue of such control, the business, financial and be disregarded?
management policies of both corporations would be directed towards
common ends. Likewise, cash or funds of SM, including those of its branches HELD: Yes. La Campana Guagua Packing and La Campana Coffee Factory,
which are directly remitted to Yutivo, and subject to withdrawal only by Inc. are operating under on single management, that is, as one business
Yutivo, SM’s being under Yutivo’s control, the former’s operations and though with two trade names. True, the coffee factory is a corporation and,
existence became dependent upon the latter. by legal fiction, an entity existing separate and apart from the person
composing it, that Tan Tong and his family. But it is settled that this fiction
SM, being but a mere instrumentality or adjunct of Yutivo, the CTA correctly of law, which has been introduced as a matter of convenience and
disregarded the technical defense of separate corporate entity to arrive at the to subserve the ends of justice cannot be invoked as to further and
true tax liability of Yutivo. end subversive of that purpose.
COMMISSIONER OF INTERNAL REVENUE, petitioner, In the present case, Tan Tong appears to be the owner of the guagua
vs. factory. And the factory, though an incorporated business, is in reality owned
ISSUE: WON the award may be rendered against TESCO? As Libra Garments is but an alter-ego of the old employer, Lawman
Industrial, the former must bear the consequences of the latter’s unfair act
HELD: Yes. We note that it is only in this Petition that petitioner denied, for by reinstating petitioners to their former positions without loss of seniority
the first time, the employer-employee relationship. In fact, in the letters it rights.
submitted to the Acting Referee and to the Commission, petitioner
represented and defended itself as the employer of the deceased. Petitioner AC RANSOM LABOR UNION-CCLU VS. NLRC (150 SCRA 498 May 29,
even admitted that TESCO and UMACOR are sister companies operating 1987) – A decision was rendered by the CIR and affirmed by this Court
under one single management and housed in the same building. Although against AC Ransom for unfair labor practice. Writ of execution were issued
respect for the corporate personality as such, is the general rule, successively against Ransom to no avail. The Union filed an ex-parte motion
there are exceptions. In appropriate cases, the veil of corporate for a Writ of Execution and Garnishment against the officers/agents of AC
fiction may be pierced as when the same is made as a shield to Ransom personally and on their estates, as the case may be, which the Labor
confuse the legitimate issues. Arbiter granted. On appeal, the NLRC reversed the Labor Arbiter relieving the
TAN BOON BEE & CO., INC., petitioner, “While the records show that originally, the incorporators were aliens, friends
vs. or third-parties in relation of one to another, in the course of its existence, it
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF developed into a close family corporation. The BOD and stockholders belong
BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC to one family the head of which FL Cease always retained the majority and
PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG COMPANY, hence, the control and management of its affairs. In fact, during the
respondents reconstruction of its records before the SEC, only 9 nominal shares out of 300
(GR No. L-41337; 163 SCRA 205; June 30, 1988) appear in the name of his 3 eldest children then and another person close to
them (Ternate). It is likewise noteworthy to observe that as his children
FACTS: For failure of private respondent Graphic Publishing Inc. to pay increase or perhaps become of age, he continued distributing his shares
paper products purchased from petitioner (doing business under the name among them adding Florence, Teresa and Marion until at the time of his
and style Anchor Supply, Inc.), petitioner filed a complaint in the CFI of death, only 190 were left to his name. Definitely, only the members of his
Manila. A writ of Execution was issued levying a printing machine which family benefited from the corporation.
private respondent Philippine American Drug Company claimed as its own.
PADCO filed a third party claim and asked the court to nullify the auction sale The accounts of the corporation and therefore its operation, as well as that of
already conducted, which herein respondent judge granted. the family appears to be indistinguishable and apparently joined together. As
admitted by the defendants, the corporation “never” had any account with
ISSUE: WON the respondent judge should be upheld? any banking institution or if any account was carried in a bank on its behalf, it
was in the name of FL Cease. In brief, the operation of the Corporation is
HELD: No. It is true that a corporation, upon coming into being, is invested merged with those of the majority stockholders, the latter using the former
by law with a personality separate and distinct from that of the persons as his instrumentality and for the exclusive benefit of all his family. From the
composing it as well as from any other legal entity to which it may be foregoing indication, therefore, there is truth in plaintiffs’ allegation that the
related. As a matter of fact, the doctrine that a corporation is a legal entity corporation is only a business conduit of his father and an extension of his
distinct and separate from the members and stockholders who compose it is personality, they are once and the same thing. Thus, the assets of the
recognized and respected in all cases which are within reason and the law. corporation are also the estate of FL Cease, the father of the parties herein
However, this separate and distinct personality is merely a fiction who are al legitimate children of full blood”
created by law for convenience and to promote justice. Accordingly,
this separate personality of the corporation may be disregarded, or Were we to sustain petitioners, the legal fiction of separate corporate
the veil of corporate fiction pierced, in cases where it is used as a personality shall have been used to delay and ultimately deprive and defraud
cloak or cover for fraud or illegality, or to work an injustice, or the respondents of their successional right to the estate of their deceased
where necessary to achieve equity or when necessary for the father.
protection of creditors. Corporations are composed of natural
persons and the legal fiction of a separate corporate personality is D. WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
not a shield for the commission of injustice and inequity. Likewise,
this is true when the corporation is merely an adjunct, business WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
conduit or alter-ego of another corporation. In such case, the fiction
of separate and distinct corporate entities should be disregarded. 1. Absent any of the following circumstances, the courts will not be
justified in disregarding the corporate entity;
In the instant case, petitioner’s evidence established that PADCO never a. The corporation is used or being used to defeat public
engaged in the printing business; that the BOD and the officers of PADCO convenience;
and Graphic are the same; and that PADCO holds 50% share of stock of b. Justify wrong;
Graphic. The printing machine in question was in the premises of Graphic, c. Protect fraud;
long before PADCO even acquired its alleged title from Capitol Publishing. d. Defend crime;
e. Confuse legitimate issues;
Considering the above, respondent judge should have pierced PADCO’s veil of f. Circumvent the law;
corporate identity. g. Perpetuate deception; or
h. An alter-ego, adjunct or business conduit for the sole benefit of a
CEASE VS. CA (93 SCRA 483; Oct. 18, 1979) – Forrest L. Cease is the stockholder or a group of stockholders or another corporation.
common predecessor-in-interest of the parties. He and other American 2. The wrong doing must be clearly and convincingly established. It
citizens organized the Tiaong Milling and Plantation Company and in the cannot be justified by speculation and can never be presumed.
course of its corporate existence all other incorporators were bought out by 3. The petitioner must seek to impose a claim against the stockholders or
Cease and his children. The corporation’s charter expired but there were no officers directly liable, otherwise piercing the veil of corporate fiction
records as to its liquidation. Upon Cease’s death, Ernesto, Teresita, Cecilia (3 would not be available nor justified.
of the 5 children) and Bonifacia Terante re-incorporated under FL Cease
Plantation Company, to the objection of Benjamin and Florence who wanted CRUZ VS. DALISAY (supra) – It is well-settled doctrine, both in law and in
actual division of Forrest Cease’s shares. The latter two filed a civil case equity that as a legal entity, a corporation has a personality distinct
asking to declare the corporation identical to FL Cease and that its properties and separate from its individual stockholders or members. The mere
be divided among Fl Cease’s children as his intestate heirs which was granted fact that one is president of a corporation does not render the
by the trial court. property he owns or possesses the property of the corporation,
since the president, as individual, and the corporation are separate
ISSUE: WON the assets of the corporation are also the properties of Forrest entities
L. Cease?
REMO, JR. VS. INTERMEDIATE APPELLATE COURT (175 SCRA 405;
HELD: Yes. In sustaining respondent’s theory of “merger of Forrest Cease April 18, 1989) – Petitioner Feliciano Coprada, as president of Akron,
and the Tiaong Milling as one personality”, or that “the company is only the purchased 13 trucks from private respondent (EB Marcha Transport Co., Inc.)
business conduit and alter-ego of the deceased FL Cease and the registered for and in consideration of P525,000 as evidenced by a deed of absolute sale.
DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990) - Pursuant to a In 1989, the workers of ACRYLIC unionized and a CBA was executed. In
complaint for money claims which was ultimately decided by the NLRC 1990, petitioner union claimed that the plant facilities build and set up by
against PHILSA Construction and Trading Co. (recruiter) and Arieb ACRYLIC should be considered an extension or expansion of the facilities of
Enterprises (employer), a writ of execution was issed by the POEA which was TEXTILE MILLS, to make ACRYLIC part of the TEXTILE MILLS bargaining unit.
returned unsatisfied as PHILSA was no longer operating and was financially Public respondent voluntary arbitrator Calica declared that the CBA of
incapable of satisfying the judgment. petitioner DOES NOT extend to employees of ACRYLIC.
At the motion of private respondent, an alias writ was issued against the ISSUE: WON the veil of corporate entity should be pierced?
properties of Mr. Francisco del Rosario and if insufficient, against the cash
and/or surety bond of the Bonding Company concerned. HELD: No. Under the doctrine of piercing the veil of corporate entity, when
valid grounds therefore exist, the legal fiction that a corporation is an entity
Petitioner appealed to the NLRC which was denied together with his MR. with a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will be
ISSUE: WON the writ of execution must be upheld? considered as a mere association of persons. The members or
stockholders of a corporation will be considered as the corporation,
HELD: No. Under the law, a corporation is bestowed juridical personality, that is, liability will attach directly to the officers and stockholders.
separate and distinct from its stockholders. But when the juridical personality
of the corporation is used to defeat public convenience, Justify wrong, In the case at bar, petitioner alleges that the creation of the ACRYLIC is a
protect fraud or defend crime, the corporation shall be considered as a devise to evade the application of the CBA between petitioner and TEXTILE
mere association of persons, and its responsible officers and/or MILL. While we do not discount the possibility of the similarities of the
stockholders shall be held individually liable. For the same reasons, a businesses of the two corporations, neither are we inclined to apply the
corporation shall be liable for he obligation of a stockholder or a corporation doctrine invoked by petitioner.
and its successor-in-interest shall be considered as one and the liability of the 1. The fact that the business of Indophil Textile Mills and Indphil Acrylic
former shall attach to the latter. Manufacturing are related;
2. That some of the employees of PR are the same persons manning and
But for the separate juridical personality of a corporation to be disregarded, providing for auxilliary services to the units of ACRILYC, and that;
the wrongdoing must be clearly and convincingly established. It cannot be 3. The physical plants, offices and facilities are situated in the same
presumed. In this regard, we find the NLRC decision wanting. compound.
1. PHILSA allowed its license to expire so as to evade payment of private It is our considered opinion that these facts are not sufficient to
respondent’s claim – not supported by facts. The license expired in 1985, justify piercing the corporate veil of ACRILYC.
it was delisted in 1986, there was no judgment yet in favour of PR. An
intent to evade payment of his claims cannot therefore be implied UMALI VS. CA – “the legal corporate entity is disregarded only if its sought
from the expiration of PHILSA’s license and its delisting. to hold the officers and stockholders directly liable for a corporate debt or
obligation”. In the instant case, petitioner does not seek to impose a
2. Organization of PHILSA International Placemen and Services Corp. and its claim against the members of ACRILYC.
registration with POEA implies fraud – it was organized and registered in
1981, several years before private respondent filed his complaint with the
POEA in 1985. The creation of the second corporation could not
HELD: No. Respondents, therefore do not have any cause of action against
it. The trial court erred in disregarding the corporate entity by saying that IFL YU VS. NLRC, FERNANDO DURAN, EDUARDO PALIWAN, ROQUE
is a wholly owned subsidiary of PNB and that it is a mere alter-ego or ESTOCE AND RODRIGO SANTOS (245 SCRA 134) - Private respondents
business conduit of the latter. were employees of Tanduay Distillery, Inc. (TDI). On March 29, 1988, 22
employees of TDI, including PRs, received a memorandum from TDI,
The mere fact that a corporation owns all of the stocks of another terminating their services for reasons of retrenchment, because First Pacific
corporation, taken alone is not sufficient to justify their being Metro Corporation is buying TDI’s assets, which purchase did not push
treated as one entity. If used to perform legitimate functions, a through.
subsidiary’s separate existence may be respected, and the liability
of the parent corporation as well as the subsidiary will be confined On June 1, 1988, after employees had ceased as such, Twin Ace Holdings,
to those arising in their respective businesses. Inc. took over the business and assumed the name Tanduay Distillers
(Tanduay).
KOPPEL PHIL VS. YATCO – this Court disregarded the separate existence
of the parent and subsidiary on the ground that the latter was formed Labor Arbiter, on a case originally filed in April 26, decided in favor of PRs
merely for the purpose of evading the payment of higher taxes. In the case holding the retrenchment illegal, which was affirmed by the NLRC. Petitioners
at bar, respondents failed to show any cogent reason why the filed an opposition against the motion for execution (which was directed
separate entities of PNB and IFL should be disregarded. towards them and TDI) contending that Tanduay is a separate entity distinct
from TDI, and respondents James Yu and Wilson Young, which was
While there exists no definite test of general application in determining when dismissed by the NLRC.
a subsidiary may be treated as a mere instrumentality of the parent
corporation some factors have been identified that will justify the application ISSUE1: WON the order of execution is void?
of the treatment of the doctrine of piercing the corporate veil:
HELD: Yes. The decision dated May 24, 1989, was already final and
1. As a general rule, the stock ownership alone by one corporation ofhte executory and cannot be amended or corrected except for clerical errors or
stock of anoher does not thereby render the dominant corporation liable for mistakes. An examination of the said decision does not in any manner
the torts of the subsidiary unless the separate corporate existence of obligate Tanduay or even petitioners Yu and Young to reinstate PRs. Only
the subsidiary is a mere sham, or unless the control of the TDI was held liable upto the time of change of ownership. The order of
subsidiary is such that it is by an instrumentality or adjunct of the execution in effect amended the decision. It is beyond the power and
dominant corporation (Garrett vs. Southern Railway Co.; Tennessee SC); competence of Labor Arbiter Cueto to amend a final decision. The writ of
execution must not go beyond the scope of judgment.
2. The doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of ISSUE2: WON NLRC committed grave abuse of discretion in holding
a corporation is abused or used for wrongful purpose. The doctrine applies petitioner Yu and Young liable?
when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or when it is used as a shield to HELD: It cannot be said that TDI and Tanduay are one and the same, as
confuse legitimate issues or where the corporation is so organized and seems to be the impression of respondents when they impleaded petitioners
controlled and its affairs are so conducted as to make it merely an as party-respondents in their complaint.
instrumentality, agency, conduit or adjunct of another corporation;
Such a stance is not supported by the facts. The name of the company
3. The test in determining the doctrine of piercing the veil of corporation for whom the petitioners are working is Twin Ace Holdings
fiction: Corporation. As stated by the SolGen, Twin Ace is part of the Allied Banking
a. Control, not mere majority of complete control, but complete Group although it conducts the rum business under the name of Tanduay
domination, not only of finances, but of policy and business Distillers. The use of a similar sounding or almost identical name is an
practices in respect to the transaction attacked so that the corporate obvious device to capitalize on the goodwill which Tanduay Rhum has built
entity as to this transaction had at the time no separate mind, will over the years. Twin Ace or Tanduay Distillers and TDI are distinct
or existence of its own; and separate corporations. There is nothing to suggest that the
owners of TDI, have any common relationship as to identify it with
b. Such control must have been used by the defendant to commit Allied Banking Group which runs Tanduay Distillery.
fraud, or wrong to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin
to plaintiff’s legal rights; and Ace was only a subsequent interested buyer. PRs have not presented any
proof as to communality of ownership and management to support
The buyer (Twin Ace) did not buy TDI as a corporation, only most of its When to take effect? (1) Upon approval by the SEC; or (2) From the date of
assets, equiment and machinery. Thus, Tanduay Distillers or Twin-Ace filing if not acted upon within 6 months for a cause not attributed to the
did not take over the corporate personality of TDI although they corporation (does not apply to increasing or decreasing the capital stock or
manufacture the same product at the same plant with the same shortening the corporate term, which shall require the approval of the SEC
equipment and machinery. Obviously, the trade name “Tanduay” went [Sec. 38 and 120])
with the sale because the new firm does business as Tanduay Distillers and
its main product of rum is sold as Tanduay Rum. There is no showing, SPECIAL AMENDMENTS
however, that TDI itself was absorbed by Twin Ace or that it ceased
to exist as a separate corporation. In point of fact, TDI is now herein a Sec. 37.Power to extend or shorten corporate term. - A private
party respondent represented by its own counsel. 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
The fiction of separate and distinct corporate entites cannot, in the instant trustees and ratified at a meeting by the stockholders representing at least
case, be disregarded and brushed aside, there being not the lease two-thirds (2/3) of the outstanding capital stock or by at least two-thirds
indication that the second corporation was a dummy or servces as a (2/3) of the members in case of non-stock corporations. Written notice of the
client of the first corporate entity. 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
AMENDMENT OF THE CORPORATE CHARTER with postage prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may exercise his
Sec. 36. Corporate powers and capacity. - Every corporation appraisal right under the conditions provided in this code.
incorporated under this Code has the power and capacity:
Sec. 38. Power to increase or decrease capital stock; incur, create or
xxx increase bonded indebtedness. - No corporation shall increase or
4. To amend its articles of incorporation in accordance with the provisions of decrease its capital stock or incur, create or increase any bonded
this Code; 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)
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise of the outstanding capital stock shall favor the increase or diminution of the
prescribed by this Code or by special law, and for legitimate purposes, any capital stock, or the incurring, creating or increasing of any bonded
provision or matter stated in the articles of incorporation may be amended by indebtedness. Written notice of the proposed increase or diminution of the
a majority vote of the board of directors or trustees and the vote or written capital stock or of the incurring, creating, or increasing of any bonded
assent of the stockholders representing at least two-thirds (2/3) of the indebtedness and of the time and place of the stockholder's meeting at which
outstanding capital stock, without prejudice to the appraisal right of the proposed increase or diminution of the capital stock or the incurring or
dissenting stockholders in accordance with the provisions of this Code, or the increasing of any bonded indebtedness is to be considered, must be
vote or written assent of at least two-thirds (2/3) of the members if it be a addressed to each stockholder at his place of residence as shown on the
non-stock corporation. books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally.
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 A certificate in duplicate must be signed by a majority of the directors of the
amended shall be indicated by underscoring the change or changes made, corporation and countersigned by the chairman and the secretary of the
and a copy thereof duly certified under oath by the corporate secretary and a stockholders' meeting, setting forth:
majority of the directors or trustees stating the fact that said amendment or
amendments have been duly approved by the required vote of the (1) That the requirements of this section have been complied with;
stockholders or members, shall be submitted to the Securities and Exchange (2) The amount of the increase or diminution of the capital stock;
Commission. (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
The amendments shall take effect upon their approval by the Securities and and residences of the persons subscribing, the amount of capital stock or
Exchange Commission or from the date of filing with the said Commission if number of no-par stock subscribed by each, and the amount paid by each on
not acted upon within six (6) months from the date of filing for a cause not his subscription in cash or property, or the amount of capital stock or number
attributable to the corporation 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;
The steps to be followed for an effective amendment of the articles of (4) Any bonded indebtedness to be incurred, created or increased;
incorporation would thus be: (5) The actual indebtedness of the corporation on the day of the meeting;
1. Resolution by at least a majority of the board of directors or trustees; (6) The amount of stock represented at the meeting; and
2. Vote OR WRITTEN ASSENT of the stockholders representing at least (7) The vote authorizing the increase or diminution of the capital stock, or
2/3 of the outstanding capital stocks or members in case of a non-stock the incurring, creating or increasing of any bonded indebtedness.
corporation. (Note: non-voting shares are considered in determining the
voting and quorum requirement in case of amendments of the articles of Any increase or decrease in the capital stock or the incurring, creating or
incorporation as provided in Sec. 6); increasing of any bonded indebtedness shall require prior approval of the
3. Submission and filing of the amendments with the SEC as follows: Securities and Exchange Commission.
a. The original and amended articles together shall contain all the
provision required by law to be set out in the articles of One of the duplicate certificates shall be kept on file in the office of the
incorporation. Such articles, as amended, shall be indicated by corporation and the other shall be filed with the Securities and Exchange
underscoring the change or changes made; Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
by the Commission of its certificate of filing, the capital stock shall stand 4. Date and place of execution of the articles of incorporation and the
increased or decreased and the incurring, creating or increasing of any signatories and acknowledgment thereof.
bonded indebtedness authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission shall not accept for CHANGE IN CORPORATE NAME
filing any certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding office at Change in corporate name is included in the general power to amend and
the time of the filing of the certificate, showing that at least twenty-five maybe effected with compliance to Sec. 16.
(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 Any change in the corporate identity or name does not affect the rights and
either in actual cash to the corporation or that there has been transferred to obligations of the corporation. A mere change in the name of the
the corporation property the valuation of which is equal to twenty-five (25%) corporation does not affect the identity of a corporation nor in any
percent of the subscription: Provided, further, That no decrease of the capital manner affect the rights, privileges and obligations previously
stock shall be approved by the Commission if its effect shall prejudice the acquired or incurred by it.
rights of corporate creditors.
PHILIPPINE FIRST INSURANCE CO., plaintiff-appellant
Non-stock corporations may incur or create bonded indebtedness, or increase vs.
the same, with the approval by a majority vote of the board of trustees and MARIA CARMEN HARTIGAN, CGH and O. ENGKEE, defendants-
of at least two-thirds (2/3) of the members in a meeting duly called for the appellees (GR No. L-26370; 74 SCRA 252; July 31, 1970)
purpose.
FACTS: Plaintiff changed its name from “The Yek Tong Lin Fire and Marine
Bonds issued by a corporation shall be registered with the Securities and Insurance Co., Ltd” (Yek Tong).
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof. The complaint alleges that under its old name, PFIC signed as co-maker
together with Hartigan, a promissory note for P5,000 in favor of China
SEC. 37&38 vs. SEC. 16: Banking Corporation (Chinabank). Plaintiff agreed to act as such upon
1. In the former a meeting of the stockholders would be REQUIRED, unlike in application of the defendant, who together with Antonio Chua and Chang Ka
Sec. 16, where the “written assent” would suffice. Fu, signed an indemnity agreement in favor of the plaintiff.
2. Former requires the approval of the SEC.
Defendants admitted the execution of the indemnity agreement but argued
NOTE: When the amendment of the corporate charter involves shortening that it was made in favor of Yek Tong and not PFIC. They claim that there
the life of the corporation with the effect of dissolution, Sec. 120 would was no privity of contract between plaintiff and defendants and consequently,
apply, requiring approval by the SEC. the plaintiff has no cause of action against them considering that the plaintiff
does not allege that PFIC and Yek Tong are one and the same or that the
GROUNDS FOR DISAPPROVAL OF AMENDMENT plaintiff has acquired the rights of the latter.
Sec. 17. Grounds when articles of incorporation or amendment may CFI of Manila dismissed the complaint.
be rejected or disapproved.- The Securities and Exchange Commission
may reject the articles of incorporation or disapprove any amendment thereto ISSUE: WON the trial court correctly dismissed the case?
if the same is not in compliance with the requirements of this Code: Provided,
That the Commission shall give the incorporators a reasonable time within HELD: No. Sec. 18 (Now Sec. 16) of the Corporation Law (Act No. 1459)
which to correct or modify the objectionable portions of the articles or explicitly permits the articles of incorporation to be amended. The law does
amendment. The following are grounds for such rejection or disapproval: not only authorize corporations to amend their charter; it also lays down the
procedure for such amendment; and, what is more relevant to the present
1. That the articles of incorporation or any amendment thereto is not discussion, it contains provisos restricting the power to amend when it comes
substantially in accordance with the form prescribed herein; to the term of their existence and the increase or decrease of the capital
stock. There is no prohibition therein against the change of name. The
2. That the purpose or purposes of the corporation are patently inference is clear that such a change is allowed, for if the legislature had
unconstitutional, illegal, immoral, or contrary to government rules and intended to enjoin corporations from changing names, it would have
regulations; expressly stated so in this section or in any other provision of the law.
3. That the Treasurer's Affidavit concerning the amount of capital stock No doubt, the name of the corporation is peculiarly important as
subscribed and/or paid if false; necessary to the very existence of a corporation. The general rule as
to corporation is that each corporation shall have a name by which
4. That the percentage of ownership of the capital stock to be owned by it is to sue and be sued and do all legal acts. The name of the
citizens of the Philippines has not been complied with as required by existing corporation in this respect designates the corporation in the same manner as
laws or the Constitution. the name of an individual designates the person. Since an individual has
the right to change his name under certain conditions, there is no
No articles of incorporation or amendment to articles of incorporation of compelling reason why a corporation may not enjoy the same right.
banks, banking and quasi-banking institutions, building and loan associations, The sentimental considerations which individuals attach to their names are
trust companies and other financial intermediaries, insurance companies, not present in corporations and partnerships. Of course, as in the case of an
public utilities, educational institutions, and other corporations governed by individual, such change may not be made exclusively by the
special laws shall be accepted or approved by the Commission unless corporation’s own act. It has to follow the procedure prescribed by
accompanied by a favorable recommendation of the appropriate government law for the purpose, and this is what is important and indispensably
agency to the effect that such articles or amendment is in accordance with prescribed – strict adherence to such procedure.
law.
RED LINE TRANSPORT VS. RURAL TRANSIT CO. – what was held as
PROVISIONS NOT SUBJECT TO AMENDMENT (fait accompli): contrary to public policy is the USE by one corporation of the name of
1. Names of the incorporations and the incorporating directors or trustees; another corporation as its trade name. We are certain no one will disagree
2. Name of the treasurer originally or first elected by the subscribers or that such an act can only result in confusion and open the door to frauds and
members to act as such; evasions and difficulties of administration and supervision. Surely, the Red
3. Number of shares and the amount originally subscribed and paid out of Line case was not one of change of name.
the original authorized capital stock of the corporation; and
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
The change of name of a corporation DOES NOT result in its dissolution. time expires. So where the extension is by amendment of the articles of
There is unanimity in authorities: “An authorized change in the name of a incorporation, the amendment must be adopted before that time.
corporation has no more effect upon its identity as a corporation than
change of name of natural person has upon his identity. It does not The logic of this position is well-expressed in a four square case decided by
affect the rights of the corporation or lessen or add to its the CA of Kentucky:
obligations. After a corporation has effected a change in its name it
should sue and be sued in its new name” (13 Am. Jur. 276-277) “But section 561 (section 2147) provides that, when any corporation
expires by the terms of its articles of incorporation, it may be thereafter
A mere change in the name of a corporation, either by the legislature or by continued to act for the purpose of closing up its business, but for no other
the corporators or stockholders under legislative authority, does not, purpose. The corporate life of the Home Building Association expired on
generally speaking, affect the identity of the corporation, nor in any May 3, 1905. After that date, by the mandate of the statute, it could
way affect the rights, privileges, or obligations previously acquired continue to act for the purpose of closing up its business, but for no other
or incurred by it. Indeed, it has been said that a change of name by a purpose. The proposed amendment was not made until January 16, 1908,
corporation has no more effect upon the identity of the corporation than a or nearly three years after the corporation expired by the terms of the
change of name by a natural person has upon the identity of such person. articles of incorporation. When the corporate life of the corporation was
The corporation, upon such change in its name, is in no sense a new ended, there was nothing to extend. Here it was proposed nearly three
corporation, nor the successor of the original one, but remains and years after the corporate life of the association had expired to revivify the
continues to be the original corporation. It is the same corporation dead body, and to make that relate back some two years and eight
with a different name, and its character is in no respect changed. ... months. In other words, the association for two years and eight months
(6 Fletcher, Cyclopedia of the Law of Private Corporations, 224-225, citing had only existed for the purpose of winding up its business, and, after this
cases). length of time, it was proposed to revivify it and make it a live corporation
for the two years and eight months daring which it had not been such.
REPUBLIC PLANTERS BANK VS. CA (216 SCRA 738; Dec. 31, 1992) – A The law gives a certain length of time for the filing of records in this court,
change in the corporate name does not make a new corporation, and and provides that the time may be extended by the court, but under this
whether effected by special act or under a general law, has no effect on the provision it has uniformly been held that when the time was expired, there
identity of the corporation, or on its property rights or liabilities. The is nothing to extend, and that the appeal must be dismissed... So, when
corporation continues, as before, responsible in its new name for all debts or the articles of a corporation have expired, it is too late to adopt an
other liabilities which it had previously contracted or incurred. amendment extending the life of a corporation; for, the corporation having
expired, this is in effect to create a new corporation ..."
HELD: No. The privilege of extension is purely statutory. All the statutory However, this authority does not extend to the fundamental changes in the
conditions precedent must be complied with in order that the corporate charter such as amendments or substantial changes thereof, which
extension may be effectuated. And, generally, these conditions must be belong to the stockholders as a whole. The equitable principle therefore
complied with, and the steps necessary to effectuate an extension must be is that the stockholders may have all the profits but shall turn over
taken, during the life of the corporation, and before the expiration of the management of the enterprise to the Board of Directors.
the term of existence as originally fixed by its charter or the general law,
since, as a rule, the corporation is ipso facto dissolved as soon as the CLASSIFICATION OF POWERS OF CORPORATE AGENTS/OFFICERS
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
deny specifically under oath the genuineness and due execution of the
Unless the law so provides, corporate powers may be delegated to contracts sued upon have the effect of eliminating the question of his
individual directors or other officers or agents. Whether or not the acts authority from the case.
of the individual director, officer or agent would bind the corporation depend
on the nature of the agency created or the poers conferred upon such person It is declared under Sec. 28 (now 23) that corporate powers shall be
by the statute, the corporate charter, the by-laws, the corporate action of the exercised, and all corporate business conducted by the board of
board or stockholders, or whether it is necessary or incidental to one’s office. directors, and this principle is recognized in the by-laws of the
corporation in question which contain a provision declaring that the
The general rule is that a corporation is bound by the acts of its power to make contracts shall be vested in the board of directors.
corporate officers who act within the scope of the 5 classification of
powers of corporate agents, which are: It is true that it is also true in the by-laws, that the president shall have the
1. Those expressly conferred or those granted by the articles of power and it shall be his duty, to sigh contract; but this has reference
incorporation, corporate by-laws or by the official act of the board of rahter to the formality of reducing to proper form the contract which
directors; are authorized by the board and is not intended to confer an independent
2. Those that are incidental or those acts as are naturally and ordinarily power to make contract binding on the corporation.
done which are reasonable and necessary to carry out the corporate
purpose or purposes; The fact that the power to make corporate contracts is thus vested in the
3. Those that are inherent or acts that go with the office; board of directors does not signify that a formal vote of the board must
4. Those that are apparent or those acts which although not actually always be taken before contractual liability can be fixed upon a corporation;
granted, the principal knowingly allows or permits it to be done; and for a board can create liability, like an individual, by other means
5. Powers arising out of customs, usage or emergency. than by a formal expression of its will.
J. F. RAMIREZ, plaintiff-appellee, Participation of the stockholders. The letter accepting the offer was
vs. dispatched in a meeting of the board called by Ramon Fernandez, where 4
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants- members, including the president was present. The minutes add that terms
appellants of this offer were approved; but at the suggestion of Fernandez it was
(G.R. No. 11897 September 24, 1918) decided to call a special meeting of the stockholders to consider the matter
and definite action was postponed. From the meeting of the stockholders, it
FACTS: The Board of Directors were apprised of the fact the plaintiff JF can be inferred that this body was then cognizant that the offer had already
Ramirez, who is based in Paris and represented by his son Jose Ramirez, had been accepted. It is not, however, necessary to find the judgment of the
control of agencies for two different marks of films, “Éclair Films” and “Milano stockholder proceedings, even if the assumption is that they did not approve
Films”. of the contract.
Negotiations began between Jose Ramirez and the board of directors of Both upon the principle and authority it is clear that the action of the
Orientalist Co. where Ramon Fernandez, one of the members of the board stockholders, whatever its character, must be ignored. The theory of
and TOC’s treasurer was chiefly active. a corporation is that the stockholders may have all the profits but shall
turn over the complete management of the enterprise to their
Near the end of July 1913, Jose Ramirez offered to supply from Paris the representatives and agents, called directors. Accordingly, there is little
aforesaid films to TOC through Fernandez. Accordingly, Fernandez had an for the stockholders to do beyond electing directors, making by-laws, and
informal conference with the BOD except one, and with approval of those exercising certain other special powers defined by law. In conformity with
whom he had communicated, accepted the offer through letters signed by this idea, it is settled that contract between a corporation and third
Fernandez in his capacity as treasurer. person must be made by the director and not by the stockholders.
The corporation, in such matters, is represented by the former and not by the
Upon arrival of the said films, it turned out that TOC was without funds, so latter. It results that where a meeting of the stockholders is called for the
the first drafts, taken in the name of TOC were received and paid by its purpose of passing on the propriety of making a corporate contract, its
president, Hernandez, through his own funds and such films were treated by resolutions are at most advisory and not in any wise binding on the board.
him as his own property; and in fact, they never came into the possession of
TOC and were rented by Hernandez to TOC as they are exhibited in the BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8, 1932) –
Oriental Theater. Petitioners, directors of respondent upto March 1929, sought to recover 1%
(to each plaintiff) of the profits of the copany for the year 1929, under and in
Other films arrived together with their drafts, taken in the name of TOC accordance with an amendment to the by-laws which was made at the
through its president, which were not paid and gave rise to the present general meeting of the stockholders on Feb. 1929, to which the lower court
action. TOC was declared the principal debtor and Ramon Fernandez, the rendered in their favor.
guarantor.
ISSUE: WON the amendment has a binding effect as to grant plaintiffs’
ISSUE: WON the corporation could be held liable for the contract? claim?
HELD: Yes. The public is not supposed nor required to know the transactions HELD: No. Sec. 20 of the Corporation Law limits the authority of a
which happen around the table where the corporate board of directors or the corporation to adopt by-laws which are not consistent with the provisions of
stockholders are from time to time convoked. In dealing with the law. The appellees contend that the articled in question is merely a
corporations, the public at large is bound to rely to a large extent provision of the compensation of directors which is not only consistent with
upon outward appearances. If a man is acting for a corporation with the but expressly authorized by Sec. 21 of the Corporation Law.
external indicia of authority, any person not having notice of want of
authority may usually rely upon those appearances; and if it be found that We cannot agree with this contention. The authority conferred upon
the directors had permitted the agent to exercise that authority and thereby corporations in that section refers only to providing compensation for the
held him out as a person competent to bind the corporation, or had future services of directors, officers, and employees thereof after the
acquiesced in a contract and retained the benefit supposed to have been adoption of the by-law or other provisions in relation thereto, and cannot in
conferred by it, the corporation will be bound, notwithstanding the actual any sense be held to authorize the giving, as in this case, of continuous
authority may ever have been granted. compensation to particular directors after their employment has terminated
for part services rendered gratuitously by them to the corporation. To permit
The failure of the defendant corporation to make an issue in its answer with the transaction involved in this case would be to create an obligation
regard to the authority of Ramon Fernandez to bind it, and particularly to unknown to law, and to countenance a misapplication of the funds of the
DBP declined to receive the summons saying it is not authorized, Alfa having HELD: No. There is no record showing that Jose dela Rosa owned a share of
a personality separate and distinct. The trial court, in turn ordered private stock in the corporation. If he did not own any share of stock, certainly he
respondents to take the appropriate steps to serve the summons to Alfa could not be a director pursuant to Sec. 30 of the Corporation Law and
which they made through the officers and later on, was later on declared to consequently he cannot be a managing director by virtue of the by-laws of
be proper service of summons. the corporation that the manager shall be elected by the BOD among its
members.
After the second motion for reconsideration, the trial court reversed itself,
saying that the service of summons upon the petitioners were not proper, Accordingly, Faustino Alberto could not be compelled to vacate his office and
them not being officers of the corporation anymore. On appeal, the CA cede the same to dela Rosa because the by-laws provide that the Directors
reversed the trial court. shall serve until the election and qualification of their duly qualified successor.
ISSUE: WON the petitioners can still be authorized to receive the summons ELECTION AND VOTING
despite the voting trust agreement with DBP?
Sec. 24. Election of directors or trustees. - At all elections of directors or
HELD: No. Sec. 59 of the Code expressly recognizes VTAs and gives a more trustees, there must be present, either in person or by representative
definitive meaning. By its very nature, a VTA results in the separation of the authorized to act by written proxy, the owners of a majority of the
voting right of a stockholder from his other rights such as the right to receive outstanding capital stock, or if there be no capital stock, a majority of the
dividends, the right to inspect the books of the corporation, the right to sell members entitled to vote. The election must be by ballot if requested by any
certain interests in the assets of the corporation and other rights to which a voting stockholder or member. In stock corporations, every stockholder
stockholder may be entitled until the liquidation of the corporation. However, entitled to vote shall have the right to vote in person or by proxy the number
in order to distinguish a VTA from proxies and other voting pool and of shares of stock standing, at the time fixed in the by-laws, in his own name
agreements, it must pass three criteria or tests, namely: (1) the voting rights on the stock books of the corporation, or where the by-laws are silent, at the
of the stock are separated from other attributes or ownership; (2) that the time of the election; and said stockholder may vote such number of shares
voting right granted are intended to be irrevocable for a definite period of for as many persons as there are directors to be elected or he may cumulate
time; and (3) that the principal purpose of the grant of voting rights is to said shares and give one candidate as many votes as the number of directors
acquire voting control of the corporation. to be elected multiplied by the number of his shares shall equal, or he may
distribute them on the same principle among as many candidates as he shall
The execution of VTA, therefore, may create a dichotomy between see fit: Provided, That the total number of votes cast by him shall not exceed
the equitable and beneficial ownership of the corporate shares of the number of shares owned by him as shown in the books of the corporation
stockholder, on the one hand and the legal title thereto, on the multiplied by the whole number of directors to be elected: Provided,
other hand. however, That no delinquent stock shall be voted. Unless otherwise provided
in the articles of incorporation or in the by-laws, members of corporations
By virtue of the VTA, the petitioners are no longer directors. Under the old which have no capital stock may cast as many votes as there are trustees to
and new Corporation Code, the most immediate effect of a VTA on the status be elected but may not cast more than one vote for one candidate.
of a stockholder who is a party to its execution is that he becomes only an Candidates receiving the highest number of votes shall be declared elected.
equitable or beneficial owner, from being the legal titleholder or owner of the Any meeting of the stockholders or members called for an election may
shares subject of the VTA. adjourn from day to day or from time to time but not sine die or indefinitely
if, for any reason, no election is held, or if there not present or represented
Under the old code, the eligibility of a director, strictly speaking, cannot be by proxy, at the meeting, the owners of a majority of the outstanding capital
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
stock, or if there be no capital stock, a majority of the member entitled to of the board; and
vote. 2. Unless the AOI or the by-laws provide for a greater quorum/voting
requirement.
NOTE:
1. Majority of the outstanding capital stock, whether in person or by Every action of the board without a meeting and without the required voting
written proxy must be present at the election of the directors; or and quorum requirement will not bind the corporation unless subsequently
majority of members entitled to vote, in the case of a non-stock ratified, expressly or impliedly.
corporation. If the required quorum is not obtaining, the meeting may
be adjourned; Individual directors, however, can rightfully be considered as agents of the
2. On the request of any voting stockholder or member, the election may corporation. And although they cannot bind the corporation by their
be held by ballot otherwise viva-voce would suffice. individual acts, this is subject to certain EXCEPTIONS: (1) by delegation of
3. The candidates receiving the highest number of votes shall be elected. authority; (2) when expressly conferred; or (3) where the officer or agent is
clothed with actual or apparent authority.
CUMULATIVE VOTING:
1. Cumulative voting gives the stockholder entitled to vote the right to give YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992) – Constacio
a candidate as many votes as the number of directors to be elected B. Malagna, President and Chairman of the Board of private respondent
multiplied by the number of his shares shall equal or he may distribute Prime White Cement Corporation (PWCC), sent a letter-offer (Exhibit A) to
them among the candidates as he may see fit. Mr. Yao for the delivery of cement, which was accepted by the latter by
2. This is granted by law to each stockholder with voting rights. However, delivering a check for P243,000.
in non-stock corporations, cumulative voting is generally not allowed,
UNLESS allowed by the AOI or by-laws. ISSUE: WON the letter-offer sent by Malagna binds the corporation?
3. Under this method, if there are 10 directors to be elected, a holder of
1,000 shares will have 10,000 votes which he may cast in favor of one HELD: No. A corporation can act only through its officers and agents, all acts
candidate or may apportion to any number of candidate he may wish; within the powers of said corporation may be performed by agents of his
4. PURPOSE: to allow the minority to have a rightful representation in the selection and except in so far as limitations or restrictions may be imposed by
board of directors. special charter, by-law or statutory provisions, the same general provision of
law which govern the relation of agency for natural person govern the officer
Sec. 25. Corporate officers, quorum. - Immediately after their election, or agent of a corporation, of whatever status or rank, in respect to his power
the directors of a corporation must formally organize by the election of a to act for the corporation; and the agents once appointed, or members acting
president, who shall be a director, a treasurer who may or may not be a in their stead, are subject to the same rules, liabilities and incapacities as are
director, a secretary who shall be a resident and citizen of the Philippines, agents of individuals and private persons.
and such other officers as may be provided for in the by-laws. Any two (2) or
more positions may be held concurrently by the same person, except that no Moreover, a corporate officer or agent may represent and bind the
one shall act as president and secretary or as president and treasurer at the corporation in transactions with third person to the extent that authority has
same time. been conferred upon him, and this includes powers which have been (1)
intentionally conferred, and (2) also such powers as, in the usual course of
NOTE: business, are incidental thereto, or may be implied therefrom, (3) powers
1. Except in a close corporation where the corporate officers may be added by custom and usage, as usually pertaining to the particular officer
elected directly by the stockholders, the Code requires the BOD to elect or agent, and (4) such apparent powers as the corporation has caused
the said officers; persons dealing with the officer or agent to believe that it has conferred.
2. The officers that may be elected are the:
a. President – who must be a director; While Mr. Maglana was an officer, the by-laws do not in any way confer upon
b. Treasurer – who may or may not be a director; the president the authority to enter into contracts for the corporation
c. Secretary – who should be a resident and citizen of the independently of the BOD. That power is expressly lodged in the latter.
Philippines;
d. Such other officers as may be provided for in the by-laws. Nevertheless, to expedite or facilitate the execution of the contract, only the
3. Any two or more positions may be held concurrently by the same President shall sign the contact for the corporation. No greater power can be
person, except: implied from such express, but limited delegated authority. Neither can it be
a. The president and the secretary; logically claimed that any power greater than that expressly conferred is
b. The president and the treasurer. inherent in Mr. Maglana’s position as president and chairman of the
corporation.
B. VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE
OFFICERS Although there is authority "that if the president is given general control and
supervision over the affairs of the corporation, it will be presumed that he
Sec. 25. Corporate officers, quorum has authority to make contract and do acts within the course of its ordinary
business," We find such inapplicable in this case. We note that the private
xxx corporation has a general manager who, under its By-Laws has, inter
The directors or trustees and officers to be elected shall perform the duties alia, the following powers: "(a) to have the active and direct management of
enjoined on them by law and the by-laws of the corporation. Unless the the business and operation of the corporation, conducting the same
articles of incorporation or the by-laws provide for a greater majority, a accordingly to the order, directives or resolutions of the Board of Directors or
majority of the number of directors or trustees as fixed in the articles of of the president." It goes without saying then that Mr. Maglana did not have
incorporation shall constitute a quorum for the transaction of corporate a direct and active and in the management of the business and operations of
business, and every decision of at least a majority of the directors or trustees the corporation.
present at a meeting at which there is a quorum shall be valid as a corporate
act, except for the election of officers which shall require the vote of a Petitioner's last refuge then is his alternative proposition, namely, that private
majority of all the members of the board. respondent had clothed Mr. Maglana with the apparent power to act for it
and had caused persons dealing with it to believe that he was conferred with
QUORUM: requirement for a valid board meeting is the majority of the such power. The rule is of course settled that "[a]lthough an officer or
number of the board fixed in the AOI, and a decision of at least a majority of agent acts without, or in excess of, his actual authority if he acts
the directors/trustees present in a meeting at which there is a quorum shall within the scope of an apparent authority with which the
be a valid corporate act, except: corporation has clothed him by holding him out or permitting him to
1. Election of officers, which shall require the majority of all the members appear as having such authority, the corporation is bound thereby
A complaint was filed before the labor arbiter who decided in favor of private ISSUE: WON Chen had the power to bind the corporation under a contract
respondents. of that character?
ISSUE: WON the gratuity pay should be paid? HELD: No. 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
HELD: Yes. The general rules is that a corporation, through its board of be expressly or impliedly be delegated to other officers or agents of the
directors, should act in the manner and within the formalities, if corporation, and it is well settled that except where the authority of
any, prescribed by its charter or by the general law. Thus, the employing servants and agents is expressly vested in the BOD/T, an
directors must act as a body in a meeting called pursuant to the law or the officer or agent who has general control and management of the
corporation’s by-laws, otherwise, any action taken therein may be questioned corporation’s business, or a specific part thereof, may bind the
by any objecting director or shareholder. corporation as are usual and necessary in th conduct of such
business. But the contracts of employment must be reasonable.
Be that as it may, jurisprudence tells us that an action of the board of
directors during a meeting, which was illegal for lack of notice, may Chen, as general manager of Kong Li Po, had implied authority to bind the
be ratified either (1) expressly, by the action of the directors in defendant corporation by a reasonable and usual contract of employment
subsequent legal meeting, or (2) impliedly, by the corporations’ with the plaintiffs, but we do not think that contract here in question can be
subsequent conduct. so considered. Not only is the term of employment usually long, but the
conditions are otherwise so onerous to the defendant that the possibility of
Ratification by directors may be by an express resolution or vote to that the corporation being thrown into insolvency thereby is expressly
effect, or it may be implied from adoption of the act, acceptance or contemplated in the same contract. This fact, in itself was, in our opinion,
acquiescence. Moreover, the unauthorized acts of an officer of a corporation sufficient to put the plaintiffs upon inquiry as to the extent of the business
may be ratified by the corporation by conduct implying approval and adoption manager’s authority;; they had not the right to presume that he or any other
of the act in question. Such ratification may be expressed or may be inferred single officer or employee of that corporation had implied authority to enter
from silence and inaction. into a contract of employment which might bring about its ruin.
In the case at bench, it was established that petitioner corporation did not TRINIDAD J. FRANCISCO VS. GSIS (7 SCRA 557; March 30, 1963) –
issue any resolution revoking nor nullifying the board resolution granting Trinidad Francisco, in consideration of loan extended by GSIS, mortgaged her
gratuity pay to private respondents. Instead, they paid the gratuity pay, property in QC. For being in arrears in her installments, GSIS extrajudicially
particularly, the first two installments thereof. foreclosed the mortgage.
CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the ISSUE: WON the BOD had the power to appropriate funds for the expenses
BOD to the SEC: claimed by respondent?
Sec. 26. Report of election of directors, trustees and officers. - Within HELD: No. The by-laws expressly reserved unto the stockholders the power
thirty (30) days after the election of the directors, trustees and officers of the to determine the compensation of the members of the BOD, and the
corporation, the secretary, or any other officer of the corporation, shall stockholders did restrict such compensation to (1) actual transportation
submit to the Securities and Exchange Commission, the names, nationalities expenses plus (2) per diems of P30 and (3) actual expenses while waiting.
and residences of the directors, trustees, and officers elected. Should a Even without the express prohibition, the directors are not entitled to
director, trustee or officer die, resign or in any manner cease to hold office, compensation for “The law is well-settled that directors of
his heirs in case of his death, the secretary, or any other officer of the corporations presumptively serve without compensation and in the
corporation, or the director, trustee or officer himself, shall immediately absence of an express agreement or a resolution thereto, no claim
report such fact to the Securities and Exchange Commission can be asserted therefor. Thus it has been held that there can be no
recovery of compensation, unless expressly provided for, when
PURPOSE: to give public information, under sanction of oath responsible director serves as president or vice-president, as secretary or
officers, of the nature of the business, financial condition and operational treasurer or cashier, as member of an executive committee, as
status of the company together with information on its key officers or chairman of a building committee, or similar offices.
managers so that hose dealing with it and those who intend to do business
with it may know or have the means of knowing facts concerning the Thus, the directors, in assigning themselves additional duties, such as the
corporation’s financial resources and business responsibility” visitation of FACOMAS, acted within their power, but, by voting for
themselves compensation for such additional duties, they acted in excess of
D. COMPENSATION OF DIRECTORS their authority, as express in the by-laws.
Sec. 30. Compensation of directors. - In the absence of any provision in WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS,
the by-laws fixing their compensation, the directors shall not receive any DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS,
compensation, as such directors, except for reasonable per diems: Provided, petitioner,
however, That any such compensation other than per diems may be granted vs.
to directors by the vote of the stockholders representing at least a majority of RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-
the outstanding capital stock at a regular or special stockholders' meeting. In TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE
no case shall the total yearly compensation of directors, as such directors, PORFIRIO PARIAN, respondents
exceed ten (10%) percent of the net income before income tax of the (GR No. 113032; 278 SCRA 216; Aug. 21, 1997)
corporation during the preceding year.
FACTS: In a special board meeting, a resolution was passed providing for
GENERALLY: Directors are not entitled to receive any compensation, compensation of officers. A few years later, petitioners Homero Villasis,
EXCEPT: Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-
1. Reasonable per diems; complaint for falsification of public documents (for submission of an income
ISSUE: WON the resolution granting compensation to OFFICERS of the ISSUE: WON Ong should be held jointly and severally liable?
corporation is valid?
HELD: No. It was an error to hold David Ong jointly and severally liable with
HELD: Yes. The proscription under Sec. 30, is against granting compensation TRAMAT to de la Cuesta under the questioned transaction. Ong had there so
to directors/trustees of a corporation is not a sweeping rule. Worthy of note acted, not in his personal capacity, but as an officer of a corporation,
is the clear phraseology of Sec 30 which states “… [T]he directors shall not TRAMAT, with a distinct and separate personality. As such, it should only be
receive any compensation, as such directors, …” The phrase as such the corporation, not the person acting for and on its behalf, that properly
directors is not without significance for it delimits the scope of the could be made liable thereon.
prohibition to compensation given to them for services performed
purely in their capacity as directors or trustees. The unambiguous Personal liability of a corporate director, trustee or officer along
implication is that members of the board may receive compensation, in (although not necessarily) with the corporation may so validly
addition to reasonable per diems, when they render services to the attach, as a rule, only when —
corporation in a capacity other than as directors/trustees. In the case
at bench, the Resolution granted monthly compensation to private 1. He assents (a) to a patently unlawful act of the corporation, or
respondents not in their capacity as members of the board, but rather as (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict
officers of the corporation, more particularly as Chairman, Vice-Chairman, of interest, resulting in damages to the corporation, its stockholders or other
Treasurer and Secretary of WIT. persons;
Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the 2. He consents to the issuance of watered stocks or who, having knowledge
compensation to 10% of the net income before income tax does not likewise thereof, does not forthwith file with the corporate secretary his written
find application in this case since the compensation is being given to private objection thereto;
respondents in their capacity as officers of WIT and not as board members.
3. He agrees to hold himself personally and solidarily liable with the
GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927) – corporation;
The members of the board of El Hogar Filipino receives 5% of the net profit
as shown in the balance sheet and is distributed in proportion to their 4. He is made, by a specific provision of law, to personally answer for his
attendance to meetings of the board. A complaint was filed against the, and corporate action.
the sixth cause of action alleged that the directors, instead of serving without
pay, or receiving nominal pay or a fixed salary - as the complainant In the case at bench, there is no indication that petitioner David Ong could
supposes would be proper – have been receiving large compensation in be held personally accountable under any of the abovementioned cases.
varying amounts.
RICARDO A. LLAMADO, petitioner,
ISSUE: WON the courts may declared the by-law provision null and void? vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents
HELD: No. The Corporation Law does not undertake to prescribe the (GR No. 99032; 270 SCRA 423; March 26, 1997)
rate of compensation for the directors of corporations. The power to
fixed the compensation they shall receive, if any, is left to the corporation, to FACTS: Private complainant Leon Gaw delivered to the accused Ricardo
be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this Llamado and Jacinto Pascual the amount of P180,000 which is to be repaid in
authority the compensation for the directors of El Hogar Filipino has been 6 months with 12% interest. As security, the accused issued and signed a
fixed in section 92 of its by-laws, as already stated. The justice and postdated check which was later on stopped and dishonored for being drawn
propriety of this provision was a proper matter for the shareholders against insufficient funds. Gaw filed a complaint for violation of BP Blg. 22.
when the by-laws were framed; and the circumstance that, with the Pascual remained at large and the trial on the merits against Llamado was
growth of the corporation, the amount paid as compensation to the conducted. The trial court convicted Llamado.
directors has increased beyond what would probably be necessary
to secure adequate service from them is matter that cannot be ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could be
corrected in this action; nor can it properly be made a basis for depriving held civilly and criminally liable?
the respondent of its franchise, or even for enjoining it from compliance with
the provisions of its own by-laws. If a mistake has been made, or the rule HELD: Yes. Petitioner denies knowledge of the issuance of the check without
adopted in the by-laws has been found to work harmful results, the remedy sufficient funds and involvement in the transaction with private complainant.
is in the hands of the stockholders who have the power at any lawful meeting However, knowledge involves a state of mind difficult to establish. Thus, the
to change the rule. The remedy, if any, seems to lie rather in publicity and statute itself creates a prima facie presumption, i.e., that the drawer had
competition, rather than in a court proceeding. The sixth cause of action is in knowledge of the insufficiency of his funds in or credit with the bank at the
our opinion without merit. time of the issuance and on the check's presentment for payment. Petitioner
failed to rebut the presumption by paying the amount of the check within five
E. LIBABILITY OF CORPORATE OFFICERS (5) banking days from notice of the dishonor. His claim that he signed the
check in blank which allegedly is common business practice, is hardly a
The general rule is that unless the law specifically provides a corporate officer defense. If as he claims, he signed the check in blank, he made himself
or agent is not civilly or criminally liable for acts done by him as such officer prone to being charged with violation of BP 22. It became incumbent upon
or agent, or when absent bad faith or malice. him to prove his defenses. As Treasurer of the corporation who signed the
check in his capacity as an officer of the corporation, lack of involvement in
TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7, 1994) – the negotiation for the transaction is not a defense.
Melchor dela Cuesta, doing business under the name Farmers Machineries,
sold a tractor to Tramat Mercantile, Inc. In payment, David Ong, Tramat’s Petitioner's argument that he should not be held personally liable for the
president and manager issued a check for P33,500. Tramat sold the tractor, amount of the check because it was a check of the Pan Asia Finance
together with an attached lawn mower fabricated by it, to NAWASA. David Corporation and he signed the same in his capacity as Treasurer of the
ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners, OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of voting
vs. or assenting, either willfully or knowingly, to patently unlawful acts thereby
NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS, making the responsible director liable for damages resulting therefrom;
SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents
(GR No. 121434; 273 SCRA 35; June 2, 1997) DILIGENCE: Under the second part of Sec. 31, the directors are required to
manage the corporate affairs with reasonable care and prudence. This is
FACTS: Private respondents were employees of Crispa, Inc. who were because the liability of a corporation is not limited to willful breach of trust or
dismissed due to alleged retrenchment. They filed an illegal dismissal excess of power, but extends also to negligence. Their liability rests upon the
complaint with the NLRC against Crispa, Inc., Valeriano Floro (major common law rule which renders liable every agent who violates his authority
stockholder, incorporation and director of Crispa) and petitioners, who were or neglects his duty to the damage of his principal.
high ranking officials and directors of Crispa. The Lbor Arbiter dismissed the
complaint but ordered petitioners, Floro and Crispa to pay separation pay. The degree of diligence is relative. The more fair and satisfactory rule is that
degree of care and diligence which an ordinary prudent director could
ISSUE: WON petitioners can be held liable? reasonably be expected to exercise in a like position under similar
circumstances.
HELD: Yes. 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 BUSINESS JUDGMENT RULE: Although directors are commonly said to be
people comprising it. The general rule is that obligations incurred by the responsible both for reasonable care and also prudence, the formula is
corporation, acting through its directors, officers and employees, are its sole continually repeated that they are not liable for losses due to imprudence or
liabilities. There are times, however, when solidary liabilities may be incurred honest error of judgment. The business judgment rule in effect states that
but only when exceptional circumstances warrant such as in the following questions of policy and management are left solely to the honest decision of
cases: the board of directors and the courts are without authority to substitute its
judgment as against the former. The directors are business managers and as
“1. When directors and trustees or, in appropriate cases, the long as they act in good faith, its actuations are not subject to judicial review.
officers of a corporation: (a) vote for or assent to patently
unlawful acts of the corporation; (b) act in bad faith or with ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
gross negligence in directing the corporate affairs; (c) are vs.
guilty of conflict of interest to the prejudice of the BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
corporation, its stockholders or members, and other persons; (GR No. L-15092; 5 SCRA 36; May 18, 1962)
2. When a director or officer has consented to the issuance of
watered stocks or who, having knowledge thereof, did not FACTS: Appellants have been sugar planter adhered to defendat-appellees
forthwith file with the corporate secretary his written sugar central mill under identical milling contracts with a 55% share of the
objection thereto; resulting product. There was a proposal to increase the planter’s share to
3. When a director, trustee or officer has contractually agreed 60% which was adopted by defendant in an Amended Milling Contract and
or stipulated to hold himself personally and solidarily liable consequently a Board Resolution.
with the corporation; or
4. When a director, trustee or officer is made, by specific In 1953, the appellants initiated the present action, contending that three
provision of law, personally liable for his corporate action.”i Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a
total annual production exceeding one-third of the production of all the sugar
In labor cases, particularly, corporate directors and officers are central mills in the province, had already granted increased participation (of
solidarily liable with the corporation for the termination of 62.5%) to their planters, and that under paragraph 9 of the resolution of
employment of corporate employees done with malice or in bad August 20, 1936, heretofore quoted, the appellee had become obligated to
faith. In this case, it is undisputed that petitioners have a direct hand in the grant similar concessions to the plaintiffs (appellants herein). The appellee
illegal dismissal of respondent employees. They were the ones, who as high- Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging
ranking officers and directors of Crispa, Inc., signed the Board Resolution that the stipulations contained in the resolution were made without
retrenching the private respondents on the feigned ground of serious consideration; that the resolution in question was, therefore, null and void ab
business losses that had no basis apart from an unsigned and unaudited initio, being in effect a donation that was ultra vires and beyond the powers
Profit and Loss Statement which, to repeat, had no evidentiary value of the corporate directors to adopt. The trial court decided in favor of
whatsoever. This is indicative of bad faith on the part of petitioners for which defendant, thus the present appeal.
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. ISSUE: WON the resolutions passed by the bard are valid and binding?
F. THREE-FOLD DUTY OF DIRECTORS HELD: Yes. There can be no doubt that the directors of the appellee
company had authority to modify the proposed terms of the Amended Milling
Directors owe a three-fold duty to the corporation: (1) Obedience; (2) Contract for the purpose of making its terms more acceptable to the other
Diligence and (3) Loyalty. contracting parties.
Sec. 31. Liability of directors, trustees or officers. - Directors or As the resolution in question was passed in good faith by the board
trustees who willfully and knowingly vote for or assent to patently unlawful of directors, it is valid and binding, and whether or not it will cause
acts of the corporation or who are guilty of gross negligence or bad faith in losses or decrease the profits of the central, the court has no
directing the affairs of the corporation or acquire any personal or pecuniary authority to review them.
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 “They hold such office charged with the duty to act for the corporation
corporation, its stockholders or members and other persons. according to their best judgment, and in so doing they cannot be
controlled in the reasonable exercise and performance of such duty.
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
Whether the business of a corporation should be operated at a loss during corporate insiders and cannot, therefore, utilize their strategic position for
depression, or close down at a smaller loss, is a purely business and their own preferment or use their powers and opportunities for their personal
economic problem to be determined by the directors of the corporation advantage to the exclusion of the interest which they represent.
and not by the court. It is a well-known rule of law that questions of policy
or of management are left solely to the honest decision of officers and CORPORATE OPPORTUNITY DOCTRINE: it places a director of a
directors of a corporation, and the court is without authority to substitute corporation in the position of a fiduciary and prohibits him from seizing a
its judgment of the board of directors; the board is the business manager business opportunity and/or developing it at the expense and with the
of the corporation, and so long as it acts in good faith its orders are not facilities of the corporation. He cannot appropriate to himself opportunity
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).” which in fairness should belong to the corporation.
And it appearing undisputed in this appeal that sugar centrals of La Carlota, RATIFICATION:
Hawaiian Philippines, San Carlos and Binalbagan (which produce over one- 1. The second paragraph of Sec. 31 which makes a director liable to
third of the entire annual sugar production in Occidental Negros) have account for profits if he attempts to acquire or acquires any interest
granted progressively increasing participations to their adhered planter at an adverse to the corporation in respect to any matter reposed in him in
average rate of confidence as to which equity imposes a disability upon him to deal in
his own behalf is not subject to ratification.
62.333% for the 1951-52 crop year;
2. Whereas, in Sec. 34, if a director acquires a business opportunity which
should belong to the corporation, he is bound to account for such profits
64.2% for 1952-53;
unless his act is ratified by the stockholders owing or representing at
64.3% for 1953-54; least 2/3 of the outstanding capital stock.
64.5% for 1954-55; and Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell
his property with a fair market value of P100M for P90M.
63.5% for 1955-56, a. If it was offered first to A, and A made a profit of P90M, this would fall
under Sec. 34 and may be subject to ratification; A merely acquired a
the appellee Bacolod-Murcia Milling Company is, under the terms of its business opportunity owing to the corporation.
Resolution of August 20, 1936, duty bound to grant similar increases to b. If it was offered to REALTY CORP., and A, later on offered to buy it for
plaintiffs-appellants herein. P95 and sold it making a profit of P5M, it would fall under Sec. 31 and
not subject to ratification, A should return the profits to REALTY CORP.
It was a matter reposed in him in confidence.
LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:
Generally: a director is not liable for the acts of their co-directors, unless: (1) STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) – the Governor of the
He connives or participates; or (2) He is negligent in not discovering or acting Philippine Islands, on behalf of the government, made an offer of purchase
to prevent it. Thus, absent of actual knowledge of the wrongful activities, on for the total sum of $6,,043,219.47 in gold for all the friar lands, though
the part of the co-directors, the same cannot be imputed to the other director owned by different owners.
unless in the exercise of reasonable care attending his responsibilities, he
should have been aware of suspicious circumstances demanding correlative While this state of things existed, and before the final offer had been made
action. by the Governor, the defendant, although still holding out for a higher price
for the lands, took steps to purchase the 800 shares of stock in his own
LOYALTY: refers to the proscription imposed on directors on acquiring any company from Mrs. Strong, which he knew were in the possession of F.
personal or pecuniary interest in conflict with their duty as director. Their Stuart Jones, as her agent. The defendant employed Krauffman and the
relationship is regarded as “fiduciary relation”. As fiduciaries, they are obliged latter employed Mr. Sloan, a broker, to purchase the stock for him. Mr. Sloan,
to act with utmost candor and fair dealing for the interest of the corporation the husband, did not know who wanted to buy the shares nor did Jones
and without selfish motives. when he was spoken to. Jones would not have sold at the price he did had
he known it was the defendant who was purchasing, because, as he said, it
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his would show increased value, as the defendant would not be likely to
office, acquires for himself a business opportunity which should belong to the purchase ore stock unless the price was going up.
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 ISSUE: WON it was the duty of the defendant to disclose to the agent of the
his act has been ratified by a vote of the stockholders owning or representing plaintiff the facts bearing upon or which might affect the value of the stock?
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 HELD: Yes. A director upon whose action the value of the shares depends
in the venture. cannot avail of his knowledge of what his own action will be to acquire shares
from those whom he intentionally keeps in ignorance of his expected action
Apparent from Sec. 31 and 34, the duty of loyalty is violated in the following and the resulting value of the shares.
instances:
1. When a director or trustee “acquires any personal or pecuniary interest Even though a director may not be under the obligation of a fiduciary nature
in conflict with (his) duty as such director or trustee”;; to disclose to a shareholder his knowledge affecting the value of the shares,
2. When he “attempts to acquire or acquires, in violation of his duty, any that duty may exist in special cases, and did exist upon the facts in this case.
interest adverse to the corporation in respect to any matter which has
been reposed in him in confidence, as to which equity imposes a In this case, the facts clearly indicate that a director of a corporation owning
disability upon him to deal in his own behalf”;; and friar lands in the Philippine Islands, and who controlled the action of the
3. When he, “by virtue of his office, acquires for himself a business corporation, had so concealed his exclusive knowledge of the impending sale
opportunity which should belong to the corporation, thereby obtaining to the government from a shareholder from whom he purchased, through an
profit to the prejudice of such corporation”. agent, shares in the corporation, that the concealment was in violation of his
duty as a director to disclose such knowledge, and amounted to deceit
FORBIDDEN PROFITS: Forbidden in the sense that directors and officers sufficient to avoid the sale; and, under such circumstances, it was immaterial
are fiduciary representatives of the corporation and as such they are not whether the shareholder's agent did or did not have power to sell the stock.
allowed to obtain any personal profit, commission, bonus or gain for their
official actions. This may also refer to those arising from transactions of In addition to his ownership of almost three-fourths of the shares of the stock
directors with third persons which may involve misappropriation of corporate of the company, the defendant was one of the five directors of the company,
opportunities and disloyal diverting of business. Directors and officers are and was elected by the board the agent and administrator general of such
Concealing his identity when procuring the purchase of stock, by his agent, ISSUE: WON the dealership agreement entered into by Te with his own
was in itself stock evidence of fraud on the part of the defendant. The corporation is valid and binding?
concealment was not a mere inadvertent omission but was a studied and
intentional omission, to be characterized as part of the deceitful machination HELD: No. In the instant case respondent Te was not an ordinary
to obtain the purchase without giving information whatever as to the state stockholder; he was a member of the Board of Directors and Auditor of the
and probable result of the negotiations, to the vendor of the stock, and to, in corporation as well. He was what is often referred to as a "self-dealing"
that way, obtain the same at a lower price. director.
G. SELF-DEALING DIRECTORS A director of a corporation holds a position of trust and as such, he owes a
duty of loyalty to his corporation. In case his interests conflict with those of
The self-dealing director is one who deals or transacts business with his own the corporation, he cannot sacrifice the latter to his own advantage and
corporation. benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is not
Sec. 32. Dealings of directors, trustees or officers with the a matter of statutory or technical law. It springs from the fact that directors
corporation. - A contract of the corporation with one or more of its directors have the control and guidance of corporate affairs and property and hence of
or trustees or officers is voidable, at the option of such corporation, unless all the property interests of the stockholders.
the following conditions are present:
Granting arguendo that the "dealership agreement" involved here would be
1. That the presence of such director or trustee in the board meeting in valid and enforceable if entered into with a person other than a director or
which the contract was approved was not necessary to constitute a quorum officer of the corporation, the fact that the other party to the contract was a
for such meeting; Director and Auditor of the petitioner corporation changes the whole
2. That the vote of such director or trustee was nor necessary for the situation. First of all, We believe that the contract was neither fair nor
approval of the contract; reasonable. The "dealership agreement" entered into in July, 1969, was to
3. That the contract is fair and reasonable under the circumstances; and sell and supply to respondent Te 20,000 bags of white cement per month, for
4. That in case of an officer, the contract has been previously authorized by five years starting September, 1970, at the fixed price of P9.70 per bag.
the board of directors. Respondent Te is a businessman himself and must have known, or at least
must be presumed to know, that at that time, prices of commodities in
Where any of the first two conditions set forth in the preceding paragraph is general, and white cement in particular, were not stable and were expected
absent, in the case of a contract with a director or trustee, such contract may to rise. At the time of the contract, petitioner corporation had not even
be ratified by the vote of the stockholders representing at least two-thirds commenced the manufacture of white cement, the reason why delivery was
(2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the not to begin until 14 months later. He must have known that within that
members in a meeting called for the purpose: Provided, That full disclosure period of six years, there would be a considerable rise in the price of white
of the adverse interest of the directors or trustees involved is made at such cement. In fact, respondent Te's own Memorandum shows that in
meeting: Provided, however, That the contract is fair and reasonable under September, 1970, the price per bag was P14.50, and by the middle of 1975,
the circumstances. it was already P37.50 per bag. Despite this, no provision was made in the
"dealership agreement" to allow for an increase in price mutually acceptable
Generally: A contract entered into by a director with his own corporation is to the parties. Instead, the price was pegged at P9.70 per bag for the whole
voidable at the latter’s option, except when all the conditions laid down in five years of the contract. Fairness on his part as a director of the corporation
Sec. 32 are met. On the other hand, where any of the first two conditions is from whom he was to buy the cement, would require such a provision. In
absent, the contract becomes voidable subject to the ratification of the fact, this unfairness in the contract is also a basis which renders a contract
stockholders representing 2/3 of the outstanding capital stock – the entered into by the President, without authority from the Board of Directors,
requirements of which are: (1) there must be a meeting called for that void or voidable, although it may have been in the ordinary course of
purpose; (2) full disclosure of the adverse interest of the director; and (3) the business. We believe that the fixed price of P9.70 per bag for a period of five
contract is fair and reasonable under the circumstances. years was not fair and reasonable. Respondent Te, himself, when he
subsequently entered into contracts to resell the cement to his "new dealers"
If the self-dealing director owns all or substantially all of the shares of stock, Henry Wee and Gaudencio Galang stipulated as follows:
thereby making ratification easily possible, the last sentence of Sec. 32 The price of white cement shall be mutually determined by us but in no
should be made to apply by determining reasonableness of the transaction to case shall the same be less than P14.00 per bag (94 lbs)
which there is no yardstick. Every case stands upon its own bottom, and the
ultimate question is whether the contract was honest and beneficial which is As director, especially since he was the other party in interest, respondent
always a question of fact. Te's bounden duty was to act in such manner as not to unduly prejudice the
corporation. In the light of the circumstances of this case, it is to Us quite
PRIME WHITE CEMENT CORPORATION, petitioner, clear that he was guilty of disloyalty to the corporation; he was attempting in
vs. effect, to enrich himself at the expense of the corporation. There is no
IAC and ALEJANDRO TE, respondents showing that the stockholders ratified the "dealership agreement" or that
(GR No. L-68555; 220 SCRA 103; March 19, 1993) they were fully aware of its provisions. The contract was therefore not valid
and this Court cannot allow him to reap the fruits of his disloyalty.
FACTS: Respondent Alejandro Te, a director of petitioner corporation, was
awarded a dealership agreement whereby Te would be the exclusive dealer CHARLES W. MEAD, plaintiff-appellant,
and/or distributor of the corporation in the entire Mindanao. As a vs.
consequence, Te entered into different contracts for selling white cement. E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING
Laer on, defendant corporation decided to impose certain conditions upon the AND CONSTRUCTION COMPANY, defendant-appellants
dealership agreement. (GR No. 6217; 21 Phil. 95; Dec. 26, 1911)
Several demands to comply with the agreement were made by Te to the FACTS: Herein plaintiff-appellant Mead with defendant McCullough formed
corporation but was refused and Te was constrained to cancel the contracts the Philippine Engineering and Construction Company, the incorporators
he entered into. being the only stockholders and directors of the company. When Mead left
for China, the other directors entered into an agreement where all the rights
Defendant corporation entered into an exclusive dealership agreement with in a “wrecking contract” with the naval authorities were sold to defendant.
HELD: Yes. While a corporation remains solvent, we can see no reason why H. INTERLOCKING DIRECTORS
a director or officer, by the authority of a majority of the stockholders or
board of managers, may not deal with the corporation, loan it money or buy An interlocking director is a director in one corporation who deals or transacts
property from it, in like manner as a stranger. So long as a purely private with another corporation of which he is also a director. In such case, there
corporation remains solvent, its directors are agents or trustees for the may effectively be a dual agency, a divided allegiance where allegiance in
stockholders. They owe no duties or obligations to others. But the moment one corporation may subordinated to the other.
such a corporation becomes insolvent, its directors are trustees of all the
creditors, whether they are members of the corporation or not, and must The prevailing view is that these contracts entered into where there is an
manage its property and assets with strict regard to their interest; and if they interlocking director is not voidable merely by reason of conflicting duties or
are themselves creditors while the insolvent corporation is under their interest as to corporations represented, even when a majority or all of the
management, they will not be permitted to secure to themselves by directors are common to both corporations. It is recognized that such will be
purchasing the corporate property or otherwise any personal advantage over upheld if there is no bad faith or unfairness or collusion.
the other creditors. Nevertheless, a director or officer may in good faith and
for an adequate consideration purchase from a majority of the directors or Sec. 33. Contracts between corporations with interlocking directors.
stockholders the property even of an insolvent corporation, and a sale thus – (1) Except in cases of fraud, and provided (2) the contract is fair and
made to him is valid and binding upon the minority. (Beach et al. vs. Miller, reasonable under the circumstances, a contract between two or more
supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7 Wall., corporations having interlocking directors shall not be invalidated on that
299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New ground alone: Provided, That if the interest of the interlocking director in
Hamphshire Insurance Company, 43 N. H., 263; Morawetz on Corporations one corporation is substantial and his interest in the other corporation or
(first edition), sec. 579; Haywood vs. Lincoln Lumber Company et al., 64 corporations is merely nominal, he shall be subject to the provisions of the
Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage preceding section insofar as the latter corporation or corporations are
Company, 21 Fed. Rep., 577.) concerned.
In the case of the Twin-Lick Oil Company vs. Marbury, he court said: Stockholdings exceeding twenty (20%) percent of the outstanding capital
stock shall be considered substantial for purposes of interlocking directors.
That a director of a joint-stock corporation occupies one of those
fiduciary relations where his dealings with the subject-matter of his trust NOTE:
or agency, and with the beneficiary or party whose interest is confided 1. The contract between corporations with interlocking director is valid
to his care, is viewed with jealousy by the courts, and may be set aside absent fraud and provided it is reasonable under the circumstances;
on slight grounds, is a doctrine founded on the soundest morality, and 2. If the interest of the interlocking director in one corporation exceeds
which has received the clearest recognition in this court and others. 20% and in the other merely nominal, the contract becomes voidable at
(Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7 Wall., 299; R.R. Co. the latter corporation’s option. In effect, the director would be treated
vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb., 553; as a self-dealing director under Sec. 32;
Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general 3. If the interest in both companies is either both substantial or both
doctrine, however, in regard to contracts of this class, is, not that they nominal, Sec. 33 will apply.
are absolutely void, but that they are voidable at the election of the
party whose interest has been so represented by the party claiming I. DERIVATIVE SUIT
under it. We say, this is the general rule; for there may be cases where
such contracts would be void ab initio; as when an agent to sell buys of In case of a wrongful or fraudulent act of a director, officer or agent,
himself, and by his power of attorney conveys to himself that which he stockholders have the following options:
was authorized to sell. but even here, acts which amount t a ratification 1. Individual or Personal Action – for direct injury to his rights, such as
by the principal may validate the sale denial of his right to inspect corporate books and records or pre-emptive
rights;
The sale or transfer of the corporate property in the case at bar was made by 2. Representative or Class Suit – in which one or more members of a class
three directors who were at the same time a majority of stockholders. If a sue for themselves as a class or for all to whom the right was denied,
majority of the stockholders have a clear and a better right to sell the either as an individual action or a derivative suit; and a
corporate property than a majority of the directors, then it can be said that a 3. Derivative Suit – an action based on injury to the corporation – to
majority of the stockholders made this sale or transfer to the defendant enforce a corporate right – wherein the corporation itself is joined as a
McCullough. necessary party, and recovery is in favor of and for the corporation. It is
a suit granted to any stockholder to institute a case to remedy a wrong
What were the circumstances under which said sale was made? The done directly to the corporation and indirectly to stockholders.
corporation had been going from bad to worse. The work of trying to raise
the sunken Spanish fleet had been for several months abandoned. The CANDIDO PASCUAL, plaintiff-appellant,
corporation under the management of the plaintiff had entirely failed in this vs.
undertaking. It had broken its contract with the naval authorities and the EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees
$10,000 Mexican currency deposited had been confiscated. It had no money. (GR No. L-5174; 19 Phil. 83; March 17, 1911)
It was considerably in debt. It was a losing concern and a financial failure. To
continue its operation meant more losses. Success was impossible. The FACTS: During 1903-1907, the defendant-appellees, without the knowledge
corporation was civilly dead and had passed into the limbo of utter and acquiescence of the stockholders deducted their compensation from
insolvency. The majority of the stockholders or directors sold the assets of gross income instead of from the net profits of the bank, the same with their
this corporation, thereby relieving themselves and the plaintiff of all predecessors for the years 1899-1902.
responsibility. This was only the wise and sensible thing for them to do. They
acted in perfectly good faith and for the best interests of all the stockholders. Plaintiff-appellant brings this action in his own right as a stockholder of the
"It would be a harsh rule that would permit one stockholder, or any minority bank, for the benefit of the bank and all the stockholders, in behalf of the
of stockholders to hold a majority to their investment where a continuation of corporation, which, even though, nominally a defendant, is to all intents and
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
purposes the real plaintiff in this case as shown in the prayer of the of 1903 to 1907 but not for the years 1989 to the first half of 1903.)
complaint.
So it seems to be settled by the Supreme Court of the United States, as a
ISSUE: WON plaintiff has capacity to sue? matter of substantive law, that a stockholder in a corporation who was not
such at the time of the transactions complained of, or whose shares had not
HELD: Yes. In suits of this character the corporation itself and not the devolved upon him since by operation of law, cannot maintain suits of this
plaintiff stockholder is the real party in interest. The rights of the individual character, unless such transactions continue and are injurious to the
stockholder are merged into that of the corporation. It is a universally stockholder, or affect him especially and specifically in some other way.
recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W.
itself for the benefit of all the stockholders. Text writers illustrate this rule by ROBINSON, plaintiffs-appellants,
the familiar example of one person or entity owning all the stock and still vs.
having no greater or essentially different title than if he owned but one single THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC
share. Since, therefore, the stockholder has no title, it is evident that what he BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH,
does have, with respect to the corporation and his fellow stockholder, are defendants-appellees.
certain rights sui generis. These rights are generally enumerated as being, (GR No. L-25241; 49 Phil. 512; Nov. 3, 1926)
first, to have a certificate or other evidence of his status as stockholder
issued to him; second, to vote at meetings of the corporation; third, to FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and Company
receive his proportionate share of the profits of the corporation; and lastly, to (Company), entered into a Memorandum of Agreement and Voting Trust
participate proportionately in the distribution of the corporate assets upon the Agreement with defendant Asia Banking Corporation (Bank) with the
dissolution or winding up. (Purdy's Beach on Private Corporations, sec. 554.) understanding that it was intended for the protection of all parties thereto
from outside creditors, but that they were not intended to be enforced
The right of individual stockholders to maintain suits for and on behalf of the according to the letter thereof, and that they did not contain the true
corporation was denied until within a comparatively short time, but his right agreement between the Bank and the Company which was to finance the
is now no longer doubted. Accordingly, in 1843, in the leading case of Foss company without interference from the above-named creditors.
vs. Harbottle, a stockholder brought suit in the name of himself and other
defrauded stockholders, and for the benefit of the corporation, against the That shortly after, Mullen caused the removal of the plaintiffs as directors of
directors, for a breach of their duty to the corporation. This case was decided the Company and their replacement. The defendants thereafter gave pledges
against the complaining stockholder, on the ground that the complainant had and mortgages from the Company to the Bank and entered into contracts as
not proved that the corporation itself was under the control of the guilty directed by the Bank, and permitted the Bank to foreclose the same and to
parties, and had not proved that it was unable to institute suit. The court, sell the property of the Company itself and permitted the Bank to institute
however, broadly intimated that a case might arise when a suit instituted by suits against the Company, in which the Company was not represented by
defrauded stockholders would be entertained by the court and redress given. anyone having its interest at heart and in which reason the Bank occupied
Acting upon this suggestion, and impelled by the utter inadequacy of suits both plaintiff and defendant and tricked and deluded the courts into giving
instituted by the corporation, defrauded stockholders continued to institute judgment in which the rights of the real parties were concealed and unknown
these suits and to urge the courts of equity to grant relief. These efforts were to the courts.
unsuccessful in clearly establishing the right of stockholders herein until the
cases of Atwol against Merriwether, in England, 1867, and of Dodge vs. Thereafter, defendants incorporated Philippine Motors Corporation where all
Woolsey, in this country, in 1855. These two great and leading cases have the assets and goodwill of the Company were transferred by the Bank.
firmly established the law for England and America, that where corporate
directors have committed a breach of trust either by their frauds, ISSUE: WON the plaintiffs have the legal capacity to bring an action?
ultra vires acts, or negligence, and the corporation is unable or
unwilling to institute suit to remedy the wrong, a single stockholder HELD: Yes. Invoking the well-known rule that shareholders cannot ordinarily
may institute that suit, suing on behalf of himself and other sue in equity to redress wrongs done to the corporation, but that the action
stockholders and for the benefit of the corporation, to bring about a must be brought by the Board of Directors, the appellees argue — and the
redress of the wrong done directly to the corporation and indirectly court below held — that the corporation Teal and Company is a necessary
to the stockholders. party plaintiff and that the plaintiff stockholders, not having made any
demand on the Board to bring the action, are not the proper parties plaintiff.
So it is clear that the plaintiff, by reason of the fact that he is a stockholder in But, like most rules, the rule in question has its exceptions. It is alleged in the
the bank (corporation) has a right to maintain a suit for and on behalf of the complaint and, consequently, admitted through the demurrer that the
bank, but the extent of such a right must depend upon when, how, and for corporation Teal and Company is under the complete control of the
what purpose he acquired the shares which he now owns. In the principal defendants in the case, and, in these circumstances, it is
determination of these questions we can not see how, if it be true that the obvious that a demand upon the Board of Directors to institute an
bank is a quasi-public institution, it can affect in any way the final result. action and prosecute the same effectively would have been useless,
and the law does not require litigants to perform useless acts.
It is alleged that the plaintiff became a stockholder on the 13th of November, (Exchange bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs.
1903; that the defendants, as members of the board of directors and board Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenden, 106 Cal.,
of government, respectively, during each and all the years 1903, 1904, 1905, 329; Glenn vs. Kittaning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa
1906, and 1907, did fraudulently, and to the great prejudice of the bank and Water Company, 104 U. S., 450.)
its stockholders, appropriate to their own use from the profits of the bank
sums of money amounting approximately to P20,000 per annum. The conclusion of the court below that the plaintiffs, not being stockholders
in the Philippine Motors Corporation, had no legal right to proceed against
It is self-evident that the plaintiff in the case at bar was not, before he that corporation in the manner suggested in the complaint evidently rest
acquired in September, 1903, the shares which he now owns, injured or upon a misconception of the character of the action. In this proceeding it was
affected in any manner by the transactions set forth in the second cause of necessary for the plaintiffs to set forth in full the history of the various
action. His vendor could have complained of these transactions, but he did transactions which eventually led to the alleged loss of their property and, in
not choose to do so. The discretion whether to sue to set them aside, or to making a full disclosure, references to the Philippine Motors Corporation
acquiesce in and agree to them, is, in our opinion, incapable of transfer. If appear to have been inevitable. It is to be noted that the plaintiffs seek no
the plaintiff himself had been injured by the acts of defendants' predecessors judgment against the corporation itself at this stage of the proceedings.
that is another matter. He ought to take things as he found them when he
voluntarily acquired his ten shares. If he was defrauded in the purchase of In our opinion the plaintiffs state a good cause of action for equitable relief
these shares he should sue his vendor. (Thus, he may sue for the second half and their complaint is not in any respect fatally defective. The judgment of
HELD: Yes. The defendants mainly controvert the right of plaintiff to HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of
question the appointment and selection of defendants Cuaderno and Dizon, the Republic Bank's board of directors. The suit is aimed at preventing the
which they contend to be the result of corporate acts with which plaintiff, as waste or diversion of corporate funds in paying officers appointed solely to
stockholder, cannot interfere. Normally, this is correct, but Philippine protect Pablo Roman from criminal prosecution, and not to carry on the
jurisprudence is settled that an individual stockholder is permitted to corporation's bank business. Whether the complaint's allegations to such
institute a derivative or representative suit on behalf of the effect are true or not must be determined after due hearing.
corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever (1) the officials of the corporation WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra, under
refuse to sue, or (2) are the ones to be sued or (3) hold the control Compensation of Directors) – Petitioners assert that the motion for
of the corporation. In such actions, the suing stockholder is reconsideration of the civil aspect of the RTC decision acquitting respondents
regarded as a nominal party, with the corporation as the real party is a derivative suit brought by them as minority stockholders of WIT for and
in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia on behalf of the corporation
Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs.
Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in ISSUE: WON the appeal may be considered as a derivative action?
conformity, with these principles. He is neither alleging nor vindicating
his own individual interest or prejudice, but the interest of the HELD: No. A derivative suit is an action brought by minority
Republic Bank and the damage caused to it. The action he has shareholders in the name of the corporation to redress wrongs
brought is a derivative one, expressly manifested to be for and in committed against it, for which the directors refuse to sue. It is a
behalf of the Republic Bank, because it was futile to demand action remedy designed by equity and has been the principal defense of
by the corporation, since its Directors were nominees and creatures the minority shareholders against abuses by the majority. Here,
of defendant Pablo Roman (Complaint, p. 6). The frauds charged by however, the case is not a derivative suit but is merely an appeal on the civil
plaintiff are frauds against the Bank that redounded to its prejudice. aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for
The complaint expressly pleads that the appointment of Cuaderno as estafa and falsification of public document. Among the basic
technical consultant, and of Bienvenido Dizon to head the Board of Directors requirements for a derivative suit to prosper is that the minority
of the Republic Bank, were made only to shield Pablo Roman from criminal shareholder who is suing for and on behalf of the corporation must
prosecution and not to further the interests of the Bank, and avers that both allege in his complaint before the proper forum that he is suing on a
men are Roman's alter egos. There is no denying that the facts thus pleaded derivative cause of action on behalf of the corporation and all other
in the complaint constitute a cause of action for the bank: if the questioned shareholders similarly situated who wish to join. This is necessary to
appointments were made solely to protect Roman from criminal prosecution, vest jurisdiction upon the tribunal in line with the rule that it is the allegations
by a Board composed by Roman's creatures and nominees, then the moneys in the complaint that vests jurisdiction upon the court or quasi-judicial body
disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or concerned over the subject matter and nature of the action. This was not
diversion of corporate funds, since the Republic Bank would have no interest complied with by the petitioners either in their complaint before the court a
in shielding Roman, and the directors in approving the appointments would quo nor in the instant petition which, in part, merely states that "this is a
be committing a breach of trust; the Bank, therefore, could sue to nullify the petition for review on certiorari on pure questions of law to set aside a
appointments, enjoin disbursement of its funds to pay them, and recover portion of the RTC decision in Criminal Cases Nos. 37097 and 37098" since
those paid out for the purpose, as prayed for in the complaint in this case the trial court's judgment of acquittal failed to impose any civil liability against
(Angeles vs. Santos, supra.). the private respondents. By no amount of equity considerations, if at all
ISSUE: WON De Los Angeles can institute a derivative suit? ISSUE: WON Chase has capacity to institute a derivative suit?
HELD: Yes. The theory that de los Angeles has no personality to bring suit in HELD: Yes. The evidence of defendants proves very clearly that right from
behalf of the corporation — because his stockholding is minuscule, and there the start, Chase was by them recognized as a stockholder and initial
is a "conflict of interest" between him and the PCGG — cannot be sustained. incorporator with 600 paid up shares representing a 1/3 interest in Amparts,
and that would be enough for Chase to have the correct personality to
It is claimed that since de los Angeles 20 shares (owned by him since 1977) institute this derivative suit; the second place, it also appears apparently
represent only. 00001644% of the total number of outstanding shares (1 undenied that Chase did not win in California so that he did not recover the
21,645,860), he cannot be deemed to fairly and adequately represent the $150,000.00 that he had prayed for there against Overseas, which if he had
interests of the minority stockholders. The implicit argument — that a would really in the mind of the Court have put him in estoppel to intervene in
stockholder, to be considered as qualified to bring a derivative suit, must hold any manner as incorporator or stockholder of Amparts; and in the third place
a substantial or significant block of stock — finds no support whatever in the and most important it should not be forgotten that Chase has filed the
law. The requisites for a derivative suit are as follows: present case not for his personal benefit, but for the benefit of Amparts, so
that to the Court the argument of estoppel as against him would appear to
a) the party bringing suit should be a shareholder as of the time of the act be out of place; the estoppel to be valid as a defense must be an estoppel
or transaction complained of, the number of his shares not being against Amparts itself; the long and short of it is that the Court is impelled
material; and constrained to discard all the other defenses set up by Dr. Buencamino
on the principal complaint; the result of all these would be to sustain so far,
b) he has tried to exhaust intra-corporate remedies, i.e., has made a the position of Chase that Dr. Buencamino must account for the P570,000.00
demand on the board of directors for the appropriate relief but the latter has used to pay the second series of payment on the subscription, the
failed or refused to heed his plea; and P330,000.00 used in paying the lsst series on the subscription, plus another
c) the cause of action actually devolves on the corporation, the sum of P245,000.00 entered as loan on his favor and against Amparts, for
wrongdoing or harm having been, or being caused to the corporation and not the sum of P434,000.00 earned in the blackmarketing of the excess of
to the particular stockholder bringing the suit. $140,000.00 dollars on the forwarding costs and promotional expenses, for
the sum of P391,200.00 earned in the blackmarketing of the excess of
The bona fide ownership by a stockholder of stock in his own right $117,000.00 in the transaction with Bertoni and Cotti, and all these would
suffices to invest him with standing to bring a derivative action for reach a total of P1,970,200.00; and as the appropriation of the profits for
the benefit of the corporation. The number of his shares is himself was a quasi-delict, the liability therefore assuming that it had been
immaterial since he is not suing in his own behalf, or for the done with the cooperation of Cranker would have to be solidary, 2194 New
protection or vindication of his own particular right, or the redress Civil Code.
of a wrong committed against him, individually, but in behalf and
for the benefit of the corporation. CATALINA R. REYES, petitioner,
vs.
Neither can the "conflict-of-interest" theory be upheld. From the conceded HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of
premise that de los Angeles now sits in the SMC Board of Directors by the Manila, Branch XIII and FRANCISCA R. JUSTINIANI, respondents.
grace of the PCGG, it does not follow that he is legally obliged to vote as the (GR No. L-16982; 3 SCRA 198; Sept. 30, 1961)
PCGG would have him do, that he cannot legitimately take a position
inconsistent with that of the PCGG, or that, not having been elected by the FACTS: Several purchases were made by Roxas-Kalaw Textile Mills in New
minority stockholders, his vote would necessarily never consider the latter's York for raw materials but were found out to consist of already finished
interests. The proposition is not only logically indefensible, non sequitur, but product for which reason the Central Bank of the Philippines stopped all
also constitutes an erroneous conception of a director's role and function, it dollar allocations for raw materials for the corporation which necessarily led
The claim that respondent Justiniani did not take steps to remedy the illegal HELD: No. The complaint shows that the action is for damages resulting
importation for a period of two years is also without merit. During that period from mismanagement of the affairs and assets of the corporation by its
of time respondent had the right to assume and expect that the directors principal officer, it being alleged that defendant's maladministration has
would remedy the anomalous situation of the corporation brought about by brought about the ruin of the corporation and the consequent loss of value of
their own wrong doing. Only after such period of time had elapsed could its stocks. The injury complained of is thus primarily to that of the
respondent conclude that the directors were remiss in their duty to protect corporation, so that the suit for the damages claimed should be by the
the corporation property and business. corporation rather than by the stockholders (3 Fletcher, Cyclopedia of
Corporation pp. 977-980). The stockholders may not directly claim
We are led to agree with the judge below that the appointment of a receiver those damages for themselves for that would result in the
was not only expedient but also necessary to restore the faith and confidence appropriation by, and the distribution among them of part of the
of the Central Bank authorities in the administration of the affairs of the corporate assets before the dissolution of the corporation and the
corporation, thus ultimately leading to a restoration of the dollar allocation so liquidation of its debts and liabilities, something which cannot be
essential to the operation of the textile mills. legally done in view of section 16 of the Corporation Law.
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, But while it is to the corporation that the action should pertain in cases of this
EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA- nature, however, if the officers of the corporation, who are the ones called
BORROMEO, petitioners, upon to protect their rights, refuse to sue, or where a demand upon them to
vs. file the necessary suit would be futile because they are the very ones to be
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First sued or because they hold the controlling interest in the corporation, then in
Instance of Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN that case any one of the stockholders is allowed to bring suit (3 Fletcher's
LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES respondents. Cyclopedia of Corporations, pp. 977-980). But in that case it is the
(GR No. -40620; 90 SCRA 40; May 6, 1979) corporation itself and not the plaintiff stockholder that is the real property in
interest, so that such damages as may be recovered shall pertain to the
FACTS: A writ of prelimiary injunction was filed by herein respondents as corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it is
purchasers of 1,328 shares of stock of Inocented De La Rama, inc. after a derivative suit brought by a stockholder as the nominal party plaintiff for
herein petitioners surreptitiously met and authorized the sale of 823 shares to the benefit of the corporation, which is the real property in interest (13
forestall the petitioner’s takeover from the previous president and vice- Fletcher, Cyclopedia of Corporations, p. 295).
president (sellers of the 1,328 shares), in violation of their pre-emptive right.
The trial court ruled in favor of respondents. Later on, private respondents In the present case, the plaintiff stockholders have brought the action not for
entered into a compromise agreement with the recipients for the transfer of the benefit of the corporation but for their own benefit, since they ask that
Sec. 35. Executive committee. - The by-laws of a corporation may create A. POWER TO SUE AND BE SUED
an executive committee, composed of not less than three members of the
board, to be appointed by the board. Said committee may act, by majority A corporation may sue and be sued in its corporate name just like any other
vote of all its members, on such specific matters within the competence of person.
the board, as may be delegated to it in the by-laws or on a majority vote of
the board, except with respect to: (1) approval of any action for which VENUE: the action filed against it must be instituted at the place of principal
shareholders' approval is also required; (2) the filing of vacancies in the office of the corporation.
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
subject-matter of the action by vertue of the service of summons in the
SERVICE OF SUMMONS: Sec. 11, Rule 14 of the Rules of Court provide: manner required by law. Where there is no service of summons or a
voluntary general appearance by the defendant, the court acquires no
Sec. 11. Service upon domestic private juridical entity. When the jurisdiction to pronounce a judgment in the cause. (Syllabi Salmon and Pacific
defendant is a corporation, partnership or association organized under the Commercial Co. vs. Tan Cueco, 36 Phil. 556).
laws of the Philippines with a juridical personality, service may be made on
the president, managing partner, general manager, corporate secretary, Consequently, the order of default, the judgment by default and the
treasurer, or in-house counsel. execution in Civil Case No. 97373 are void and should be set aside.
Service of summons upon persons other than those named under than those E. B. VILLAROSA & PARTNER CO., LTD., petitioner,
named in the above provision is without force and effect. vs.
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC,
DELTA MOTOR SALES CORPORATION, petitioner, Branch 132, Makati City and IMPERIAL DEVELOPMENT CORPORATION,
vs. respondent.
HON. JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First (GR No. 136426; Aug. 6, 1999)
Instance of Manila, THE CITY SHERIFF OF MANILA, and JOSE LUIS
PAMINTUAN, respondents FACTS: Petitioner is a limited partnership with principal office address at
(GR No. L-41667; April 30, 1976) Davao City and with branch offices at Parañaque, Metro Manila and Lapasan,
Cagayan de Oro City.
FACTS: Herein respondent Pamintuan initiated an action against petitioner
Delta Motors for the alleged defective Toyota car sold to him and for failure Petitioner and private respondent executed a Deed of Sale with Development
to fulfill the warranty obligation by not repairing the car. Agreement wherein the former agreed to develop certain parcels of land
located at Cagayan de Oro belonging to the latter into a housing subdivision
The summons were served on Dionisia Miranda, employee of the petitioner. for the construction of low cost housing units. They further agreed that in
Delta Motors failed to answer the complaint and was declared in default and case of litigation regarding any dispute arising therefrom, the venue shall be
evidence was presented and a decision was rendered against herein in the proper courts of Makati.
petitioner.
Private respondent, as plaintiff, filed a Complaint for Breach of Contract and
Petitioner filed a motion to lift the order of default and to set aside the Damages against petitioner, as defendant, before the RTC Makati for failure
judgment and for new trial, which was denied. of the latter to comply with its contractual obligation in that, other than a few
unfinished low cost houses, there were no substantial developments therein.
ISSUE: WON there was proper service of summons?
Summons, together with the complaint, were served upon the defendant,
HELD: No. Rule 14 of the Revised Rules of Court provides: through its Branch Manager at the stated address at Cagayan de Oro City but
the Sheriff's Return of Service stated that the summons was duly served
SEC. 13. Service upoin private domestic corporation or partnership. — If "upon defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager
defendant is a corporation organized under the laws of the Philippines or a Engr. at their new office Villa Gonzalo, Nazareth, Cagayan de Oro City, and
partnership duly registered, service may be made on the president, evidenced by the signature on the face of the original copy of the summons.
manager, secretary, cashier, agent, or any of its directors.
Defendant filed a motion to dismiss on the ground of improper service of
For the purpose of receiving service of summons and being bound summons which was denied.
by it, a corporation is identified with its agent or officer who under
the rule is designated to accept service of process. "The corporate ISSUE: WON the court acquired jurisdiction?
power to receive and act on such service, so far as to make it known
to the corporation, is thus vested in such officer or agent." (Lafayette HELD: No. Earlier cases have uphold service of summons upon a
Insurance Co. vs. French, 15 L. Ed. 451, 453). construction project manager; a corporation's assistant manager; ordinary
clerk of a corporation; private secretary of corporate executives; retained
A strict compliance with the mode of service is necessary to confer counsel; officials who had charge or control of the operations of the
jurisdiction of the court over a corporation. The officer upon whon service is corporation, like the assistant general manager; or the corporation's Chief
made be one who is named in the statute; otherwise the service is Finance and Administrative Officer. In these cases, these persons were
insufficient. So, where the statute required that in the case of a domestic considered as "agent" within the contemplation of the old rule. Notably,
corporation summons should be served on "the president or head of the under the new Rules, service of summons upon an agent of the corporation
corporation secretary treasurer, cashier or managing agent thereof", service is no longer authorized.
of summons on the secretary's wife did not confer jurisdiction over the
corporation in the foreclosure proceeding against it. Hence, the the decree of The designation of persons or officers who are authorized to accept summons
forclosure and the deficiency judgment were void and should be vacated. for a domestic corporation or partnership is now limited and more clearly
(Reader vs. District Court, 94 Pacific 2nd 858). specified in Section 11, Rule 14 of the 1997 Rules of Civil Procedure. The rule
now states "general manager" instead of only "manager"; "corporate
The purpose is to render it reasonably certain that the corporation secretary" instead of "secretary"; and "treasurer" instead of "cashier." The
will receive prompt and proper notice in an action against it or to phrase "agent, or any of its directors" is conspicuously deleted in the new
insure that the summons be served on a representative so rule.
integrated with the corporation that such person will know what to
do with the legal papers served on him. In other words, "to bring The particular revision under Section 11 of Rule 14 was explained by retired
home to the corporation notice of the filing of the action". (35A C.J.S. Supreme Court Justice Florenz Regalado, thus:
288 citing Jenkins vs. Lykes Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs. . . . the then Sec. 13 of this Rule allowed service upon a
Langston D.C. Fla., 23 F.R.D. 249). defendant corporation to "be made on the president, manager,
secretary, cashier, agent or any of its directors." The aforesaid
In the instant case the Manila court did not acquire jurisdiction over Delta terms were obviously ambiguous and susceptible of broad and
Motor because it was not properly served with summons. The service of sometimes illogical interpretations, especially the word "agent"
summons on Dionisia G. Miranda, who is not among the persons mentioned of the corporation. The Filoil case, involving the litigation
in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor. lawyer of the corporation who precisely appeared to challenge
Courts acquire jurisdiction over the person of a party defendant and of the the validity of service of summons but whose very appearance
A strict compliance with the mode of service is necessary to When a corporation is expressly empowered by law to acquire or alienate real
confer jurisdiction of the court over a corporation. The officer and/or personal properties, the limitations imposed by Sec. 36 are as follows:
upon whom service is made must be one who is named in the
statute; otherwise the service is insufficient. . . . Sec. 36. Xxx
The purpose is to render it reasonably certain that the corporation will 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
receive prompt and proper notice in an action against it or to insure that mortgage and otherwise deal with such real and personal property, including
the summons be served on a representative so integrated with the securities and bonds of other corporations, (1) as the transaction of the
corporation that such person will know what to do with the legal papers lawful business of the corporation may reasonably and necessarily
served on him. In other words, "to bring home to the corporation notice require, (2) subject to the limitations prescribed by law and the
of the filing of the action." . . . . Constitution.
The liberal construction rule cannot be invoked and utilized as a The first limitation practically sets the limit of the corporate authority to
substitute for the plain legal requirements as to the manner in acquire, own, hold or alienate property. As it has been said the purpose
which summons should be served on a domestic corporation. . . clause in the AOI grants as well as limits the powers which a corporation may
. . (emphasis supplied). exercise. Verily, WON the acquisition of such property is within the corporate
powers or authority may reasonably be determined from the purpose or
Accordingly, we rule that the service of summons upon the branch manager purposes indicated in the AOI.
of petitioner at its branch office at Cagayan de Oro, instead of upon the
general manager at its principal office at Davao City is improper. LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC., ET AL.,
Consequently, the trial court did not acquire jurisdiction over the person of respondents (Gr No. 17716; July 31, 1962) – Nicolas Concepcion executed a
the petitioner. chattel mortgage covering a certificate of public convenience grnted to him to
operate taxicab service of 27 units in Manila, in favor of petitioner, to secure
B. POWER OF SUCCESSION a loan evidenced by a promissory note guaranteed by Concepcion and one
Placido Esteban.
This right basically means that the corporation persists to exist despite death,
incapacity, civil interdiction, or withdrawal of the stockholders or members Concepcion mortgaged the same certificate to cover a second loan with
thereof. Rehabilitation Finance.
C. POWER TO ADOPT AND USE A COMMON SEAL Petitioner filed an action to foreclose the mortgage. While it was pending, RF
also foreclosed the second chattel mortgage where the certificate was sold at
This right has be expressly granted by law. However, it is not mandatory but a public auction in favor of AD Santos who applied for the approval of the
merely permissive. This is because the corporate seal performs no further or sale which was granted by the Public Service Commission.
greater function than to impart prima facie evidence of the due execution by
the corporation of a written document or obligation. Later on, the CFI rendered a judgment in favor of petitioner, where the
certificate was sold at a public auction in favor of the petitioner who
D. POWER TO AMEND ITS ARTICLES OF INCORPORATION immediately filed for approval with the Commission. AD Santos Inc., recipient
of the certificate from AD Santos, opposed the application for approval.
The procedures for the exercise of this right are provided under Sec. 16, Sec.
37 and 38 as discussed earlier under CHAPTER 5: CORPORATE CHARTER ISSUE: WON Petitioner may acquire the certificate of public convenience?
AND ITS AMENDMENTS.
HELD: No. Petitioner claims in this regard that its corporate purposes are to
As far as corporations created by special law are concerned, amendment may carry on a general mercantile and commercial business, etc., and that it is
NOT be considered as a matter of right. The law creating it may or may not authorized in its articles of incorporation to operate and otherwise deal in and
authorize or empower the corporation to make any changes in its AOI or concerning automobiles and automobile accessories' business in all its
charter. However, whether empowered or not, Congress may amend or multifarious ramification (petitioner's brief p. 7) and to operate, etc., and
repeal a corporate charter by virtue of its inherent authority to amend or otherwise dispose of vessels and boats, etc., and to own and operate
repeal laws under the Consitution. steamship and sailing ships and other floating craft and deal in the same and
engage in the Philippine Islands and elsewhere in the transportation of
E. POWER TO ADOPT BY-LAWS persons, merchandise and chattels by water; all this incidental to the
transportation of automobiles (id. pp. 7-8 and Exhibit B).
The Corporation Code actually REQUIRES a corporation to adopt by-laws, not
contrary to law, morals, or public policy, within 1 month from receipt of We find nothing in the legal provision and the provisions of petitioner's
official notice of the issuance of the certificate of incorporation or registration articles of incorporation relied upon that could justify petitioner's contention
(Sec. 46). in this case. To the contrary, they are precisely the best evidence that it has
no authority at all to engage in the business of land transportation and
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
operate a taxicab service. That it may operate and otherwise deal in THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO,
automobiles and automobile accessories; that it may engage in the respondents
transportation of persons by water does not mean that it may engage in the (GR No. L56613; March 14, 1988)
business of land transportation — an entirely different line of business. If it
could not thus engage in the line of business, it follows that it may not FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
acquire an certificate of public convenience to operate a taxicab service, such registration of a parcel of land which it claimed to have acquired by virtue of
as the one in question, because such acquisition would be without purpose a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant
and would have no necessary connection with petitioner's legitimate and its predecessors-in-interest have been in actual, continuous, public,
business. peaceful and adverse possession and occupation of the said land for more
than 30 years, which was opposed by the Government as represented by the
GOVERNMENT VS. EL HOGAR FILIPINO (supra) – the directors of El Director of Lands. The CFI and the CA ruled in favor of INC.
Hogar Filipino erected a modern reinforced concrete office building at the site
of its old building. The acquisition of the lot and the construction of the new ISSUE: WON the corporation may acquire the land in question?
office building thereon is not the subject of the second cause of action for
being ultra vires on the part of the corporation. HELD Yes. As observed at the outset, had this case been resolved
immediately after it was submitted for decision, the result may have been
ISSUE: WON the erection of the building was reasonable? quite adverse to private respondent. For the rule then prevailing under the
case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799,
HELD: Yes. With this contention we are unable to agree. Under the reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other
Corporation Law, every corporation has the power to purchase, hold and subsequent cases involving private respondent adverted to above', is that a
lease such real property as the transaction of the lawful business of the juridical person, private respondent in particular, is disqualified under the
corporation may reasonably and necessarily require. When this property was 1973 Constitution from applying for registration in its name alienable public
acquired in 1916, the business of El Hogar Filipino had developed to such an land, as such land ceases to be public land "only upon the issuance of title to
extent, and its prospects for the future were such as to justify its directors in any Filipino citizen claiming it under section 48[b]" of Commonwealth Act No.
acquiring a lot in the financial district of the City of Manila and in constructing 141, as amended. These are precisely the cases cited by petitioner in support
thereon a suitable building as the site of its offices; and it cannot be fairly of its theory of disqualification.
said that the area of the lot — 1,413 square meters — was in excess of its
reasonable requirements. The law expressly declares that corporations may Since then, however, this Court had occasion to re-examine the rulings in
acquire such real estate as is reasonably necessary to enable them to carry these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
out the purposes for which they were created; and we are of the opinion that Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among
the owning of a business lot upon which to construct and maintain its offices others. Thus, in the recent case of Director of Lands v. Intermediate
is reasonably necessary to a building and loan association such as the Appellate Court, 146 SCRA 509, We categorically stated that the majority
respondent was at the time this property was acquired. A different ruling on ruling in Meralco is "no longer deemed to be binding precedent", and that
this point would compel important enterprises to conduct their business "[T]he correct rule, ... is that alienable public land held by a possessor,
exclusively in leased offices — a result which could serve no useful end but personally or through his predecessors-in-interest, openly, continuously and
would retard industrial growth and be inimical to the best interests of society. exclusively for the prescribed statutory period [30 years under the Public
Land Act, as amended] is converted to private property by mere lapse or
We are furthermore of the opinion that, inasmuch as the lot referred to was completion of said period, ipso jure." We further reiterated therein the
lawfully acquired by the respondent, it is entitled to the full beneficial use timehonored principle of non-impairment of vested rights.
thereof. No legitimate principle can discovered which would deny to one
owner the right to enjoy his (or its) property to the same extent that is The crucial factor to be determined therefore is the length of time private
conceded to any other owner; and an intention to discriminate between respondent and its predecessors-in-interest had been in possession of the
owners in this respect is not lightly to be imputed to the Legislature. The land in question prior to the institution of the instant registration proceedings.
point here involved has been the subject of consideration in many decisions The land under consideration was acquired by private respondent from
of American courts under statutes even more restrictive than that which Aquelina de la Cruz in 1947, who, in turn, acquired by same by purchase
prevails in this jurisdiction; and the conclusion has uniformly been that a from the Ramos brothers and sisters, namely: Eusebia, Eulalia, Mercedes,
corporations whose business may properly be conducted in a populous center Santos and Agapito, in 1936. Under section 48[b] of Commonwealth Act No.
may acquire an appropriate lot and construct thereon an edifice with facilities 141, as amended, "those who by themselves or through their predecessors-
in excess of its own immediate requirements in-interest have been in open, continuous, exclusive and notorious possession
and occupation of agricultural lands of the public domain, under a bona fide
It would seem to be unnecessary to extend the opinion by lengthy citations claim of acquisition or ownership, for at least thirty years immediately
upon the point under consideration, but Brown vs. Schleier (118 Fed., 981), preceding the filing of the application for confirmation of title except when
may be cited as being in harmony with the foregoing authorities. In dealing prevented by war or force majeure" may apply to the Court of First Instance
with the powers of a national bank the court, in this case, said: of the province where the land is located for confirmation of their claims, and
the issuance of a certificate of title therefor, under the Land Registration Act.
When an occasion arises for an investment in real property for either of Said paragraph [b] further provides that "these shall be conclusively
the purposes specified in the statute the national bank act permits presumed to have performed all the conditions essential to a Government
banking associations to act as any prudent person would act in making grant and shall be entitled to a certificate of title under the provisions of this
an investment in real estate, and to exercise the same measure of chapter." Taking the year 1936 as the reckoning point, there being no
judgment and discretion. The act ought not to be construed in such a showing as to when the Ramoses first took possession and occupation of the
way as to compel a national bank, when it acquires real property for a land in question, the 30-year period of open, continuous, exclusive and
legitimate purpose, to deal with it otherwise than a prudent land owner notorious possession and occupation required by law was completed in 1966.
would ordinarily deal with such property.
The completion by private respondent of this statutory 30-year period has
At any rate the weight of judicial opinion is so overwhelmingly in favor of dual significance in the light of Section 48[b] of Commonwealth Act No. 141,
sustaining the validity of the acts alleged in the second cause of action to as amended and prevailing jurisprudence: [1] at this point, the land in
have been done by the respondent in excess of its powers that we refrain question ceased by operation of law to be part of the public domain; and [2]
from commenting at any length upon said cases. The ground stated in the private respondent could have its title thereto confirmed through the
second cause of action is in our opinion without merit. appropriate proceedings as under the Constitution then in force, private
corporations or associations were not prohibited from acquiring public lands,
THE DIRECTOR OF LANDS, petitioner, but merely prohibited from acquiring, holding or leasing such type of land in
vs. excess of 1,024 hectares.
H. POWER TO ENTER INTO MERGER OR CONSOLIDATION 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
This is an express power granted by the law under the Code, particularly Title
IX thereof. It is a question, in each case, of the logical relation of the act to the
corporate purpose expressed in the charter. For if the act is one
I. POWER TO MAKE REASONABLE DONATIONS which is lawful in itself and not otherwise prohibited, and is done
for the purpose of serving corporate ends, and reasonably
Ordinarily, a pure gift of funds or property by a corporation not created for contributes to the promotion of those ends in a substantial and not
charitable purpose is not authorized and would constitute a violation of the in a remote and fanciful sense, it may be fairly considered within
rights of its stockholders unless it is empowered by statute. There are the corporation’s charter powers (Montelibano vs. Bacolod-Murcia Milling
circumstances, however, under which a donation by a corporation may be to Co., Inc. as cited in NPC vs. VERA)
it benefit as a means of increasing its business or promoting patronage.
I. POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR
Thus, Sec. 36 (9) expressly authorizes a corporation to make donations, NECESSARY TO CARRY OUT ITS PURPOSES
subject to the following limitations:
1. The donation must be reasonable; TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA 198;
2. It must be for public welfare, or for hospital, charitable, scientific, Sept. 25, 1967) – Respondent Filipinas Cement Corporation filed an
cultural or similar purpose; and application with herein respondent PSC for a certificate of public convenience
3. It shall not be in aid of political party or candidate, or for purposes of to install, maintain and operate an electric plant in Teresa, Rizal for the
partisan political aactivity. purpose of supplying electric power and light to its cement factory and its
employees living within its compound. Herein petitioner, operating an electric
J. POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER plant in Teresa Rizal filed an opposition claiming that Filipinas is not
PLANS authorized to operate the proposed electric plant under its articles of
incorporation. PSC decided in favor of Filipinas.
It is now generally recognized in almost all jurisdiction to empower a
corporation to establish pension plans, pension trust, profit sharing plans, ISSUE: WON under its articles of incorporation, Filipinas is authorized to
stock bonus or stock option plans and other incentive plans to directors, operate and maintain an electric plant?
officers and employees. In fact, the power may include any act to promote
convenience, welfare and benefit of the employees or officers. HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for authority to
secure from any governmental, state, municipality, or provincial, city or other
REPUBLIC VS. ACOJE MINING COMPANY INC. (7 SCRA 361; Feb. 28, authority, and to utilize and dispose of in any lawful manner, rights, powers,
1963) - A post office branch was opened in herein respondent’s mining camp privileges, franchises and concessions – obviously necessary or at least
at Sta. Cruz Zambales, at its request, where Hilario M. Sanchez, an employee related to the operation of its cement factory. Moreover, said AOI also
of such company, was the postmaster. Prior to the opening the company, at provide that the corporation may generally perform any and all acts
the request of the Bureau of Posts, adopted a resolution that the former connected with the business of manufacturing portland cement or arising
would assume full responsibility for all cash received by the postmaster. On therefrom or incidental thereto.
May 11, 1954, the postmaster went on a three day leave but never returned.
As a result, an action was brought by the government to recover P13,867.24, It cannot be denied that the operation of an electric light, heat and power
the amount of shortage in the accounts of the postmaster, from the plant is necessarily connected with the business of manufacturing cement. If
company. in the modern world where we live today electricity is virtually a necessity for
our daily needs, it is more so in the case of industries like the manufacture of
ISSUE: WON the subject resolution is within the powers of the company to cement.
adopt?
NPC VS. VERA (170 SCRA 721; Feb. 27, 1989)
HELD: Yes. The opening of the post office branch was undertaken because
of a request submitted by respondent company to promote the convenience FACTS: Private Respondent Sea Lion International Port Terminal Services
and benefit of its employees. The idea did not come from the government Inc. filed a complaint for prohibition and mandamus with damages against
and the Director of Posts was prevailed upon to agree to the request only petitioner NPC and Philippine Ports Authority after NPC did not renew its
after studying the necessity for its establishment and after imposing upon the Contract for Stevedoring Services for coal-handling of NPC’s plant and in
company certain requirements intended to safeguard and protect the interest taking over its stevedoring services.
of the government. Accordingly, the company cannot now be heard to
complain of its liability upon the technical plea that the resolution is ultra ISSUE: WON NPC may embark in stevedoring and arrastre services?
vires. The least that can be said is that it cannot now go back on its plighted
word on the ground of estoppel. HELD: Yes. The NPC was created and empowered not only to construct,
operate and maintain power plants, reservois, transmission lines and other
The resolution covers a subject which concerns the benefit, convenience and works, but also:
welfare of the company’s employees and their families. There are certain
corporate acts that may be performed outside of the scope of the powers …to exercise such powers and do such things as may be reasonably
expressly conferred if they are necessary to promote the interest or welfare necessary to carry out the business and purposes for which it was organized,
of the corporation. Thus, it has been held that “although not expressly or which, from time to time, may be declared by the Board to be necessary,
authorized to do so a corporation may become a surety where the particular useful, incidental or auxiliary to accomplish said purpose… (Sec. 3[1] of RA
transaction is reasonably necessary or proper to the conduct of its business”, 6395, as amended)
and here it is undisputed that the establishment of the local post office is a
vital improvement in the living condition of its employees and laborers who To determine whether or not the NPC act falls within the purview of the
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
above provision, the Court must decide whether or not a logical and outstanding capital stock (including non-voting shares) or 2/3 of the
necessary relation exists between the act questioned and the members in case of non-stock corporations;
corporate purpose expressed in the NPC charter. For if the act is one 3. The ratification must be made at a meeting duly called for that purpose;
which is lawful in itself and not otherwise prohibited, and is done 4. Prior written notice of the proposal to extend or shorten the corporate
for the purpose of serving corporate ends, and reasonably term must be made stating the time and place of meeting addressed to
contributes to the promotion of those ends in a substantial and not each stockholder or member at his place of residence, either by mail or
in a remote and fanciful sense, it may be fairly considered within personal service;
the corporation’s charter powers (Montelibano vs. Bacolod-Murcia Milling 5. In case of extension, the same cannot be made earlier than 5 years
Co., Inc.) prior to the original or subsequent expiry date unless there are
justifiable reasons for an earlier extension;
In the instant case, it is an undisputed fact that the pier owned by NPC, 6. In case of extension, the same must be made during the lifetime of the
receives various shipment of coal which is used exclusively to fuel the corporation;
Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of 7. Any dissenting stockholder may exercise his appraisal right;
electric power. The stevedoring services which involve the unloading of the 8. Submission of the amended articles with the SEC; and
coal shipments into the NPC pier for its eventual conveyance to the power 9. Approval thereof by the SEC (as required under Sec. 37 for extension,
plant are incidental and indispensable to the operation of the plant. The and Sec. 120 for shortening the term with the effect of dissolution)
Court holds that NPC is empowered under its Charter to undertake such
services, it being reasonably necessary to the operation and maintenance of READ: Alhambra Cigar and Cigarette Manufacturing, Inc. vs. SEC
the power plant.
K. POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR,
POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988) CREATE OR INCREASE BONDED INDEBTEDNESS
FACTS: 14 plaintiffs, all associate members of the International School, Inc. Sec. 38. Power to increase or decrease capital stock; incur, create or
brought an action for injunction against 10 members of the Board of increase bonded indebtedness. - No corporation shall increase or
Trustees, after a letter of Donal Marshall, president of the board, was sent decrease its capital stock or incur, create or increase any bonded
stating that the school would be collecting a “development fee” of P2,625 per indebtedness unless approved by a majority vote of the board of directors
enrollee for the purpose of constructing new buildings and remodel existing and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3)
ones to accommodate the increasing enrollment in the school which would of the outstanding capital stock shall favor the increase or diminution of the
need P35M. The CFI of Manila dismissed the complaint. capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the
ISSUE: WON the imposition of the development fee is within the powers of capital stock or of the incurring, creating, or increasing of any bonded
the school? 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
HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to the sch0ol, increasing of any bonded indebtedness is to be considered, must be
expressly authorized the Board of Trustees “upon consultation with the addressed to each stockholder at his place of residence as shown on the
Secretary of Education and Culture” to determine the amount of fees and books of the corporation and deposited to the addressee in the post office
assessments which may be reasonably imposed upon its students, to with postage prepaid, or served personally.
maintain or conform to the school’s standard of education. Such consultation
complied with and the Secretary expressed his conformity with the A certificate in duplicate must be signed by a majority of the directors of the
reasonableness of the assessment. The lower court observed that: corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
Xxx the expansion of the school facilities, which is to be done by improving
old buildings and/or constructing new ones, is an ordinary business (1) That the requirements of this section have been complied with;
transaction well within the competence of the Board of Trustees to act upon. (2) The amount of the increase or diminution of the capital stock;
Xxx Being directly related to the purpose of elevating and maintaining the (3) If an increase of the capital stock, the amount of capital stock or number
school’s standard of instruction, which is ordained in fact by PD 732, the of shares of no-par stock thereof actually subscribed, the names, nationalities
expansion cannot result in any radical or fundamental change in the kind of and residences of the persons subscribing, the amount of capital stock or
activity being conducted by the school that might require the consent of the number of no-par stock subscribed by each, and the amount paid by each on
members composing it. 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
J. POWER TO EXTEND OR SHORTEN CORPORATE TERM the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
This has been discussed in Chapter 5: CORPORATE CHARTER AND ITS (5) The actual indebtedness of the corporation on the day of the meeting;
AMENDMENTS. (6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or
Sec. 37. Power to extend or shorten corporate term. - A private the incurring, creating or increasing of any bonded indebtedness.
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 Any increase or decrease in the capital stock or the incurring,
trustees and ratified at a meeting by the stockholders representing at least creating or increasing of any bonded indebtedness shall require
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds prior approval of the Securities and Exchange Commission.
(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 One of the duplicate certificates shall be kept on file in the office of the
to each stockholder or member at his place of residence as shown on the corporation and the other shall be filed with the Securities and Exchange
books of the corporation and deposited to the addressee in the post office Commission and attached to the original articles of incorporation. From and
with postage prepaid, or served personally: Provided, That in case of after approval by the Securities and Exchange Commission and the issuance
extension of corporate term, any dissenting stockholder may exercise his by the Commission of its certificate of filing, the capital stock shall stand
appraisal right under the conditions provided in this code. increased or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may declare:
From the above-provision and jurisprudence, the requirements and procedure Provided, That the Securities and Exchange Commission shall not accept for
for extending or shortening the corporate term are as follows: filing any certificate of increase of capital stock unless accompanied by the
1. Approval by the majority vote of the BOD/T; sworn statement of the treasurer of the corporation lawfully holding office at
2. Ratification by the stockholders representing at least 2/3 of the the time of the filing of the certificate, showing that at least twenty-five
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
(25%) percent of such increased capital stock has been subscribed and that by 50% and the subscribers be released from the obligation to pay their
at least twenty-five (25%) percent of the amount subscribed has been paid unpaid balance.
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%) In the course of time, the company became insolvent and went into the
percent of the subscription: Provided, further, That no decrease of the capital hands of Philippine Trust Company (Philtrust), as assignee in bankruptcy, and
stock shall be approved by the Commission if its effect shall prejudice the by it this action was instituted to recover ½ of the stock subscription of
rights of corporate creditors. herein defendant who subscribed to 450 of the 1,000 authorized capital
stock.
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 It does not appear that the formalities under the Corporation Code for the
of at least two-thirds (2/3) of the members in a meeting duly called for the reduction of capital stock were observed and in particular it does not appear
purpose. that any certificate was at any time filed in the Bureau of Commerce and
Industry, showing such reduction.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the Respondent judge ruled in favor of Philtrust and directed respondent to pay
sufficiency of the terms thereof. ½ of the subscription price of his shares.
The following requirements or procedure should be complied with: ISSUE: WON the reduction is valid and proper?
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of the HELD: No. A corporation has no power to release an original subscriber to its
outstanding capital stock (including non-voting shares) or 2/3 of the capital stock from the obligation of paying for his shares, without a valuable
members in case of non-stock corporations at a meeting duly called for consideration for such release; and as against creditors a reduction of the
that purpose; capital stock can take place only in the manner and under the conditions
3. Prior written notice of the proposal to extend or shorten the corporate prescribed by the statute or the charter or the AOI. Moreover, strict
term must be made stating the time and place of meeting addressed to compliance with the statutory regulations is necessary. In the case before us,
each stockholder or member at his place of residence, either by mail or the resolution releasing the shareholders from their obligation to pay 50% of
personal service; their respective subscriptions was an attempted withdrawals of so much
4. A certificaate in duplicate must be signed by a majority of the directors capital from the fund upon which the company’s creditors were entitled
of the corporation, countersigned by the chairman and the secretary of ultimately to rely and, having been effected without compliance with the
the stockholders meeting, setting forth the matters contained in statutory requirements, was wholly ineffectual.
subsection 1 to 7 of Sec. 38;
5. In case of increase in capital stock, 25% of such increased capital must MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987) -
be subscribed and that at least 25% of the amount subscribed must be The Madrigal Central Office Employees Union sought for the renewal of its
paid either in cash or property; CBA, proposing a P200 wage increase and an allowance of P100 a month.
6. In case of decrease of capital stock, the same must not prejudice the Petitioner company requested for the deferment of its negotiation.
right of the creditors;
7. Filing of the certificate of increase and amended AOI with the SEC; and Meanwhile, the company effected two reductions of its capital stock by
8. Approval thereof by the SEC. issuing marketable securities owned by petitioner in exchange for
shareholders’ shares.
METHODS OF INCREASING CAPITAL STOCK:
1. Increase the par value of the existing number of shares without After the petitioner’s failure to sit down with the respondent union, the latter
increasing the number of shares; commenced a case with the NLRC for unfair labor practice. In due time,
2. Increase the number of existing shares without increasing the par value petitioner filed its position paper, alleging operating losses.
thereof;
3. Increasing the number of shares and at the same time increasing the The Labor Arbiter rendered a decision in favor of respondent Union.
par value of the shares
ISSUE: WON the decrease in capital stock is valid and binding?
REASONS/PURPOSE FOR THE INCREASE:
1. Expansion; HELD: No. What clearly emerges from the recorded facts is that the
2. Payment of Debt Obligations; petitioner, awash with profits from its business operations but confronted
3. To acquire additional assets such as providing cars to employees to with the demand of the union for wage increase, decided to evade its
distribute the goods; responsibility towards the employees by a devised capital reduction. While
the reduction in capital stock created an apparent need for retrenchment, it
*Nothing in law prohibits increase of capital stock was, by all indications, just a mask for the purge of union members, who, by
then, had agitated for wage increases. In the face of the petitioner
REASONS FOR DECREASE: company’s piling profits, the unionists had the right to demand for such
1. To reduce or wipe out existing deficit where no creditors would thereby salary adjustments.
by affected;
2. When the capital is more than what is necessary to procreate the That the petitioner made quite handsome profits is clear from the records.
business or reduction of capital surplus;
3. To write down the value of its fixed assets to reflect their present actual This court is convinced that the petitioner’s capital reduction efforts were, to
value in case where there is a decline in the value of the fixed assets of begin with, a subterfuge, a deception as it were, to camouflage the fact that
the corporation. it had been making profits, and consequently, to justify the mass layoff in it
employee ranks, especially the union members. They were nothing but a
TRUST FUND DOCTRINE: The subscriptions to capital stock of the premature and plain distribution of corporate assets to obviate a just sharing
corporation constitute a fund which the creditors have a right to look up for to labor of the vast profits obtained by its joint efforts with capital through
the satisfaction of their claims. Accordingly, if the decrease would affect the the years. Surely, we can neither countenance nor condone this. It is an
rights of creditors, the same would not be approved by the SEC. unfair labor practice.
PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29, 1923) L. POWER TO DENY PRE-EMPTIVE RIGHT
- Shortly after its incorporation, the stockholders of Cooperativa Naval
Filipina, adopted a resolution to the effect that the capital should be reduced PRE-EMPTIVE RIGHT is a right granted by law to all existing stockholders
BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent Jamiatul A sale or other disposition shall be deemed to cover substantially all
Philippines – Al Islamia, Inc. was incorporated with P2,000,000 authorized the corporate property and assets if thereby the corporation would
capital stock divided into 20,000 shares, of which 460 belong to herein be rendered incapable of continuing the business or accomplishing
petitioner. In a stockholders meeting, an increase of the authorized capital the purpose for which it was incorporated.
stock to P1,000,000 was approved, where the previously unissued shares
were all issued. After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion, abandon
Petitioner Datu Tagoranao Benito filed a petition with herein respondent SEC such sale, lease, exchange, mortgage, pledge or other disposition of property
alleging that the additional issue of previously unissued shares was made in and assets, subject to the rights of third parties under any contract relating
violation of his pre-emptive right and that the increase of capital stock was thereto, without further action or approval by the stockholders or members.
illegal considering that the stockholders on record were not notified, and that
such issuance be cancelled. Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the exchange, mortgage, pledge or otherwise dispose of any of its property and
original unsubscribed shares, but can exercise such right with regards the assets if the same is (1) necessary in the usual and regular course of
increase capitalization. business of said corporation or (2) if the proceeds of the sale or
other disposition of such property and assets be appropriated for
ISSUE: WON the above ruling is correct? the conduct of its remaining business.
HELD: Yes. The issuance of the unsubscribed portion of the capital stock or In non-stock corporations where there are no members with voting rights,
P110,980 is valid even if assuming that it was made without notice to the the vote of at least a majority of the trustees in office will be sufficient
stockholders as claimed by petitioner. The power to issue shares of stocks in authorization for the corporation to enter into any transaction authorized by
a corporation is lodged in the bard of directors and no stockholders’ meeting this section.
is necessary to consider it because such issuance does not need approval of
stockholders. The conditions for the valid exercise of this power are thus as follows:
1. Resolution by a majority of the BOD/T;
The general rule is that pre-emptive right is recognized only with respect to 2. Authorization from the stockholders representing at least 2/3 of the
new issue of shares, and not with respect to additional issues of originally outstanding capital stock or 2/3 of the members;
authorized shares. This is on theory that when a corporation, at its inception 3. The ratification of the stockholders or member must be made at a
offers its first shares, it is presumed to have offered all of those which it is meeting duly called for that purpose;
authorized to issue. An original subscriber is deemed to have taken his shares 4. Prior written notice of the proposed action and of the time and place of
knowing that they form a definite proportionate part of the whole number of meeting must be made addressed to all stockholders of record, either by
authorized shares. When the shares left unsubscribed are reoffered, he mail or personal service;
cannot therefore claim a dilution of interest. 5. The sale of the assets shall be subject to the provisions of existing laws
on illegal combinations and monopolies; and
With respect to the claim that the increase in the authorized capital stock was 6. Any dissenting stockholder shall have the option to exercise his appraisal
without consent, expressed or implied, of the stockholder, it was the finding right.
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
transferor, except: (1) where the purchaser expressly or impliedly agrees to
The above requirements will not apply: assumes such debts; (2) where the transaction amounts to a consolidation or
1. In case the sale is NOT covering all or substantially all of the assets of a merger of the corporations; (3) where the purchasing corporation is merely a
corporation as to render it incapable of continuing the business continuation of the selling corporation; and (4) where the transaction is
or accomplishing the purpose for which it was incorporated; or entered into fraudulently in order to escape liability for such debts.
if the proceeds are to be used to continue the conduct of the remaining
business of the company; In the case at bar, there is neither proof nor allegation of the foregoing
2. If the sale is in the usual and regular course of business of the exceptions. In fact, these sales took place not only over 6 months before the
company. rendition of the judgment sought to be collected in the present action, but
also, appellee purchase the shares of stock of Insular Farms as the highest
ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA (272 SCRA 454; bidder at an auction sale held at the instance of a bank to which said shares
May 4, 1997) – The Islamic Directorate of the Philippines received two had been pledged as security for the obligation of Insular Farms in favor of
parcels of land from the Libyan government for the purpose of putting up a said bank.
Mosque, Madrasah (arabic school) and other religious infrastructures. In
1972, Martial Law was declared, most of the members of the Board of N. POWER TO ACQUIRE OWN SHARES
Trustees, together with petitioner Sen. Mamintal Tamano, fled to the middle-
east to escape political prosecution. Sec. 41. Power to acquire own shares. - A stock corporation shall have
the power to purchase or acquire its own shares for a legitimate corporate
Thereafter, two Muslim groups sprung claiming to be the legitimate IDP. One purpose or purposes, including but not limited to the following cases:
headed by Engr. Farouk Caprizo, not having been properly elected as new Provided, That the corporation has unrestricted retained earnings in its books
members of the Board of Trustees caused to be sold, through a resolution of to cover the shares to be purchased or acquired:
IDP, the two lots to respondent Iglesia Ni Cristo.
1. To eliminate fractional shares arising out of stock dividends;
The 1971 Board of Trustees now filed a petition to declare the sale null and 2. To collect or compromise an indebtedness to the corporation, arising out
void. of unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale; and
ISSUE: WON the sale is valid? 3. To pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code.
HELD: No. The Caprizo Group is a fake board of trustees. IDP never gave its
consent through a legitimate Board of Trustees. Therefore, this is not a case The limitation that the corporation must at all times have “unrestricted
of vitiated consent, but one where consent on the part of one of the retained earnings” is a condition for the exercise of this power, EXCEPT:
contracting parties is totally wanting. Ineluctably, the subject sale is void and 1. Redemption of redeemable shares under Sec. 8;
produces no effect whatsoever. 2. Exercise of stockholders right to compel a close corporation to purchase
his shares for any reason under Sec. 105 when the corporation has
The Caprizo group-INC sale is further deemed null and void ab initio because sufficient assets in its book to cover its debts and liabilities exclusive of
of the Caprizo Group’s failure to comply with Sec. 40 of the Corporation Code capital stock;
pertaining to the disposition of all or substantially all assets of the 3. In case of deadlocks under Sec. 104.
corporation.
Once purchased, the shares are considered as treasury shares and while they
The Tandang Sora property, it appears from the records, constitutes the only remain so, they have no voting rights and dividend rights. The corporation
property of the IDP. Hence, its sale to a third-party is a sale or disposition of may (1) re-issue them even below par; (2) issue them as stock dividends; (3)
all the corporate property and assets of IDP falling squarely within the retire or cancel them and thereby remove from issue effectively reducing the
contemplation of Sec. 40. For the sale to be valid, the majority vote of the number of shares issued stated in the AOI.
legitimate Board of Trustees, concurred in by vote of at least 2/3 of the bona
fide members of the corporation should have been obtained. These twin STEINBERG VS. VELASCO (52 Phil 953; March 12, 1929) - the Board of
requirements were not met as the Caprizo Groups which voted to sell the Directors of Trading Company approved and authorized the purchases of the
property was a fake Board and those whose names and signatures were capital stock of the company from its various stockholder, herein
affixed by the Caprizo Group together with the sham Board Resolution respondents, at par value amounting to P3,300. Petitioner assails the
authorizing negotiation for the sale were, from all indications, not bona fide recovery of the amount paid to such stockholders and the P3,000 dividends
members of the IDP as they were made to appear to be. declared which were claimed to be made to the injury and in fraud of its
creditors. The complaint was dismissed.
EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. (15 SCRA 415; Nov. 29,
1965) - The appellant secured in a civil case against Insular Famrs, Inc. a ISSUE: WON recovery can be made?
judgment for the balance of the price of a pump sold by the former to the
latter. A writ of execution was issued but was returned unsatisfied, saying HELD: Yes. The Board of Directors acted on the assumption that it had
that Insular Farms had no leviable property. Soon after appelant filed with accounts receivable of the face value of P19,126.02 but there was no
the same Municipal Court the present action against Pacific Farms claiming it stipulation as to the value of such accounts and P12,512.47 of which had but
to be an alter ego of Insular Farms, which the court denied. On appeal, the little, if any value. The purchase of the stocks and the dividend declaration
CFI and CA also denied the petition. further decreased the assets of the corporation. The profits amounted only to
P3,314.72. In other words, that the corporation did not then have actual
ISSUE: WON Pacific Farms should answer for the liability of Insular Farms? bona fide surplus from which the dividends could be paid, and that the
payment of them in full at the time would “affect the financial condition of
HELD: No. It appears on record that the appellee purchase 1,000 shares of the corporation”.
stock of Insular Farms, and thereupon sold said shares of stock to certain
individuals, who forthwith reorganized said corporation and that the board of It is indeed peculiar that the action of the board in the assailed acts was all
directors thereof, as reorganized, then caused its assets, including its done at the same meeting of the board of directors, and it appears that the
leasehold right over a public land in Pangasinan to be sold to herein appellee. stockholders, whose shares were purchased, were former directors and
These facts do not prove that the appellee is an alter ego of Insular Farms, or resigned before the board approved the purchase and declaration of
is liable for its debts. dividends. In other words, the directors were permitted to resign so that they
could sell their stock to the corporation. In this situation and upon this state
Generally where on corporation sells or otherwise transfers all o its assets to of facts, it is very apparent that the directors did not act in good faith or that
another corporation, the latter is not liable for the debts and liabilities of the they were grossly ignorant of their duties.
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
“j. Power to acquire or dispose of shares or securities. – A private
Creditors of a corporation have the right to assume that so long as there are corporation, in order to accomplish it purpose as stated in its articles of
outstanding debts and liabilities, the board of directors will not use the assets incorporation, and imposed by the Corporation Law, has the power to
of the corporation to purchase its own stock, and that it will not declare acquire, hold, mortgage, pledge or dispose of shares, bonds, securities,
dividends to stockholders when the corporation is insolvent. and other evidences of indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the corporate
The amount involved in this case is not large, but the legal principles are purpose, does not need the approval of the stockholders; but
important and we have given them consideration which they deserve. when the purchase of shares of another corporation is done solely
for investment and not to accomplish the purpose of its
O. POWER TO INVEST FUNDS incorporation, the vote of approval of the stockholders is
necessary”
Sec. 42. Power to invest corporate funds in another corporation or
business or for any other purpose. - Subject to the provisions of this “40. Power to invest corporate funds. – A private corporation has the
Code, a private corporation may invest its funds in any other corporation or power to invest its corporate funds in any other corporation or business, or
business or for any purpose other than the primary purpose for which it was for any other purpose other than the main purpose for which it was
organized when approved by a majority of the board of directors or trustees organized, provided that its board of directors has been authorized in a
and ratified by the stockholders representing at least two-thirds (2/3) of the resolution by the affirmative vote of stockholders holding shares in the
outstanding capital stock, or by at least two thirds (2/3) of the members in corporation entitling them to exercise at least two-thirds of the voting
the case of non-stock corporations, at a stockholder's or member's meeting power on such a proposal at a stockholders’ meeting called for that
duly called for the purpose. Written notice of the proposed investment and purpose. When the investment is necessary to accomplish its purpose or
the time and place of the meeting shall be addressed to each stockholder or purposes as stated in its articles of incorporation, the approval of the
member at his place of residence as shown on the books of the corporation stockholders is not necessary”
and deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder shall have We agree with Professor Guevarra. We therefore agree with the finding of
appraisal right as provided in this Code: Provided, however, That where the the lower court that the investment in question does not fall under the
investment by the corporation is reasonably necessary to accomplish its purview of Sec. 17 ½ fo the Corporation Law.
primary purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary. JOHN GOKONGWEI, JR., petitioner,
vs.
“MAY INVEST FUNDS” has been held by the SEC to mean an investment in SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO,
the form of money, stock, bonds and other liquid assets and does not include JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
real properties or other fixed assets, otherwise the law would have phrased WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
Sec. 42 to include “assets” rather than “to invest funds”. CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA,
respondents.
SECONDARY PURPOSE: the law uses the phrase “for any purpose other (GR No. L-45911; April 11, 1979)
than the primary purpose” signifying that even if the business or undertaking
is allowed or authorized in the secondary purpose or purposes of the FACTS: Petitioner John Gokongwei alleged that the respondent corporation
corporation, the provision of Sec. 42 would apply. has been investing corporate funds in other corporations or business outside
of its primary purpose in violation of Sec. 17 ½ of the Corporation Law.
REQUIREMENTS FOR A VALID INVESTMENT OF CORPORATE FUNDS:
1. Resolution by a majority of the BOD/T; Respondents sent notices of the annual stockholders’ meeting including in the
2. Ratification by the stockholders representing 2/3 of the outstanding agenda thereof the re-affirmation of the authorization of the BOD by the
capital stock (or 2/3 of members); stockholders at the meeting to invest corporate funds in other companies or
3. The ratification must be made at a meeting duly called for that purpose; businesses or for purposes other than the main purpose. An injunction was
4. Prior written notice of the proposed investment and the time and place prayed for by petitioner, but the date of hearing originally set was cancelled.
of the meeting shall be made, addressed to each stockholder or member No action was taken up to the date of the filing of the instant petition.
by mail or by personal service; and
5. Any dissenting stockholder shall have the option to exercise his appraisal ISSUE: WON respondent SEC committed grave abuse of discretion in
right. allowing the above agenda to be taken up in the stockholders’ meeting?
RATIFICATION: as a requirement, applies only to investments that are HELD: No. Section 17-1/2 of the Corporation Law allows a corporation to
beyond the corporation’s primary purpose, or outside the express or implied "invest its funds in any other corporation or business or for any purpose
powers of the investing corporation. Thus, if the investment is reasonably other than the main purpose for which it was organized" provided that its
necessary to accomplish its primary purpose, the approval of the stockholders Board of Directors has been so authorized by the affirmative vote of
or members is not required. stockholders holding shares entitling them to exercise at least two-thirds of
the voting power. If the investment is made in pursuance of the
DELA RAMA VS. MA-AO SUGAR CENTRAL CO., INC. (27 SCRA 247; Feb. corporate purpose, it does not need the approval of the
28, 1969) - Defendant Ma-ao Sugar Central Co, Inc., engaged in the stockholders. It is only when the purchase of shares is done solely
manufacture of sugar, invested P655,000 in shares of stock of Philippine for investment and not to accomplish the purpose of its
Fiber Processing Co., Inc., which is engaged in the manufacture of sugar incorporation that the vote of approval of the stockholders holding
bags. The sale, though not previously authorized, was ratified by the 2/3 vote shares entitling them to exercise at least two-thirds of the voting
of the stockholders. Claiming the business of defendant is not related to that power is necessary.
of Philippine Fiber, such sale was attacked but the trial court decided on its
legality. As stated by respondent corporation, the purchase of beer manufacturing
facilities by SMC was an investment in the same business stated as its main
ISSUE: WON the investment by Ma-ao Sugar constitutes a violation of Sec. purpose in its Articles of Incorporation, which is to manufacture and market
17-1/2 of the Corporation Law? beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong
HELD: Yes. In his work entitled “The Philippine Corporation Law”, Professor (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of
Sulpicio S. Guevarra of the UP College of Law, reconciled par. (9) and (10) of San Miguel beer thereat. Restructuring of the investment was made in 1970-
Sec. 13, as follows: 1971 thru the organization of SMI in Bermuda as a tax free reorganization.
P. POWER TO DECLARE DIVIDENDS WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said that the
right of the stockholders to be paid dividends vest as soon as they have been
DIVIDENDS are corporate profits set aside, declared and ordered by the lawfully and finally declared by the BOD. It is not revocable unless: (1) it has
BOD to be paid to the stockholders. It is a fruit of investment, the recurrent not been officially communicated to the stockholders; or (2) it is in the form
return, analogous to interest and rent upon other forms of invested capital. of stock dividends which is revocable any time prior to distribution because
this does not result in the distribution of assets but merely the division of
Sec. 43. Power to declare dividends. - The board of directors of a stock existing shares of a stockholder into smaller units or integers.
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 TRANSFER OF SHARES: The dividends already declared belong to the
the basis of outstanding stock held by them: Provided, That any cash owner at the time of declaration. Usually, however, the dividends are payable
dividends due on delinquent stock shall first be applied to the unpaid balance to stockholders of record on a specific future date and as far as the
on the subscription plus costs and expenses, while stock dividends shall be corporation is concerned, the registered owner is the one entitled to
withheld from the delinquent stockholder until his unpaid subscription is fully dividends. As against his transferor, however, the transferee has presumably
paid: Provided, further, That no stock dividend shall be issued without the the right to such dividends and is oftentimes taken into account in entering
approval of stockholders representing not less than two-thirds (2/3) of the effecting the transfer of shares.
outstanding capital stock at a regular or special meeting duly called for the
purpose. (16a) NIELSON & COMPANY, INC., plaintiff-appellant,
vs.
Stock corporations are prohibited from retaining surplus profits in excess of LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee
one hundred (100%) percent of their paid-in capital stock, except: (1) when (GR No. L-21601; Dec. 28, 1968)
justified by definite corporate expansion projects or programs approved by
the board of directors; or (2) when the corporation is prohibited under any FACTS: This is a motion for reconsideration filed by respondent Lepanto
loan agreement with any financial institution or creditor, whether local or contending that the order of the SC to pay Nielson 10% of the stock
foreign, from declaring dividends without its/his consent, and such consent dividends, declared by Lepanto during the extension of the contract, as
has not yet been secured; or (3) when it can be clearly shown that such compensation for services under a management contract is in violation of the
retention is necessary under special circumstances obtaining in the Corporation Law and that it could not be the intention of the parties that the
corporation, such as when there is need for special reserve for probable services of Nielson should be paid in stock dividends.
contingencies.
ISSUE: WON Nielson & Co. is entitled to receive stock dividends?
UNRESTRICTED RETAINED EARNINGS: the undistributed earnings of the
corporation which have not been allocated for any managerial, contractual or HELD: No. The consideration for which shares of stock may be issued are:
legal purposes and which are free for distribution to the stockholders as (1) cash; (2) property; and (3) undistributed profits. Shares of stock are
dividends. given the special name "stock dividends" only if they are issued in lieu of
It is Our considered view, therefore, that under Section 16 of the Corporation R. ULTRA VIRES ACTS
Law stock dividends cannot be issued to a person who is not a stockholder in
payment of services rendered. And so, in the case at bar Nielson can not be Sec. 45. Ultra vires acts of corporations. - No corporation under this
paid in shares of stock which form part of the stock dividends of Lepanto for Code shall possess or exercise any corporate powers except those conferred
services it rendered under the management contract. We sustain the by this Code or by its articles of incorporation and except such as are
contention of Lepanto that the understanding between Lepanto and Nielson necessary or incidental to the exercise of the powers so conferred.
was simply to make the cash value of the stock dividends declared as the
basis for determining the amount of compensation that should be paid to ULTRA VIRES ACTS are those which cannot be executed or performed by a
Nielson, in the proportion of 10% of the cash value of the stock dividends corporation because they are not within its express, inherent, or implied
declared. And this conclusion of Ours finds support in the record. powers as defined by its charter or AOI. Accordingly, it may be subject to a
collateral attack questioning the authority of the corporation to engage in
Q. POWER TO ENTER INTO MANAGEMENT CONTRACT such particular endeavor.
1. The time, place and manner of calling and conducting regular or special ISSUE: WON the Association can be considered dissolved for non-adoption
meetings of the directors or trustees; of by-laws?
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members; HELD: Yes. As correctly postulated by the petitioner, interpretation of this
3. The required quorum in meetings of stockholders or members and the provision of Sec. 46 begins with the determination of the meaning and import
manner of voting therein; of the word "must" in this section. Ordinarily, the word "must" connotes an
4. The form for proxies of stockholders and members and the manner of imperative act or operates to impose a duty which may be enforced. It is
voting them; synonymous with "ought" which connotes compulsion or mandatoriness.
5. The qualifications, duties and compensation of directors or trustees, However, the word "must" in a statute, like "shall," is not always imperative.
officers and employees; It may be consistent with an exercise of discretion. In this jurisdiction, the
6. The time for holding the annual election of directors of trustees and tendency has been to interpret "shall" as the context or a reasonable
the mode or manner of giving notice thereof; construction of the statute in which it is used demands or requires. This is
7. The manner of election or appointment and the term of office of all equally true as regards the word "must." Thus, if the languages of a statute
officers other than directors or trustees; considered as a whole and with due regard to its nature and object reveals
8. The penalties for violation of the by-laws; that the legislature intended to use the words "shall" and "must" to be
9. In the case of stock corporations, the manner of issuing stock directory, they should be given that meaning.
certificates; and
10. Such other matters as may be necessary for the proper or convenient In this respect, the following portions of the deliberations of the Batasang
transaction of its corporate business and affairs. Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
AMENDMENT: On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be filed
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by within one month after the issuance? In other words, would this be
a majority vote thereof, and the owners of at least a majority of the mandatory or directory in character?
outstanding capital stock, or at least a majority of the members of a non-
stock corporation, at a regular or special meeting duly called for the purpose, MR. MENDOZA. This is mandatory.
may amend or repeal any by-laws or adopt new by-laws. The owners of two-
thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the
members in a non-stock corporation may delegate to the board of directors effect of the failure of the corporation to file these by-laws within one
or trustees the power to amend or repeal any by-laws or adopt new by-laws: month?
Provided, That any power delegated to the board of directors or trustees to
amend or repeal any by-laws or adopt new by-laws shall be considered as MR. MENDOZA. There is a provision in the latter part of the Code which
revoked whenever stockholders owning or representing a majority of the identifies and describes the consequences of violations of any provision
outstanding capital stock or a majority of the members in non-stock of this Code. One such consequences is the dissolution of the
corporations, shall so vote at a regular or special meeting. corporation for its inability, or perhaps, incurring certain penalties.
Whenever any amendment or new by-laws are adopted, such amendment or MR. FUENTEBELLA. But it will not automatically amount to a dissolution
new by-laws shall be attached to the original by-laws in the office of the of the corporation by merely failing to file the by-laws within one month.
corporation, and a copy thereof, duly certified under oath by the corporate Supposing the corporation was late, say, five days, what would be the
secretary and a majority of the directors or trustees, shall be filed with the mandatory penalty?
Securities and Exchange Commission the same to be attached to the original
articles of incorporation and original by-laws. MR. MENDOZA. I do not think it will necessarily result in the automatic
or ipso facto dissolution of the corporation. Perhaps, as in the case, as
The amended or new by-laws shall only be effective upon the issuance by the you suggested, in the case of El Hogar Filipino where a quo warranto
Securities and Exchange Commission of a certification that the same are not action is brought, one takes into account the gravity of the violation
inconsistent with this Code. committed. If the by-laws were late — the filing of the by-laws were late
by, perhaps, a day or two, I would suppose that might be a tolerable
TWO MODES OF AMENDMENT: delay, but if they are delayed over a period of months — as is
1. By a majority vote of the directors or trustees and the majority vote of happening now — because of the absence of a clear requirement that
the outstanding capital stock or members, at a regular or special by-laws must be completed within a specified period of time, the
meeting called for that purpose; or corporation must suffer certain consequences.
2. By the board of directors alone when delegated by stockholders owning
2/3 of the outstanding capital stock or 2/3 of the members. This power, This exchange of views demonstrates clearly that automatic corporate
however, is considered revoked, when so voted by a majority of the dissolution for failure to file the by-laws on time was never the intention of
outstanding capital stock or members in a regular or special meeting. the legislature. Moreover, even without resorting to the records of
On the other hand, it is equally well settled that by-laws of a corporation GOVERNMENT VS. EL HOGAR (supra) - Fourth cause of action. — It
must be reasonable and for a corporate purpose, and always within the appears that among the by-laws of the association there is an article (No. 10)
charter limits. They must always be strictly subordinate to the constitution which reads as follows:
and the general laws of the land. They must not infringe the policy of the
state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not “The board of directors of the association, by the vote of an absolute
disturb vested rights or impair the obligation of a contract, take away or majority of its members, is empowered to cancel shares and to return to
abridge the substantial rights of stockholder or member, affect rights of the owner thereof the balance resulting from the liquidation thereof
property or create obligations unknown to the law. (People's Home Savings whenever, by reason of their conduct, or for any other motive, the
Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. continuation as members of the owners of such shares is not desirable.”
Globe Milling Co., 79 Am. St. Rep., 769.)
ISSUE: WON the above provision is valid?
The validity of the by-law of a corporation is purely a question of law. (South
Florida Railroad Co. vs. Rhodes, 25 Fla., 40.) HELD: No. This by-law is of course a patent nullity, since it is in
direct conflict with the latter part of section 187 of the Corporation
“The power to enact by-laws restraining the sale and transfer of stock Law, which expressly declares that the board of directors shall not
must be found in the governing statute or the charter. Restrictions upon have the power to force the surrender and withdrawal of unmatured
the traffic in stock must have their source in legislative enactment, as the stock except in case of liquidation of the corporation or of forfeiture
corporation itself cannot create such impediments. By-laws are intended of the stock for delinquency. It is agreed that this provision of the by-
merely for the protection of the corporation, and prescribe regulation and laws has never been enforced, and in fact no attempt has ever been made by
not restriction; they are always subject to the charter of the corporation. the board of directors to make use of the power therein conferred. In
The corporation, in the absence of such a power, cannot ordinarily November, 1923, the Acting Insular Treasurer addressed a letter to El Hogar
inquire into or pass upon the legality of the transaction by which Filipino, calling attention to article 10 of its by-laws and expressing the view
its stock passes from one person to another, nor can it question that said article was invalid. It was therefore suggested that the article in
the consideration upon which a sale is based. A by-law cannot question should be eliminated from the by-laws. At the next meeting of the
take away or abridge the substantial rights of stockholder. Under a board of directors the matter was called to their attention and it was resolved
statute authorizing by- laws for the transfer of stock, a corporation can do to recommend to the shareholders that in their next annual meeting the
no more than prescribe a general mode of transfer on the corporate books article in question be abrogated. It appears, however, that no annual meeting
and cannot justify an unreasonable restriction upon the right of sale. (4 of the shareholders called since that date has been attended by a sufficient
Thompson on Corporations, sec. 4137, p. 674. number of shareholders to constitute a quorum, with the result that the
provision referred to has not been eliminated from the by-laws, and it still
The jus disponendi, being an incident of the ownership of property, the stands among the by-laws of the association, notwithstanding its patent
general rule (subject to exceptions hereafter pointed out and discussed) is conflict with the law.
that every owner of corporate shares has the same uncontrollable right to
alien them which attaches to the ownership of any other species of It is supposed, in the fourth cause of action, that the existence of this article
property. A shareholder is under no obligation to refrain from selling his among the by-laws of the association is a misdemeanor on the part of the
shares at the sacrifice of his personal interest, in order to secure the respondent which justifies its dissolution. In this view we are unable to
welfare of the corporation, or to enable another shareholder to make gains concur. The obnoxious by-law, as it stands, is a mere nullity, and could not
and profits. (10 Cyc., p. 577.) be enforced even if the directors were to attempt to do so. There is no
provision of law making it a misdemeanor to incorporate an invalid provision
It follows from the foregoing that a corporation has no power to prevent or in the by-laws of a corporation; and if there were such, the hazards incident
to restrain transfers of its shares, unless such power is expressly conferred in to corporate effort would certainly be largely increased. There is no merit in
its charter or governing statute. This conclusion follows from the further this cause of action.
consideration that by-laws or other regulations restraining such
transfers, unless derived from authority expressly granted by the ISSUE2: Owing to the failure of a quorum at most of the general meetings
legislature, would be regarded as impositions in restraint of trade. since the respondent has been in existence, it has been the practice of the
(10 Cyc., p. 578.) directors to fill vacancies in the directorate by choosing suitable persons from
among the stockholders. This custom finds its sanction in article 71 of the by-
The foregoing authorities go farther than the stand we are taking on this laws, which reads as follows:
question. They hold that the power of a corporation to enact by-laws
restraining the sale and transfer of shares, should not only be in “ART. 71. The directors shall elect from among the shareholders members to
harmony with the law or charter of the corporation, but such power fill the vacancies that may occur in the board of directors until the election at
should be expressly granted in said law or charter. the general meeting”
The only restraint imposed by the Corporation Law upon transfer of shares is WON Art. 71 is valid?
found in section 35 of Act No. 1459, quoted above, as follows: "No transfer,
however, shall be valid, except as between the parties, until the transfer is HELD: Yes. We are unable to see the slightest merit in the charge. No fault
entered and noted upon the books of the corporation so as to show the can be imputed to the corporation on account of the failure of the
names of the parties to the transaction, the date of the transfer, the number shareholders to attend the annual meetings; and their non-attendance at
It result that the practice of the directorate of filling vacancies by the action The doctrine of "corporate opportunity" is precisely a recognition by the
of the directors themselves is valid. Nor can any exception be taken to then courts that the fiduciary standards could not be upheld where the fiduciary
personality of the individuals chosen by the directors to fill vacancies in the was acting for two entities with competing interests. This doctrine rests
body. Certainly it is no fair criticism to say that they have chosen competent fundamentally on the unfairness, in particular circumstances, of an officer or
businessmen of financial responsibility instead of electing poor persons to so director taking advantage of an opportunity for his own personal profit when
responsible a position. The possession of means does not disqualify a man the interest of the corporation justly calls for protection.
for filling positions of responsibility in corporate affairs.
It is not denied that a member of the Board of Directors of the San Miguel
READ AGAIN: BARRETO VS. LA PREVISORA FILIPINA (CHAPTER 6) Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion
GOKONGWEI VS. SEC (supra) - As additional causes of action, it was and diversification; (c) research and development; and (d) sources of
alleged that corporations have no inherent power to disqualify a stockholder funding, availability of personnel, proposals of mergers or tie-ups with other
from being elected as a director and, therefore, the questioned act is ultra firms.
vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while
representing other corporations, entered into contracts (specifically a It is obviously to prevent the creation of an opportunity for an officer or
management contract) with respondent corporation, which was allowed director of San Miguel Corporation, who is also the officer or owner of a
because the questioned amendment gave the Board itself the prerogative of competing corporation, from taking advantage of the information which he
determining whether they or other persons are engaged in competitive or acquires as director to promote his individual or corporate interests to the
antagonistic business; that the portion of the amended bylaws which states prejudice of San Miguel Corporation and its stockholders, that the questioned
that in determining whether or not a person is engaged in competitive amendment of the by-laws was made. Certainly, where two corporations are
business, the Board may consider such factors as business and family competitive in a substantial sense, it would seem improbable, if not
relationship, is unreasonable and oppressive and, therefore, void; and that impossible, for the director, if he were to discharge effectively his duty, to
the portion of the amended by-laws which requires that "all nominations for satisfy his loyalty to both corporations and place the performance of his
election of directors ... shall be submitted in writing to the Board of Directors corporation duties above his personal concerns.
at least five (5) working days before the date of the Annual Meeting" is
likewise unreasonable and oppressive. Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require
ISSUE: WON the amended by-laws of SMC disqualifying a competitor from that he disclose this information to a competitive arrival. These dangers are
nomination or election to the BOD are valid and reasonable? enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem
HELD: Yes. The validity or reasonableness of a by-law of a corporation in manifest that in such situations, the director has an economic incentive to
purely a question of law. Whether the by-law is in conflict with the law of the appropriate for the benefit of his own corporation the corporate plans and
land, or with the charter of the corporation, or is in a legal sense policies of the corporation where he sits as director.
unreasonable and therefore unlawful is a question of law. This rule is subject,
however, to the limitation that where the reasonableness of a by-law is a Indeed, access by a competitor to confidential information regarding
mere matter of judgment, and one upon which reasonable minds must marketing strategies and pricing policies of San Miguel Corporation would
necessarily differ, a court would not be warranted in substituting its judgment subject the latter to a competitive disadvantage and unjustly enrich the
instead of the judgment of those who are authorized to make by-laws and competitor, for advance knowledge by the competitor of the strategies for
who have exercised their authority. the development of existing or new markets of existing or new products
could enable said competitor to utilize such knowledge to his advantage.
It is a settled state law in the United States, according to Fletcher, that
corporations have the power to make by-laws declaring a person employed in Neither are We persuaded by the claim that the by-law was Intended to
the service of a rival company to be ineligible for the corporation's Board of prevent the candidacy of petitioner for election to the Board. If the by-law
Directors. ... (A)n amendment which renders ineligible, or if elected, subjects were to be applied in the case of one stockholder but waived in the case of
to removal, a director if he be also a director in a corporation whose business another, then it could be reasonably claimed that the by-law was being
is in competition with or is antagonistic to the other corporation is valid." This applied in a discriminatory manner. However, the by law, by its terms,
is based upon the principle that where the director is so employed in applies to all stockholders. The equal protection clause of the Constitution
the service of a rival company, he cannot serve both, but must requires only that the by-law operate equally upon all persons of a class.
betray one or the other. Such an amendment "advances the benefit Besides, before petitioner can be declared ineligible to run for director, there
of the corporation and is good." An exception exists in New Jersey, must be hearing and evidence must be submitted to bring his case within the
where the Supreme Court held that the Corporation Law in New Jersey ambit of the disqualification. Sound principles of public policy and
prescribed the only qualification, and therefore the corporation was not management, therefore, support the view that a by-law which disqualifies a
empowered to add additional qualifications. This is the exact opposite of the competition from election to the Board of Directors of another corporation is
HELD2: Yes. Private respondents contend that the disputed amended by A. STOCKHOLDERS’ MEETING
laws were adopted by the Board of Directors of San Miguel Corporation a-, a
measure of self-defense to protect the corporation from the clear and present Sec. 50. Regular and special meetings of stockholders or members. -
danger that the election of a business competitor to the Board may cause Regular meetings of stockholders or members shall be held annually on a
upon the corporation and the other stockholders inseparable prejudice. date fixed in the by-laws, or if not so fixed, on any date in April of every year
Submitted for resolution, therefore, is the issue — whether or not respondent as determined by the board of directors or trustees: Provided, That written
San Miguel Corporation could, as a measure of self- protection, disqualify a notice of regular meetings shall be sent to all stockholders or members of
competitor from nomination and election to its Board of Directors. record at least two (2) weeks prior to the meeting, unless a different period
is required by the by-laws.
It is recognized by an authorities that 'every corporation has the inherent
power to adopt by-laws 'for its internal government, and to regulate the Special meetings of stockholders or members shall be held at any time
conduct and prescribe the rights and duties of its members towards itself and deemed necessary or as provided in the by-laws: Provided, however, That at
among themselves in reference to the management of its affairs. At common least one (1) week written notice shall be sent to all stockholders or
law, the rule was "that the power to make and adopt by-laws was inherent in members, unless otherwise provided in the by-laws.
every corporation as one of its necessary and inseparable legal incidents. And
it is settled throughout the United States that in the absence of positive Notice of any meeting may be waived, expressly or impliedly, by any
legislative provisions limiting it, every private corporation has this inherent stockholder or member.
power as one of its necessary and inseparable legal incidents, independent of
any specific enabling provision in its charter or in general law, such power of Whenever, for any cause, there is no person authorized to call a meeting, the
self-government being essential to enable the corporation to accomplish the Securities and Exchange Commission, upon petition of a stockholder or
purposes of its creation. 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
In this jurisdiction, under section 21 of the Corporation Law, a corporation corporation by giving proper notice required by this Code or by the by-laws.
may prescribe in its by-laws "the qualifications, duties and compensation of The petitioning stockholder or member shall preside thereat until at least a
directors, officers and employees ... " This must necessarily refer to a majority of the stockholders or members present have been chosen one of
qualification in addition to that specified by section 30 of the Corporation their number as presiding officer.
Law, which provides that "every director must own in his right at least one
share of the capital stock of the stock corporation of which he is a director ... The stockholders have no power to act as or for the corporation except at a
" In Government v. El Hogar, the Court sustained the validity of a provision in corporate meeting called and conducted according to law. This rule arises
the corporate by-law requiring that persons elected to the Board of Directors from the need to protect the stockholder by providing them with notice of
must be holders of shares of the paid up value of P5,000.00, which shall be meeting and giving them opportunity to attend the meeting, discuss the
held as security for their action, on the ground that section 21 of the issues and vote (an exception would be an ordinary amendment where
Corporation Law expressly gives the power to the corporation to provide in its “written asset” is acceptable).
by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not
fixed, on any date of April of very year as the BOD/T may determine. April,
ISSUE3: WON stockholders have the vested right to be elected a director? because this is the time the Audited Financial Statements are already
available.
HELD: No. Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the stockholders DATE OF SPECIAL MEETING: At any time deemed necessary or as
and that he impliedly contracts that the will of the majority shall govern in all provided for in the by-laws.
matters within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law." To this extent, therefore, the stockholder REQUIREMENTS FOR A VALID STOCKHOLDERS’ MEETING:
may be considered to have "parted with his personal right or privilege to 1. It Must Be Held On The Date Fixed In The By-Laws Or In
regulate the disposition of his property which he has invested in the capital Accordance With The Law.
stock of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. ... It cannot therefore be justly said that the contract, The date required, as previously discussed, admits of an exception, as
express or implied, between the corporation and the stockholders is infringed when the annual meeting cannot be held on the appointed time for
... by any act of the former which is authorized by a majority ... ." some valid and meritorious reasons.
Under section 22 of the same law, the owners of the majority of the 2. Prior Notice Must Be Given
subscribed capital stock may amend or repeal any by-law or adopt new by-
laws. It cannot be said, therefore, that petitioner has a vested right to be Sec 50 and 51 requires that written notice of regular meeting shall be
elected director, in the face of the fact that the law at the time such right as sent at least 2 weeks prior to the meeting, whereas, 1 week prior notice
stockholder was acquired contained the prescription that the corporate is required for special meetings.
charter and the by-law shall be subject to amendment, alteration and
modification. EXCEPTIONS: (a) If the by-laws provide for a different period for
sending out notice for regular or special meetings (failure to comply
It being settled that the corporation has the power to provide for the would render the resolutions adopted at the option of the stockholder
qualifications of its directors, it has also been settled that the disqualification who was not notified); (b) Waiver, either express or implied.
of a competitor from being elected to the Board of Directors is a reasonable
exercise of corporate authority. The Notice must contain the agenda or business matter/s that may be
taken up before the meeting otherwise it may become voidable at the
CHAPTER 9: MEETINGS instance of any objecting stockholder or member.
Meetings applies to every duly convened assembly either of stockholders, THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF THE
members, directors or trustees, managers, etc. for any legal purpose or the SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL.,
transaction of business of common interest. petitioners,
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
vs.
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents. FACTS: It was agreed by the stockholders of Daguhoy Enterprises at a
(GR No. L-12282; March 31, 1959) stockholder’s meeting that the said corporation shall be voluntarily dissolved,
and was placed under the receivership of Gapol, the largest stockholder. A
FACTS: A meeting electing the BOD of herein petitioner was declared null petition for voluntary dissolution was drafted and signed by Ponce, which was
and void by the Court in a suit filed by John Castillo, et. al. to be filed with the appropriate authorities. It was found out that instead of
filing the petition, Gapol filed a complaint in the CFI for the accounting of the
In compliance with the order, another election was scheduled on March 28 at funds and assets of the corporation, and to reimburse it the amounts
5:30. On March 27, the plaintiff filed an ex-parte motion alleging that the expended for the purchase of a parcel of land, a loan extended to the wife of
meeting is composed of the same people that had conducted and supervised Ponce, and an amount spent by Ponce in a trip to the US. Gapol contends
the previously nullified meeting; that the election to be conducted did not that such amount, taken from the corporation, was misapplied,
comply with the 5 day notice requirement required by the by-laws and the misappropriated and misspent by Ponce to his own use and benefit, thus he
constitution of the association, since the notice was posted and sent out only prayed for the removal of Ponce as a member of the board of directors. Such
on March 26 and the election was to be held on March 28. removal was rejected by the court, but Gapol’s petition for the calling of a
stockholders’ meeting, was granted. At said meeting, a new set of board of
ISSUE: WON the notice requirement is complied with? directors was elected. Ponce filed a petition in the lower court seeking to set
aside its order, but the same was denied. Thus, they filed for an appeal to
HELD: No. Section 3, article III, of the constitution and by-laws the the SC.
association provides:
ISSUE: WON the Court may issue such order directing a stockholder to call a
“Notice of the time and place of holding of any annual meeting, or any meeting of the stockholders of a corporation?
special meeting, the members, shall be given either by posting the same in
a postage prepaid envelope, addressed to each member on the record at HELD: Yes. The corporation law provides that “whenever, from any cause,
the address left by such member with the Secretary of the Association, or there is no person authorized to call a meeting, or when the officer
at his known post-office address or by delivering the same person at least authorized to do so refuses, fails or neglects to call a meeting, any judge of a
(5) days before the date set for such meeting. . . . In lieu of addressing or CFI on the showing of a good cause therefore, may issue an order to any
serving personal notices to the members, notice of the members, notice of stockholder or member of a corporation, directing him to call a meeting of
a regular annual meeting or of a special meeting of the members may be the corporation by giving the proper notice required”. Thus, on the showing
given by posting copies of said notice at the different departments and of good cause therefore, the court may authorize a stockholder to
plants of the San Miguel Brewery Inc., not less than five (5) days prior to call a meeting and to preside thereat until the majority stockholders
the date of the meeting. (Annex K.)” representing a majority of the stock present and permitted to be
voted shall have chosen one among them to preside. This showing
Notice of a special meeting of the members should be given at least five days of good cause exists when the court is apprised of the fact that the
before the date of the meeting. Therefore, the five days previous notice by-laws of the corporation require the calling of a general meeting
required would not be complied with. of the stockholders to elect the board of directors but the call of the
meeting has not been done. There is no need to issue a notice of hearing,
nor is there any necessity to hold a hearing, upon the board of directors. The
3. It Must Be Held at the Proper Place court here found good cause in calling the meeting for the election of a new
board, because the chairman of the board of directors who is so authorized
Sec. 51. Place and time of meetings of stockholders or members. - to call such meeting, failed, neglected or refused to perform his duty. Having
Stockholders' or members' meetings, whether regular or special, shall be held the authority to grant such relief, the lower court did not exceed its
in the city or municipality where the principal office of the corporation is jurisdiction nor did it abuse its discretion in granting it.
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 NOTE: In a case decided by the SEC, it rules that under the present state of
municipality. law, the Ponce case will apply ONLY “where there is no person authorized to
call the meeting:, thus an ex-parte proceeding may be allowed as obviously
Notice of meetings shall be in writing, and the time and place thereof stated there is no person to summon and no person whose right to due process will
therein. be violated. However, where there is an officer authorized to call the meeting
and that officer refuses, fails or neglects to call a meeting then the Ponce
All proceedings had and any business transacted at any meeting of the case WILL NOT APPLY. This is so, because the phrase “or when the officer
stockholders or members, if within the powers or authority of the authorized to do so refuses, or fails, or neglects to call a meeting” has been
corporation, shall be valid even if the meeting be improperly held or called, deliberately omitted in Sec. 50 of the Corporation Code.
provided all the stockholders or members of the corporation are present or
duly represented at the meeting. Likewise, in the same ruling of the SEC, the Ponce case likened the
questioned order to a writ of preliminary injunction which may be issued ex
Meeting must, at all times, be held in the city or municipality where the parte, the said PI can no longer be issued without notice and hearing under
principal office is located, or if practicable at the principal office of the Sec. 5 of Rule 58 of the Rules of Court. Mandamus is the proper remedy.
corporation. For this purpose, Metro Manila is considered as one city or
municipality. IN SUMMARY: The following are authorized to call a meeting:
a. The person or persons authorized under the by-laws;
While there is no law allowing a STOCK corporation to hold a meeting outside b. Absent any provision in the by-laws, it may be called by the
the city or municipality where the principal office is located, NON-STOCK President;
corporations are allowed to provide a provision in its by-laws any place of c. By the secretary on order of the president or on written demand of
members’ meeting provided there is proper notice (Sec. 93) the stockholders representing at least a majority of the outstanding
capital stock or majority of the members entitled to vote, or the
4. It Must Be Called by the Proper Party stockholder or member making the demand if there is no secretary
or he refuses to do so, under Sec. 28; and
DOMINGO PONCE AND BUHAY L. PONCE, petitioners, d. A stockholder as empowered by the proper forum pursuant to Sec.
vs. 50
DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of
Manila, Branch I, and POTENCIANO GAPOL, respondents 5. Quorum and Voting Requirement Must Be Met
(GR No. L-5883; Nov. 28, 1953)
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code of corporate officers as provided under Sec. 25 which required the vote of a
or in the by-laws, a quorum shall consist of the stockholders representing a majority of all the members of the board.
majority of the outstanding capital stock or a majority of the members in the
case of non-stock corporations. PROXY VOTING: is not allowed for a director or trustee, since he was
supposedly elected because of his expertise in management or his business
A by-law provision may provide for a higher quorum requirement than that acumen such that he is expected to personally attend and vote on matters
prescribed in the Code, but not less. Otherwise, the by-law provision brought before the meeting.
providing for a lesser quorum requirement have no force and effect since a
by-law provision is subordinate to the statute and could not defeat the C. STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING
requirements of the law. The same goes for a by-law provision providing for
a voting requirement less than that provided in the Code. Being a property right, a stockholder can vote his share the way he pleases
except in the following:
If the voting requirement is met, any resolution passed in the meeting, even 1. Non-voting shares are not entitled to vote except in those instances
if improperly held or called will be valid if ALL the stockholders or members provided in the penultimate paragraph of Sec. 6 of the Code;
are present or duly represented thereat, as provided under the last 2. Treasury shares have no voting rights while they remain in the treasury
paragraph of Sec. 51: (Sec. 57);
3. Shares of stock declared delinquent are not entitled to vote at any
All proceedings had and any business transacted at any meeting of the meeting; and
stockholders or members, if within the powers or authority of the 4. Unregistered transferee of shares of stock.
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 PROXY VOTING: is allowed or through a voting trust agreement, or by the
duly represented at the meeting. executor, administrator, receiver or other legal representative appointed by
the court.
B. DIRECTORS’/TRUSTEES’ MEETING
PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor are
Sec. 53. Regular and special meetings of directors or trustees. - entitled to vote in the absence of an agreement to the contrary:
Regular meetings of the board of directors or trustees of every corporation
shall be held monthly, unless the by-laws provide otherwise. Sec. 55. Right to vote of pledgors, mortgagors, and administrators. -
In case of pledged or mortgaged shares in stock corporations, the pledgor or
Special meetings of the board of directors or trustees may be held at any mortgagor shall have the right to attend and vote at meetings of
time upon the call of the president or as provided in the by-laws. stockholders, unless the pledgee or mortgagee is expressly given by the
pledgor or mortgagor such right in writing which is recorded on the
Meetings of directors or trustees of corporations may be held anywhere in or appropriate corporate books.
outside of the Philippines, unless the by-laws provide otherwise. Notice of
regular or special meetings stating the date, time and place of the meeting Executors, administrators, receivers, and other legal representatives duly
must be sent to every director or trustee at least one (1) day prior to the appointed by the court may attend and vote in behalf of the stockholders or
scheduled meeting, unless otherwise provided by the by-laws. A director or members without need of any written proxy.
trustee may waive this requirement, either expressly or impliedly.
SHARES OWNED BY TWO OR MORE PERSONS JOINTLY:
REGULAR MEETINGS: those held monthly or as the by-laws may provide;
SPECIAL MEETINGS: those that are held at any time upon call of the Sec. 56. Voting in case of joint ownership of stock. - In case of shares
President or the person authorized to do so as may be provided in the by- of stock owned jointly by two or more persons, in order to vote the same, the
laws. 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
PLACE: Unlike the meeting of stockholders, the meetings of other person to vote such share or shares: Provided, That when the shares
directors/trustees may be held anywhere, within or even outside the are owned in an "and/or" capacity by the holders thereof, any one of the
Philippines, except when the by-laws provide otherwise. joint owners can vote said shares or appoint a proxy therefor.
NOTICE REQUIREMENT: is necessary for the purpose of determining the D. PROXY AND OTHER REPRESENTATIVE VOTING
legality of and binding effect of the resolution/s passed, EXCEPT:
1. When subsequently ratified; PROXY: is a species of absentee voting by mail by a one way ballot for the
2. In close corporations where a director may bid the corporation even slate or proposals suggested by the management or even perhaps, the
without a meeting; solicitor thereof. It is the authority given by the stockholder or member to
3. When the right to a notice is waived. another to vote for him at a stockholders’ or members’ meeting. The term is
also used to refer to the instrument or paper which is evidence of the
The SEC has ruled that a special meeting conducted in the absence of some authority of an agent or the holder thereof to vote for and in behalf of the
of the directors and without any notice to them is illegal and the action at stockholder or member.
such meeting although by a majority of the directors is invalid, unless ratified.
Sec. 58. Proxies. - Stockholders and members may vote in person or by
However, if all the directors are present, their presence at the meeting proxy in all meetings of stockholders or members. Proxies shall be in writing,
waives the want of notice. signed by the stockholder or member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise provided in the proxy, it shall
PRESIDING OFFICER: Unless the by-laws otherwise provide, the presidnet. 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.
Sec. 54. Who shall preside at meetings. - The president shall preside at
all meetings of the directors or trustee as well as of the stockholders or PROXY VOTING: is a right granted by law to all stockholders entitled to
members, unless the by-laws provide otherwise. vote in stock corporations and cannot, therefore, be denied. EXCEPT: In a
non-stock corporation with by-laws providing for a prohibition on the use of
QUORUM: Unless the AOI or by-laws provide for a greater majority, a proxies (Sec. 89).
majority of the members of the BOD/T as fixed in the AOI will constitute a
quorum for the transaction of corporate business and the decision of the REQUIREMENTS: In the absence of a by-law provision regulating the form
majority of those present shall be valid as a corporate act. EXCEPT: election and execution of proxy, Sec. 58 requires:
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
1. The proxy must be in writing; The voting trustee or trustees may vote by proxy unless the agreement
2. It is signed by the stockholder or member or his duly authorized provides otherwise.
representative; and
3. It is filed on or before the schedule meeting with the corporate VOTING TRUSTS DISTINGUISHED FROM PROXY
secretary.
VOTING TRUST PROXY
It is to be noted, however, that publicly listed companies are requreid to The beneficial owner of the shares Legal title to the shares remain with
observe and comply with SEC Memorandum Circular No. 5 -1996, ceased to be stockholder of record of the beneficial owner
the corporation since the shares are
TYPES OF PROXIES: transferred to the trustee
1. General – gives a general discretionary power of attorney to vote for Trustee votes as owner of the shares Proxy votes merely as an agent
directors and all ordinary matters that my properly come before a The beneficial owner is disqualified The owner of the shares may be
meeting. It is not an authority, however, to vote for fundamental to be a director elected as such since legal title
changes in the corporate charter or for other unusual transactions, thereof remains with him
unless so specified; Purpose is to acquire voting control Generally used to secure voting an
2. Special – restricts the authority to vote on specified matters only and of the corporation quorum requirements or merely for
may direct the manner in which the vote will be cast. the purpose of representing an
absent stockholder
DURATION: May be fixed by the proxy’s own terms but it cannot exceed 5
Irrevocable Revocable anytime unless coupled
years and for not more than 5 years for each renewal. Otherwise, it expires with an interest
after the meeting for which it was given.
The trustee can act and vote at any Proxy can generally act as such only
meeting during the duration of the at a particular meeting
VOTING TRUST: is one created by an agreement between a group of
VTA
stockholders of a corporation and a trustee, or a group of identical
Trustee may vote in person or by Proxy holder must vote in person
agreements between individual stockholders and a common trustee, whereby
proxy
it is provided that for a term of years, or for a period contingent upon a
Duration may exceed five years Proxy is of a shorter duration and
certain event, or until the agreement is terminated, control over the stock
may not exceed 5 years
owned by such stockholders, shall be lodged in the trustee, either with or
without reservation to the owners or persons designated by them the power VTA to be valid and effective, must Unless required by the by-laws,
to direct how such control shall be issued. be notarized and filed with the SEC proxies need not be notarized nor is
it required to be filed with the SEC.
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 READ AGAIN: LEE VS. CA
trustees the right to vote and other rights pertaining to the shares for a
period not exceeding five (5) years at any time: Provided, That in the case of NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION,
a voting trust specifically required as a condition in a loan agreement, said EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO,
voting trust may be for a period exceeding five (5) years but shall petitioners,
automatically expire upon full payment of the loan. A voting trust agreement vs.
must be in writing and notarized, and shall specify the terms and conditions HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of
thereof. A certified copy of such agreement shall be filed with the corporation Branch VIII of the Court of First Instance of Rizal, BATJAK INC., GRACIANO
and with the Securities and Exchange Commission; otherwise, said A. GARCIA and MARCELINO CALINAWAN JR., respondents.
agreement is ineffective and unenforceable. The certificate or certificates of (G.R. No. L-34192 June 30, 1988)
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 PHILIPPINE NATIONAL BANK, petitioner,
issued pursuant to said agreement. In the books of the corporation, it shall vs.
be noted that the transfer in the name of the trustee or trustees is made HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the
pursuant to said voting trust agreement. Court of First Instance of Rizal, Branch VIII and BATJAK INCORPORATED,
respondents
The trustee or trustees shall execute and deliver to the transferors voting (G.R. No. L-34213 June 30, 1988)
trust certificates, which shall be transferable in the same manner and with
the same effect as certificates of stock. FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered into a
Voting Trust Agreement with petitioner NIDC, in order to assist the former
The voting trust agreement filed with the corporation shall be subject to with its financial obligations. The VTA was for a period of 5 years constituting
examination by any stockholder of the corporation in the same manner as 60% of the outstanding paid-up and subscribed shares of Batjak. 5 years
any other corporate book or record: Provided, That both the transferor and therafter, or on Aug. 31, 1970, Batjak represented by majority stockholders,
the trustee or trustees may exercise the right of inspection of all corporate through Atty. Amado Duran, legal counsel, wrote to NIDC inquiring if the
books and records in accordance with the provisions of this Code. atter was still interest in negotiating the renewal of the VTA, but there was
no reply even with the second letter sent on Sept. 22, 1970.
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 On Sept. 23, 1970, legal counsel of Batjak wrote another letter asking for a
thereupon shall be bound by all the provisions of said agreement. complete accounting of the assets, properties, management and operation of
Batjak, preparatory to their turn-over and transfer to the stockholders of
No voting trust agreement shall be entered into for the purpose of Batjak.
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud. NIDC replied that it had no intention to comply with such demand. Batjak
filed an action for mandamus with preliminary injunction which was granted.
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 ISSUE: WON Batjak has the personality to enforce the voting trust
certificates as well as the certificates of stock in the name of the trustee or agreement executed by its stockholders and whether it may compel the
trustees shall thereby be deemed canceled and new certificates of stock shall trustee to turn over the assets of the corporation?
be reissued in the name of the transferors.
Batjak has no clear right to be entitled to the writ prayed for. What Sec. 60. Subscription contract. - Any contract for the acquisition of
Batjak seeks to recover is title to, or possession of, real property unissued stock in an existing corporation or a corporation still to be formed
(the three (3) oil mills which really made up the assets of Batjak) shall be deemed a subscription within the meaning of this Title,
but which the records show already belong to NIDC. It is not disputed notwithstanding the fact that the parties refer to it as a purchase or some
that the mortgages on the three (3) oil mills were foreclosed by PNB and other contract.
NIDC and acquired by them as the highest bidder in the appropriate
foreclosure sales. Ownership thereto was subsequently consolidated by PNB SUBSCRIPTION VS. PURCHASE: In the latter, the buyer becomes a
and NIDC, after Batjak failed to exercise its right of redemption. The three shareholder only upon full payment of the price. UNISSUE shares cannot be
(3) oil mills are now titled in the name of NIDC. From the foregoing, it is the subject of a “purchase”.
evident that Batjak had no clear right to be entitled to the writ prayed for. In
Lamb vs. Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs. “We may add that the law in force in this jurisdiction makes no distinction, in
The Board of Pharmacy, 20 Phil. 367, the Court said that the writ of respect to the liability of the subscriber, between shares subscribed before
mandamus will not issue to give to the applicant anything to which he is not incorporation is effected and shares subscribed thereafter. All like are bound
entitled by law. to pay full value in cash or its equivalent, and any attempt to discriminate in
favor of one subscriber by relieving him of this liability wholly or in part is
Batjak premises its right to the possession of the three (3) off mills on the forbidden. In what is here said we have reference of course primarily to
Voting Trust Agreement, claiming that under said agreement, NIDC was subscriptions to shares that have not been previously issued. It is conceivable
constituted as trustee of the assets, management and operations of Batjak, that the power of the corporation to make terms with the purchaser would be
that due to the expiration of the Voting Trust Agreement, on 26 October greater where the shares which are the subject of the transaction have been
1970, NIDC should tum over the assets of the three (3) oil mills to Batjak acquired by the corporation in course of commerce, after they have already
From the foregoing provisions, it is clear that what was assigned to NIDC was been once issued. But the shares with which are here concerned are not of
the power to vote the shares of stock of the stockholders of Batjak, this sort.” (National Exchange Co., Inc. vs. Dexter)
representing 60% of Batjak's outstanding shares, and who are the signatories
to the agreement. The power entrusted to NIDC also included the authority EXAMPLE: If X corporation had P1M authorized capital divided into 1M
to execute any agreement or document that may be necessary to express the shares with a par value of P1. 500,000 has already been subscribed:
consent or assent to any matter, by the stockholders. Nowhere in the said 1. Z “purchased” 100,000 of the UNISSUED shares paying 50% down
provisions or in any other part of the Voting Trust Agreement is mention payment and the balance payable after 6 months, with a condition that
made of any transfer or assignment to NIDC of Batjak's assets, operations, he will not be considered a shareholder until full payment. – He is still
and management. NIDC was constituted as trustee only of the voting rights liable for the balance because this will be considered a subscription no
of 60% of the paid-up and outstanding shares of stock in Batjak. This is matter how the parties refer to it and accordingly, Z is liable as a
confirmed by paragraph No. 9 of the Voting Trust Agreement, thus: shareholder therein.
2. Z was declared a delinquent shareholder and X Co. was declared as the
9. TERMINATION — Upon termination of this Agreement as heretofore winning bidder by paying P100,000 and acquired the delinquent shares.
provided, the certificates delivered to the TRUSTEE by virtue hereof Later on, 20,000 of the shares were sold to Y – here, the shares being
shall be returned and delivered to the undersigned stockholders as the from treasury and not from unissued shares, may be the proper subject
absolute owners thereof, upon surrender of their respective voting trust of a “purchase” and thus, a condition that Y would not became a
certificates, and the duties of the TRUSTEE shall cease and terminate.- shareholder until full payment may be valid.
Under the aforecited provision, what was to be returned by NIDC as trustee ORAL: A subscription contract need not be in writing such that an oral
to Batjak's stockholders, upon the termination of the agreement, are the contract of subscription is valid and enforceable under the Statute of Frauds.
certificates of shares of stock belonging to Batjak's stockholders, not the Thus, it was ruled by the SC that such an agreement does not seem to fall
properties or assets of Batjak itself which were never delivered, in the first within the definition of a sale under our substantive law, and is therefore
place to NIDC, under the terms of said Voting Trust Agreement. believed that an oral subscription agreement as distinguished from sale of
stock is valid and enforceable.
In any event, a voting trust transfers only voting or other rights pertaining to
the shares subject of the agreement or control over the stock. The law on the CONDITION: Subscriptions may be made upon a condition precedent or
matter is Section 59, Paragraph 1 of the Corporation Code (BP 68) which upon special terms (condition subsequent). A conditional subscription, or
provides: one made upon a condition precedent, does not make the subscriber a
Sec. 59. Voting Trusts — One or more stockholders of a stock stockholder, or render him to pay the amount of his subscription, until
corporation may create a voting trust for the purpose of confering upon performance of the condition. A subscription upon special terms, on the
a trustee or trusties the right to vote and other rights pertaining to the other hand, is an absolut subscription, making the subscriber a stockholder,
shares for a period not exceeding five (5) years at any one time: ... and rendering him liable as such, as soon as the subscription is accepted, the
special term being an independent stipulation.
Where the consideration is other than actual cash, or consists of intangible THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
property such as patents of copyrights, the valuation thereof shall initially be vs.
determined by the incorporators or the board of directors, subject to approval I. B. DEXTER, defendant-appellant
by the Securities and Exchange Commission. (GR No. L-27872; Feb. 25, 1928)
Shares of stock shall not be issued in exchange for promissory notes or FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a written
future service. subscription to the corporate stock of C. S. Salmon & Co. in the following
form:
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. I hereby subscribe for three hundred (300) shares of the capital stock of C.
S. Salmon and Company, payable from the first dividends declared on any
The issued price of no-par value shares may be fixed in the articles of and all shares of said company owned by me at the time dividends are
incorporation or by the board of directors pursuant to authority conferred declared, until the full amount of this subscription has been paid
upon it by the articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a majority of the Upon subscription, defendant Dexter paid P15,000 from the dividends
outstanding capital stock at a meeting duly called for the purpose. declared by the company and supplemented by money supplied personally be
the subscriber. No other payment was made.
“ISSUE”: is generally employed to indicate the making of a share contract or
contract of subscription, that is, transaction by which a person becomes the ISSUE: WON the subscription to be paid out of the dividends declared on the
owner of shares and by which new share contracts are created. It is often shares has the effect of relieving the subscriber from personal liability in an
associated with the execution and delivery of a share certificate but the action to recover the value of the shares?
issuance of the shares is not dependent on the delivery of a certificate of
stock. HELD: No. Under the American regime corporate franchises in the Philippine
Islands are granted subject to the provisions of section 74 of the Organic Act
“PAR” or “ISSUED PRICE”: while it may not reflect the true value of the of July 1, 1902, which, in the part here material, is substantially reproduced
shares which constantly fluctuates, merely indicates the amount which the in section 28 of the Autonomy Act of August 29, 1916. In the Organic Act it is
original subscribers are supposed to contribute to the corporate capital as the among other things, declared: "That all franchises, privileges, or concessions
basis of the privilege of profit sharing with limited liability. granted under this Act shall forbid the issue of stock or bonds except in
exchange for actual cash or for property at a fair valuation equal to the par
PROPERTY: If shares are issued in exchange for property, the value of such value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902,
should at least be equal to the par or issued value of the stocks. Such value, sec. 74.)
may be determined with reference to
a. REAL PROPERTY - (1) independent appraiser’s appraisal report;; (2) BIR Pursuant to this provision we find that the Philippine Commission inserted in
Zonal Valuation; or (3) Market Value indicated in the Real Estate Tax the Corporation Law, enacted March 1, 1906, the following provision: ". . .
Declaration. no corporation shall issue stock or bonds except in exchange for
b. INTANGIBLE PROPERTY – as determined by the incorporators or the actual cash paid to the corporation or for property actually received
BOD subject to the approval of the SEC. by it at a fair valuation equal to the par value of the stock or bonds
so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)
TRUE VALUE RULE: the motives and intent of those making the valuation
are disregarded and the sole and decisive factor or question is whether or not The prohibition against the issuance of shares by corporations except for
the property or services are in fact worth the value placed on them. actual cash to the par value of the stock to its full equivalent in property is
thus enshrined in both the organic and statutory law of the Philippine Islands;
GOOD FAITH RULE: is based on the proposition that the value of the and it would seem that our lawmakers could scarcely have chosen language
property or services is a matter about which there can be an honest more directly suited to secure absolute equality stockholders with respect to
difference of opinion. Therefore, if the parties have acted in good faith their liability upon stock subscriptions. Now, if it is unlawful to issue stock
without fraud or intentional over-valuation, the transaction cannot be otherwise than as stated it is self-evident that a stipulation such as that
overturned even if it later becomes evident that the property or services were now under consideration, in a stock subscription, is illegal, for this
in fact worth much less than the value fixed on them initially. stipulation obligates the subscriber to pay nothing for the shares
except as dividends may accrue upon the stock. In the contingency
Most jurisdiction follow the GOOD FAITH rule. that dividends are not paid, there is no liability at all. This is a
discrimination in favor of the particular subscriber, and hence the
STOCK DIVIDENDS: Sec. 62(5) which states that “amounts transferred stipulation is unlawful.
from unrestricted retained earnings to stated capital” refer to stock dividends
where corporate earnings are capitalized rather than being distributed as The general doctrine of corporation law is in conformity with this conclusion,
cash dividend. It merely converts income into capital, the consideration being as may be seen from the following proposition taken from the standard
the retained earnings itself which would have accrued to the stockholders in encyclopedia treatise, Corpus Juris:
proportion to their respective stockholdings.
Nor has a corporation the power to receive a subscription upon
NO CONSIDERATION: stocks may not be issued without consideration for such terms as will operate as a fraud upon the other subscribers
the following reasons: (1) it is discriminatory against other stockholders; and or stockholders by subjecting the particular subcriber to lighter
(2) it prejudices the rights of creditors under the Trust Fund Doctrine. burdens, or by giving him greater rights and privileges, or as a
fraud upon creditors of the corporation by withdrawing or
Share of Stock: may rightfully be described as a profit sharing contract, a REGISTRATION: is necessary to:
series of units of interest and participation in a corporation in consideration of 1. Enable the corporation to know who its stockholders are;
a proportionate right to participate in dividend and other distributions. They 2. Enable the transferee to exercise his rights as a stockholder;
are personal properties and the owners thereof have the unbridled right to 3. Afford the corporation an opportunity to object or refuse registration of
transfer the same to anyone they please subject only to reasonable charter the transfer in cases allowed by law (as when it has unpaid claims on
provisions. the shares transferred);
4. Avoid fictitious and fraudulent transfers; and
Certificate of Stock: is the piece of paper or document which evidences 5. Protect creditors who have the right to look upon stockholders, in case
the ownership of shares and a convenient instrument in the transfer of the of non-payment or watered shares, for the satisfaction of their claims.
title.
MANDAMUS: If the corporate secretary refuses to registered or record the
Sec. 63. Certificate of stock and transfer of shares. - The capital stock transfer, mandamus will lie to compel the registration. This is because such
of stock corporations shall be divided into shares for which certificates signed duty is ministerial. HOWEVER, he cannot be compelled to do so when the
by the president or vice president, countersigned by the secretary or transferee’s title to said shares has no prima facie validity or is uncertain.
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 TWO MODES OF TRANSFERRING STOCKS:
property and may be transferred by delivery of the certificate or certificates 1. Endorsement and delivery of certificate of stock;
endorsed by the owner or his attorney-in-fact or other person legally 2. Notarized deed.
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 The SEC has, however, ruled that when a corporation has already issued
corporation showing the names of the parties to the transaction, the date of stock certificates, any transfer of the shares can only be effectively made by
the transfer, the number of the certificate or certificates and the number of endorsement and delivery of the stock certificate. A deed of transfer, sale or
shares transferred. assignment alone would not suffice (as affirmed by the SC in Rural Bank of
Lipa City, Inc. vs. CA) for to rule otherwise would open the door to fraudulent
No shares of stock against which the corporation holds any unpaid claim shall or fictitious transfer which the SEC seeks to avoid. In effect, while a formal
be transferable in the books of the corporation. contract of sale in a notarized document is equivalent to actual delivery of the
certificate itself, this mode of transfer is available only if no certificate of
REQUISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK: stock has been issued.
1. It must be signed by the president or vice-president and countersigned
by the secretary or assistant secretary; RIGHT TO TRANSFER SHARES OF STOCK: may not be unreasonably
2. It must be sealed with the corporate seal, and restricted prohibited. Thus, in Padgett vs. Bobcock & Templeton and Fleischer
3. The entire value thereof (together with the interest or expenses, if any) vs. Botica Nolasco, the SC held that every owner of corporate shares has the
should have been paid. same uncontrollable right to alienate them and is under no obligation from
selling them at his sacrifice and for the welfare and benefit of the corporation
RIGHTS OF SUBSCRIBERS: While it appears, that a subscriber to shares and other stockholders. But while unreasonable restrictions may not be
of stock cannot be entitled to the issuance of a certificate of stock until the allowed, the right to transfer may be “regulated” to give the corporation
full amount of his subscription together with interest and expenses (in case of protection against colorable or fraudulent transfer or to enable it to know
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
who its stockholders are. Also, as a matter of policy, the SEC allows the grant No share of stock against which the corporation hold, any unpaid claim
of “preferential rights” to existing stockholders and/or the corporation, giving shall be transferable on the books of the corporation.
them the first option to purchase the shares of a selling stockholder within a
reasonable period not exceeding thirty days provided that the same is The legal provision just quoted does not require any entry except of transfers
contained in the AOI and in all the stock certificates to be issued. This is of shares of stock in order that such transfers may be valid as against third
considered “reasonable” since it merely suspends the right to transfer within persons. Now, what did the Legislature mean in using the word "transfer"?
the period specified.
Inasmuch as it does not appear from the text of the Corporation Law that an
OTHER RESTRICTIONS: attempt was made to give a special signification to the word "transfer", we
1. It is not valid, except as between the parties, until recorded in the books shall construe it according to its accepted meaning in ordinary parlance.
of the corporation;
2. Shares of stock against which the corporation holds any unpaid claim The word "transferencia" (transfer) is defined by the "Diccionario de la
shall not be transferrable in the books of the corporation. Unpaid claims, Academia de la Lengua Castellana" as "accion y efecto de transferir" (the act
refer to claims arising from unpaid subscription and not to any and effect of transferring); and the verb "transferir", as "ceder o renunciar en
indebtedness which a stockholder may owe the corporation such as otro el derecho o dominio que se tiene sobre una cosa, haciendole dueno de
monthly dues; ella" (to assign or waive the right in, or absolute ownership of, a thing in
3. Restrictions required to be indicated in the AOI, bylaws and stock favor of another, making him the owner thereof).
certificates of a close corporation;
4. Restrictions imposed by special law, such as the Public Service Act In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589,
requiring the approval of the government agency concerned if it will vest the word "transfer" is defined as follows:
unto the transferee 40% of the capital of the public service company;
5. Sale to aliens in violation of maximum ownership of shares under the "Transfer" means any act by which property of one person is vested in
Nationalization Laws; and another, and "transfer of shares", as used in Uniform Stock Transfer Act
6. Those covered by reasonable agreement of the parties. (Comp. St. Supp., 690), implies any means whereby one may be divested
of and another acquire ownership of stock. (Wallach vs. Stein [N.J.], 136
TRANSFER: as used in the Corporation Code, refers to absolute and A., 209, 210.)"
unconditional transfer to warrant registration in the books of the corporation
in order to bind the latter and other third persons. In view of the definitions cited above, the question arises as to whether or
not a mortgage constituted on certain shares of stock in accordance with Act
ENRIQUE MONSERRAT, plaintiff-appellee, No. 1508, as amended by Act No. 2496, is a transfer of such shares in the
vs. abovementioned sense.
CARLOS G. CERON, ET AL., defendants.
ERMA, INC., and, THE SHERIFF OF MANILA, respondents Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496,
(G.R. No. 37078; September 27, 1933) defines the phrase "hipoteca mobiliaria" (chattel mortgage) as follows:
FACTS: Enrique Monserrat, president and manager of the Manila Yellow SEC. 3. A chattel mortgage is a conditional sale of personal property as
Taxicab Co., Inc. (MYTC), assigned to Carlos G. Ceron the usufruct of his security for the payment of a debt, or the performance of some other
1,200 shares in consideration of the interest shown and the financial aid obligation specified therein, the condition being that the sale shall be
extended him (Monserrat) in the organization of the corporation. This avoided upon the seller paying to the purchaser a sum of money or doing
assignment allowed Ceron to derive the right to enjoy the profits (during his some other act named. If the condition is performed according to its terms
lifetim) that may be derived from the shares but prohibited him from acts of the mortgage and sale immediately become void, and the mortgage is
absolute ownership, such acts and the right to vote, reserved to Monserrat hereby divested of his title.
and his heirs. Such assignment was recorded in the books of the corporation
and the corresponding shares certificate was issued to Ceron. According to the legal provision just quoted, although a chattel mortgage,
accompanied by delivery of the mortgaged thing, transfers the title and
Later on, Ceron mortgaged the shares to herein defendant Eduardo Matute, ownership thereof to the mortgage creditor, such transfer is not absolute but
the latter without knowledge of the existence of the assignment. Due to non- constitutes a mere security for the payment of the mortgage debt, the
payment, Matute foreclosed the mortgage and the shares were sold at a transfer in question becoming null and void from the time the mortgage
public auction. debtor complies with his obligation to pay his debt.
Monserrat claims ownership over the shares and the lower court rendered In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17;
judgment in his favor, holding that the mortgage on the shares was null and 34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and Phrases, second
void, but the mortgage on the usufruct is valid. series, vol. 4, p. 978, the following appears:
ISSUE: WON it is necessary to enter upon the books of the corporation a A "transfer" is the act by which owner of a thing delivers it to another with
mortgage constituted on shares of stock in order that such mortgage may be the intent of passing the rights which he has in it to the latter, and a
valid and may have force and effect as against third persons? chattel mortgage is not within the meaning of such term.
HELD: No. Section 35 of the Corporation Law provides the following: Therefore, the chattel mortgage is not the transfer referred to in
section 35 of Act No. 1459 commonly known as the Corporation law,
SEC. 35. The capital stock of stock corporations shall be divided into which transfer should be entered and noted upon the books of a
shares for which certificates signed by the president or the vice-president, corporation in order to be valid, and which, as has already been
counter signed by the secretary or clerk and sealed with the seal of the said, means the absolute and unconditional conveyance of the title
corporation, shall be issued in accordance with the by-laws. Shares of and ownership of a share of stock.
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 If, in accordance with said section 35 of the Corporation Law, only the
person legally authorized to make the transfer. No transfer, however, shall transfer or absolute conveyance of the ownership of the title to a
be valid, except as between the parties, until the transfer is entered and share need be entered and noted upon the books of the corporation
noted upon the books of the corporation so as to show the names of the in order that such transfer may be valid, therefore, inasmuch as a
parties to the transaction, the date of the transfer the number of the chattel mortgage of the aforesaid title is not a complete and
certificate, and the number of shares transferred. absolute alienation of the dominion and ownership thereof, its entry
It is obvious, therefore, that the defendant entity Erma, Inc., as a conditional If with respect to a chattel mortgage of shares of stock of a corporation,
purchaser of the shares of stock in question given as security for the registration in the province of the owner's domicile should be sufficient, those
payment of his credit, acquired in good faith Carlos G. Ceron's right and title who lend on such security would be confronted with the practical difficulty of
to the 600 common shares of stock evidenced by certificate No. 7 of the being compelled not only to search the records of every province in which the
MYTC, and as such conditional purchaser in good faith, it is entitled to the mortgagor might have been domiciled but also every province in which a
protection of the law. chattel mortgage by any former owner of such shares might be registered.
We cannot think that it was the intention of the legislature to put this almost
In view of the foregoing considerations, we are of the opinion and so hold prohibitive impediment upon the hypothecation of shares of stock in view of
that, inasmuch as section 35 of the Corporation Law does not require the great volume of business that is done on the faith of the pledge of shares
the notation upon the books of a corporation of transactions of stock as collateral.
relating to its shares, except the transfer of possession and
ownership thereof, as a necessary requisite to the validity of such It is a common but not accurate generalization that the situs of shares of
transfer, the notation upon the aforesaid books of the corporation, stock is at the domicile of the owner. The term situs is not one of fixed of
of a chattel mortgage constituted on the shares of stock in question invariable meaning or usage. Nor should we lose sight of the difference
is not necessary to its validity. between the situs of the shares and the situs of the certificates of shares.
The situs of shares of stock for some purposes may be at the domicile of the
owner and for others at the domicile of the corporation; and even elsewhere.
GONZALO CHUA GUAN, plaintiff-appellant, (Cf. Vidal vs. South American Securities Co., 276 Fed., 855; Black Eagle Min.
vs. Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 Norrie vs. Kansas City Southern
SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO G. Ry. Co., 7 Fed. [2d]. 158.) It is a general rule that for purposes of
SOTTO, and EMILIO VERGARA, as president, secretary and treasurer execution, attachment and garnishment, it is not the domicile of the
respectively of the same, defendants-appellees owner of a certificate but the domicile of the corporation which is
(G.R. No. L-42091; November 2, 1935) decisive. (Fletcher, Cyclopedia of the Law of Private Corporations, vol. 11,
paragraph 5106. Cf. sections 430 and 450, Code of Civil Procedure.)
FACTS: To secure the payment of a debt, Gonzalo H. Co Toco mortgage his
shares to Chua Chiu, such assignment recorded in the Office of the Register By analogy with the foregoing and considering the ownership of shares in a
of Deeds and the books of the corporation. For non-payment, the mortgage corporation as property distinct from the certificates which are merely the
was foreclosed and the shares were sold at a public auction with plaintiff evidence of such ownership, it seems to us a reasonable construction of
Chua Guan as the highest bidder. section 4 of Act No. 1508 to hold that the property in the shares may be
deemed to be situated in the province in which the corporation has
The Company refused to cancel the certificates of stock and issue new ones its principal office or place of business. If this province is also the
to herein plaintiff alleging that prior to the date of plaintiff’s demand, nine province of the owner's domicile, a single registration sufficient. If
attachments had been issued and served and noted on the books of the not, the chattel mortgage should be registered both at the owner's
corporation. Thus, a prayer for a writ of mandamus. domicile and in the province where the corporation has its principal
office or place of business. In this sense the property mortgaged is
The validity of the assignments and the mortgage is not in question. not the certificate but the participation and share of the owner in
the assets of the corporation.
ISSUE: WON the registration of the mortgage in the registry of chattel
mortgage in the office of the register of deeds give constructive notice to the In view of the premises, the attaching creditors are entitled to priority over
said attaching creditors and thus gave preference to the mortgage over the the defectively registered mortgage of the appellant and the judgment
other debts? appealed from must be affirmed without special pronouncement as to costs
in this instance.
HELD: No. In passing, let it be noted that the registration of the said chattel
mortgage in the office of the corporation was not necessary and had no legal TORIBIA USON, plaintiff-appellee,
effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long mooted question as to vs.
whether or not shares of a corporation could be hypothecated by placing a VICENTE DIOSOMITO, ET AL., defendants.
chattel mortgage on the certificate representing such shares we now regard VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and NORTH
as settled by the case of Monserrat vs. Ceron, supra. But that case did not ELECTRIC COMPANY, INC., appellants.
deal with any question relating to the registration of such a mortgage or the (G.R. No. L-42135; June 17, 1935)
effect of such registration. Nothing appears in the record of that case even
tending to show that the chattel mortgage there involved was ever registered FACTS: In a civil action filed by herein plaintiff-appellee Uson, an attachment
anywhere except in the office of the corporation, and there was no question was levied on Jan. 18, 1932 upon the property of defendant Vicente
involved there as to the right of priority among conflicting claims of creditors Diosmomito including the question 75 shares of North Electric Company, Inc..
of the owner of the shares On March 20, 1933, the said shares were sold at a public auction to satisfy
the claim of Uson.
Section 4 of Act No. 1508 provides two ways for executing a valid chattel
mortgage which shall be effective against third persons. First, the possession In the present action, appellant HPL Jollye claims ownership of said shares.
of the property mortgage must be delivered to and retained by the Apparently, these shares were sold by Diosomito to Emetertio Barcelon on
mortgagee; and, second, without such delivery the mortgage must be Feb. 3, 1931 but the certificates were cancelled and a new one issued only
recorded in the proper office or offices of the register or registers of deeds. If on Sep. 16, 1932. Later on, the same shares were sold to Jollye and
a chattel mortgage of shares of stock of a corporation may validly be made registered in the books on Feb. 13, 1933.
without the delivery of possession of the property to the mortgagee and the
mere registration of the mortgage is sufficient to constructive notice to third ISSUE: WON a bona fide transfer of the shares of a corporation, not
parties, we are confronted with the question as to the proper place of registered or noted on the books of the corporation, is valid as against a
registration of such a mortgage. Section 4 provides that in such a case the subsequent lawful attachment of said shares, regardless of whether the
mortgage resides at the time of making the same or, if he is a non-resident, attaching creditor had actual notice of said transfer or not?
in the province in which the property is situated; and it also provides that if
the property is situated in a different province from that in which the HELD: Section 35 of the Corporation Law is as follows:
ISSUE: WON the restriction imposed on the right to transfer the shares is Whereas it is recognized that the success of said corporation depends, now
valid? and for at least one year next following, in the larger stockholders
retaining their respective interests in the business of said corporation:
HELD: No. The opinion seems to be unanimous that a restriction imposed Therefore, the undersigned mutually and reciprocally agree not to sell,
upon a certificate of shares, similar to the ones under consideration, transfer, or otherwise dispose of any part of their present holdings of stock
is null and void on the ground that it constitutes and unreasonable in said John R. Edgar & Co. Inc., till after one year from the date hereof.
limitation of the right of ownership and is in restraint of trade.
ISSUE: WON Evangelista has a better right to the shares and control of the ISSUE: WON petitioner Razon is the rightful owner of the shares?
corporate affairs?
HELD: No. In the case of Embassy Farms, Inc. v. Court of Appeals (188
HELD: Yes. From the pleadings submitted by the parties it is clear that SCRA 492 [1990]) we ruled:
although Evangelista has indorsed in blank the shares outstanding in his
For the petitioner Rural Bank of Salinas to refuse registration of the Like the Abejo spouses, the respondents in Rural Bank of Salinas were
transferred shares in its stock and transfer book, which duty is ministerial on already prima facie shareholders when the deeds of assignment were
its part, is to render nugatory and ineffectual the spirit and intent of Section questioned. If the said deeds were to be annulled later on, respondents
63 of the Corporation Code. Thus, respondent Court of Appeals did not err in would still be considered shareholders of the corporation from the time of the
upholding the Decision of respondent SEC affirming the Decision of its assignment until the annulment of such contracts.
Hearing Officer directing the registration of the 473 shares in the stock and
transfer book in the names of private respondents. At all events, the ISSUE2: WON petitioner is entitled to the relief of mandamus as against the
registration is without prejudice to the proceedings in court to determine the company?
validity of the Deeds of Assignment of the shares of stock in question.
HELD: No. Petitioner prays for the issuance of a writ of mandamus, directing
LIM TAY, petitioner, the corporate secretary of respondent corporation to have the shares
vs. transferred to his name in the corporate books, to issue new certificates of
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE stock and to deliver the corresponding dividends to him.
OF ALFONSO LIM, respondents
(G.R. No. 126891; August 5, 1998) In order that a writ of mandamus may issue, it is essential that the
person petitioning for the same has a clear legal right to the thing
FACTS: To secure their separate loans, respondent Sy Guiok and Alfonso demanded and that it is the imperative duty of the respondent to
Lim, each executed a contract of pledge covering their respective 300 shares perform the act required. It neither confers powers nor imposes
in favor of petitioner Lim Tay where they indorsed in blank and delivered duties and is never issued in doubtful cases. It is simply a command
their shares of stock to Tay. to exercise a power already possessed and to perform a duty
already imposed.
For non-payment, Lim Tay filed a Petition for Mandamus in the SEC against
Go Fay & Compny, Inc. to cancel the old certificates and issue a new one in In the present case, petitioner has failed to establish a clear legal right.
his name, which was granted by the SEC but reversed by the CA. Petitioner's contention that he is the owner of the said shares is completely
without merit. Quite the contrary and as already shown, he does not have
ISSUE: WON the rulings in the Abejo case and the Rural Bank of Salinas any ownership rights at all. At the time petitioner instituted his suit at the
case will apply? SEC, his ownership claim had no prima facie leg to stand on. At best, his
contention was disputable and uncertain Mandamus will not issue to establish
HELD: No. Petitioner's reliance on the doctrines set forth in Abejo v. De la a legal right, but only to enforce one that is already clearly established.
Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced.
ISSUE3: WON by Guiok and Lim’s failure to pay, the ownership of the shares
ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of stock automatically passed to Lim Tay?
in Pocket Bell Philippines, Inc. Subsequent to such contract of sale, the
corporate secretary, Norberto Braga, refused to record the transfer of the HELD: No. On appeal, petitioner claimed that ownership over the shares had
shares in the corporate books and instead asked for the annulment of the passed to him, not via the contracts of pledge, but by virtue of prescription
sale, claiming that he and his wife had a pre-emptive right over some of the and by respondents' subsequent acts which amounted to a novation of the
shares, and that his wife's shares were sold without consideration or consent. contracts of pledge. We do not agree.
At the time the Bragas questioned the validity of the sale, the contract had At the outset, it must be underscored that petitioner did not acquire
already been perfected, thereby demonstrating that Telectronic Systems, Inc. ownership of the shares by virtue of the contracts of pledge. Article 2112 of
was already the prima facie owner of the shares and, consequently, a the Civil Code states:
stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be
annulled later on, Telectronic Systems, Inc. had, in the meantime, title over “The creditor to whom the credit has not been satisfied in due time, may
the shares from the time the sale was perfected until the time such sale was proceed before a Notary Public to the sale of the thing pledged. This sale
annulled. The effects of an annulment operate prospectively and do not, as a shall be made at a public auction, and with notification to the debtor and
rule, retroact to the time the sale was made. Therefore, at the time the the owner of the thing pledged in a proper case, stating the amount for
Bragas questioned the validity of the tranfers made by the Abejos, which the public sale is to be held. If at the first auction the thing is not
Telectronic Systems, Inc. was already a prima facie shareholder of the sold, a second one with the same formalities shall be held; and if at the
corporation, thus making the dispute between the Bragas and the Abejos second auction there is no sale either, the creditor may appropriate the
"intra-corporate" in nature. Hence, the Court held that "the issue is not on thing pledged. In this case he shall be obliged to give an acquittance for
ownership of shares but rather the non-performance by the corporate his entire claim.”
secretary of the ministerial duty of recording transfers of shares of stock of
the corporation of which he is secretary." Furthermore, the contracts of pledge contained a common proviso, which we
quote again for the sake of clarity:
Unlike Abejo, however, petitioner's ownership over the shares in this
case was not yet perfected when the Complaint was filed. The “3. In the event of the failure of the PLEDGOR to pay the amount within a
contract of pledge certainly does not make him the owner of the period of six (6) months from the date hereof, the PLEDGEE is hereby
shares pledged. Further, whether prescription effectively transferred authorized to foreclose the pledge upon the said shares of stock hereby
ownership of the shares, whether there was a novation of the contracts of created by selling the same at public or private sale with or without notice
FACTS: Teofilo Po was an incorporator who subscribed to 80 shares and paid That procedure cannot be followed in the instant case because, as already
25% of the subscription. No certificate of stock was issued to him. noted, the twenty shares in question are not covered by any certificate of
stock in Po's name. Moreover, the corporation has a claim on the said
Later on, Po sold to herein petitioner Nava 20 of the 80 shares at par value of shares for the unpaid balance of Po's subscription. A stock
P100, or P2,000. Nava requested herein private respondents, officers of Peers subscription is a subsisting liability from the time the subscription is
Marketing Corporation, to register him as owner of the shares, but they made. The subscriber is as much bound to pay his subscription as he
refused, Po being delinquent in the payment of the balance due his would be to pay any other debt. The right of the corporation to
subscription. demand payment is no less incontestable. (Velasco vs. Poizat, 37 Phil.
802; Lumanlan vs. Cura, 59 Phil. 746).
Po filed an action for mandamus in the CFI of Negros but it was dismissed.
A corporation cannot release an original subscriber from paying for
Po claims that the trial court erred in applying the ruling in Fua Cun vs. his shares without a valuable consideration (Philippine National Bank
Summers and China Banking Corporation wherein it was ruled that the vs. Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA 1366) or
payment of one-half of the subscription does not entitle the subscriber to a without the unanimous consent of the stockholders (Lingayen Gulf
certificate for one-half of the number of shares subscribed. Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).
ISSUE: WON Peers Marketing Corporation may be compelled by mandamus Under the facts of this case, there is no clear legal duty on the part of the
to enter in its stock and transfer book the sale made by Po to Nava of the 20 officers of the corporation to register the twenty shares in Nava's name,
shares forming part of Po’s subscription of 80 shares, it being admitted that Hence, there is no cause of action for mandamus
the corporation has an unpaid claim of P6,000 as the balance on said
subscription? As already stressed, in this case no stock certificate was issued to Po.
Without stock certificate, which is the evidence of ownership of
HELD: No. We hold that the transfer made by Po to Nava is not the corporate stock, the assignment of corporate shares is effective
"alienation, sale, or transfer of stock" that is supposed to be recorded in the only between the parties to the transaction (Davis vs. Wachter, 140 So.
stock and transfer book, as contemplated in section 52 of the Corporation 361).
Law.
The delivery of the stock certificate, which represents the shares to be
As a rule, the shares which may be alienated are those which are alienated , is essential for the protection of both the corporation and its
covered by certificates of stock, as shown in the following provisions of stockholders (Smallwood vs. Moretti, 128 So. 2d 628).
the Corporation Law and as intimated in Hager vs. Bryan, 19 Phil. 138
(overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616,
notes, and Hodges vs. Lezama, 14 SCRA 1030). THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS,
BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO
SEC. 35. The capital stock of stock corporations shall be divided into CUSTODIO, and JUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY,
shares for which certificates signed by the president or the vice-president, INC., petitioners,
countersigned by the secretary or clerk and sealed with the seal of the vs.
corporation, shall be issued in accordance with the by-laws. Shares of HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC,
stock so issued are personal property and may be transferred by delivery SECURITIES AND EXCHANGE COMMISSION, HONORABLE ENRIQUE L.
of the certificate indorsed by the owner or his attorney in fact or other FLORES, JR., in his capacity as Hearing Officer, REYNALDO VILLANUEVA, SR,
person legally authorized to make the transfer. No transfer, however, shall AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES,
be valid, except as between the, parties, until the transfer is entered and AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN
noted upon the books of the corporation so as to show the names of the and ELENA USI, respondents
parties to the transaction, the date of the transfer, the number of the (G.R. No. 124535; September 28, 2001)
certificate, and the number of shares transferred.
FACTS: Private respondent Reynaldo Villanueva Sr., a stockholder of Rural
No share of stock against which the corporation holds any unpaid claim Bank of Lipa City, Inc. executed a Deed of Assignment wherein he assigned
shall be transferable on the books of the corporation. his shares, as well as those of eight stockholders under his control with a
The Villanueva spouses failed to settle their obligation on the due date, and There being no showing that any of the requisites mandated by law was
the BOD sent a demand letter for the surrender of the said shares and for the complied with, the SEC Hearing Officer did not abuse his discretion in
delivery of sufficient collateral to cover the balance of the debt, which the granting the issuance of the preliminary injunction prayed for by petitioners
Villanueva spouses ignored. Their shares were converted into Treasury in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the
shares. order of the SEC en banc affirming the ruling of the SEC Hearing Officer, and
the Court of Appeals decision upholding the SEC en banc order, are valid and
The Villanueva spouses questioned the legality of the such conversion and in accordance with law and jurisprudence, thus warranting the denial of the
filed with the SEC a petition for annulment of the stockholders’ meeting and instant petition for review.
election of directors and officers because they were not notified of such
meeting. ALFONSO S. TAN, Petitioner,
vs.
The SEC hearing officer dismissed the application for issuance of a SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL
preliminary injunction, but was granted on reconsideration. The decision was SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and
affirmed by the SEC en banc and later by the CA. PATRICIA AGUILAR, Respondents
(G.R. No. 95696; March 3, 1992)
ISSUE: WON the transfer of the shares is ineffective for non-indorsement
and non-delivery of the certificate of stocks? FACTS: With the withdrawal of two of the original incorporators, petitioner
Alfonso Tan assigned 50 of his 400 shares (covered by Stock Certificate No.
HELD: Yes. The Corporation Code specifically provides: 2) to his brother Angel S. Tan, private respondent.
SECTION 63. Certificate of stock and transfer of shares. — The capital Petitioner’s stock certificate was cancelled by the corporate secretary, Patricia
stock of stock corporations shall be divided into shares for which Aguilar, by virtue of Resolution No. 1981(b), while petitioner was still the
certificates signed by the president or vice president, countersigned by the president and member of the board.
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of With the cancellation of Certificate of stock No. 2 and the subsequent
stocks so issued are personal property and may be transferred by delivery issuance of Stock Certificate No. 6 in the name of Angel S. Tan and for the
of the certificate or certificates indorsed by the owner or his attorney-in- remaining 350 shares, Stock Certificate No. 8 was issued in the name of
fact or other person legally authorized to make the transfer. No transfer, petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29),
however, shall be valid, except as between the parties, until the transfer is alleging that:
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 9. That in view of his having taken 33 1/3 interest, I was personally
certificate or certificates and the number of shares transferred. requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make proper
endorsement in the cancelled Certificate of Stock No. 2 and Certificate No.
No shares of stock against which the corporation holds any unpaid claim 8, but he did not endorse, instead he kept the cancelled (1981) Certificate
shall be transferable in the books of the corporation. (Emphasis ours) of Stock No. 2 and returned only to me Certificate of Stock No. 8, which I
delivered to Tan Su Ching.
Petitioners argue that by virtue of the Deed of Assignment, private
respondents had relinquished to them any and all rights they may have had 10. That the cancellation of his stock (Stock No. 2) was known by him in
as stockholders of the Bank. While it may be true that there was an 1981; that it was Stock No. 8 that was delivered in March 1983 for his
assignment of private respondents' shares to the petitioners, said endorsement and cancellation.
assignment was not sufficient to effect the transfer of shares since
there was no endorsement of the certificates of stock by the Petitioner filed with the SEC a case questioning the cancellation of the
owners, their attorneys-in-fact or any other person legally aforesaid Stock Nos. 2 and 8.
authorized to make the transfer. Moreover, petitioners admit that the
assignment of shares was not coupled with delivery, the absence of which is ISSUE: WON the cancellation and transfer of stock certificate no. 2 was
a fatal defect. The rule is that the delivery of the stock certificate duly valid?
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 HELD: Yes. Petitioner claims that "(T)he cancellation and transfer of
the transferee only by delivery of the duly indorsed certificate of petitioner's shares and Certificate of Stock No. 2 (Exh. A) as well as the
stock. issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was patently
and palpably unlawful, null and void, invalid and fraudulent." (Rollo, p. 9)
We have uniformly held that for a valid transfer of stocks, there must be And, that Section 63 of the Corporation Code of the Philippines is "mandatory
strict compliance with the mode of transfer prescribed by law. The in nature", meaning that without the actual delivery and endorsement of the
requirements are: (a) There must be delivery of the stock certificate in question, there can be no transfer, or that such transfer is null
certificate: (b) The certificate must be endorsed by the owner or his and void.
attorney-in-fact or other persons legally authorized to make the
transfer; and (c) To be valid against third parties, the transfer must Contrary to the understanding of the petitioner with respect to the use of the
be recorded in the books of the corporation. As it is, compliance with word "may", in the case of Shauf v. Court of Appeals, (191 SCRA 713, 27
any of these requisites has not been clearly and sufficiently shown. November 1990), this Court held, that "Remedial law statues are to be
construed liberally." The term 'may' as used in adjective rules, is only
It may be argued that despite non-compliance with the requisite permissive and not mandatory.
endorsement and delivery, the assignment was valid between the parties,
meaning the private respondents as assignors and the petitioners as This Court held in Chua v. Samahang Magsasaka, that "the word "may"
assignees. While the assignment may be valid and binding on the petitioners indicates that the transfer may be effected in a manner different from that
and private respondents, it does not necessarily make the transfer effective. provided for in the law." (62 Phil. 472)
Consequently, the petitioners, as mere assignees, cannot enjoy the
But delivery is not essential where it appears that the persons ISSUE: WON plaintiff was bound to present and register the certificate
sought to be held as stockholders are officers of the corporation, assigned to him within any definite or fixed period?
and have the custody of the stock book . . . (67 Phi. 36).
HELD: No. The defendant has not made herein any pretense to that effect;
Furthermore, there is a necessity to delineate the function of the stock itself but it contends that from the moment the certificate was assigned to the
from the actual delivery or endorsement of the certificate of stock itself as is plaintiff, the latter's right to have the assignment registered commenced to
the question in the instant case. A certificate of stock is not necessary to exist. This contention is correct, but it would not follow that said right
render one a stockholder in corporation. should be exercised immediately or within a definite period. The
existence of a right is one thing, and the duration of said right is
Nevertheless, a certificate of stock is the paper representative or another.
tangible evidence of the stock itself and of the various interests
therein. The certificate is not stock in the corporation but is merely On the other hand, it is stated in the appealed order of dismissal that the
evidence of the holder's interest and status in the corporation, his plaintiff sought to register the assignment on April 13, 1955; whereas in
ownership of the share represented thereby, but is not in law the plaintiff's brief it is alleged that it was only in February, 1955, when the
equivalent of such ownership. It expresses the contract between defendant refused to recognize the plaintiff. If, as already observed, there is
the corporation and the stockholder, but is not essential to the no fixed period for registering an assignment, how can the complaint
existence of a share in stock or the nation of the relation of be considered as already barred by the Statute of Limitations when it was
shareholder to the corporation. (13 Am. Jur. 2d, 769) filed on April 26, 1955, or barely a few days (according to the lower court)
and two months (according to the plaintiff), after the demand for registration
Under the instant case, the fact of the matter is, the new holder, Angel S. and its denial by the defendant. Plaintiff's right was violated only sometime in
Tan has already exercised his rights and prerogatives as stockholder and was 1955, and it could not accordingly have asserted any cause of action against
even elected as member of the board of directors in the respondent the defendant before that.
corporation with the full knowledge and acquiescence of petitioner. Due to
the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and The defendant seems to believe that the plaintiff was compelled immediately
responsibilities in the board of the respondent corporation when he was to register his assignment. Any such compulsion is obviously for the benefit
elected as officer thereof. of the plaintiff, because it is only after registration that the transfer would be
Besides, in Philippine jurisprudence, a certificate of stock is not a binding against the defendant. But we are not here concerned with a
negotiable instrument. "Although it is sometime regarded as quasi- situation where the plaintiff claims anything against the defendant allegedly
negotiable, in the sense that it may be transferred by endorsement, accruing under the outstanding certificate in question between the date of
coupled with delivery, it is well-settled that it is non-negotiable, the assignment to the plaintiff and the date of the latter’s demand for
because the holder thereof takes it without prejudice to such rights registration and issuance of a new certificate.
or defenses as the registered owner/s or transferror's creditor may
have under the law, except insofar as such rights or defenses are APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffs-
subject to the limitations imposed by the principles governing appellees,
estoppel." (De los Santos vs. McGrath, 96 Phil. 577) vs.
J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED
To follow the argument put up by petitioner which was upheld by the Cebu STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY
SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of ADMINISTRATION OF THE UNITED STATES, defendant-appellant.
Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the REPUBLIC OF THE PHILIPPINES, intervenor-appellant
cancelled "mother" Certificate No. 2 whose endorsement was deliberately (G.R. No. L-4818; February 28, 1955)
withheld by petitioner, is to prescribe certain restrictions on the transfer of
stock in violation of the corporation law itself as the only law governing FACTS: Plaintiff delos Santos alleges that he purchased 55,000 shares of
transfer of stocks. While Section 47(s) grants a stock corporation the Lepanto Consolidated Mining Co., Inc. from Juan Campos, and later 200,000
authority to determine in the by-laws "the manner of issuing certificates" of shares from Carl Hess and much later 800,000 still from Hess (for the
shares of stock, however, the power to regulate is not the power to account and benefit of Astraquillo). Both of the supposed vendors, now
prohibit, or to impose unreasonable restrictions of the right of deceased.
stockholders to transfer their shares. (Emphasis supplied)
By virtue of vesting order P-12, title to the 1,600,000 shares in dispute was,
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which however, vested in the Alien Property Custodian of the US. In due course, the
prohibits a transfer of stock without the consent or approval of all the Vested Property Claims Committee of the Philippine Alien Property
stockholders or of the president or board of directors is illegal as constituting Administration made a “determination” allowing said claims, which were
undue limitation on the right of ownership and in restraint of trade. (47 Phil. considered and hear jointly. But upon personal review of the Philippine Alien
583) Property Administrator, the “determination” was reversed and decreed that
Defendant Attorney General of the US contends that the shares were bought E. FORGED AND UNAUTHORIZED TRANSFERS
by Vicente Madrigal, in trust and for the benefit, of the Mistsui Bussan,
abranch office of a Japanese company; and that Madrigal endorsed in blank FORGED AND UNAUTHORIZED TRANSFERS VS. UNAUTHORIZED
and delivered the shares to Mistsui for safe keeping; that Mitsui never sold or ISSUANCE OF STOCK CERTIFICATE: In the former, what is forged or
otherwise disposed of the said shares; and that the stock certificates must unauthorized is the transfer of the certificate from the true and lawful owner
have been stolen or looted during the emergency from the liberation. to another person. While the latter refers to the act of the corporation in
issuing the certificate, either fraudulently or by mistake.
ISSUE: WON plaintiffs are the rightful owners of the shares?
In forged or unauthorized transfer:
HELD: No. Even, however, if Juan Campos and Carl Hess had sold the shares 1. The purchaser or purchasers, no matter how innocent they may have
of stock in question, as testified to by De los Santos, the result, insofar as been, will acquire no title as against the lawful owner by virtue of the
plaintiffs are concerned, would be the same. It is not disputed that said doctrine of non-negotiability of certificates of stock;
shares of stock were registered, in the records of the Lepanto, in the name of 2. The purchaser will have no right or remedy against the corporation
Vicente Madrigal. Neither is it denied that the latter was, as regards said because he took the shares not by virtue of a misrepresentation made
shares of stock, a mere trustee for the benefit of the Mitsuis. The record by the corporation but on the faith of a forged endorsement or
shows — and there is no evidence to the contrary — that Madrigal had never unauthorized transfer;
disposed of said shares of stock in any manner whatsoever, except by turning 3. The corporation incurs no liability to the person in whose favor the
over the corresponding stock certificates, late in 1941, to the Mitsuis, the certificate is endorsed or issued.
beneficial and true owners thereof. It has, moreover, been established, by 4. If the old certificate is cancelled and new one is issued by the
the uncontradicted testimony of Kitajima and Miwa, the managers of the corporation, the holder thereof may be required to return the same for
Mitsuis in the Philippines, from 1941 to 1945, that the Mitsuis had neither its cancellation;
sold, conveyed, or alienated said shares of stock, nor delivered the 5. However, if new certificates are issued and passes into the hands of a
aforementioned stock certificates, to anybody during said period. Section 35 subsequent bona fide purchaser, the latter may rightfully acquire title
of the Corporation Law reads: thereto since the corporation will be estopped to deny the validity
thereof;
The capital stock corporations shall be divided into shares for which 6. The subsequent purchaser in good faith took the shares, not by virtue of
certificates signed by the president or the vice-president, countersigned by a forged or unauthorized transfer but on reliance to the genuineness of
the secretary or clerk and sealed with the seal of the corporation, shall be the certificate issued by the corporation or by virtue of the
issued in accordance with the by-laws. Shares of stock so issued are representation made by the corporation that the same is valid and
personal property and may be transferred by delivery of the certificate therefore, compel the corporation to recognize him as a stockholder or
endorsed by the owner or his attorney in fact or other person legally claim reimbursement and damages against the latter.
authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is entered and Example: A owns 100 shares of X Co., B stole the stock certificate and forged
noted upon the books of the corporation so as to show the names of A’s signature:
the parties to the transaction, the date of the transfer, the number of the a. If B indorsed and sold it to C:
certificate, and the number of shares transferred. 1. C will not acquire title to the shares whether he is innocent or not;
2. C cannot compel the corporation to register him as stockholder;
Pursuant to this provision, a share of stock may be transferred by 3. X Co. does not incur any liability in favor of C
endorsement of the corresponding stock certificate, coupled with its b. If X Co. cancelled the certificate and issued a new one to C:
delivery. However, the transfer shall "not be valid, except as 1. If A later on finds out that his certificate was stolen, C may still be
between the parties," until it is "entered and noted upon the books required to return the new certificate;
of the corporation." no such entry in the name of the plaintiffs herein 2. If C sold it to D, an innocent purchaser, D may rightfully acquire
having been made, it follows that the transfer allegedly effected by Juan thereto since X Co. is estopped to deny the validity of the
Campos and Carl Hess in their favor is "not valid, except as between" certificate;
themselves. It does not bind either Madrigal or the Mitsuis, who are not 3. If A later on finds out that his certificate was stole, X Co. may be
parties to said alleged transaction. What is more, the same is "not valid," or, compelled to recognize both A and D as stockholders.*
in the words of the Supreme Court of Wisconsin (Re Murphy, 51 Wisc. 519, 8
N. W. 419) — which were quoted approval in Uson vs. Diosomito (61 Phil., *This is so because the A cannot be deprived of his rights as owner by virtue
535) — "absolutely void" and, hence, as good as non-existent, insofar as of a forged transfer, and B, because of X Co.’s representation that the person
Madrigal and the Mitsuis are concerned. For this reason, although a stock named therein is the owner of shares in the corporation.
certificate is sometimes regarded as quasi-negotiable, in the sense
that it may be transferred by endorsement, coupled with delivery, it c. If (b3) above would result in over-issuance of shares
is well settled that the instrument is non-negotiable, because the 1. Only A, the rightful owner may be recognized and A will have a
holder thereof takes it without prejudice to such rights or defenses right to compel X Co. to issue him a new certificate;
as the registered owner or creditor may have under the law, except 2. D will be entitled to damages from the X Co.;
insofar as such rights or defenses are subject to the limitations 3. X Co. will have a right of action against the who made false
imposed by the principles governing estoppel. representation and in whose favor a new certificate is issued.**
Certificates of stock are not negotiable instruments (post, Par. 102), **In this sense, if D sues X Co., the latter will have no valid defense, but he
consequently, a transferee under a forged assignment acquires no title may institute a third party complaint against C. If C is an innocent purchaser,
which can be asserted against the true owner, unless his own negligence X Co., may file a fourth party complaint against B.
has been such as to create an estoppel against him (Clarke on
Corporations, Sec. Ed. p. 415). If the owner of the certificate has endorsed ISSUANCE OF STOCK CERTIFICATION
it in blank, and it is stolen from him, no title is acquired by an innocent
purchaser for value (East Birmingham Land Co. vs. Dennis, 85 Ala. 565, 2 Subscriptions to shares of stock are indivisible such that a subscriber to such
L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412). shares will not be entitled to the issuance of a stock certificate until he has
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co. If the board of directors does not wish to make, or does not make, use of
(Ltd.), plaintiff-appellant, said authority it has two other remedies for accomplishing the same purpose.
vs. As was said by this court in the case of Velasco vs. Poizat (37 Phil., 802):
JEAN M. POIZAT, defendant-appellee
(G.R. No. L-11528; March 15, 1918) “The first and most special remedy given by the statute consists in
permitting the corporation to put the unpaid stock for sale and dispose of
FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock of The it for the account of the delinquent subscriber. In this case the provisions
Philippine Chemical Product Co., of which 5 were paid. In an action instituted of sections 38 to 48, inclusive, of the Corporation Law are applicable and
by Miguel Velasco as assignee of the company, he seeks to recover the must be followed. The other remedy is by action in court.”
balance of the subscription. The CFI rendered a judgment dismissing the
complaint. Hence, this appeal. Admitting that the provision of article 46 of the said by-laws maybe regarded
as a contract between the defendant corporation and its stockholders , yet as
ISSUE: WON defendant is liable for the balance? it is only to the board of directors of the corporation that said articles gives
the authority or right to apply on the payment of unpaid subscriptions such
HELD: Yes. We think that Poizat is liable upon this subscription. A stock amount of the 70 percent of the profit distributable among the shareholders
subscription is a contract between the corporation on one side, and the in equal parts as may be deemed fit, it cannot be maintained that the said
subscriber on the other, and courts will enforce it for or against either. It is a article has prescribe an operative method for the payment of said
rule, accepted by the Supreme Court of the United States, that a subscription continuously until their full amortization.
subscription for shares of stock does not require an express promise
to pay the amount subscribed, as the law implies a promise to pay In the instant case, the defendant corporation, through its board of directors,
on the part of the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 made use of its discretionary power, taking advantage of the first of the two
of the Corporation Law clearly recognizes that a stock subscription is remedies provided by the aforesaid law. On the other hand, the plaintiff has
subsisting liability from the time the subscription is made, since it requires no right whatsoever under the provision of the above cited article 46 of the
the subscriber to pay interest quarterly from that date unless he is relieved said by-laws to prevent the board of directors from following, for that
from such liability by the by-laws of the corporation. The subscriber is as purpose, any other method than that mentioned in the said article, for the
much bound to pay the amount of the share subscribed by him as he very reason that the same does not give the stockholders any right in
would be to pay any other debt, and the right of the company to connection with the determination of the question whether or not there
demand payment is no less incontestable. should be deducted from the 70 percent of the profit distributable among the
stockholders such amount as may be deemed fit for the payment of
The provisions of the Corporation Law (Act No. 1459) has given recognition subscriptions due and unpaid. Therefore, it is evident that the defendant
of two remedies for the enforcement of stock subscriptions. The first and corporation has not violated, nor disregarded any right of the plaintiff
most special remedy given by the statute consists in permitting the recognized by the said by-laws, nor exceeded its authority in the discharge of
corporation to put up the unpaid stock for sale and dispose of it for its executive functions, nor abused its discretion when it performed the acts
the account of the delinquent subscriber. In this case the provisions of mentioned in the complaint as grounds thereof, and, consequently, the facts
section 38 to 48, inclusive of the Corporation Law are applicable and must be therein alleged do not constitute a cause of action.
followed. The other remedy is by action in court, concerning which we
find in section 49 the following provision: LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-
appellant,
“Nothing in this Act shall prevent the directors from collecting, by action vs.
in any court of proper jurisdiction, the amount due on any unpaid IRINEO BALTAZAR, defendant-appellee.
subscription, together with accrued interest and costs and expenses (G.R. No. L-4824; June 30, 1953)
incurred.”
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee,
ARNALDO F. DE SILVA, plaintiff-appellant, vs.
vs. IRINEO BALTAZAR, defendant and appellant
ABOITIZ & COMPANY, INC., defendant-appellee (G.R. No. L-6244; June 30, 1953)
(G.R. No. L-19893; March 31, 1923)
FACTS: Herein defendant Irineo Baltazar subscribed to 600 shares, at
FACTS: Plaintiff de Silva subscribed to 650 shares of defendant company and P100.000 par value per share, of the plaintiff corporation paying P15,000 and
paid 200 of such subscription leaving a balance of P225,000. On April 22, making further payments leaving a balance of P18,500.
1922, he was informed by the corporate secretary that he has been declared
delinquent by the BOD and that he should pay the unpaid subscription On July 23, 1946, the stockholders, including herein defendant, approved
otherwise such shares shall be sold at a public auction. Resolution No. 17 agreeing: (1) to “call” of the balance of the unpaid
subscription to be paid: 50% within 60 days beginning Aug. 1, 1946; the
De Silva filed a complaint in the CFI of Cebu, contending among others that remaining 50% 60 days beginning October 1, 1946; (2) that all unpaid
the resolution adopted was violative of Art. 46 of the by-laws stating that all unpaid subscriptions after the due dates of both calls to be subject to 12%
shares subscribed and were not paid at the time of the incorporation shall be interest per annum; (3) that after the expiration of a grace period of 60 days,
paid out of the 70% of the profit obtained until such shares are paid in full. all unpaid subscribed shares would revert to the corporation.
De Silva contends that such article provides for the operative method of
payment of the shares, and by declaring the unpaid subscription to have A demand was made against defendant, but was ignored. Hence this action.
become due and payable on May 31st and in publishing the notice declaring
his shares to be delinquent, the company has exceeded its executive ISSUE: WON Baltazar is liable to pay the unpaid portion of his subscription
authority.
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
HELD: No. We agree with the lower court that the law requires that
notice of any call for the payment of unpaid subscription should be FACTS: Petitioner, an employee of respondent company, subscribed to 1,500
made not only personally but also by publication. This is clear from the shares at P100 per share. He paid an initial payment P37,500. On Sept. 1,
provisions of section 40 of the Corporation Law, Act No. 1459, as amended. 1975, he was appointed President and General Manager of the company but
on Jan. 2, 1986, he resigned.
It will be noted that section 40 is mandatory as regards publication, using the
word "must". As correctly stated by the trial court, the reason for the He filed a complaint with the NLRC claiming unpaid wages, cost of living
mandatory provision is not only to assure notice to all subscribers, but also to allowance, the balance of his gasoline and representation expenses and his
assure equality and uniformity in the assessment on stockholders. (14 C.J. bonus compensation for 1986. Respondent admitted that petitioner was
639). entitled to P17,060.07 but the same was already set-off against his unpaid
subscription. Petitioner questioned such set-off claiming that no call or notice
We find the citation of authorities made by the plaintiff and appellant was made.
inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the corporation
involved was insolvent, in which case all unpaid stock subscriptions become The Labor Arbiter decided in favor of petitioner. On appeal, such decision was
payable on demand and are immediately recoverable in an action instituted reversed by the NLRC.
by the assignee. Said the court in that case:
ISSUE: WON the set-off was properly made?
“. . . . it is now quite well settled that when the corporation becomes
insolvent, with proceedings instituted by creditors to wind up and HELD: No. Firstly, the NLRC has no jurisdiction to determine such intra-
distribute its assets, no call or assessment is necessary before the corporate dispute between the stockholder and the corporation as in the
institution of suits to collect unpaid balance on subscription.” matter of unpaid subscriptions. This controversy is within the exclusive
jurisdiction of the Securities and Exchange Commission.
But when the corporation is a solvent concern, the rule is:
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over
“It is again insisted that plaintiffs cannot recover because the suit was the said subject matter under the circumstances of this case, the unpaid
not proceeded by a call or assessment against the defendant as a subscriptions are not due and payable until a call is made by the
subscriber, and that until this is done no right of action accrues. In a corporation for payment. Private respondents have not presented a
suit by a solvent going corporation to collect a subscription, and in certain resolution of the board of directors of respondent corporation calling for the
suits provided by statute this would be true;. . . . . (Id.)” payment of the unpaid subscriptions. It does not even appear that a notice of
such call has been sent to petitioner by the respondent corporation.
ISSUE 2: WON the Baltazar is correct in claiming that Resolution No. 17 of
1946 of the BOD released him from the obligation to pay for his unpaid What the records show is that the respondent corporation deducted the
subscription? amount due to petitioner from the amount receivable from him for the unpaid
subscriptions. No doubt such set-off was without lawful basis, if not
HELD: No. There must be unanimous consent of the stockholders of the premature. As there was no notice or call for the payment of unpaid
corporation. We quote some authorities: subscriptions, the same is not yet due and payable.
Subject to certain exceptions, considered in subdivision (3) of this section, BONIFACIO LUMANLAN, plaintiff-appellee,
the general rule is that a valid and binding subscription for stock of vs.
a corporation cannot be cancelled so as to release the subscriber JACINTO R. CURA, ET AL., defendants.
from liability thereon without the consent of all the stockholders or DIZON & CO., INC., ETC., appellant.
subscribers. Furthermore, a subscription cannot be cancelled by the (G.R. No. L-39861; March 21, 1934)
company, even under a secret or collateral agreement for
cancellation made with the subscriber at the time of the FACTS: Lumanlan subscribed to 300 shares of stock of appellant company at
subscription, as against persons who subsequently subscribed or a par value of P50.
purchased without notice of such agreement. (18 C.J.S. 874).
Layag was appointed the receiver of said company, at the instance of its
“(3) Exceptions. creditors Julio Valenzuela, Pedro Santos and Francisco Escoto, to collect the
unpaid subscriptions, there appearing that the company had no assets except
In particular circumstances, as where it is given pursuant to a bona fide the credits against those who had subscribed for shares of stock.
compromise, or to set off a debt due from the corporation, a release,
supported by consideration, will be effectual as against dissenting The CFI rendered a decision in favor of Julio Valenzuela and held Lumanlan
stockholders and subsequent and existing creditors. A release which might liable for the unpaid subscription and loans and advances together with
originally have been held invalid may be sustained after a considerable lapse interests.
of time. (18 C.J.S. 874).”
Pending appeal, the parties entered into an agreement where Lumanlan
In the present case, the release claimed by defendant and appellant does not would dismiss the appeal and the corporation would collect only 50% of the
fall under the exception above referred to, because it was not given pursuant amount subscribed by him for stock, provided that in case the 50% was
to a bona fide compromise, or to set off a debt due from the corporation, and inufficient to pay Valenzuela he should pay an additional amount not to
there was no consideration for it. exceed the judgment against him in that case. Lumanlan paid Valenzuela the
sum of P11,840 including interest.
In conclusion we hold that under the Corporation Law, notice of call for
payment for unpaid subscribed stock must be published, except Disregarding the agreement, appellant company asked for and order of
when the corporation is insolvent, in which case, payment is execution of the CFI decision which was granted and the provincial sheriff
immediately demandable. We also rule that release from such levied upon two parcels of land of Lumanlan.
payment must be made by all the stockholders.
ISSUE: WON Lumanlan is still liable to the corporation?
ERNESTO M. APODACA, petitioner,
vs. HELD: Yes. In the promissory note given by the corporation to Valenzuela
NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and the former obligated itself to pay Valenzuela the sum of P8,000 with interest
INTRANS PHILS., INC., respondents at 12 per cent per annum and, upon failure to pay said sum and interest
(G.R. No. 80039; April 18, 1989)
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
when due, 25 per cent of the principal as expenses of collection and judicial regulations is necessary...." The Poizat doctrine found acceptance in later
costs in case of litigation. cases. One of the latest cases, Lingayen Gulf Electric Power v. Baltazar,
Speaks to this effect: "In the case of Velasco v. Poizat, the corporation
By virtue of these facts Lumanlan is entitled to a credit against the judgment involved was insolvent, in which case all unpaid stock subscriptions become
in case No. 37492 for P11,840 and an additional sum of P2,000, which is 25 payable on demand and are immediately recoverable in an action instituted
per cent on the principal debt, as he had to file this suit to collect, or receive by the assignee."
credit for the sum which he had paid Valenzuela for and in place of the
corporation, or a total of P13,840. This leaves a balance due Dizon & co., It would be unwarranted to ascribe to the late President Roxas the view that
Inc., of P1,269 on that judgment with interest thereon at 6 per cent per the payment of the stock subscriptions, as thus required by law, could be
annum from August 30, 1930. condoned in the event that the counterpart fund to be invested by the
Government would not be available. Even if such were the case, however,
It appears from the record that during the trial of the case now under and such a promise were in fact made, to further the laudable purpose to
consideration, the Bank of the Philippine Islands appeared in this case as which the proposed corporation would be devoted and the possibility that the
assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was lumber producers would lose money in the process, still the plain and
appointed assignee in case No. 43065 of the Court of First Instance of the specific wording of the applicable legal provision as interpreted by
City of Manila on November 28, 1932. It is therefore evident that there are this Court must be controlling. It is a well-settled principle that with
still other creditors of Dizon & Co., Inc. This being the case that corporation all the vast powers lodged in the Executive, he is still devoid of the
has a right to collect all unpaid stock subscriptions and any other amounts prerogative of suspending the operation of any statute or any of its
which may be due it. terms.
It is established doctrine that subscriptions to the capital of a EDWARD A. KELLER & CO., LTD., petitioner-appellant,
corporation constitute a fund to which the creditors have a right vs.
to look for satisfaction of their claims and that the assignee in COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE
insolvency can maintain an action upon any unpaid stock CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C.
subscription in order to realize assets for the payment of its ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS C.
debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.) LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION
MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-appellees.
PHILIPPINE NATIONAL BANK, plaintiff-appellee, (G.R. No. L-68097; January 16, 1986)
vs.
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE FACTS: Petitioner-appellant appointed defendant COB Group Marketing, Inc.
LUMBER CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS, INC., as exclusive distributor of its household products in Panay and Negros. Under
GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER CO., INC., its sales agreement, Keller sold on credit its products to COB Group
ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN Marketing.
LUMBER CO., INC., defendants-appellees.
(G.R. Nos. L-24177-85; June 29, 1968) The BOD of COB Group Marketing were apprised by Jose E. Bax that the firm
owed Keller about P179,000.
FACTS: In various suits decided jointly, PNB as creditor, and therefore the
real party in interest, was allowed by the lower court to substitute the Keller sued COB Marketing and its stockholders.
receiver of the Philippine Lumber Distributing Agency in these respective
actions for the recovery from the defendant lumber producers the balance of ISSUE: WON Keller can collect the unpaid subscriptions of the stockholders?
their stock subscriptions.
HELD: Yes. It is settled that a stockholder is personally liable for the
The defendant lumber producers were convinced by the late President financial obligations of a corporation to the extent of his unpaid
Manuel Roxas to form a cooperative and ensure the stable supply of lumber subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs
in the country and to eliminate alien middlemen. To induce them, the 1311-2).
president promised and agreed to invest P9.00 for every P1.00 that the
members would invest therein. GERARDO GARCIA, plaintiff-appellee,
vs.
There was no appropriation made by congress for the P9.00 investment. The ANGEL SUAREZ, defendant-appellant
President then instructed Hon. Emilio Abello, then Executive Secretary and (G.R. No. L-45493; April 21, 1939)
chairman of the BOD of PNB to grant an overdraft of P250,000 (later
increased to P350,000) which was approved by the BOD of PNB with interest FACTS: Appellant Suarez subscribed to 16 shares of Compania Hispano-
at 6%. Filipina, Inc. and paid the value of 4 shares, at P100 par value each, or P400.
The Philippines did not invest the P9.00 for every peso coming from Plaintiff-appellee Garcia was appointed by the court as receiver of the
defendant lumber producers. The loan extended by PNB was not paid. company, to collect the unpaid subscription, among others. On June 18,
Hence, these suits which the trial court dismissed. 1931, Garcia brought an action to recover from Suarez and other
shareholders the balance of their subscriptions, but the complaint was
ISSUE: WON the lumber producers are liable for the full value of their dismissed for lack of prosecution.
subscriptions?
On Oct. 10, 1935, a similar action was instituted which was granted by the
HELD: Yes. In Philippine Trust Co. v. Rivera, citing the leading case of CFI holding defendant liable for the balance of his unpaid subscription and
Velasco v. Poizat, this Court held: "It is established doctrine that subscriptions interest. On appeal, the defendant raises the issue of prescription.
to the capital of a corporation constitute a fund to which creditors have a
right to look for satisfaction of their claims and that the assignee in ISSUE: WON defendant Suarez is liable?
insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debt.... A corporation has no HELD: Yes. The premise of the argument is wrong because it confuses two
power to release an original subscriber to its capital stock from the obligation distinct obligations: the obligation to pay interest and that to pay the amount
of paying for his shares, without a valuable consideration for such release; of the subscription. The said section 37 of the Corporation Law provides
and as against creditors a reduction of the capital stock can take place only in when the obligation to pay interest arises and when payment should be
the manner and under the conditions prescribed by the statute or the charter made, but it is absolutely silent as to when the subscription to a stock should
or the articles of incorporation. Moreover, strict compliance with the statutory be paid. Of course, the obligation to pay arises from the date of the
INSPECTION BY AGENT: while the right is founded on stock ownership, This conclusion is supported by the undoubted weight of authority in the
thus personal in nature, it may be made by the stockholder’s agent or United States, where it is generally held that the provisions of law conceding
representative since it may be unavailing in many instances. the right of inspection to stockholders of corporations are to be liberally
construed and that said right may be exercised through any other properly
INSPECTION BY DIRECTOR/TRUSTEE: As compared to a stockholder or authorized person. As was said in Foster vs. White (86 Ala., 467), "The right
member, the right of a director or trustee to inspect and examine corporate may be regarded as personal, in the sense that only a stockholder
books and records is considered absolute and unqualified and without regard may enjoy it; but the inspection and examination may be made by
to motive. This is because a director supervises, directs and manages another. Otherwise it would be unavailing in many instances." An
corporate business and it is necessary that he be equipped with all observation to the same effect is contained in Martin vs. Bienville Oil Works
the information and data with regard to the affairs of the company Co. (28 La., 204), where it is said: "The possession of the right in question
in order that he may manage and direct its operations intelligently would be futile if the possessor of it, through lack of knowledge necessary to
and according to this best judgment in the interest of all the exercise it, were debarred the right of procuring in his behalf the services of
stockholders he represents. Thus, while stockholders and mmebers are one who could exercise it." In Deadreck vs. Wilson (8 Baxt. [Tenn.], 108),
entitled to inspect and examine the books and records as provided in Sec. 74 the court said: "That stockholders have the right to inspect the books
and 75 they may not gain access to highly sensitive and confidential of the corporation, taking minutes from the same, at all reasonable
information. In the case of directors, “it is not denied” that they have such times, and may be aided in this by experts and counsel, so as to
access. This would include, among others, (a) marketing strategies and make the inspection valuable to them, is a principle too well settled to
pricing structure; (b) budget for expansion and diversification; (c) need discussion." Authorities on this point could be accumulated in great
research and development; and (d) sources of funding, availability abundance, but as they may be found cited in any legal encyclopedia or
of personnel, proposals for mergers or tie-ups with other firms. treaties devoted to the subject of corporations, it is unnecessary here to refer
to other cases announcing the same rule.
REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED THE
RIGHT TO INSPECT THE CORPORATE BOOKS: (MDC) The demurrer is overruled; and it is ordered that the writ of mandamus shall
1. Mandamus. In such event, the corporate secretary shall be included as issue as prayed, unless within 5 days from notification hereof the
a party respondent since he is customarily charged with the custody of respondents answer to the merits.
all documents or records of the corporation and against whom personal
order of the court would be made; ANTONIO PARDO, petitioner,
2. Damages either against the corporation or the responsible officer who vs.
refused the inspection; or THE HERCULES LUMBER CO., INC., and IGNACIO FERRER,
3. Criminal complaint for violation of his right to inspect and copy respondents
excerpts of all business transactions and minutes of meetings. The (G.R. No. L-22442; August 1, 1924)
officer or agent who refused the examination or copying thereof, shall
be guilty and liable of an offense punishable under Sec. 144 of the FACTS: Petitioner Antonio Pardo seeks to obtain a writ of mandamus to
Code. Sec. 144 imposes a penalty of a fine of not less than P1,000 but compel respondent company to permit petitioner and his duly authorized
not more than P10,000 or an imprisonment for not less than 30 days but agent and representative to examine the records and business transactions of
not more than 5 years, or both, at the discretion of the court. If the said company.
refusal is pursuant to a resolution or order of the board, the liability shall
be imposed upon the directors/trustees who voted for such refusal. Respondents raised the defense that under Art. 10 of the by-laws, it is
declared that “every shareholder may examine the books of the company and
DEFENSE OF CORPRATE OFFICERS: (INL) other documents pertaining to the same upon the days which the board of
1. That the person demanding has improperly used any information directors’ shall annually fix”. And thus was set from 15th to 25th of March by
secured through any prior examination of the records or minutes of such virtue of a board resolution.
corporation or any other corporation;
2. That he was not acting in good faith or for a legitimate purpose in ISSUE: WON the BOD may choose specific performance and particular dates
making his demand; or when the right of inspection may be exercised?
3. The right is limited or restricted by special law or the law of its
creation. HELD: No. The general right given by the statute may not be lawfully
FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and absolute writ HELD: No. Pursuant to the second paragraph of section 51 of the
of mandamus to be issued to each and all of the respondents to, among Corporation Law, "(t)he record of all business transactions of the corporation
others, place at his disposal at reasonable hours the minutes, documents and and minutes of any meeting shall be open to the inspection of any director,
books of Isabela Sugar Company, Inc. (which he is a director and member or stockholder of the corporation at reasonable hours."
stockholder) for his inspection and to issue immediately, upon payment of
the fees, certified copies of any documentation in connection with said The stockholder's right of inspection of the corporation's books and records is
minutes, documents and the books of the aforesaid corporation. based upon their ownership of the assets and property of the corporation. It
is, therefore, an incident of ownership of the corporate property, whether this
Director Veraguth telegraphed the secretary of the company, asking the latter ownership or interest be termed an equitable ownership, a beneficial
to forward in the shortest possible time a certified copy of the resolution of ownership, or a ownership. This right is predicated upon the necessity of self-
the board of directors concerning the payment of attorney's fees in the case protection. It is generally held by majority of the courts that where the right
against the Isabela Sugar Company and others. To this the secretary made is granted by statute to the stockholder, it is given to him as such and must
answer by letter stating that, since the minutes of the meeting in question be exercised by him with respect to his interest as a stockholder and for
had not been signed by the directors present, a certified copy could not be some purpose germane thereto or in the interest of the corporation. In
furnished and that as to other proceedings of the stockholders a request other words, the inspection has to be germane to the petitioner's
should be made to the president of the Isabela Sugar Company, Inc. It interest as a stockholder, and has to be proper and lawful in
further appears that the board of directors adopted a resolution providing for character and not inimical to the interest of the corporation. In Grey
inspection of the books and the taking of copies "by authority of the v. Insular Lumber, this Court held that "the right to examine the books
President of the corporation previously obtained in each case." of the corporation must be exercised in good faith, for specific and
honest purpose, and not to gratify curiosity, or for specific and
ISSUE: WON the corporate secretary is justified in refusing to furnish copies honest purpose, and not to gratify curiosity, or for speculative or
of the minutes of the meeting of the BOD? vexatious purposes. The weight of judicial opinion appears to be, that on
application for mandamus to enforce the right, it is proper for the court to
HELD: Yes. The Corporation Law, section 51, provides that: inquire into and consider the stockholder's good faith and his purpose and
motives in seeking inspection. Thus, it was held that "the right given by
“All business corporations shall keep and carefully preserve a record of all statute is not absolute and may be refused when the information is
business transactions, and a minute of all meetings of directors, members, not sought in good faith or is used to the detriment of the
or stockholders, in which shall be set forth in detail the time and place of corporation." But the "impropriety of purpose such as will defeat
holding the meeting was regular or special, if special its object, those enforcement must be set up the corporation defensively if the Court is to take
present and absent, and every act done or ordered done at the meeting. . cognizance of it as a qualification. In other words, the specific provisions take
.. from the stockholder the burden of showing propriety of purpose and place
upon the corporation the burden of showing impropriety of purpose or
The record of all business transactions of the corporation and the minutes motive. It appears to be the general rule that stockholders are entitled to full
of any meeting shall be open to the inspection of any director, member, or information as to the management of the corporation and the manner of
stockholder of the corporation at reasonable hours.” expenditure of its funds, and to inspection to obtain such information,
especially where it appears that the company is being mismanaged or that it
The above puts in statutory form the general principles of Corporation Law. is being managed for the personal benefit of officers or directors or certain of
Directors of a corporation have the unqualified right to inspect the books and the stockholders to the exclusion of others."
records of the corporation at all reasonable times. Pretexts may not be put
forward by officers of corporations to keep a director or shareholder from While the right of a stockholder to examine the books and records
inspecting the books and minutes of the corporation, and the right of of a corporation for a lawful purpose is a matter of law, the right of
inspection is not to be denied on the ground that the director or shareholder such stockholder to examine the books and records of a wholly-
is on unfriendly terms with the officers of the corporation whose records are owned subsidiary of the corporation in which he is a stockholder is a
sought to be inspected. A director or stockholder cannot of course make different thing.
copies, abstracts, and memoranda of documents, books, and papers as an
incident to the right of inspection, but cannot, without an order of a court, be Some state courts recognize the right under certain conditions, while others
permitted to take books from the office of the corporation. We do not do not. Thus, it has been held that where a corporation owns approximately
conceive, however, that a director or stockholder has any absolute no property except the shares of stock of subsidiary corporations which are
right to secure certified copies of the minutes of the corporation merely agents or instrumentalities of the holding company, the legal fiction of
until these minutes have been written up and approved by the distinct corporate entities may be disregarded and the books, papers and
directors. (See Fisher's Philippine Law of Stock Corporations, sec. 153, and documents of all the corporations may be required to be produced for
Fletcher Cyclopedia Corporations, vol. 4, Chap. 45.) examination, and that a writ of mandamus, may be granted, as the records
SEC. 4. Corporations created by special laws or charters. — Corporations Sec. 78. Articles of merger or consolidation. - After the approval by the
created by special laws or charters shall be governed primarily by the stockholders or members as required by the preceding section, articles of
provisions of the special law or charter creating them or applicable to them. merger or articles of consolidation shall be executed by each of the
supplemented by the provisions of this Code, insofar as they are applicable. constituent corporations, to be signed by the president or vice-president and
certified by the secretary or assistant secretary of each corporation setting
The provision of Section 74 of Batas Pambansa Blg. 68 of the new forth:
Corporation Code with respect to the right of a stockholder to
demand an inspection or examination of the books of the 1. The plan of the merger or the plan of consolidation;
corporation may not be reconciled with the abovequoted provisions
of the charter of the respondent bank. It is not correct to claim, 2. As to stock corporations, the number of shares outstanding, or in the case
therefore, that the right of inspection under Section 74 of the new of non-stock corporations, the number of members; and
Corporation Code may apply in a supplementary capacity to the
charter of the respondent bank. 3. As to each corporation, the number of shares or members voting for and
against such plan, respectively.
CHAPTER 12: MERGER AND CONSOLIDATION Sec. 79. Effectivity of merger or consolidation. - The articles of merger
or of consolidation, signed and certified as herein above required, shall be
Sec. 36, par. 8 of the Corporation Code of the Philippines expressly submitted to the Securities and Exchange Commission in quadruplicate for its
empowers a corporation to merge or consolidate with another corporation approval: Provided, That in the case of merger or consolidation of banks or
subject to the requirements and procedure prescribed in TITLE IX. banking institutions, building and loan associations, trust companies,
insurance companies, public utilities, educational institutions and other
Sec. 76. Plan or merger of consolidation. - Two or more corporations special corporations governed by special laws, the favorable recommendation
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
of the appropriate government agency shall first be obtained. If the by another which survives and continues the combined business. It is the
Commission is satisfied that the merger or consolidation of the corporations uniting of two or more corporations by the transfer of property to one of
concerned is not inconsistent with the provisions of this Code and existing them which continue in existence, the other or the others being dissolved and
laws, it shall issue a certificate of merger or of consolidation, at which time merged therein.
the merger or consolidation shall be effective.
Example: It was agreed that B Company will take over and acquire all the
If, upon investigation, the Securities and Exchange Commission has reason to business, assets, properties, rights and liabilities of C Corporation and by
believe that the proposed merger or consolidation is contrary to or virtue of which B will absorb C which is to be dissolved.
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. CONSOLIDATION: is the uniting or amalgamation of two or more existing
Written notice of the date, time and place of hearing shall be given to each corporations to form a new corporation. It signifies a union as necessarily
constituent corporation at least two (2) weeks before said hearing. The results in the creation of a new corporation and the termination of existence
Commission shall thereafter proceed as provided in this Code. of old ones. The united concern resulting from such union is called
consolidated corporation.
Sec. 80. Effects of merger or consolidation. - The merger or
consolidation shall have the following effects: Thus, in the example given, if B and C agreed to form a new corporation, A
Company, which will absorb both business, and all of B’s and C’s assets,
1. The constituent corporations shall become a single corporation which, in properties, rights and liabilities are transferred to A which will continue their
case of merger, shall be the surviving corporation designated in the plan of combined business while B and C will be dissolved, a consolidation takes
merger; and, in case of consolidation, shall be the consolidated corporation place.
designated in the plan of consolidation;
In effect, in a consolidation, the constituent corporations are all dissolved,
2. The separate existence of the constituent corporations shall cease, except while in a merger, the absorbing or surviving corporation is not, only the
that of the surviving or the consolidated corporation; absorbed.
3. The surviving or the consolidated corporation shall possess all the rights, REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR
privileges, immunities and powers and shall be subject to all the duties and CONSOLIDATION:
liabilities of a corporation organized under this Code; 1. The BOD/T of each constituent corporations shall approve a plan or
merger or consolidation setting for the matters required in Sec. 76;
4. The surviving or the consolidated corporation shall thereupon and 2. Approval of the plan by the stockholders representing 2/3 outstanding
thereafter possess all the rights, privileges, immunities and franchises of each capital stock or 2/3 of the member in non-stock corporations of each of
of the constituent corporations; and all property, real or personal, and all such corporations at separate corporate meetings called for the
receivables due on whatever account, including subscriptions to shares and purpose;
other choses in action, and all and every other interest of, or belonging to, or 3. Prior notice of such meeting, with a copy or summary of the plan of
due to each constituent corporation, shall be deemed transferred to and merger or consolidation shall be given to all stockholders or members at
vested in such surviving or consolidated corporation without further act or least 2 weeks prior to the scheduled meeting, either personally or by
deed; and registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each constituent
5. The surviving or consolidated corporation shall be responsible and liable corporations to be signed by the president or vice-president and
for all the liabilities and obligations of each of the constituent corporations in certified by the corporate secretary or assistant secretary setting forth
the same manner as if such surviving or consolidated corporation had itself the matters required in Sec. 78;
incurred such liabilities or obligations; and any pending claim, action or 5. Submission of the articles of merger or consolidation in quadruplicate to
proceeding brought by or against any of such constituent corporations may the SEC subject to the requirement of Sec. 79 that if it involve
be prosecuted by or against the surviving or consolidated corporation. The corporations under direct supervision of any other government agency
rights of creditors or liens upon the property of any of such constituent or governed by special laws the favorable recommendation of the
corporations shall not be impaired by such merger or consolidation. government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at
REASON FOR REORGANIZATION: The reasons inducing a reorganization which time the merger or consolidation shall be effective. If the plan,
are not in every case the same, but for the most part, they are to be found in however, is believed to be contrary to law, the SEC shall set a hearing to
the weak financial or insolvent condition of the particular corporations. The give the corporations concerned an opportunity to be heard upon notice
aim of corporate reorganization or combination is generally to put the and thereafter, the Commission shall proceed as provided in the Code.
company upon a sound financial basis and to enable it to take care of its
obligations thereby avoiding liquidation or bankruptcy. But in some cases, a EFFECTS OF MERGER OR CONSOLIDATION:
reorganization is effected notwithstanding the fact that the corporation is 1. There will only be a single corporation. In case of merger, the surviving
solvent. corporation or the consolidate corporation in case of consolidation;
2. The termination of corporate existence of the constituent corporations,
ILLEGAL COMBINATIONS: While a merger or consolidation is a right, except that of the surviving corporation or the consolidated corporation;
granted by law, to corporations registered under the Code, Act 3518 3. The surviving corporation or the consolidated corporation will possess all
proscribes illegal combination. It provides, under Sec. 20 thereof that “no the rights, privileges, immunities and powers and shall be subject to all
corporation engaged in commerce may acquire, directly or indirectly, the the duties and liabilities of a corporation organized under the Code;
whole or any part of the stock or other share capital of another corporation 4. The surviving or consolidated corporation shall possess all the rights,
or corporations engaged in commerce, where the effect of such acquisitions privileges, immunities and franchises of the constituent corporations,
may be to substantially lessen competition between the corporation or and all property and all receivables due, including subscriptions to
corporations whose stock is so acquired and the corporation making the shares and other choses in action, and every other interest of, or
acquisition, or between any of them, or to restrain such commerce in any belonging to or due to the constituent corporations shall be deemed
section community, or ten to create a monopoly of any line of commerce.” transferred to and vested in such surviving or consolidated corporation
Corollary to this is Art. 186 of the Revised Penal Code which imposes a without further act or deed; and
penalty of imprisonment and/or fine on any person who enters into a 5. The rights of creditors or any lien on the property of the constituent
contract or conspiracy to create monopolies and combinations in restraint of corporations shall not be impaired by the merger or consolidation.
trade.
MERGER: is a union effected by absorbing one or more existing corporations LIQUIDATION: There would be no need to liquidate or wind-up the affairs
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
of the corporation because (1) there are no assets to distribute; (2) no debts The records do not show when the SEC approved the merger. Private
and liabilities to pay – since all these are transferred to the surviving or respondent's theory is that it took effect on the date of the execution of the
consolidated corporation. agreement itself, which was September 16, 1975. Private respondent
contends that, since he issued the promissory note to CBTC on September 7,
ASSOCIATED BANK, petitioner, 1977 — two years after the merger agreement had been executed — CBTC
vs. could not have conveyed or transferred to petitioner its interest in the said
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents. note, which was not yet in existence at the time of the merger. Therefore,
(G.R. No. 123793; June 29, 1998) petitioner, the surviving bank, has no right to enforce the promissory note on
private respondent; such right properly pertains only to CBTC.
FACTS: Associated Banking Corporation and Citizens Bank and Trust
Company merged to form Associated Citizens Bank which subsequently Assuming that the effectivity date of the merger was the date of its
changed its corporate name to Associate Bank. execution, we still cannot agree that petitioner no longer has any interest in
the promissory note. A closer perusal of the merger agreement leads to a
The defendant Lorenzo Sarmiento Jr. executed a promissory note in favor of different conclusion. The provision quoted earlier has this other clause:
Associated Bank for P2.5M of which P2.25M remains unpaid. Despite
repeated demands, the defendant failed to pay the sum due. Upon the effective date of the [m]erger, all references to [CBTC] in any
deed, documents, or other papers of whatever kind or nature and
Defendant denied all pertinent allegations in the complaint and alleged as wherever found shall be deemed for all intents and purposes, references to
affirmative and/or special defense that Associated Bank is not the real party [ABC], the SURVIVING BANK, as if such references were direct references
in interest because the promissory note was executed in favor of Citizens to [ABC]. . . .
Bank and Trust Company.
Thus, the fact that the promissory note was executed after the
Defendant was declared in default for not appearing in the Pre-Trial effectivity date of the merger does not militate against petitioner.
Conference and the plaintiff was allowed to present evidence ex-parte, the The agreement itself clearly provides that all contracts —
Motion to Life Order of Default and or Reconsideration of the Order being irrespective of the date of execution — entered into in the name of
dismissed. The trial court ruled in favor of Associated Bank. On appeal, the CBTC shall be understood as pertaining to the surviving bank,
CA reversed the trial court. herein petitioner. Since, in contrast to the earlier aforequoted provision,
the latter clause no longer specifically refers only to contracts existing at the
ISSUE: WON Associated Bank, the surviving corporation, may enforce the time of the merger, no distinction should be made. The clause must have
promissory note made by Sarmiento in favor of CBTC, the absorbed company been deliberately included in the agreement in order to protect the interests
after the effectivity of the merger? of the combining banks; specifically, to avoid giving the merger agreement a
farcical interpretation aimed at evading fulfillment of a due obligation.
HELD: Yes. Ordinarily, in the merger of two or more existing
corporations, one of the combining corporations survives and Thus, although the subject promissory note names CBTC as the payee, the
continues the combined business, while the rest are dissolved and reference to CBTC in the note shall be construed, under the very provisions
all their rights, properties and liabilities are acquired by the of the merger agreement, as a reference to petitioner bank, "as if such
surviving corporation. Although there is a dissolution of the reference [was a] direct reference to" the latter "for all intents and
absorbed corporations, there is no winding up of their affairs or purposes."
liquidation of their assets, because the surviving corporation
automatically acquires all their rights, privileges and powers, as No other construction can be given to the unequivocal stipulation. Being
well as their liabilities. clear, plain and free of ambiguity, the provision must be given its literal
meaning and applied without a convoluted interpretation. Verba lelegis non
The merger, however, does not become effective upon the mere est recedendum.
agreement of the constituent corporations. The procedure to be
followed is prescribed under the Corporation Code. Section 79 of said Code In light of the foregoing, the Court holds that petitioner has a valid cause of
requires the approval by the Securities and Exchange Commission (SEC) of action against private respondent. Clearly, the failure of private respondent to
the articles of merger which, in turn, must have been duly approved by a honor his obligation under the promissory note constitutes a violation of
majority of the respective stockholders of the constituent corporations. The petitioner's right to collect the proceeds of the loan it extended to the former.
same provision further states that the merger shall be effective only
upon the issuance by the SEC of a certificate of merger. The BANK OF THE PHILIPPINE ISLANDS, Petitioner,
effectivity date of the merger is crucial for determining when the vs.
merged or absorbed corporation ceases to exist; and when its BPI EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF UNIONS
rights, privileges, properties as well as liabilities pass on to the IN BPI UNIBANK, Respondent
surviving corporation. (G.R. No. 164301; August 10, 2010)
Consistent with the aforementioned Section 79, the September 16, 1975 FACTS: On March 23, 2000, the Bangko Sentral ng Pilipinas approved the
Agreement of Merger, which Associated Banking Corporation (ABC) and Articles of Merger executed on January 20, 2000 by and between BPI, herein
Citizens Bank and Trust Company (CBTC) entered into, provided that its petitioner, and FEBTC. This Article and Plan of Merger was approved by the
effectivity "shall, for all intents and purposes, be the date when the necessary Securities and Exchange Commission on April 7, 2000.
papers to carry out this [m]erger shall have been approved by the Securities
and Exchange Commission." As to the transfer of the properties of CBTC to Pursuant to the Article and Plan of Merger, all the assets and liabilities of
ABC, the agreement provides: FEBTC were transferred to and absorbed by BPI as the surviving corporation.
FEBTC employees, including those in its different branches across the
“10. Upon effective date of the Merger, all rights, privileges, powers, country, were hired by petitioner as its own employees, with their status and
immunities, franchises, assets and property of [CBTC], whether real, tenure recognized and salaries and benefits maintained.
personal or mixed, and including [CBTC's] goodwill and tradename, and all
debts due to [CBTC] on whatever act, and all other things in action BPI has an existing Union Shop Clause agreement with the BPI Employees
belonging to [CBTC] as of the effective date of the [m]erger shall be Union-Davao Chapter-Federation of Unions in BPI Unibank (BPI Union)
vested in [ABC], the SURVIVING BANK, without need of further act or whereby it is a pre-condition that new employees must join the union before
deed” they can be regularized otherwise they will not have a continued
employment. By reason of the failure of the FEBTC employees to join the
union, BPI Union recommended to BPI their dismissal. BPI refused. The issue
As the Union likewise pointed out in its pleadings, there were benefits C. REQUIREMENTS AND PROCEDURE
under the CBA that the former FEBTC employees did not enjoy with
their previous employer. As BPI employees, they will enjoy all these CBA Sec. 82. How right is exercised. – The appraisal right may be exercised
benefits upon their "absorption." Thus, although in a sense BPI is continuing by any stockholder who shall have voted against the proposed corporate
FEBTC’s employment of these absorbed employees, BPI’s employment of action, by making a written demand on the corporation within thirty (30)
these absorbed employees was not under exactly the same terms and days after the date on which the vote was taken for payment of the fair value
conditions as stated in the latter’s employment contracts with FEBTC. This of his shares: Provided, That failure to make the demand within such period
further strengthens the view that BPI and the former FEBTC employees shall be deemed a waiver of the appraisal right. If the proposed corporate
voluntarily contracted with each other for their employment in the surviving action is implemented or affected, the corporation shall pay to such
corporation. stockholder, upon surrender of the certificate or certificates of stock
representing his 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
CHAPTER 13: APPRAISAL RIGHT anticipation of such corporate action.
A. DEFINITION If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the
Appraisal Right is the method of paying a shareholder for the taking of his corporation cannot agree on the fair value of the shares, it shall be
property. It is a statutory means whereby a stockholder can avoid the determined and appraised by three (3) disinterested persons, one of whom
conversion of this property into another property not of his own choosing and shall be named by the stockholder, another by the corporation, and the third
is given to a shareholder as compensation for the abrogation of the common- by the two thus chosen. The findings of the majority of the appraisers shall
law rule that a single stockholder could block a certain corporate act such as be final, and their award shall be paid by the corporation within thirty (30)
merger. days after such award is made: Provided, That no payment shall be made to
any dissenting stockholder unless the corporation has unrestricted retained
PURPOSE: is to protect the property rights of dissenting stockholders from earnings in its books to cover such payment: and Provided, further, That
actions by the majority shareholders which alters the nature and character of upon payment by the corporation of the agreed or awarded price, the
their investment. In effect, it is a right granted to dissenting stockholders on stockholder shall forthwith transfer his shares to the corporation.
certain corporate or business decisions to demand payment of the fair market
value of their shares. REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE OF
THIS RIGHT ARE:
B. WHEN EXERCISED 1. The stockholder must have voted against the proposed corporate action
in any of the instances allowed by law for the exercise of the right of
Sec. 81. Instances of appraisal right.- Any stockholder of a corporation appraisal;
shall have the right to dissent and demand payment of the fair value of his 2. The written demand for payment must be made by the dissenting
shares in the following instances: stockholder within 30 days after the date on which the vote was taken.
Failure to make the demand within the said period shall be deemed a
3. In case any amendment to the articles of incorporation has the effect of waiver on the part of the stockholder concerned to exercise his appraisal
changing or restricting the rights of any stockholder or class of shares, right;
or of authorizing preferences in any respect superior to those of 3. Surrender of the certificate of stock by the dissenting stockholder for
outstanding shares of any class, or of extending or shortening the term notation in the corporate books and the payment of the corporation of
of corporate existence; the fair market value of the said shares as of the day prior to the date
on which the vote was taken. If the stockholder and the corporation
4. In case of sale, lease, exchange, transfer, mortgage, pledge or other cannot agree on the fair market value thereof, the same shall be
disposition of all or substantially all of the corporate property and assets determined in accordance with the provisions of par.2 of Sec. 82;
as provided in the Code; and 4. The fair value of the shares of the dissenting stockholder must be paid
by the corporation only if it has “unrestricted retained earnings” in its
3. In case of merger or consolidation. books to cover such payment. If the corporation has no unrestricted
retained earnings, the dissenting stockholder may not, therefore, be
ENUMERATION NOT EXCLUSIVE: it may also cover: able to effectively exercise his appraisal right, EXCEPT in the case of a
1. Investment of funds in another corporation or business or for any other close corporation under Sec. 105;
purpose other than its primary purpose as provided in Sec. 42; 5. Upon payment of the shares by the corporation, the dissenting
2. Likewise, in a close corporation, a stockholder has the unbridled right to stockholder shall transfer his shares to the corporation.
compel the corporation “for any reason” to purchase his shares at their
fair value which shall not be less than the par or issued value, when the D. EFFECT OF EXERCISE OF APPRAISAL RIGHT
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
DISSENTING STOCKHOLDER WILL BE LIABLE FOR THE COST AND
Sec. 83. Effect of demand and termination of right. - From the time of EXPENSES OF APPRAISAL WHEN:
demand for payment of the fair value of a stockholder's shares until either a. When the price offered by the corporation is approximately the same as
the abandonment of the corporate action involved or the purchase of the said the fair value ascertained by the appraisers;
shares by the corporation, all rights accruing to such shares, including voting b. Where the action filed by the dissenting stockholder and his refusal to
and dividend rights, shall be suspended in accordance with the provisions of accept payment is found by the court to be unjustified.
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 G. NOTATION
value of his shares within 30 days after the award, his voting and dividend
rights shall immediately be restored. Sec. 86. Notation on certificates; rights of transferee. - Within ten
(10) days after demanding payment for his shares, a dissenting stockholder
SUSPENSION OF STOCKHOLDER RIGHTS: Upon completion of the steps shall submit the certificates of stock representing his shares to the
provided in Sec. 82, the stockholder concerned is regarded as having made corporation for notation thereon that such shares are dissenting shares. His
an election to withdraw from the corporate enterprise and take the value of failure to do so shall, at the option of the corporation, terminate his rights
his stock. Such a procedure suspends (for a maximum period of 30 days) under this Title. If shares represented by the certificates bearing such
certain ownership rights associated with stockholder status, such as the right notation are transferred, and the certificates consequently cancelled, the
to receive dividends or distribution and the right to vote which cannot be rights of the transferor as a dissenting stockholder under this Title shall cease
restored without compliance with the governing statutory conditions. 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
DIRECTOR EXERCISING APPRAISAL RIGHT: may still continue to to the transferee.
function as such, prior to payment, unless there is a contrary provision in the
by-laws. PURPOSE: to give notice and guide to the corporation to determine the
respective rights of stockholder.
E. WHEN RIGHT TO PAYMENT CEASES
SALE: The law does not prohibit the dissenting stockholder to sell, transfer
Sec. 84. When right to payment ceases. - No demand for payment or assign his shares. If such be the case, the right of the dissenting
under this Title may be withdrawn unless the corporation consents thereto. stockholder to be paid the fair value of his shares shall cease and the
If, however, such demand for payment is withdrawn with the consent of the transferee will acquire all the rights of a regular stockholder inclusive of all
corporation, or if the proposed corporate action is abandoned or rescinded by dividends which would have accrued on such shares.
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 CHAPTER 14: NON-STOCK CORPORATIONS (TITLE XI)
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 A. DEFINITION
dividend distributions which would have accrued on his shares shall be paid
to him. Sec. 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
INSTANCES WHEN THE RIGHT OF A DISSENTING STOCKHOLDER TO its members, trustees, or officers, subject to the provisions of this Code on
BE PAID THE FAIR VALUE OF HIS SHARES CEASES: dissolution: Provided, That any profit which a non-stock corporation may
1. When he withdraws his demand for payment and the corporation obtain as an incident to its operations shall, whenever necessary or proper,
consents thereto; be used for the furtherance of the purpose or purposes for which the
2. When the proposed action is abandoned or rescinded by the corporation was organized, subject to the provisions of this Title.
corporation;
3. When the proposed action is disapproved by the SEC where such The provisions governing stock corporation, when pertinent, shall be
approval is necessary; applicable to non-stock corporations, except as may be covered by specific
4. When the SEC determines that he is not entitled to exercise his provisions of this Title.
appraisal right;
5. When he fails to submit the stock certificate within ten (10) days from CAPITAL STOCK: the old notion is that a non-stock corporation is one
demand to the corporation for notation that such shares are dissenting which has no capital stock divided into shares – this may no longer hold true
shares; and, under the definition provided by Sec. 87. Thus, even if it may have capital
6. If the shares are transferred and the certificate subsequently cancelled. stock divided into shares, proprietary or otherwise, a corporation is
considered “non-stock” so long as it does not distribute dividends to its
F. COST OF APPRAISAL members and officers. We have, for instance, Club shares issued t the
members, the totality of which may rightfully represent “capital” of the
If the corporation and the dissenting stockholder do not agree, an appraisal corporation but whose income (if there be any) is not distributed by way of
to be made by three disinterested person may be made. dividends during its corporate existence. The corporation, in such a case, is
legally “non-stock”.
Sec. 85. Who bears costs of appraisal. - The costs and expenses of
appraisal shall be borne by the corporation, unless the fair value ascertained PROFITS: A non-stock corporation is generally not allowed to engage in any
by the appraisers is approximately the same as the price which the business undertaking or activity for profit as it would run counter to its very
corporation may have offered to pay the stockholder, in which case they shall nature as a non-profit entity. However, as may be allowed and specified in
be borne by the latter. In the case of an action to recover such fair value, all its AOI or incidental to the objects and purposes indicated therein, it may
costs and expenses shall be assessed against the corporation, unless the engage in certain money-making ventures or economic activities provided
refusal of the stockholder to receive payment was unjustified. that any profits derived therefrom shall be used for the furtherance of the
purposes for which the corporation was organized or to defray the operating
THE CORPORATION BEARS THE COST IF: expenses of the entity. It has thus been said that the fact that a non-profit
a. The price offered by the corporation is lower than the fair value of the corporation earns a profit, gain or income for the corporation or members
shares of the dissenting stockholder as determined by the appraisers; does not make it a profit-making corporation where such profit or income is
b. Where an action is filed by the dissenting stockholder to recover such used for the purpose set forth in the AOI and is not distributable to its
fair value and the refusal of the stockholder to receive payment is found incorporators, members or officers, since mere intangible or pecuniary
by the court to be justified. benefits to the members do not change the nature of the corporation.
Finally, the appealed decision did not give due importance to the undisputed Hence, the present petition.
fact therein stated that "at the board meeting of the association held on
December 7, 1965, a list of 174 applications for membership, old and new, ISSUE: WON in disapproving respondent’s application for proprietary
was submitted to the board and approved by the latter, over the objection of membership with CCCI, petitioners are liable to respondent for damages?
the petitioner [therein private respondent] who was present at said meeting."
Such action of the petitioner association's board of directors approving the HELD: Yes. Petitioners contend, inter alia, that the Court of Appeals erred in
174 membership applications of old and new members constituting its active awarding exorbitant damages to respondent despite the lack of evidence that
membership as duly processed and screened by the authorized committee they acted in bad faith in disapproving the latter’s application;; and in
just be deemed a waiver on its part of any technicality or requirement of disregarding their defense of damnum absque injuria.
form, since otherwise the association would be practically paralyzed and
deprived of the substantial revenues from the membership dues of For his part, respondent maintains that the petition lacks merit, hence, should
P17,400.00 (at P100.00 per application). be denied.
WHEREFORE the respondent court's decision is hereby set aside and in lieu CCCI’s Articles of Incorporation provide in part:
thereof judgment is rendered dismissing private respondent's petition in the
Court of First Instance of Manila and dissolving the preliminary injunction, SEVENTH: That this is a non-stock corporation and membership therein as
with costs against private respondent. well as the right of participation in its assets shall be limited to qualified
persons who are duly accredited owners of Proprietary Ownership
CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS, Certificates issued by the corporation in accordance with its By-Laws.
JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA
and JOSE B. SALA, petitioners, Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:
vs.
RICARDO F. ELIZAGAQUE, respondent SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the
(G.R. No. 160273 ; January 18, 2008) admission of new members of the Club shall be as follows:
(a) Any proprietary member, seconded by another voting proprietary
FACTS: Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation member, shall submit to the Secretary a written proposal for the admission
operating as a non-profit and non-stock private membership club, having its of a candidate to the "Eligible-for-Membership List";
principal place of business in Banilad, Cebu City. Petitioners herein are (b) Such proposal shall be posted by the Secretary for a period of thirty
members of its Board of Directors. (30) days on the Club bulletin board during which time any member may
interpose objections to the admission of the applicant by communicating
Sometime in 1987, San Miguel Corporation, a special company proprietary the same to the Board of Directors;
member of CCCI, designated respondent Ricardo F. Elizagaque, its Senior (c) After the expiration of the aforesaid thirty (30) days, if no objections
Vice President and Operations Manager for the Visayas and Mindanao, as a have been filed or if there are, the Board considers the objections
As shown by the records, the Board adopted a secret balloting known as the The exercise of a right, though legal by itself, must nonetheless be in
"black ball system" of voting wherein each member will drop a ball in the accordance with the proper norm. When the right is exercised arbitrarily,
ballot box. A white ball represents conformity to the admission of an unjustly or excessively and results in damage to another, a legal wrong is
applicant, while a black ball means disapproval. Pursuant to Section 3(c), as committed for which the wrongdoer must be held responsible. It bears
amended, cited above, a unanimous vote of the directors is required. When reiterating that the trial court and the Court of Appeals held that petitioners’
respondent’s application for proprietary membership was voted upon during disapproval of respondent’s application is characterized by bad faith.
the Board meeting on July 30, 1997, the ballot box contained one (1) black
ball. Thus, for lack of unanimity, his application was disapproved. As to petitioners’ reliance on the principle of damnum absque injuria or
damage without injury, suffice it to state that the same is misplaced. In
Obviously, the CCCI Board of Directors, under its Articles of Incorporation, Amonoy v. Gutierrez, we held that this principle does not apply when there
has the right to approve or disapprove an application for proprietary is an abuse of a person’s right, as in this case.
membership. But such right should not be exercised arbitrarily. Articles 19
and 21 of the Civil Code on the Chapter on Human Relations provide As to the appellate court’s award to respondent of moral damages, we find
restrictions. the same in order. Under Article 2219 of the New Civil Code, moral damages
may be recovered, among others, in acts and actions referred to in Article 21.
In GF Equity, Inc. v. Valenzona, we expounded Article 19 and correlated it We believe respondent’s testimony that he suffered mental anguish, social
with Article 21, thus: humiliation and wounded feelings as a result of the arbitrary denial of his
application.
“This article, known to contain what is commonly referred to as the
principle of abuse of rights, sets certain standards which must be observed ISSUE2: WON the liability is solidary considering that only one voted for
not only in the exercise of one's rights but also in the performance of one's disapproval?
duties. These standards are the following: to act with justice; to give
everyone his due; and to observe honesty and good faith. The law, HELD: Yes. Section 31 of the Corporation Code provides:
therefore, recognizes a primordial limitation on all rights; that in their
exercise, the norms of human conduct set forth in Article 19 must be SEC. 31. Liability of directors, trustees or officers. — Directors or trustees
observed. A right, though by itself legal because recognized or who willfully and knowingly vote for or assent to patently unlawful acts of
granted by law as such, may nevertheless become the source of the corporation or who are guilty of gross negligence or bad faith in
some illegality. When a right is exercised in a manner which does directing the affairs of the corporation or acquire any personal or pecuniary
not conform with the norms enshrined in Article 19 and results in interest in conflict with their duty as such directors, or trustees shall be
damage to another, a legal wrong is thereby committed for which liable jointly and severally for all damages resulting therefrom suffered
the wrongdoer must be held responsible. But while Article 19 lays by the corporation, its stockholders or members and other persons.
down a rule of conduct for the government of human relations and for the (Emphasis ours)
maintenance of social order, it does not provide a remedy for its violation.
Generally, an action for damages under either Article 20 or Article 21 WHEREFORE, we DENY the petition. The challenged Decision and
would be proper. (Emphasis in the original)” Resolution of the Court of Appeals in CA-G.R. CV No. 71506 are AFFIRMED
with modification in the sense that (a) the award of moral damages is
In rejecting respondent’s application for proprietary membership, we find that reduced from P2,000,000.00 to P50,000.00; (b) the award of exemplary
petitioners violated the rules governing human relations, the basic principles damages is reduced from P1,000,000.00 to P25,000.00; and (c) the award of
to be observed for the rightful relationship between human beings and for attorney’s fees and litigation expenses is reduced from P500,000.00 and
the stability of social order. The trial court and the Court of Appeals aptly P50,000.00 to P50,000.00 and P25,000.00, respectively.
held that petitioners committed fraud and evident bad faith in disapproving
respondent’s applications. This is contrary to morals, good custom or public D. TRUSTEES AND OFFICERS
policy. Hence, petitioners are liable for damages pursuant to Article 19 in
relation to Article 21 of the same Code. The word “trustees” as used in Sec. 92 makes reference to the governing
board or body in a non-stock corporation.
It bears stressing that the amendment to Section 3(c) of CCCI’s Amended By-
Laws requiring the unanimous vote of the directors present at a special or Sec. 92. Election and term of trustees. - Unless otherwise provided in
regular meeting was not printed on the application form respondent filled and the articles of incorporation or the by-laws, the board of trustees of non-
submitted to CCCI. What was printed thereon was the original provision of stock corporations, which may be more than fifteen (15) in number as may
Section 3(c) which was silent on the required number of votes needed for be fixed in their articles of incorporation or by-laws, shall, as soon as
admission of an applicant as a proprietary member. organized, so classify themselves that the term of office of one-third (1/3) of
their number shall expire every year; and subsequent elections of trustees
Petitioners explained that the amendment was not printed on the application comprising one-third (1/3) of the board of trustees shall be held annually and
form due to economic reasons. We find this excuse flimsy and unconvincing. trustees so elected shall have a term of three (3) years. Trustees thereafter
Such amendment, aside from being extremely significant, was introduced elected to fill vacancies occurring before the expiration of a particular term
way back in 1978 or almost twenty (20) years before respondent filed his shall hold office only for the unexpired period.
application. We cannot fathom why such a prestigious and exclusive golf
No person shall be elected as trustee unless he is a member of the
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
corporation. HELD: No. We adopt the general rule that "... the courts will not
Unless otherwise provided in the articles of incorporation or the by-laws, interfere with the internal affairs of an unincorporated association
officers of a non-stock corporation may be directly elected by the members. so as to settle disputes between the members, or questions of
policy, discipline, or internal government, so long as the
QUALIFICATIONS OF TRUSTEES: government of the society is fairly and honestly administered in
1. He is a member of the association; conformity with its laws and the law of the land, and no property or
2. Majority thereof must be residents of the Philippines; and civil rights are invaded. Under such circumstances, the decision of the
3. Other qualifications as may be provided for in the by-laws. governing body or established private tribunal of the association is binding
and conclusive and not subject to review or collateral attack in the courts. "
DISQUALIFICATIONS and REMOVAL: Sec. 27 as to disqualifications, and (7 C.J.S. pp. 38- 39).
Sec. 29 and 30 as to removal also apply to Trustees.
The general rule of non-interference in the internal affairs of associations is,
NUMBER OF TRUSTEES: may exceed 15 as may be fixed in the AOI or by- however, subject to exceptions, but the power of review is extremely
laws, contrary to a stock corporation whose BOD must not exceed 15 limited. Accordingly, the courts have and will exercise power to
members. interfere in the internal affairs of an association where (1) law and
justice so require, and (2) the proceedings of the association are
TERM: Sec. 92 allows the AOI or by-laws to provide a desired term of office subject to judicial review where there is fraud, oppression, or bad
and may vary depending on the needs of a specific corporation. By analogy faith, or (3) where the action complained of is capricious, arbitrary,
of the provisions of Sec. 7, however, a term in excess of 5 years is not or unjustly discriminatory. Also, the courts will usually entertain
allowed as it would unduly deprive other members to take active part in jurisdiction to grant relief (4) in case property or civil rights are
corporate management. invaded, although it has also been held that the involvement of property
rights does not necessarily authorize judicial intervention, in the absence of
STAGGERED TERM: The term of office may also be staggered unless the arbitrariness, fraud or collusion. Moreover, the courts will intervene (5)
AOI or by-laws otherwise provide. If such be the case, the board shall classify where the proceedings in question are violative of the laws of the
themselves in order that 1/3 of their number shall expire every year and society, or the law of the land, as by depriving a person of due
subsequent elections of trustees comprising 1/3 shall be held annually. The process of law. Similarly, judicial intervention is warranted (6) where
trustees so elected to fill up any vacancy occurring before the expiration of a there is a lack of jurisdiction on the part of the tribunal conducting
particular term shall hold office only for the unexpired portion of his the proceedings, where the organization exceeds its powers, or
predecessor. where the proceedings are otherwise illegal. (7 C.J.S., pp. 39-41).
GOVERNING BOARDS: While the Code speaks of the BOT as the governing In accordance with the general rules as to judicial interference cited above,
board or body in a non-stock corporation the same law allows a non-stock the decision of an unincorporated association on the question of an election
corporation or any other special corporation to designate their governing to office is a matter peculiarly and exclusively to be determined by the
board by any other name other than BOD/T. The Rotary Club for instance, association, and, in the absence of fraud, is final and binding on the courts.
designates it as Board of Governors while the Evangelica Independence (7 C.J.S., p. 44).
Metodista En Las Islas Filipinas calls it as the Consistory of Elders.
The instant controversy between petitioner So and respondent Josefa falls
ELECTION BY MEMBERS OF OFFICERS: One of the significant features of squarely within the ambit of the rule of judicial non-intervention or non-
a non-stock corporation is that it allows the AOI or by-laws to provide that interference. The elections in dispute, the manner by which it was conducted
the officers thereof shall be directly elected by the members. Unlike in a stock and the results thereof, is strictly the internal affair that concerns only the
corporation where corporate officers are elected by the BOD. Lions association and/or its members, and We find from the records that the
same was resolved within the organization of Lions Clubs International in
Section 138. Designation of governing boards. - The provisions of specific accordance with the Constitution and By-Laws which are not immoral,
provisions of this Code to the contrary notwithstanding, non-stock or unreasonable, contrary to public policy, or in contravention of the laws of the
special corporations may, through their articles of incorporation or land
their by-laws, designate their governing boards by any name other
than as board of trustees. At the meeting of the International Board of Directors held on June 27, 1982,
the election of petitioner James L. So to serve as District Governor of District
LIONS CLUBS INTERNATIONAL and JAMES L. SO, petitioners, 301-Al for the fiscal year 1982-83 was approved and said petitioner was duly
vs. informed thereof by Richard G. Rice, Manager, District Operations
HON. AUGUSTO M. AMORES, Presiding Judge of the Court of First Department, Lions Clubs International in his letter dated July 8, 1982 and
Instance of Manila, Branch XXIV, COURT OF APPEALS and VICENTE JOSEFA, marked Annex "K" to the petition, p. 79, Records. Petitioner attended and
respondents. completed the District Governors' Executive Seminar as District Governor of
(G.R. No. L-61259; April 26, 1983) 301-Al (see Annex "L", P. 80, Records). On June 29, 1982, petitioner So was
proclaimed, sworn to and installed to office as District Governor of District
FACTS: Vicente Josefa and James L. So entered into an agreement whereby 301-Al by the President of Lions International at the close of the 65th Lions
So would withdraw his candidacy for the post of Governor of District 301-A of Clubs International Convention held in Atlanta, Georgia, U.S.A
herein petitioner Lions Club International. Such withdrawal was accepted by
Governor Huang, however news items were published conveying the idea The findings upon the evidence submitted and examined at the hearing of
that So had not withdrawn from the gubernatorial race. the election protest before the Committee personally attended by both
petitioner So and respondent Josefa may not be disturbed by the courts. The
Josefa filed a complaint before the CFI for quo warranto, injunction or at decision of the Association's tribunal, the International Board of Directors, is
least a temporary restraining order alleging irregularities in the election; that controlling since respondent Josefa alleges no invasion of this property or civil
although at the old site of the election, Josefa won, the Lions Club rights and neither is it claimed that the government of the Association is not
Internation unlawfully recognized So as the winner. fairly and honestly administered in conformity with its laws and the law of the
land.
The trial court issued the TRO which was later on lifted and on appeal, the
CA issued a new TRO. E. PLACE OF MEETINGS
ISSUE: WON the dispute between petitioners and Josefa is a justiciable issue Sec. 93. Place of meetings. - The by-laws may provide that the members
cognizable by the courts? 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
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
located: Provided, That proper notice is sent to all members indicating the CHAPTER 15: CLOSE CORPORATION
date, time and place of the meeting: and Provided, further, That the place of
meeting shall be within the Philippines. A. DEFINITION
PLACE OF MEETING: another distinctive feature of a non-stock corporation
is that membership meeting may be held anywhere in the Philippines Sec. 96. Definition and applicability of Title. - A close corporation,
whereas in a stock corporation, the stockholders’ meeting is mandated to be within the meaning of this Code, is one whose articles of incorporation
held or conducted within the city or municipality where the principal office is provide that: (1) All the corporation's issued stock of all classes, exclusive of
located, and as far as practicable, within the principal office of the treasury shares, shall be held of record by not more than a specified number
corporation. 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
F. DISTRIBUTION OF ASSETS UPON DISSOLUTION 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
Corporations, stock and non-stock, may be dissolved in accordance and foregoing, a corporation shall not be deemed a close corporation when at
pursuant to the provisions of Sections 118 to 121 of the Corporation Code least two-thirds (2/3) of its voting stock or voting rights is owned or
and the pertinent provisions of P.D. 902-A, as amended. If such be the case, controlled by another corporation which is not a close corporation within the
the assets of the corporation are to be distributed in accordance with law and meaning of this Code.
established jurisprudence.
Any corporation may be incorporated as a close corporation, except mining or
Sec. 94. Rules of distribution. - In case dissolution of a non-stock oil companies, stock exchanges, banks, insurance companies, public utilities,
corporation in accordance with the provisions of this Code, its assets shall be educational institutions and corporations declared to be vested with public
applied and distributed as follows: interest in accordance with the provisions of this Code.
1. All liabilities and obligations of the corporation shall be paid, satisfied and The provisions of this Title shall primarily govern close corporations:
discharged, or adequate provision shall be made therefore; Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.
2. Assets held by the corporation upon a condition requiring return, transfer
or conveyance, and which condition occurs by reason of the dissolution, shall The ultimate effect of the special provisions of the law on close corporations
be returned, transferred or conveyed in accordance with such requirements; is to furnish another form of business organization – a “de facto corporation
with a corporate shell”. It is referred to sometimes as a hybrid of both the
3. Assets received and held by the corporation subject to limitations corporate and partnership forms, an “incorporated partnership” or
permitting their use only for charitable, religious, benevolent, educational or “corporation de jure but a de facto partnership”.
similar purposes, but not held upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall be transferred or conveyed to This is because a close corporation may partake the nature of a partnership
one or more corporations, societies or organizations engaged in activities in in that the stockholders thereof take an active role in the management of the
the Philippines substantially similar to those of the dissolving corporation corporate affairs either as directors, officers or even perhaps as partners in
according to a plan of distribution adopted pursuant to this Chapter; management which is akin to the partnership form of business. This, in fact,
is the main distinction between a close corporation and the ordinary stock
4. Assets other than those mentioned in the preceding paragraphs, if any, corporation where, in the latter, the stockholders have hardly a voice in
shall be distributed in accordance with the provisions of the articles of management except perhaps to elect the directors.
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 Despite this, the stockholders who are active in management still enjoy
classes of members, or provide for distribution; and limited liability to the extent of their subscription in so far as corporate
obligations are concerned. It will be noted, however, that under no. 5 of Sec.
5. In any other case, assets may be distributed to such persons, societies, 100 of the Code, they are made personally liable for corporate torts unless
organizations or corporations, whether or not organized for profit, as may be they have obtained a reasonably adequate insurance liability.
specified in a plan of distribution adopted pursuant to this Chapter.
CLOSE CORPORAIONS: must contain the three provisions required to be
Sec. 95. Plan of distribution of assets. - A plan providing for the indicated in the AOI as provided by Sec. 96. Absent any of the provisions
distribution of assets, not inconsistent with the provisions of this Title, may required by the said section, the corporation, will not, for all legal intents and
be adopted by a non-stock corporation in the process of dissolution in the purposes, be considered as a close corporation and would thus not be
following manner: governed by TITLE XII of the Code, but by the general provisions governing
ordinary corporation. “A corporation does not become a close corporation just
The board of trustees shall, by majority vote, adopt a resolution because man and his wife owns 99.86% if the capital stock” (San Juan
recommending a plan of distribution and directing the submission thereof to Structural Steel vs. CA). The qualifying conditions requreid by law must be
a vote at a regular or special meeting of members having voting rights. complied with.
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 2/3 OWNED BY ANOTHER CORPORATION: Even if another corporation
member entitled to vote, within the time and in the manner provided in this owns or controls 2/3 of the “voting” stocks of a close corporation, the latter
Code for the giving of notice of meetings to members. Such plan of may still be considered as such close corporation if the corporation owning or
distribution shall be adopted upon approval of at least two-thirds (2/3) of the controlling the shares is also a close corporation.
members having voting rights present or represented by proxy at such
meeting. BUSINESS WITH PUBLIC INTEREST: may not be formed as close
corporation under the second paragraph of Sec. 95. Sec. 140 of the Code
Culled from the law is that non-stock corporations may provide in the AOI or lays down a similar policy authorizing NEDA to recommend to the legislature
by-laws, for the distribution of its assets among its members subject to the the setting of maximum limits to family or group ownership of stock in
provisions of Sec. 94 and 95. That is, the exception relative to assets which it corporations vested with public interest, and the determination of whether or
holds upon some trust. In which event, the claims of the state, beneficiaries, not it should be vested with public interest within its domain.
rightful owners or donors will have to be considered. Thus, assets not subject
to the provisions of number 2-4 of Sec. 94 may be distributed in accordance B. PERMISSIVE PROVISIONS
with a plan of distribution thereof in accordance with the rule established in
Sec. 95 of the Code. Sec. 97. Articles of incorporation. - The articles of incorporation of a
close corporation may provide:
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
2. Unless the context clearly requires otherwise, the stockholders of the
1. For a classification of shares or rights and the qualifications for owning or corporation shall be deemed to be directors for the purpose of applying the
holding the same and restrictions on their transfers as may be stated therein, provisions of this Code; and
subject to the provisions of the following section; 3. The stockholders of the corporation shall be subject to all liabilities of
2. For a classification of directors into one or more classes, each of whom directors.
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 ELECTION OF OFFICERS: Sec. 97 likewise allows the AOI of a close
or directors than those provided in this Code. corporation to provide that all officers or employees shall be elected or
appointed by the stockholders instead of the BOD.
The articles of incorporation of a close corporation may provide that the
business of the corporation shall be managed by the stockholders of the C. EFFECT OF BREACH OF QUALIFYING CONDITIONS
corporation rather than by a board of directors. So long as this provision
continues in effect: Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on
the right to transfer shares must appear in the articles of incorporation and in
1. No meeting of stockholders need be called to elect directors; the by-laws as well as in the certificate of stock; otherwise, the same shall
2. Unless the context clearly requires otherwise, the stockholders of the not be binding on any purchaser thereof in good faith. Said restrictions shall
corporation shall be deemed to be directors for the purpose of applying the not be more onerous than granting the existing stockholders or the
provisions of this Code; and corporation the option to purchase the shares of the transferring stockholder
3. The stockholders of the corporation shall be subject to all liabilities of with such reasonable terms, conditions or period stated therein. If upon the
directors. expiration of said period, the existing stockholders or the corporation fails to
exercise the option to purchase, the transferring stockholder may sell his
The articles of incorporation may likewise provide that all officers or shares to any third person.
employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors. The restriction must be indicated not only in the AOI and the stock
certificates but also in the by-laws. The restrictions, however, shall not be
CLASSIFICATION OF SHARES: Under no. 1 above, the close corporation more onerous than granting existing stockholders or the corporation the
may classify its shares into different classes to be held of record only by option to purchase the shares of the selling or transferring stockholder within
specified persons. Example: Classes A, B and C. Class A is to be held only by reasonable terms, conditions and period. If, after the expiration of the period,
the incorporators; Class B by their relatives within the third civil degree of the existing stockholders or the corporation fails to exercise the option, the
consanguinity or affinity; Class C by their close business associates. stockholder concerned may transfer his shares to any third person subject to
the provisions, however, of Sec. 99:
CLASSIFICATION OF DIRECTORS: Under no. 2 above, a close
corporation may provide for a classification of directors into one or more Sec. 99. Effects of issuance or transfer of stock in breach of
class, each of whom may be voted for and elected solely by a particular class qualifying conditions. –
of stock. Example: 1,000 Class A shares; 500 Class B shares; and 200 Class C
shares. The AOI may provide that each class shall have a representation in 1. If stock of a close corporation is issued or transferred to any person who is
the BOD regardless of the number of shares within each class. So, if the close not entitled under any provision of the articles of incorporation to be a holder
corporation has 5 directors, then the AOI may allocate 3 directors for Class A of record of its stock, and if the certificate for such stock conspicuously
shares, 1 for B and 1 for C. Within each class, cumulative voting may also be shows the qualifications of the persons entitled to be holders of record
exercised by the stockholders of such class to elect their representative in the thereof, such person is conclusively presumed to have notice of the
board. But to the extent that each class can elect its own directors regardless fact of his ineligibility to be a stockholder.
of the number of shares in such class, cumulative voting may, in effect be
restricted. This is so because if there is no provision for a classification of 2. If the articles of incorporation of a close corporation states the number of
directors, then Class A stockholders, by cumulating their votes (5x1000) will persons, not exceeding twenty (20), who are entitled to be holders of record
have 5,000 votes and can elect 3 directors with 1,666 votes each. Class B of its stock, and if the certificate for such stock conspicuously states such
shares, having 2,500 votes can vote 2 members and Class C shares having number, and if the issuance or transfer of stock to any person would cause
only 1,000 votes cannot be guaranteed to any seat in the board. 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
QUORUM AND VOTING REQUIREMENT: a close corporation may provide have notice of this fact.
for a greater quorum or voting requirement under no. 3 above. Although the
AOI or by-laws of other stock corporations may provide for greater quorum 3. If a stock certificate of any close corporation conspicuously shows a
and voting requirements in directors’ meeting as provided in Sec. 25 of the restriction on transfer of stock of the corporation, the transferee of the stock
Code, those for stockholder’ meeting, unlike in a close corporation, may not is conclusively presumed to have notice of the fact that he has
be altered or increased. This provisions in effect, increases the veto power of acquired stock in violation of the restriction, if such acquisition
the minority stockholders. violates the restriction.
DIRECT MANAGEMENT BY STOCKHOLDERS: the AOI of the close 4. Whenever any person to whom stock of a close corporation has been
corporation may provide that the corporation shall be managed by the issued or transferred has, or is conclusively presumed under this section to
stockholders rather than by the BOD. If such be the case, the stockholders have, notice either (a) that he is a person not eligible to be a holder of stock
are deemed directors and are subject to all the rights and liabilities of a of the corporation, or (b) that transfer of stock to him would cause the stock
director. However, their liability would be more extensive in that they are of the corporation to be held by more than the number of persons permitted
personally lilable for torts unless, again, the corporation has obtained by its articles of incorporation to hold stock of the corporation, or (c) that the
reasonably adequate liability insurance. As distinguished from the ordinary transfer of stock is in violation of a restriction on transfer of stock, the
stock corporation, directors hereof are liable for corporate torts only if they corporation may, at its option, refuse to register the transfer of
have been negligent or acted fraudulently in the performance of their stock in the name of the transferee.
functions. As to what is “reasonably adequate liability insurance” would vary
depending on the facts and circumstances of the case. 5. The provisions of subsection (4) shall not applicable if the transfer of
stock, though contrary to subsections (1), (2) of (3), has been consented
In order that the provision allowing a close corporation to do away with a to by all the stockholders of the close corporation, or if the close
BOD may be effective, the same must contain the continuing provisions corporation has amended its articles of incorporation in accordance
required in par. 2 of Sec. 97: with this Title.
1. No meeting of stockholders need be called to elect directors;
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
6. The term "transfer", as used in this section, is not limited to a transfer for CONDUCT OF CORPORATE AFFAIRS under par. 3 and 4, may be the
value. subject of an agreement, in writing, and will be effective and binding despite
the fact that it may make them partners among themselves. Agreements may
7. The provisions of this section shall not impair any right which the also be entered into by and between the stockholders of a close corporation
transferee may have to rescind the transfer or to recover under any which relates to the management of the corporate affairs which would not
applicable warranty, express or implied. otherwise be valid and binding in other corporations. This is because
stockholders’ agreement in the latter cannot limit or restrict the discretion
SALE OF SHARES: Apparently, a selling stockholder may not be able to and powers of the BOD to manage the corporate affairs.
transfer his shares if to do so would violate the qualifying conditions indicated
in the AOI unless of course, all the stockholder consents to the transfer or E. WHEN BOARD MEETINGS NOT NECESSARY:
the AOI is amended (no. 5 above).
As a rule, directors in ordinary stock corporations must act as a body at a
STOCKHOLDER: concerned is not, however, left without any recourse as he duly constituted meeting to have a valid corporate transaction. In a close
may compel the close corporation to purchase his shares at their fair value corporation, directors may validly act even without a meeting subject only to
for any reason subject only to the condition laid down in Sec. 105. the conditions laid down in the Code under Sec. 101:
TRANSFEREE: may rescind the transaction or to recover from the transferor Sec. 101. When board meeting is unnecessary or improperly held. -
under any applicable warranty, express or implied. Unless the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
D. STOCKHOLDERS’ AGREEMENT
1. Before or after such action is taken, written consent thereto is signed by all
Sec. 100. Agreements by stockholders. – the directors; or
1. Agreements by and among stockholders executed before the formation 2. All the stockholders have actual or implied knowledge of the action and
and organization of a close corporation, signed by all stockholders, shall make no prompt objection thereto in writing; or
survive the incorporation of such corporation and shall continue to be valid
and binding between and among such stockholders, if such be their intent, 3. The directors are accustomed to take informal action with the express or
to the extent that such agreements are not inconsistent with the articles implied acquiescence of all the stockholders; or
of incorporation, irrespective of where the provisions of such agreements
are contained, except those required by this Title to be embodied in said 4. All the directors have express or implied knowledge of the action in
articles of incorporation. question and none of them makes prompt objection thereto in writing.
2. An agreement between two or more stockholders, if in writing and signed If a director's meeting is held without proper call or notice, an action taken
by the parties thereto, may provide that in exercising any voting rights, the therein within the corporate powers is deemed ratified by a director who
shares held by them shall be voted as therein provided, or as they may failed to attend, unless he promptly files his written objection with the
agree, or as determined in accordance with a procedure agreed upon by secretary of the corporation after having knowledge thereof.
them.
F. PRE-EMPTIVE RIGHTS
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 Sec. 102. Pre-emptive right in close corporations. - The pre-emptive
parties on the ground that its effect is to make them partners among right of stockholders in close corporations shall extend to all stock to be
themselves. issued, including reissuance of treasury shares, whether for money, property
or personal services, or in payment of corporate debts, unless the articles of
4. A written agreement among some or all of the stockholders in a close incorporation provide otherwise.
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 G. AMENDMENTS TO ARTICLES OF INCORPORATION
interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are Sec. 103. Amendment of articles of incorporation. - Any amendment to
parties thereto the liabilities for managerial acts imposed by this Code on the articles of incorporation which seeks to delete or remove any provision
directors. 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
5. To the extent that the stockholders are actively engaged in the shall not be valid or effective unless approved by the affirmative vote of at
management or operation of the business and affairs of a close least two-thirds (2/3) of the outstanding capital stock, whether with or
corporation, the stockholders shall be held to strict fiduciary duties to each without voting rights, or of such greater proportion of shares as may be
other and among themselves. Said stockholders shall be personally specifically provided in the articles of incorporation for amending, deleting or
liable for corporate torts unless the corporation has obtained removing any of the aforesaid provisions, at a meeting duly called for the
reasonably adequate liability insurance. purpose.
Private respondents failed to substantiate their claim that Naguiat Enterprises The Court here finds no application to the rule that a corporate officer cannot
managed, supervised and controlled their employment. It appears that they be held solidarily liable with a corporation in the absence of evidence that he
were confused on the personalities of Sergio F. Naguiat as an individual who had acted in bad faith or with malice. In the present case, Sergio Naguiat is
was the president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a held solidarily liable for corporate tort because he had actively engaged in the
separate corporate entity with a separate business. They presumed that management and operation of CFTI, a close corporation.
Sergio F. Naguiat, who was at the same time a stockholder and director of
Sergio F. Naguiat Enterprises, Inc., was managing and controlling the taxi Antolin T. Naguiat was the vice president of the CFTI. Although he carried
business on behalf of the latter. A closer scrutiny and analysis of the records, the title of "general manager" as well, it had not been shown that he had
however, evince the truth of the matter: that Sergio F. Naguiat, in acted in such capacity. Furthermore, no evidence on the extent of his
supervising the taxi drivers and determining their employment terms, was participation in the management or operation of the business was proferred.
rather carrying out his responsibilities as president of CFTI. Hence, Naguiat In this light, he cannot be held solidarily liable for the obligations of CFTI and
Enterprises as a separate corporation does not appear to be involved at all in Sergio Naguiat to the private respondents.
the taxi business.
CHAPTER 16: SPECIAL CORPORATIONS (TITLE XIII)
And, although the witness insisted that Naguiat Enterprises was his employer,
he could not deny that he received his salary from the office of CFTI inside A. CHAPTER I – EDUCATIONAL INSTITUTIONS
the base.
Sec. 106. Incorporation. - Educational corporations shall be governed by
Another driver-claimant admitted, upon the prodding of counsel for the special laws and by the general provisions of this Code.
corporations, that Naguiat Enterprises was in the trading business while CFTI
was in taxi services. EDUCATIONAL INSTITUTIONS are those that provide facilities for
teaching or instruction. It includes both public and private schools or colleges
In addition, the Constitution of CFTI-AAFES Taxi Drivers Association which, and universities and are subject to the provisions of special laws and by the
admittedly, was the union of individual respondents while still working at general provisions of the Code.
Clark Air Base, states that members thereof are the employees of CFTI and
"(f)or collective bargaining purposes, the definite employer is the Clark Field PUBLIC SCHOOLS or those created by the government are, however,
Taxi Inc." subject to the law of their creation. UP for instance has its own special
charter and would thus be governed by the special law creating it. Insofar as
ISSUE2: WON Sergio F. Naguiat and his son Antolin Naguiat, officers of CFTI they may be applicable however, the provisions of any special law or the
may be solidarily liable with CFTI? Corporation Code supplement the law of their creation.
HELD: Only Sergio F. Naguiat. Sergio F. Naguiat, in his capacity as president PRIVATE SCHOOLS OR COLLEGES include any private institutions for
of CFTI, cannot be exonerated from joint and several liability in the payment teaching, managed by private individuals or corporations which offer courses
of separation pay to individual respondents. of kindergarten, primary, intermediary or secondary instructions or superior
courses in vocational, technical, professional or special schools by which
Sergio F. Naguiat, admittedly, was the president of CFTI who actively diploma or certificates are to be granted or titles and degrees conferred (Sec.
managed the business. Thus, applying the ruling in A.C. Ransom, he falls 2, Act No. 2076, as amended by CA 180).
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 These instructions of learning once recognized by the government as such
corporation to its dismissed employees. are mandated by law to be incorporated within 90 days under the provisions
of the Corporation Code and must, perforce, comply with the requirements
Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises and procedure laid down thereunder. (Sec. 5, supra)
were "close family corporations" owned by the Naguiat family. Section 100,
paragraph 5, (under Title XII on Close Corporations) of the Corporation Code, Their failure to do so will not immune the educational institution from suit as
states: a corporation (Chang Kai Shek School vs. CA; April 18, 1989, supra)
(5) To the extent that the stockholders are actively engage(d) in the The SEC, however, shall not act on the incorporation of any educational
management or operation of the business and affairs of a close corporation, unless the provision of Sec. 107 is complied with:
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally Sec. 107. Pre-requisites to incorporation. - Except upon favorable
liable for corporate torts unless the corporation has obtained reasonably recommendation of the Ministry of Education and Culture, the Securities and
adequate liability insurance. (emphasis supplied) Exchange Commission shall not accept or approve the articles of
incorporation and by-laws of any educational institution
Nothing in the records show whether CFTI obtained "reasonably adequate
liability insurance;" thus, what remains is to determine whether there was BOARD OF DIRECTORS/TRUSTEES: or the governing board by any name
corporate tort. of an educational institution is similar in number as to any other corporation
except that in case it is non-stock, the number must be in multiples of five
Our jurisprudence is wanting as to the definite scope of "corporate tort." (5). As compared to stock corporation, their number may be within the
Essentially, "tort" consists in the violation of a right given or the omission of a vicinity of five (5) to fifteen (15).
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
INCORPORATE:
TERM OF OFFICE: Members of the Board may hold office for five years but
they shall be staggered so that 1/5 of their number shall expire every year. Sec. 110. Corporation sole. - For the purpose of administering and
Sec. 108 provides: managing, as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
Sec. 108. Board of trustees. - Trustees of educational institutions archbishop, bishop, priest, minister, rabbi or other presiding elder of such
organized as non-stock corporations shall not be less than five (5) nor more religious denomination, sect or church.
than fifteen (15): Provided, however, That the number of trustees shall be in
multiples of five (5). CONTENTS OF THE ARTICLES OF INCORPORATION:
Unless otherwise provided in the articles of incorporation or the by-laws, the Sec. 111. Articles of incorporation. - In order to become a corporation
board of trustees of incorporated schools, colleges, or other institutions of sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of
learning shall, as soon as organized, so classify themselves that the term of any religious denomination, sect or church must file with the Securities and
office of one-fifth (1/5) of their number shall expire every year. Trustees Exchange Commission articles of incorporation setting forth the following:
thereafter elected to fill vacancies, occurring before the expiration of a
particular term, shall hold office only for the unexpired period. Trustees 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
elected thereafter to fill vacancies caused by expiration of term shall hold elder of his religious denomination, sect or church and that he desires to
office for five (5) years. A majority of the trustees shall constitute a quorum become a corporation sole;
for the transaction of business. The powers and authority of trustees shall be 2. That the rules, regulations and discipline of his religious denomination,
defined in the by-laws. sect or church are not inconsistent with his becoming a corporation sole and
do not forbid it;
For institutions organized as stock corporations, the number and term of 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding
directors shall be governed by the provisions on stock corporations. elder, he is charged with the administration of the temporalities and the
management of the affairs, estate and properties of his religious
CONSTITUTIONAL PROVISION ON FILIPINO OWNERSHIP: par. 2, denomination, sect or church within his territorial jurisdiction, describing such
Sec. 4 of Article XIV (Education, Science and Technology, Arts, Culture and territorial jurisdiction;
Sports) 4. The manner in which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is required to be
Educational institutions, other than those established by religious groups and filled, according to the rules, regulations or discipline of the religious
mission boards, shall be owned solely by citizens of the Philippines or denomination, sect or church to which he belongs; and
corporations or associations at least sixty per centum of the capital of which 5. The place where the principal office of the corporation sole is to be
is owned by such citizens. The Congress may, however, require increased established and located, which place must be within the Philippines.
Filipino equity participation in all educational institutions. The control and
administration of educational institutions shall be vested in citizens of the The articles of incorporation may include any other provision not contrary to
Philippines. law for the regulation of the affairs of the corporation.
No educational institution shall be established exclusively for aliens and no PROCEDURE FOR THE ORGANIZATION:
group of aliens shall comprise more than one-third of the enrollment in any
school. The provisions of this sub section shall not apply to schools Sec. 112. Submission of the articles of incorporation. - The articles of
established for foreign diplomatic personnel and their dependents and, unless incorporation must be verified, before filing, by affidavit or affirmation of the
otherwise provided by law, for other foreign temporary residents. chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case
may be, and accompanied by a copy of the commission, certificate of election
Culled from this is that while foreigners may own a maximum of 40% of the or letter of appointment of such chief archbishop, bishop, priest, minister,
capital stock of an educational corporation, not one of them may sit as a rabbi or presiding elder, duly certified to be correct by any notary public.
member of the governing board thereof. Neither may they act as an officer
with the power of control and administration of the institution. In effect their From and after the filing with the Securities and Exchange Commission of the
ownership of any capital would be limited to “non-controlling” interest. said articles of incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph, such
B. CHAPTER II - RELIGIOUS CORPORATIONS chief archbishop, bishop, priest, minister, rabbi or presiding elder shall
become a corporation sole and all temporalities, estate and properties of the
REGLIGIOUS CORPORATIONS are those composed entirely of spiritual religious denomination, sect or church theretofore administered or managed
persons, which are created for the furtherance of religion or perpetuating the by him as such chief archbishop, bishop, priest, minister, rabbi or presiding
rights of the church or for the administration of church or religious work or elder shall be held in trust by him as a corporation sole, for the use, purpose,
property. behalf and sole benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums, parsonages and
CLASSES OF RELIGIOUS CORPORATIONS: cemeteries thereof.
Sec. 109. Classes of religious corporations. - Religious corporations may TERM OF EXISTENCE: As can be gleaned from the law, the AOI of a
be incorporated by one or more persons. Such corporations may be classified corporation sole does not require a provision for its term of existence. For
into corporations sole and religious societies. obvious reasons, since a corporation sole is supposed to exist in perpetuity. It
may, however, be dissolved in accordance with Sec. 115 of the Code.
Religious corporations shall be governed by this Chapter and by the general
provisions on non-stock corporations insofar as they may be applicable. BEGINNING OF CORPORATE EXISTENCE: is upon filing of the verified
AOI with the SEC and the documents required under Sec. 112. This serves as
C. CORPORATION SOLE an exception to the rule that a corporation acquires juridical personality only
upon the issuance of a certificate of incorporation by the said government
CORPORATION SOLE: consists of one person only and his successor in agency.
some particular station, who are incorporated by law in order to give them
some legal capacities and advantages, particularly that of perpetuity, which in POWER TO ALIENATE PROPERTIES, LIMITATION: The extent of the its
their natural persons they could not have had. power to mortgage or sell real properties is, however, subject to certain
restriction, that is, a proper court order must first be secured for that
PURPOSE OF INCORPORATION AND PERSONS WHO MAY purpose, which is not otherwise imposed in any other corporation.
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
Intervention of the court may dispensed with only if the rules, regulations
and discipline of the religious denomination, sect or church concerned HELD: Yes. In solving the problem thus submitted to our consideration, We
provide or regulate the manner or method of holding or alienating properties. can say the following: A corporation sole is a special form of
Sec. 113 provides: corporation usually associated with the clergy. Conceived and
introduced into the common law by sheer necessity, this legal creation which
Sec. 113. Acquisition and alienation of property. - Any corporation sole was referred to as "that unhappy freak of English law" was designed to
may purchase and hold real estate and personal property for its church, facilitate the exercise of the functions of ownership carried on by the clerics
charitable, benevolent or educational purposes, and may receive bequests or for and on behalf of the church which was regarded as the property owner
gifts for such purposes. Such corporation may sell or mortgage real property (See I Couvier's Law Dictionary, p. 682-683).
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 A corporation sole consists of one person only, and his successors
the satisfaction of the court that notice of the application for leave to sell or (who will always be one at a time), in some particular station, who
mortgage has been given by publication or otherwise in such manner and for are incorporated by law in order to give them some legal capacities
such time as said court may have directed, and that it is to the interest of the and advantages, particularly that of perpetuity, which in their
corporation that leave to sell or mortgage should be granted. The application natural persons they could not have had. In this sense, the king is a
for leave to sell or mortgage must be made by petition, duly verified, by the sole corporation; so is a bishop, or dens, distinct from their several chapters
chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as (Reid vs. Barry, 93 Fla. 849, 112 So. 846).
corporation sole, and may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole: Provided, That leaves no room for doubt that the bishops or archbishops, as
That in cases where the rules, regulations and discipline of the religious the case may be, as corporation's sole are merely administrators of
denomination, sect or church, religious society or order concerned the church properties that come to their possession, in which they
represented by such corporation sole regulate the method of acquiring, hold in trust for the church. It can also be said that while it is true that
holding, selling and mortgaging real estate and personal property, such rules, church properties could be administered by a natural persons, problems
regulations and discipline shall control, and the intervention of the courts regarding succession to said properties can not be avoided to rise upon his
shall not be necessary. death. Through this legal fiction, however, church properties acquired by the
incumbent of a corporation sole pass, by operation of law, upon his death not
OWNERSHIP OF PROPERTY: does not vest unto the head upon his personal heirs but to his successor in office. It could be seen, therefore,
registration of real property in the name of the corporation sole, such that a corporation sole is created not only to administer the temporalities of
devolving upon the church or congregation acquiring it. the church or religious society where he belongs but also to hold and
transmit the same to his successor in said office. If the ownership or title to
CONSITUTIONAL LIMITATION, RE: 60% FILIPINO OWNED: does not the properties do not pass to the administrators, who are the owners of
apply to corporation sole with regards ownership of real property in its own church properties?.
name. It has thus been held that the Roman Catholic Church of the
Philippines, a corporation sole, has no nationality and that the framers of the Bouscaren and Elis, S.J., authorities on cannon law, on their treatise
Constitution did not have in mind the religious corporation sole when they comment:
provided that 60% of the capital of the corporation acquiring it must be
owned by Filipino citizens. In matters regarding property belonging to the Universal Church and to
the Apostolic See, the Supreme Pontiff exercises his office of supreme
CHARACTER OF THE LAND: at the time of institution of registration administrator through the Roman Curia; in matters regarding other church
proceedings must first be determined before a corporation sole, or any property, through the administrators of the individual moral persons in the
private corporation for that matter, can acquire the land must first be Church according to that norms, laid down in the Code of Cannon Law.
determined. If it does not form part of public domain, the constitutional This does not mean, however, that the Roman Pontiff is the owner of all
prohibition against its acquisition by private corporation will not apply. Thus, the church property; but merely that he is the supreme guardian
it has likewise been earlier held that under the Public Land Act, alienable (Bouscaren and Ellis, Cannon Law, A Text and Commentary, p. 764).
public land may be subject to registration by a possessor if he, personally or
through his predecessors-in-interest, had openly continuously and exclusively We must therefore, declare that although a branch of the Universal Roman
possessed the same for 30 years as the same is converted into private Catholic Apostolic Church, every Roman Catholic Church in different
property by mere lapse or completion of the said period. countries, if it exercises its mission and is lawfully incorporated in accordance
with the laws of the country where it is located, is considered an entity or
THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO, person with all the rights and privileges granted to such artificial being under
INC., petitioner, the laws of that country, separate and distinct from the personality of the
s. Roman Pontiff or the Holy See, without prejudice to its religious relations with
THE LAND REGISTRATION COMMISSION and THE REGISTER OF the latter which are governed by the Canon Law or their rules and
DEEDS OF DAVAO CITY, respondents regulations.
(G.R. No. L-8451; December 20, 1957)
The Corporation Law also contains the following provisions:
FACTS: Mateo Rodis executed a Deed of Sale in favor of the Roman Catholic
Apostolic Administrator of Davao, Inc., with Mgr. Clovit Thibault, a Canadian SECTION 159. Any corporation sole may purchase and hold real estate and
citizen, as actual incumbent. When the deed of sale was presented to the personal; property for its church, charitable, benevolent, or educational
Register of Deeds of Davao for registration, the latter required the purposes, and may receive bequests or gifts of such purposes. Such
corporation to submit an affidavit declaring that 60% of the members thereof corporation may mortgage or sell real property held by it upon obtaining
were Filipino citizens. an order for that purpose from the Court of First Instance of the province
in which the property is situated; but before making the order proof must
Entertaining some doubts as to the registrability of the deed of sale, the be made to the satisfaction of the Court that notice of the application for
Register of Deeds referred the matter to the Land Registration Commission leave to mortgage or sell has been given by publication or otherwise in
which held that by virtue of the provisions of Sec. 1 and 5 of Art. XIII of the such manner and for such time as said Court or the Judge thereof may
Philippine Constitution, the vendee was not qualified to acquire private lands have directed, and that it is to the interest of the corporation that leave to
in the Philippines in the absence of proof that at least 60% of the capital, mortgage or sell must be made by petition, duly verified by the bishop,
property, or assets of the Roman Catholic Apostolic Administrator of Davao, chief priest, or presiding elder acting as corporation sole, and may be
Inc. was actually owned or controlled by Filipino citizens. opposed by any member of the religious denomination, society or church
represented by the corporation sole: Provided, however, That in cases
ISSUE: WON the corporation sole may register the property transferred? where the rules, regulations, and discipline of the religious denomination,
Since then, however, this Court had occasion to re-examine the rulings in 2. In the case at bar the application was filed after the effectivity on the New
these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41 Constitution on January 17, 1973;
Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among
others. Thus, in the recent case of Director of Lands v. Intermediate which was denied by the lower court for lack of merit.
Appellate Court, 146 SCRA 509, We categorically stated that the majority
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
Still insisting of the alleged unconstitutionality of the registration (a point advantages, particulary that of perpetuity, which in their natural persons
which, incidentally, the appellant never raised in the lower court prior to its they could not have had.
Motion for Reconsideration), the Republic elevated this appeal, and the IAC
affirmed the lower court’s decision. There is no doubt that a corporation sole by the nature of its Incorporation is
vested with the right to purchase and hold real estate and personal property.
ISSUE: WON private respondent, corporation sole, is entitled to confirmation It need not therefore be treated as an ordinary private corporation because
of its title to the 4 parcels of land? whether or not it be so treated as such, the Constitutional provision involved
will, nevertheless, be not applicable.
HELD: The parties herein do not dispute that since the acquisition of the four
(4) lots by the applicant, it has been in continuous possession and enjoyment In the light of the facts obtaining in this case and the ruling of this Court in
thereof, and such possession, together with its predecessors-in-interest, Director of Lands vs. IAC, (supra, 513), the lands subject of this petition were
covering a period of more than 52 years (at least from the date of survey in already private property at the time the application for confirmation of title
1928) with respect to lots 1 and 2, about 62 years with respect to lot 3, all of was filed in 1979. There is therefore no cogent reason to disturb the findings
plan PSU-65686; and more than 39 years with respect to the fourth parcel of the appellate court.
described in plan PSU-11 2592 (at least from the date of the survey in 1940)
have been open, public, continuous, peaceful, adverse against the whole
world, and in the concept of owner. VACANCY: in the office of the “head” of the corporation, the person
authorized by the rules, regulations or discipline of the denomination shall
Petitioner argues that considering such constitutional prohibition, private exercise all the powers and authority of the corporation sole during such
respondent is disqualified to own and register its title to the lots in question. vacancy and until such vacancy has been filled-up. The manner in which the
Further, it argues that since the application for registration was filed only on vacancy is to be filled in clearly spelled out in Sec. 114 of the Code:
February 2, 1979, long after the 1973 Constitution took effect on January 17,
1973, the application for registration and confirmation of title is ineffectual Sec. 114. Filling of vacancies. - The successors in office of any chief
because at the time it was filed, private corporation had been declared archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation
ineligible to acquire alienable lands of the public domain pursuant to Art. XIV, sole shall become the corporation sole on their accession to office and shall
Sec. 11 of the said constitution. (Rollo, p. 41) 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,
The questioned posed before this Court has been settled in the case of or letters of appointment, duly certified by any notary public.
DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA 509
[1986]) which reversed the ruling first enunciated in the 1982 case of Manila During any vacancy in the office of chief archbishop, bishop, priest, minister,
Electric Co. vs. CASTRO BARTOLOME, (114 SCRA 789 [1982]) imposing the rabbi or presiding elder of any religious denomination, sect or church
constitutional ban on public land acquisition by private corporations which incorporated as a corporation sole, the person or persons authorized and
ruling was declared emphatically as res judicata on January 7, 1986 in empowered by the rules, regulations or discipline of the religious
Director of Lands vs. Hermanos y Hermanas de Sta. Cruz de Mayo, Inc., (141 denomination, sect or church represented by the corporation sole to
SCRA 21 [1986]). In said case, (Director of Lands v. IAC, supra), this Court administer the temporalities and manage the affairs, estate and properties of
stated that a determination of the character of the lands at the time the corporation sole during the vacancy shall exercise all the powers and
of institution of the registration proceedings must be made. If they authority of the corporation sole during such vacancy.
were then still part of the public domain, it must be answered in the
negative. Under the above-provision, it is required that the successor, in order to be
permitted to transact business as a corporation sole, must file with the SEC a
If, on the other hand, they were already private lands, the constitutional copy of his commission, certificate of election, or letter of appointment, duly
prohibition against their acquisition by private corporation or association certified by a notary public.
obviously does not apply. In affirming the Decision of the Intermediate
Appellate Court in said case, this Court adopted the vigorous dissent of the DISSOLUTION:
then Justice, later Chief Justice Claudio Teehankee, tracing the line of cases
beginning with CARINO, in 1909, thru SUSI, in 1925, down to HERICO, in Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs
1980, which developed, affirmed and reaffirmed the doctrine that open, settled voluntarily by submitting to the Securities and Exchange Commission
exclusive and undisputed possession of alienable public land for the period a verified declaration of dissolution.
prescribed by law creates the legal fiction whereby the land, upon completion
of the requisite period ipso jure and without the need of judicial or other The declaration of dissolution shall set forth: (NRAN)
sanction, ceases to be public land and becomes' private property. (DIRECTOR 1. The name of the corporation;
OF LANDS vs. IAC, supra, p. 518). 2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular
It must be emphasized that the Court is not here saying that a corporation religious denomination, sect or church;
sole should be treated like an ordinary private corporation. 4. The names and addresses of the persons who are to supervise the
winding up of the affairs of the corporation.
In Roman Catholic Apostolic Administration of Davao, Inc. vs. Land
Registration Commission, et al. (L-8451, December 20,1957,102 Phil. 596). Upon approval of such declaration of dissolution by the Securities and
We articulated: Exchange Commission, the corporation shall cease to carry on its operations
except for the purpose of winding up its affairs.
In solving the problem thus submitted to our consideration, We can say
the following: A corporation sole is a special form of corporation usually DISSOLUTION BY JUDICIAL DECREE: is generally not allowed because
associated with the clergy. Conceived and introduced into the common law of the doctrine of separation of the Church and the State. However, the State
by sheer necessity, this legal creation which was referred to as "that may exercise its police power if the corporation is being carried out and is
unhappy freak of English Law" was designed to facilitate the exercise of being used for illegal purposes.
the functions of ownership carried on by the clerics for and on behalf of
the church which was regarded as the property owner (See 1 Bouvier's D. RELIGIOUS SOCIETIES
Law Dictionary, p. 682-683).
Under common law, a religious society is a body of persons associated
A corporation sole consists of one person only, and his successors (who together for the purpose of maintaining religious worship. The religious
will always be one at a time), in some particular station, who are society and the church are distinct bodies, independent of each other, though
incorporated by law in order to give them some legal capacities and they may exist with each other.
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
Under Philippine Law, a religious society, order, diocese, synod or district B. METHODS OF DISSOLUTION
organization of any religious denomination, sect or church may incorporate
for the administration of its temporalities or for the management of its affairs, THREE WAYS OF DISSOLUTION:
properties and estate in accordance with the Code: 1. Expiration of its corporate term;
2. Voluntary surrender of its primary franchise (voluntary dissolution); and
Sec. 116. Religious societies. - Any religious society or religious order, or 3. The revocation of its corporate franchise (involuntary dissolution)
any diocese, synod, or district organization of any religious denomination,
sect or church, unless forbidden by the constitution, rules, regulations, or Sec. 117, however, mentions only two methods:
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 Sec. 117. Methods of dissolution. - A corporation formed or organized
vote at a meeting called for the purpose of at least two-thirds (2/3) of its under the provisions of this Code may be dissolved voluntarily or
membership, incorporate for the administration of its temporalities or for the involuntarily.
management of its affairs, properties and estate by filing with the Securities
and Exchange Commission, articles of incorporation verified by the affidavit This is rightfully so, because the expiration of corporate term can be
of the presiding elder, secretary, or clerk or other member of such religious considered voluntary dissolution t being the intention of the stockholders that
society or religious order, or diocese, synod, or district organization of the it shall exist only for such period.
religious denomination, sect or church, setting forth the following:
C. EXPIRATION OF CORPORATE TERM
1. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or A corporation registered under the Corporation Code, with the exception of
church; religious ones, is required to indicate its term of existence in the AOI. It
ceases to exist and is deemed automatically dissolved upon the expiration of
2. That at least two-thirds (2/3) of its membership have given their written the term indicated thereat without the need of any formal proceedings.
consent or have voted to incorporate, at a duly convened meeting of the
body; EXTENSION: It is to be observed, however, that the original term of
existence indicated in the AOI is subject to extension in accordance with the
3. That the incorporation of the religious society or religious order, or provisions of Sec. 11 and 37 of the Code. If such be the case, the corporation
diocese, synod, or district organization desiring to incorporate is not continues to be possessed with juridical personality and may carry out its
forbidden by competent authority or by the constitution, rules, regulations or business for the period of time granted by virtue of such extension.
discipline of the religious denomination, sect, or church of which it forms a
part; The extension should nonetheless be made before the expiration of the
original term, but not earlier than 5 years prior to such expiration, otherwise
4. That the religious society or religious order, or diocese, synod, or district the corporation is dissolved, ipso facto.
organization desires to incorporate for the administration of its affairs,
properties and estate; PHILIPPINE NATIONAL BANK, petitioner,
vs.
5. The place where the principal office of the corporation is to be established THE COURT OF FIRST INSTANCE OF RIZAL, PASIG — BRANCH XXI,
and located, which place must be within the Philippines; and PRESIDED BY JUDGE GREGORIO G. PINEDA, CHUNG SIONG PEK @
BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG TY @
6. The names, nationalities, and residences of the trustees elected by the VICTORIA CHENG GENG TY, and THE REGISTER OF DEEDS OF RIZAL,
religious society or religious order, or the diocese, synod, or district PASIG, METRO MANILA AND/OR HIS DEPUTIES AND AGENTS, respondents
organization to serve for the first year or such other period as may be (G.R. No. 63201; May 27, 1992)
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 FACTS: Philippine Blooming Mills, Inc. (PBM), a corporation with corporate
than five (5) nor more than fifteen (15). existence of 25 years, entered into a lease contract with private respondents,
whereby the latter shall lease the parcels of land owned by them to PBM for
Apparent from the foregoing, is that a religious society is not mandated by a period of 20 years, extendible to another 20 years, provided that PBM
law to register as a corporation but may do so to acquire juridical personality extend its corporate existence in accordance with law.
and for the purpose of administration of its temporalities and properties and
even to acquire properties of its own. Thus, it has been held that an PBM introduced improvements on the land which were annotated with the
unincorporated religious association cannot acquire private agricultural lands Register of Deeds.
in the Philippines (Register of Deeds vs. Ung Sui Temple)
Later on, PBM executed a deed of assignment in favor of PNB over its
TERM OF EXITENCE: Like the corporation sole, the AOI of a religious leasehold rights and later on a real estate mortgage covering all the
society need not contain a term of its existence as it is supposed to exist in improvements to secure a loan.
perpetuity.
PBM filed a petition for registration of improvements in the titles of real
BEGINNING OF CORPORATE EXISTENCE: is upon issuance of the property of private respondents which was opposed by private respondents
certificate of registration by the SEC. Absent any specific provision of the law, on the ground that PBM failed to renew the contract of lease and apply for
it must be deemed to fall within the general rule under Sec. 19. extension of its corporate existence.
CHAPTER XVII: DISSOLUTION (TITLE XIV) The CFI issued an order directing the cancellation of the inscriptions on
respondents’ certificates of title.
A. DISSOLUTION is the extinguishment of the corporate franchise and
the termination of corporate existence. ISSUE: WON the cancellation of entries on respondents’ title is valid and
proper?
When a corporation is dissolved, it ceases to be a juridical entity and can no
longer pursue the business for which it was incorporated. It will nevertheless HELD: Yes. The contract of lease expressly provides that the term of the
continue as a body corporate for another period of three years from the time lease shall be twenty years from the execution of the contract but can be
it is dissolved but only for the purpose of winding up its affairs and the extended for another period of twenty years at the option of the lessee
liquidation of its assets. should the corporate term be extended in accordance with law. Clearly, the
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
option of the lessee to extend the lease for another period of twenty years was tantamount to a waiver of its rights and interests over the improvements
can be exercised only if the lessee as corporation renews or extends its on the leased premises.
corporate term of existence in accordance with the Corporation Code which is
the applicable law. Contracts are to be interpreted according to their literal D. SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)
meaning and should not be interpreted beyond their obvious intendment.
Thus, in the instant case, the initial term of the contract of lease which MODES OF VOLUNTARY DISSOUTION:
commenced on March 1, 1954 ended on March 1, 1974. PBM as lessee 1. Voluntary Dissolution where no creditors are affected (Sec. 118);
continued to occupy the leased premises beyond that date with the 2. Voluntary Dissolution where creditors are affected (Sec. 119);
acquiescence and consent of the respondents as lessor. Records show 3. Shortening of corporate term (Sec. 120).
however, that PBM as a corporation had a corporate life of only twenty-five
(25) years which ended an January 19, 1977. It should be noted however 1. VOLLUNTARY DISSOUTION WHERE NO CREDITORS ARE
that PBM allowed its corporate term to expire without complying with the AFFECTED:
requirements provided by law for the extension of its corporate term of
existence. Sec. 118. Voluntary dissolution where no creditors are affected. - If
dissolution of a corporation does not prejudice the rights of any creditor
Section 11 of Corporation Code provides that a corporation shall exist for a having a claim against it, the dissolution may be effected by majority vote of
period not exceeding fifty (50) years from the date of incorporation unless the board of directors or trustees, and by a resolution duly adopted by the
sooner dissolved or unless said period is extended. Upon the expiration of the affirmative vote of the stockholders owning at least two-thirds (2/3) of the
period fixed in the articles of incorporation in the absence of compliance with outstanding capital stock or of at least two-thirds (2/3) of the members of a
the legal requisites for the extension of the period, the corporation ceases to meeting to be held upon call of the directors or trustees after publication of
exist and is dissolved ipso facto (16 Fletcher 671 cited by Aguedo F. the notice of time, place and object of the meeting for three (3) consecutive
Agbayani, Commercial Laws of the Philippines, Vol. 3, 1988 Edition p. 617). weeks in a newspaper published in the place where the principal office of
When the period of corporate life expires, the corporation ceases to be a said corporation is located; and if no newspaper is published in such place,
body corporate for the purpose of continuing the business for which it was then in a newspaper of general circulation in the Philippines, after sending
organized. But it shall nevertheless be continued as a body corporate for such notice to each stockholder or member either by registered mail or by
three years after the time when it would have been so dissolved, for the personal delivery at least thirty (30) days prior to said meeting. A copy of the
purpose of prosecuting and defending suits by or against it and enabling it resolution authorizing the dissolution shall be certified by a majority of the
gradually to settle and close its affairs, to dispose of and convey its property board of directors or trustees and countersigned by the secretary of the
and to divide its assets (Sec. 122, Corporation Code). There is no need for corporation. The Securities and Exchange Commission shall thereupon issue
the institution of a proceeding for quo warranto to determine the the certificate of dissolution.
time or date of the dissolution of a corporation because the period
of corporate existence is provided in the articles of incorporation. FORMAL AND PROCEDURAL REQUIREMENTS:
When such period expires and without any extension having been 1. Majority vote of the board of directors or trustees;
made pursuant to law, the corporation is dissolved automatically 2. Sending of notice of each stockholders or member either by registered
insofar as the continuation of its business is concerned. The quo mail or personal delivery at least thirty (30) days prior to the meeting
warranto proceeding under Rule 66 of the Rules of Court, as amended, may (scheduled by the board for the purpose of submitting the board action
be instituted by the Solicitor General only for the involuntary dissolution of a to dissolve the corporation for approval of the stockholder or
corporation on the following grounds: a) when the corporation has offended members.);
against a provision of an Act for its creation or renewal; b) when it has 3. Publication of the notice of time, place and subject of the meeting for
forfeited its privileges and franchises by non-user; c) when it has committed three (3) consecutive weeks in a newspaper published in the place
or omitted an act which amounts to a surrender of its corporate rights, where the principal office of said corporation is located or in a
privileges or franchises; d) when it has mis-used a right, privilege or franchise newspaper of general circulation in the Philippines;
conferred upon it by law, or when it has exercised a right, privilege or 4. Resolution adopted by the affirmative vote of the stockholders owning
franchise in contravention of law. Hence, there is no need for the SEC to at least 2/3 of the outstanding capital stock or 2/3 of the members at
make an involuntary dissolution of a corporation whose corporate term had the meeting duly called for the purpose;
ended because its articles of incorporation had in effect expired by its own 5. A copy of the resolution authorizing the dissolution must be certified by
limitation. a majority of the board of directors or trustees and countersigned by the
corporate secretary;
Considering the foregoing in relation to the contract of lease between the 6. Issuance of a certificate of dissolution by the SEC.
parties herein, when PBM's corporate life ended on January 19, 1977 and its
3-year period for winding up and liquidation expired on January 19, 1980, the FAILURE TO COMPLY: with the above requirements will have no effect on
option of extending the lease was likewise terminated on January 19, 1977 the legal existence of the corporation. Elsewise stated, a corporation benig a
because PBM failed to renew or extend its corporate life in accordance with creation of the law by the grant of its existence by the State, may only be
law. From then on, the respondents can exercise their right to terminate the dissolved in the manner prescribed by the law of its creation. Since it is the
lease pursuant to the stipulations in the contract. State that grants its right to exist, it is only through the State which can allow
th termination of existence. Unless dissolved pursuant thereto, a corporation
The rights of the lessor and the lessee over the improvements which the does not cease to have a juridical personality.
latter constructed on the leased premises is governed by Article 1678 of the
Civil Code. A mere resolution by the stockholders or the BOD of a corporation to dissolve
the same does not affect the dissolution but that some other steps,
The provision gives the lessee the right to remove the improvements if the administrative or judicial is necessary (Daguhoy Enterprises vs. Ponce)
lessor chooses not to pay one-half of the value thereof. However, in the case
at bar, the law will not apply because the parties herein have stipulated in 2. VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED
the contract their own terms and conditions concerning the improvements, to
wit, that the lessee, namely PBM, bound itself to remove the improvements Sec. 119. Voluntary dissolution where creditors are affected. - Where
before the termination of the lease. Petitioner PNB, as assignee of PBM the dissolution of a corporation may prejudice the rights of any creditor, the
succeeded to the obligation of the latter under the contract of lease. It could petition for dissolution shall be filed with the Securities and Exchange
not possess rights more than what PBM had as lessee under the contract. Commission. The petition shall be signed by a majority of its board of
Hence, petitioner was duty bound to remove the improvements before the directors or trustees or other officers having the management of its affairs,
expiration of the period of lease as what we have already discussed in the verified by its president or secretary or one of its directors or trustees, and
preceding paragraphs. Its failure to do so when the lease was terminated 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
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
least two-thirds (2/3) of the outstanding capital stock or by at least two- merely means that it has the capacity of continuous existence during a
thirds (2/3) of the members at a meeting of its stockholders or members particular period or until dissolved in accordance with law.
called for that purpose.
It may thus amend its AOI and provide a term of existence or shorten it
If the petition is sufficient in form and substance, the Commission shall, by which may have the effect of a dissolution. Thus, while Sec. 115 of the Code
an order reciting the purpose of the petition, fix a date on or before which provides for the process and procedure for the dissolution of a corporation
objections thereto may be filed by any person, which date shall not be less sole, there is nothing in the law itself which would prohibit it from amending
than thirty (30) days nor more than sixty (60) days after the entry of the its AOI. It is believed, however, that authorization for the dissolution by the
order. Before such date, a copy of the order shall be published at least once particular religious denomination, sect or church, as required in sub-
a week for three (3) consecutive weeks in a newspaper of general circulation paragraph 3 of Sec. 115 would still be necessary in the case of amending the
published in the municipality or city where the principal office of the AOI to affect dissolution.
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 Sec. 120. Dissolution by shortening corporate term. - A voluntary
be posted for three (3) consecutive weeks in three (3) public places in such dissolution may be effected by amending the articles of incorporation to
municipality or city. 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
Upon five (5) day's notice, given after the date on which the right to file Exchange Commission in accordance with this Code. Upon approval of the
objections as fixed in the order has expired, the Commission shall proceed to amended articles of incorporation of the expiration of the shortened term, as
hear the petition and try any issue made by the objections filed; and if no the case may be, the corporation shall be deemed dissolved without any
such objection is sufficient, and the material allegations of the petition are further proceedings, subject to the provisions of this Code on liquidation.
true, it shall render judgment dissolving the corporation and directing such
disposition of its assets as justice requires, and may appoint a receiver to SPECIAL AMENDMENT: Shortening of the corporate term with the effect of
collect such assets and pay the debts of the corporation. dissolution is a special type of amendment covered and governed by the
special provisions of Sec. 37 of the Code. Thus, while the general provision
FORMAL AND PROCEDURAL REQUIREMENTS: on amendment under Sec. 16 allows “written assent” in determining the
1. Affirmative vote of the stockholders representing at least 2/3 of the voting requirement for ordinary amendments, sec. 37 mandates that the vote
outstanding capital stock or at least 2/3 of the members at a meeting must be cast at a duly constituted meeting.
duly called for that purpose;
2. Petition for dissolution shall be filed with the SEC (the proper forum) Likewise, sec. 16 provides that amendment of the AOI is deemed approved if
signed by a majority of its board of directors or trustees or other officers not acted upon by the SEC within 6 months from the date of filing for a cause
having the management of its affairs, verified by the president or not attributable to the corporation. This is not applicable in case of
secretary or one of its directors or trustees, setting forth all claims and shortening the corporate term which will have the effect of dissolution in Sec.
demands against it. 120, which requires the approval of the SEC.
3. Issuance of an order by the SEC reciting the purpose of the petition
and fixing the date on or before which objections thereto may be filed E. INVOLUNTARY DISSOLUTION
by any person, which date shall not be less than thirty days nor more
than sixty days after entry of the order. Sec. 121. Involuntary dissolution. - A corporation may be dissolved by
4. Before such date, a copy of the order must be published once a week the Securities and Exchange Commission upon filing of a verified complaint
for three (3) consecutive weeks in a newspaper of general circulation and after proper notice and hearing on the grounds provided by existing
published in the city or municipality where the principal office is situated laws, rules and regulations.
or in a newspaper of general circulation in the Philippines.
5. Posting of the same order for three (3) consecutive weeks in three (3) Culled from the above provision is that this is a dissolution is by judicial
public places in such city or municipality. decree.
6. Upon five (5) days’ notice, given after the date on which the right to file
objections has expired, the SEC shall hear the petition and try any JURISDICTION OVER DISSOLUTION CASES: In a ruling laid down by
issue made by the objections filed. the SC, actions, for quo warranto against corporations or against persons
7. Judgment dissolving the corporation and directing of its assets as justice who usurps an office in a corporation fall under the jurisdiction of the SEC
requires and the appointment of a receiver (if necessary in its discretion) (Unilongo, et. al. vs. CA; GR No. 123910; April 5, 1999).
to collect such assets and pay the debts of the corporation
This, however, is no longer exclusive and absolute in view of the
APPOINTMENT OF A RECEIVER: While the foregoing are mandatory amendments introduced by the Securities Regulations Code (SRC) of 2000, or
requirements, the appointment of a receiver is only permissive. As can be RA 8799, which transferred the jurisdiction of the SEC under Sec. 5 of PD
gleaned from the second paragraph of Sec. 119, it uses the phrase “and may 902-A to the regional trial courts as designated by the SC (Sec. 5.2, RA
appoint a receiver”, showing the clear intent of the aw that the same is 8799). The jurisdiction of the courts and the SEC over revocation proceedings
merely discretionary on the part of the proper forum. Such language, held by seems to be concurrent under the present set up since Sec. 5 of RA 8799,
the High Court, “tends to recognize that in cases of voluntary dissolution, particularly par. (m) thereof, provides that the SEC has the power to
there is no occasion for the appointment of a receiver except under special “suspend, or revoke, after proper notice and hearing the franchise and
circumstances and upon proper showing” (China Bank vs. Michellin) certificate of registration of corporations, partnership or associations, upon
any ground provided by law”. This, despite the transfer of its jurisdiction
3. DISSOLUTION BY SHORTENING CORPORATE TERM under the SRC.
Sec. 120 was inserted to incorporate the long standing practice of dissolving GROUNDS FOR INVOLUNTARY DISSOLUTION: as provided under Sec.
a corporation by amendment of the AOI by shortening the corporate 6 of PD 902-A: (FSRCFF)
existence.
1. Fraud in procuring its certificate of registration;
A corporation may exist for 50 years, but there is no law which prevents the 2. Serious misrepresentation as to what the corporation can do or is
shareholders thereof to shorten that period and effect a dissolution of the doing to the great prejudice of or damage to the general public;
corporation. 3. Refusal to comply or defiance of any lawful order of the
Commission restraining commission of acts which would amount to a
PERPETUAL SUCCESSION: In fact, a corporation may be given the grave violation of its franchise;
capacity of “perpetual succession” like the corporation sole and the religious 4. Continuous inoperation for a period of at least five (5) years;
society. It does not mean, however, that it shall continue to exist forever. It 5. Failure to file by-laws within the required period;
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
6. Failure to file required reports in appropriate forms as determined by Railroad Company with the view of reselling the same to Manila Railroad for a
the Commission within the prescribed period. profit; that it had continuously offended against the laws of the Philippine
Islands and had misused its corporate authority, franchise and privileges and
OTHER GROUNDS PROVIDED FOR IN THE CORPORATION CODE: had assumed privileges and franchises not granted.
1. Violation of any provision of the Code under section 144;
2. In case of deadlock in a close corporation as provided for in section 105; ISSUE: WON defendant corporation should be dissolved?
3. In a close corporation, any acts of directors, officers or those in control
of the corporation which is illegal or fraudulent or dishonest or HELD: No. Section 212 of Act No. 190 provides a judgment which may be
oppressive or unfairly prejudicial to the corporation or any stockholder rendered in said case:
or whenever corporate assets are being misapplied or wasted under
section 105. When in any such action, it is found and adjudged that the corporation
has, by any act done or omitted surrendered, or forfeited its corporate
INVOLUNTARY DISSOLUTION: is a harsh remedy akin to a capital rights, privileges, and franchise, or has not used the same during the term
punishment. Thus, it has been laid to rest in the case of Government vs. of five years, judgment shall be entered that it be ousted and excluded
Philippine Sugar Estate that courts proceed with extreme caution which have therefrom and that it be dissolved; but when it is found and adjudged
for their object the forfeiture of corporate franchise, and forfeiture will not be that a corporation has offended in any matter or manner which
allowed, except under express limitation, or for plain abuse of power by does not by law work as a surrender or forfeiture, or has misused
which the corporation fails to fulfil the design and purpose of its organization. a franchise or exercised a power not conferred by law, but not of
But when the abuse or violation constitutes or threatens a substantial injury such a character as to work a surrender or forfeiture of its
to the public or such as to amount to a violation of the fundamental franchise, judgment shall be rendered that it be ousted from the
conditions of its charter, or its conduct is characterized by “obduracy or continuance of such offense or the exercise of such power.
pertinacity in contempt of law”, dissolution will be granted.
It will be seen that said section (212) gives the court a wide discretion in its
Likewise, it has been held that the relief of dissolution will be awarded only judgment in depriving corporations of their franchise. High, in his work on
where no other adequate remedy is available and it will not be allowed where Extraordinary Legal Remedies, says at page 606:
the rights of the stockholders can be, or are, protected in some other way.
It is to be observed in the outset that the courts proceed with extreme
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellant, caution in the proceeding which have for their object the
vs. forfeiture of corporate franchises, and a forfeiture will not be
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO. (LTD.) allowed, except under express limitation, or for a plain abuse of
defendant-appellant power by which the corporation fails to fulfill the design and
(G.R. No. L-11789; April 2, 1918) purpose of its organization.
FACTS: Defendant corporation by its charter is authorized among others: In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co.
(3 L.R.A. 510) the court said (p. 518):
j) To buy shares of the Compañia de Navegacion, Ferrocarriles, Diques, y
Almacenes de Depositos, and, in this manner or otherwise, to engage in The scope of the remedy furnished by its (quo warranto) is to forfeit the
any mercantile or industrial enterprise. franchises of a corporation for misuser or nonuser. It is therefore
necessary in order to secure a judicial forfeiture of respondent's charter to
(k) With no other restrictions than those provided by law, place funds of show a misuser of its franchises justifying such a forfeiture. And as already
the corporation in hypothecary or pignorative loans, in public securities of remarked the object being to protect the public, and not to redress private
the United States, in stocks or shares issued by firms, corporations, or grievances, the misuser must be such as to work or threaten a substantial
companies that are legally organized and operated, and in rural and urban injury to the public, or such as to amount to a violation of the fundamental
property. It may also contract and guarantee all kinds of obligations, in condition of the contract by which the franchise was granted and thus
conformity with existing laws defeat the purpose of the grant; and ordinarily the wrong or evil must be
one remediable in no other form of judicial proceeding.
These powers are necessarily limited by Sec. 75 of of the Act of Congress of
July 1, 1902, and by the section 13 Act of 1459, the latter being a Courts always proceed with great caution in declaring a forfeiture of
reproduction of the former, which is as follows: franchises, and require the prosecutor seeking the forfeiture to bring the
case clearly within the rules of law entitling him to exact so severe a
That no corporation shall be authorized to conduct the business of buying penalty. (People vs. North River Sugar Refining Co., 9 L.R.A., 33, 39; State
and selling real estate or be permitted to hold or own real estate except vs. Portland Natural Gas Co., 153, Ind., 483.)
such as may be reasonably necessary to enable it to carry out the
purposes for which it is created, . . . . Corporations, however, may loan While it is true that the courts are given a wide discretion in ordering the
funds upon real estate, security, and purchase real estate when necessary dissolution of corporations for violations of its franchises, etc., yet
for the collection of loans, but they shall dispose of real estate so obtained nevertheless, when such abuses and violations constitute or threaten
within five years after receiving the title . . . a substantial injury to the public or such as to amount to a violation
of the fundamental conditions of the contract (charter) by which the
The defendant corporation entered into a contract with The Tayabas Land franchises were granted and thus defeat the purpose of the grant,
Company (TLC) where PSEC invested P400,000 in the TLC and that “All lands then the power of the courts should be exercised for the protection
bought or which may be bought with the credit, which The Philippine Sugar of the people.
brings to The Tayabas Land Company and which lie within and without the
railway line from Pagbilao to Lopez, shall be held as security for such credit, Under the law the people of the Philippine Islands have guaranteed the
at their respective cost price, until their alienation, except the part thereof payment of the interest upon cost of the construction of the railroad which
which pertains to D. Mariano Lim in The Tayabas Land Company” and that if occupied or occupies at least some of the lands purchased by the defendant.
TLC is to sell the land and its improvements at a price lower than P0.50 per Every additional dollar of increase in the price of the land purchased by the
square meter TLC is to obtain the consent of PSEC first. railroad company added that much to the costs of construction and thereby
increased the burden imposed upon the people. The very and sole purpose of
An action for quo warranto was brought by the Attorney General for and in the intervention of the defendants in the purchase of the land from the
behalf of the Government of the Philippine Islands for the purpose of having original owners was for the purpose of selling the same to the Railroad
the charter of the defendant corporation PSEC declared forfeited for engaging Company at profit — at an increased price, thereby directly increasing the
in the “buying and selling of real estate” along the right of way of Manila burden of the people by way of additional taxation. The purpose of the
The administration of property in the manner described is more befitting to HELD: Yes. Although, admittedly, defendant corporation has not secured the
the business of a real estate agent or trust company than to the business of a requisite authority to engage in banking, defendants deny that its
building and loan association. transactions partake of the nature of banking operations. It is conceded,
however, that, in consequence of a propaganda campaign therefor, a total of
ISSUE2: WON the defendant should be dissolved on the above-ground? 59,463 savings account deposits have been made by the public with the
corporation and its 74 branches, with an aggregate deposit of P1,689,136.74,
HELD: No. It is a general rule of law that corporations possess only which has been lent out to such persons as the corporation deemed suitable
such express powers. The management and administration of the property therefor. It is clear that these transactions partake of the nature of banking,
of the shareholders of the corporation is not expressly authorized by law, and as the term is used in Section 2 of the General Banking Act.
we are unable to see that, upon any fair construction of the law, these
activities are necessary to the exercise of any of the granted powers. The Accordingly, defendant corporation has violated the law by engaging in
corporation, upon the point now under the criticism, has clearly extended banking without securing the administrative authority required in Republic
itself beyond the legitimate range of its powers. But it does not result that Act No. 337.
the dissolution of the corporation is in order, and it will merely be
enjoined from further activities of this sort. That the illegal transactions thus undertaken by defendant corporation
warrant its dissolution is apparent from the fact that the foregoing misuser
of the corporate funds and franchise affects the essence of its
Fourth cause of action. — It appears that among the by-laws of the business, that it is willful and has been repeated 59,463 times, and
association there is an article (No. 10) which reads as follows: that its continuance inflicts injury upon the public, owing to the
number of persons affected thereby.
The board of directors of the association, by the vote of an
absolute majority of its members, is empowered to cancel shares Wherefore, the writ prayed for should be, as it is hereby granted and
and to return to the owner thereof the balance resulting from the defendant corporation is, accordingly, ordered dissolved.
liquidation thereof whenever, by reason of their conduct, or for
any other motive, the continuation as members of the owners of REPUBLIC OF THE PHILIPPINES, petitioner-appellee,
such shares is not desirable. vs.
BISAYA LAND TRANSPORTATION CO., INC., MIGUEL CUENCO, MANUEL
ISSUE3: WON if the above by-law is invalid, the corporation may be CUENCO, LOURDES CUENCO, JOSE P. VELEZ, JESUS P. VELEZ and FEDERICO
dissolved? A. REYES (Original Respondents); and ANTONIO V. CUENCO, CARMEN
CUENCO, DIOSCORO B. LAZARO and MANUEL V. CUENCO, JR. (New
HELD: No. This by-law is of course a patent nullity, since it is in direct Directors of respondent corporation), respondent-appellees.
conflict with the latter part of section 187 of the Corporation Law, which MIGUEL CUENCO, respondent-crossclaimant-appellant.
expressly declares that the board of directors shall not have the power to (G.R. No. L-31490; January 6, 1978)
force the surrender and withdrawal of unmatured stock except in case of
liquidation of the corporation or of forfeiture of the stock for delinquency. It FACTS: The Solicitor General initiated this quo warranto proceedings against
is agreed that this provision of the by-laws has never been enforced, and in respondent corporation on the following nine causes of action:
fact no attempt has ever been made by the board of directors to make use of
the power therein conferred. 1. To conceal its illegal transaction, respondent corporation falsely
reconstituted its articles of incorporation in July 1948 by adding new
It is supposed, in the fourth cause of action, that the existence of this cattle ranch, agriculture, and general merchandise;
article among the by-laws of the association is a misdemeanor on 2. On May 25, 1948, respondent corporation through its Board of
the part of the respondent which justifies its dissolution. In this view Directors, adopted a resolution authorizing it to acquire 1,024 hectares
we are unable to concur. The obnoxious by-law, as it stands, is a mere of public land in Zamboanga and 10,000 hectares of timber concession
nullity, and could not be enforced even if the directors were to attempt to do in Mindanao in violation of Section 6, Act No. 143);
so. There is no provision of law making it a misdemeanor to incorporate an 3. In May, 1949, respondent office constituting themselves as Board of
invalid provision in the by-laws of a corporation; and if there were such, the Directors of respondent corporation, passed a resolution authorizing the
hazards incident to corporate effort would certainly be largely increased. corporation to lease a pasture land of 2,000 hectares of cattle ranch on
There is no merit in this cause of action. a public land in Bayawan, Negros Occidental;
4. From August 1946 to the end of 1952, respondent corporation operated
REPUBLIC OF THE PHILIPPINES, petitioner, a general merchandise store, a business which is neither for, nor
vs. incidental to, the accomplishment of its principal business for which it
SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. was organized, i.e., the operation of land and water transportation;
RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN, 5. Respondent corporation snowed Mariano Cuenco and Manuel Cuenco to
BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D. BALATBAT, act as president in 1945 to 1948 and 1953 to 1954, respectively, when
JOSE SEBASTIAN and VITO TANJUTCO JR., respondents. at that time, neither of them owned a single stock;
(G.R. No. L-20583; January 23, 1967) 6. In violation of its charter and articles of incorporation, as well as
applicable statutes concerning its operation, it engaged in mining by
FACTS: The AOI of defendant corporation were registered with the SEC on organizing the Jose P. Velez Coal Mines, and allowing said corporation to
March 27, 1961. Based on the opinion of legal counsel of the Central Bank of use the facilities and assets of respondent corporation;
the Philippines, that the defendant corporation is a banking institution, the 7. It imported and sold at black market prices to third persons truck spare
Monetary Board promulgated Resolution No. 1095, declaring that the Parts, the of which were appropriated by respondent directors;
corporation is performing banking operations without having first complied 8. It paid its laborers and employees wages below the minimum wage law
with the provisions of Sec. 2 and 6 of RA No. 337. Despite such resolution, to the great prejudice of its labor force, and in violation of the laws of
the company still continued with its operations and was able to establish 74 the state, manipulating its books and records so as to make it appear
branches all over the Philippines and induced the public to open 59,643 that its laborers and employees were and have been paid their salaries
savings deposit accounts. and wages in accordance with the minimum wage law;
9. It deliberately failed to maintain accurate and faithful stock and transfer
The Solicitor General initiated this quo warranto proceeding to dissolve said books since 1945 up to the filing of the petition, enabling it to defraud
company.
The SC held that a corporation, whose corporate life expired, cannot lawfully The fact, however, is that since 1953, the old Corporation had been illegally
pursue the business for which it was organized. It cannot apply for a new plying its business of selling ice in Sabang because, under the Corporation
certificate or a secondary franchise for it is incapable of receiving a grant Law, Sec. 77, after November 1953, it could not lawfully continue the
(Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a business for which it had been established (operate ice plant, sell ice, etc).
contract executed prior to its dissolution for the purpose of continuing the After November 1953, it could only continue to exist for three years for the
business of its organization (Cebu Ports vs. State Marine). purpose of prosecuting and defending suits by or against it, and of enabling it
gradually to settle and close its affairs, to dispose and convey its property
Debts due to or by a corporation are not extinguished. It has thus been held and to divide its capital stock. It could not, without violating the law, continue
that the termination of the life of a juridical entity does not, by itself, imply to sell ice. And yet, the Commission awarded the certificate on the basis of
the diminution or extinction of rights demandable against such juridical entity such serve and distribution of ice — applying the "prior operator" rule. In
(Gonzales vs. Sugar Regulatory Adm.) other words, the new Camarines Corporation is rewarded, precisely because
the old corporation, its predecessor, had violated the law during that period
Sec. 145. Amendment or repeal. - No right or remedy in favor of or (1953-1957). We cannot, and should not countenance such anomalous
against any corporation, its stockholders, members, directors, trustees, or result.
officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either On the other hand, when the old Camarines Corporation docketed its
by the subsequent dissolution of said corporation or by any subsequent application October 1, 1957, it had no juridical personality, it had
amendment or repeal of this Code or of any part thereof. ceased to exist as a corporation and could not sue nor apply for
certificate, for it was incapable of receiving a grant. It was not even
PROPERTY RIGHTS: Thus, a lease to a corporation may, by its terms, a corporation de facto. And then, there is no application subscribed by the
terminate where the corporation cease to exist. But unless the lease so new Camarines Corporation. Far from being mere technicality, these point
provides, the rights and obligations thereunder are not extinguished by the support a conclusion which appears to be just and equitable, not only for the
corporation’s dissolution since leases affect property rights and survives the reasons already indicated, but also to compensate Buenaflor's diligence and
death of the parties. The stockholders succeed to the rights and liabilities of courage in exposing the irregular practice of a "ghost" corporation foisting its
the dissolved corporation in an unexpired leasehold state which may be services upon the unsuspecting public of Sabang and neighboring territory —
enforced by or against the receiver or liquidating trustee. enjoying a franchise without paying, perhaps, the corporate income tax and
other burdens attached to corporate existence.
CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not hold
true in cases of contracts for personal services which are deemed terminated Remembering the Camarines Corporation's automatic cessation in November
by the dissolution of the corporation. In such cases, there is found an 1956 (three years after November 1953) we must decline to regard the new
“implied condition” that the contract shall terminate in such event. Camarines Corporation (formed October 30, 1957) as a continuation of the
old. At most, it is the transferee of the properties of the old corporation (or
PERIOD OF LIQUIDATION: Despite its dissolution, a corporation more properly, the assets of the stockholders) plus the certificate of public
nonetheless, continues to be a body corporate for a period of 3 years for convenience to operate the ice plant in Naga and Magarao. And yet, as
purposes of liquidation and winding up its affairs (Sec. 122). Upon expiration stated, the new corporation has not filed any application for certificate of
of the 3 year period to wind up its affairs, the juridical personality of the public convenience in Sabang, and has not published such application
corporation ceases for all intent and purposes, and as a general rule, it can
no longer sue and be sued (see Gelano vs. CA). Wherefore, revoking the appealed decision in so far as it awarded the
certificate to said Corporation, we hereby approve Buenaflor's application for
JAIME T. BUENAFLOR, petitioner, five tons, instead of one ton, subject to the usual conditions imposed by the
vs. Public Service Commission on ice plant establishments.
CAMARINES SUR INDUSTRY CORPORATION, respondent
(G.R. Nos. L-14991-94; May 30, 1960) CEBU PORT LABOR UNION, represented by this President ALEJO
CABABAJAY, petitioner,
FACTS: In Aug. and Sept. 1957, Jaime Buenaflor filed applications before the vs.
Public Service Commission for the construction of a 5-ton ice plant and to STATES MARINE CORPORATION, NICASIO PANSACALA,
establish a cold storage and refrigeration service of about 6,000 cubic feet ANDRESTURA, ALFONSO VILLAJAS, and PERPETUO REGIS,
capacity in Sabang, respectively. After being served a copy of the application respondents
of petitioner, respondent corporation also filed the same applications on Oct. (G.R. No. L-9350; May 20, 1957)
1957.
FACTS: On Sept. 12, 1953, petitioner filed a petition for “recognition of
Counsel for Buenaflor presented a motion to dismiss on the ground that the stevedoring services and injunction” against respondents claiming that it was
corporate life of respondent already expired in Nov. 1953. Respondent awarded a contract for the exclusive right of loading and unloading of the
Corporation then registered on Oct. 1957, a new AOI and transferred all cargoes of the vessel MV Bisayas formerly owned by Elizalde & CO., though
assets of the old corporation together with existing certificate of public at the time of the filing of the petition it was owned and operated by the
convenience to the new corporation. States Marine Corporaiton.
The PSC provisionally approved the transfer of the assets, as well as the Respondent corporation filed a motion to dismiss on the ground that it has no
certificate of public convenience to the new corporation. legal capacity to sue or be sued, it having been dissolved on Oct. 17, 1952
and therefore has no personality to enter or refuse to enter into any contract,
On Nov. 1957, the new corporation answered the motion to dismiss by much less of threatening the petitioner as alleged in the petition.
alleging its recent incorporation.
Petitioner relied on Sec. 77 to include said corporation as party respondent
ISSUE: WON Buenaflor’s application should be approved? despite the fact that counsel for the other respondents called already the
On Aug. 2, 1988, the trial court granted the motion to dismiss insofar as SRA After dissolution, a body corporate continues to exist for 3 years for the
is concerned while denying that same motion insofar as RP Bank and purpose of liquidation and winding up of its affairs:
Philsucom were concerned.
Sec. 122. Corporate liquidation. - Every corporation whose charter
ISSUE: WON SRA could be made a party-respondent liable to the claim of expires by its own limitation or is annulled by forfeiture or otherwise, or
the petitioners? whose corporate existence for other purposes is terminated in any other
manner, shall nevertheless be continued as a body corporate for three (3)
HELD: Yes. The termination of the life of a juridical entity does not by itself years after the time when it would have been so dissolved, for the purpose of
imply the diminution or extinction of rights demandable against such juridical prosecuting and defending suits by or against it and enabling it to settle and
entity. 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
Executive Order No. 18, promulgated on 28 May 1986, abolished the established.
Philsucom, created the SRA and authorized the transfer of assets from
Philsucom to SRA. Section 13 of Executive Order No. 18 reads in part: 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
Assets and records that, as determined by the Sugar Regulatory stockholders, members, creditors, and other persons in interest. From and
Administration, are required in its operation are hereby transferred to the after any such conveyance by the corporation of its property in trust for the
Sugar Regulatory Administration. benefit of its stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates, the legal
Although the Philsucom is hereby abolished, it shall nevertheless continue interest vests in the trustees, and the beneficial interest in the stockholders,
as a juridical entity for three years after the time when it would have been members, creditors or other persons in interest.
so abolished, 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 Upon the winding up of the corporate affairs, any asset distributable to any
convey its property and to distribute its assets, but not for the purpose of creditor or stockholder or member who is unknown or cannot be found shall
continuing the functions for which it was established, under the be escheated to the city or municipality where such assets are located.
supervision of the Sugar Regulatory Administration.
1. By the corporation itself through the BOD HELD: No. The rule appears to be well settled that, in the absence of
a. This is the usual method or procedure of liquidating a corporation (China statutory provision to the contrary, pending actions by or against a
Banking Corp vs. Michelin) and although there is no law authorizing it, corporation are abated upon expiration of the period allowed by law
neither is there anything that prohibits the BOD from undertaking the for the liquidation of its affairs.
same
b. If this method is resorted to, the board will only have a period of 3 years It is generally held, that where a statute continues the existence of a
to finish its task of liquidation corporation for a certain period after its dissolution for the purpose of
c. Claims for or against the corporate entity not filed within the period will prosecuting and defending suits, etc., the corporation becomes defunct
become unenforceable as there exist no corporate entity against which upon the expiration of such period, at least in the absence of a provision to
they can be enforced. the contrary, so that no action can afterwards be brought by or against it,
d. Actions pending for or against the corporation when the 3 year period and must be dismissed. Actions pending by or against the corporation
expires are abated, since after the period, the corporation ceases for all when the period allowed by the statute expires, ordinarily abate.
intents and purposes and is no longer capable of suing or being sued
(National Abaca & Other Fibers Co. vs. Pore) . . . This time limit does not apply unless the circumstances are
such as to bring the corporation within the provision of the
2. By a trustee appointed by the corporation statute. However, the wording of the statutes, in some jurisdictions
a. The corporation may opt to convey all corporate assets to a trustees authorize suits after the expiration of the time limit, where the statute
who will take charge of liquidation provides that for the purpose of any suit brought by or against the
b. If this method is used, the three year period limitation imposed by corporation shall continue beyond such period for a further named period
section 122 will not apply provided the designation of the trustee is after final judgment. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp.
made within that period. 892-893.).
c. Thus, during the period of liquidation, but before the completion
thereof, a dissolved corporation is still liable for all its debts and Our Corporation Law contains no provision authorizing a corporation, after
liabilities in an action filed against it through its trustee even if the case three (3) years from the expiration of its lifetime, to continue in its corporate
is filed beyond the 3 year period of liquidation. name actions instituted by it within said period of three (3) years. In fact,
section 77 of said law provides that the corporation shall "be continued as a
3. By appointment of a receiver body corporate for three (3) years after the time when it would have been . .
a. A receiver may be appointed by the proper forum on petition or motu . dissolved, for the purpose of prosecuting and defending suits by or against
proprio upon the dissolution of the corporation (Sec. 119) it . . .", so that, thereafter, it shall no longer enjoy corporate existence for
b. The appointment of a receiver is, however, permissive rather than such purpose. For this reason, section 78 of the same law authorizes the
mandatory and the law tends to recognize that in cases of voluntary corporation, "at any time during said three years . . . to convey all of its
dissolution there is no occasion for the appointment of a receiver except property to trustees for the benefit of members, stockholders, creditors and
under special circumstances and upon proper showing (China Banking other interested", evidently for the purpose, among others, of enabling said
vs. Michelin) trustees to prosecute and defend suits by or against the corporation begun
c. If a receiver is appointed, the 3 year period fixed by law within which to before the expiration of said period. Hence, commenting on said sections,
complete the task of liquidation will not likewise apply because the Judge Fisher, in his work entitled Philippines Law on Stock Corporations
dissolved corporation is substituted by the receiver who may sue or be (1929 ed.), has the following to say:
sued even after that period (Sumera vs. Valencia).
d. Thus, it has been held that when a corporation is dissolved and the It is to be noted that the time during which the corporation, through its
liquidation of assets is placed in the hands of a receiver or assignee, the own officers, may conduct the liquidation of its assets and sue and be sued
3 year period is not applicable and the assignee may institute all actions as a corporation is limited to three years from the time the period of
leading to the liquidation of the corporation even after the expiration of dissolution commences; but that there is no time limit within the
3 years. trustees must complete a liquidation placed in their hands. It is
e. Note however, that a receiver may be appointed by the court even while provided only (Corp. Law, Sec. 78) that the conveyance to the
the corporation is a going concern and does not always imply dissolution trustees must be made within the three-year period. It may be
of a corporation. found impossible to complete the work of liquidation within the three-year
period or to reduce disputed claims to judgment. The authorities are to the
NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiff- effect that suits by or against a corporation abate when it ceased to be an
appellant, entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but
vs. trustees to whom the corporate assets have been conveyed pursuant to
APOLONIA PORE, defendant-appellee the authority of section 78 may sue and be sued as such in all matters
(G.R. No. L-16779; August 16, 1961) connected with the liquidation. By the terms of the statute the effect of
the conveyance is to make the trustees the legal owners of the
FACTS: On Nov. 3, 1953, plaintiff filed a complaint before the Municipal property conveyed, subject to the beneficial interest therein of
Court of Tacloban, Leyte, against defendant for the recovery of advances the creditors and stockholders. (pp. 389-390; see also Sumera v. Valencia
latter failed to account for, amounting to P1,213.34. The court rendered a [67 Phil. 721, 726-727).
decision holding that defendant is liable for P272.49.
Obviously, the complete loss of plaintiff's corporate existence after the
Said court denying reconsideration, plaintiff appealed before the CFI to which expiration of the period of three (3) years for the settlement of its affairs is
a motion to dismiss was filed by defendant on the ground that EO No. 372 what impelled the President to create a Board of Liquidators, to continue the
abolished plaintiff and thus it no longer had capacity to sue. management of such matters as may then be pending. The first question
must, therefore, be answered in the negative.
Plaintiff objected there to on the ground that the said EO granted plaintiff to
continue in existence for 3 years from Nov. 30, 1950, the effectivity date of Wherefore, actions commenced within the 3 year period of liquidation may be
the EO, for the purpose of prosecuting and defending suits by or against it continued by the trustee despite the expiration of the said period.
and of enabling the Board of Liquidators to gradually settle the its affairs and
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
For the foregoing considerations, we are of the opinion and so hold that
TIBURCIO SUMERA, as receiver of the corporation "Devota de when a corporation is dissolved and the liquidation of its assets is
Nuestra Señora de la Correa", plaintiff-appellant, placed in the hands of a receiver or assignee, the period of three
vs. years prescribed by section 77 of Act No. 1459 known as the
EUGENIO VALENCIA, defendant-appellee Corporation Law is not applicable, and the assignee may institute all
(G.R. No. 45485; May 3, 1939) actions leading to the liquidation of the assets of the corporation
even after the expiration of three years.
FACTS: Devota de Nuestra Senora de la Correa filed for a voluntary
dissolution which was approved by the CFI of Bulacan on Feb. 14, 1928 Wherefore, the order appealed from is reversed and it is ordered that the
appointing Damaso Nicolas as assignee to take charge of liquidation. Nicolas case be remanded to the court of origin to the end that it may decide the
was substituted by herein appellant Sumera who filed a motion with the court same on the merits, with costs against the appellee.
asking defendant Valencia to deliver to him the P400.00 funds of the
corporation which was denied, reserving, however to said assignee the right THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE
to bring the proper action. Accordingly, on June 5, 1936, Sumera filed the REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
present complaint for recovery of money. vs.
HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE DECEASED
The defendant interposed the defense that the right against him had already CASIMIRO GARCIA, and LEONOR MOLL, defendants-appellees
prescribed which was found by the lower court to be tenable, the case not (G.R. No. L-18805; August 14, 1967)
being filed within the 3 year period prescribed under Sec. 77 of Act No. 1459.
FACTS: A suit was filed by the Board of Liquidators for the recovery of a sum
ISSUE: WON the 3 year period prescribed by the Corporation Law is of money from National Coconut Corporation’s (NACOCO) general manager
applicable if the liquidation is placed on the hands of a receiver or assignee? and board chairman Maximo Kalaw and other defendants as directors.
HELD: No. Passing now to discuss the question raised by plaintiff and The defendants pose that since the three year period has elapsed since its
appellant in his sole assignment of alleged error, section 77 of Act No. 1459 abolition by virtue of EO 372, the Board of Liquidators may not now continue
provides that "Every corporation whose charter expires by its own limitation with, and prosecute, the present case to its conclusion.
or is annulled by forfeiture or otherwise, or whose corporate existence for
other purposes is terminated in any other manner, shall nevertheless be ISSUE: WON the Board of Liquidators has personality to proceed as party-
continued as a body corporate for three years after the time when it would plaintiff in this case?
have been so dissolved, for the purpose of prosecuting and defending suits
by or against it and of enabling it gradually to settle and close its affairs to HELD: Yes. The executive order abolishing NACOCO and creating the Board
dispose of and convey its property and to divide its capital stock, but not for of Liquidators should be examined in context. The proviso in Section 1 of
the purpose of continuing the business for which it was established." And Executive Order 372, whereby the corporate existence of NACOCO was
section 77 of the same Act provides, "At any time during said three years said continued for a period of three years from the effectivity of the order for "the
corporation is authorized and empowered to convey all of its property to purpose of prosecuting and defending suits by or against it and of enabling
trustees for the benefit of members, stockholders, creditors, and others the Board of Liquidators gradually to settle and close its affairs, to dispose of
interested. From and after any such conveyance by the corporation of its and convey its property in the manner hereinafter provided", is to be read
property in trust for the benefit of its members, stockholders, creditors, and not as an isolated provision but in conjunction with the whole. So reading, it
others in interest, all interest which the corporation had in the property will be readily observed that no time limit has been tacked to the
terminates, the legal interest vests in the trustees, and the beneficial interest existence of the Board of Liquidators and its function of closing the
in the members, stockholders, creditors, or other persons in interest. affairs of the various government owned corporations, including
NACOCO.
Fletcher, in volume 8, page 9226, of his Encyclopedia of Private Corporations,
says: By Section 2 of the executive order, while the boards of directors of the
various corporations were abolished, their powers and functions and duties
6537. Effect of expiration of statutory extension of life. — In general. — under existing laws were to be assumed and exercised by the Board of
The qualified existence after dissolution, as provided for by statute, Liquidators. The President thought it best to do away with the boards of
terminates at the expiration of the time fixed, or, no time is fixed, at the directors of the defunct corporations; at the same time, however, the
expiration of a reasonable time. Where the extreme limit to which the President had chosen to see to it that the Board of Liquidators step into the
statute has extended the life of a corporation after its dissolution has vacuum. And nowhere in the executive order was there any mention of the
expired, it has no offices which can bind it by agreement, but only has lifespan of the Board of Liquidators. A glance at the other provisions of the
statutory trustees. After the expiration of such time, it is generally held not executive order buttresses our conclusions.
only that the corporation cannot sue or be sued but that actions pending
at such time are abated. But a statute authorizing the continuance of a Not that our views on the power of the Board of Liquidators to proceed to the
corporation for three years to wind up its affairs, does not preclude an final determination of the present case is without jurisprudential support. The
action to wind up brought after the three years. first judicial test before this Court is National Abaca and Other Fibers
Corporation vs. Pore, L-16779, August 16, 1961. In that case, the
In the light of the legal provisions and authorities cited, interpretative of said corporation, already dissolved, commenced suit within the three-year
laws, if the corporation carries out the liquidation of its assets extended period for liquidation. That suit was for recovery of money
through its own officers and continues and defends the actions advanced to defendant for the purchase of hemp in behalf of the corporation.
brought by or against it, its existence shall terminate at the end of She failed to account for that money. We there said that "the rule appears to
three years from the time of dissolution; but if a receiver or be well settled that, in the absence of statutory provision to the
assignee is appointed, as has been done in the present case, with or contrary, pending actions by or against a corporation are abated
without a transfer of its properties within three years, the legal upon expiration of the period allowed by law for the liquidation of
interest passes to the assignee, the beneficial interest remaining in its affairs." We there said that "[o]ur Corporation Law contains no provision
the members, stockholders, creditors and other interested persons; authorizing a corporation, after three (3) years from the expiration of its
and said assignee may bring an action, prosecute that which has lifetime, to continue in its corporate name actions instituted by it within said
already been commenced for the benefit of the corporation, or period of three (3) years." However, these precepts notwithstanding,
defend the latter against any other action already instituted or we, in effect, held in that case that the Board of Liquidators escapes
which may be instituted even outside of the period of three years from the operation thereof for the reason that "[o]bviously, the
fixed for the offices of the corporation. complete loss of plaintiff's corporate existence after the expiration
of the period of three (3) years for the settlement of its affairs is
On May 29, 1959, the corporation, through its lawyer, filed a complaint for FACTS: Sometime before Oct. 15, 1953, an investigation was conducted on
collection against petitioners. the business operation and activities of defendant corporation leading to the
discovery of deficiency taxes on logs produced from its concession.
Meanwhile, the corporation amended its AOI to shorten its term of existence
up to Dec. 31, 1960 only which was approved by the SEC but the trial court The Collector of Internal Revenue demanded payment for forest charges and
was not notified of such amendment. 25% surcharge. After further investigation, another assessment was sent to
the defendant by the BIR demanding a total sum of P45, 541.66 representing
On Nov. 20, 1964, almost 4 years after the dissolution, the trial court deficiency taxes, forest charges, surcharges and penalties. Later on, another
rendered a decision in favor of private respondent. assessment was sent to defendant corporation for discharging lumber
without permit.
ISSUE: WON a corporation whose corporate life had ceased by the
expiration of its term of existence, could still continue prosecuting and Defendant contend that the present action was barred by Sec. 77 of the
defending suits after its dissolution and beyond the period of 3 years to wind Corporation Law which allows corporate existence to continue after
up its affairs, without having undertaken any step to transfer its assets to a dissolution only for a period of 3 years. That the company was extra-judicially
trustee or assignee? dissolved on April 23, 1954, the orginal complaint was filed only on Sept. 8,
1958 and the amended complaint on Aug. 26, 1956.
HELD: Yes. In American corporate law, upon which our Corporation Law was
patterned, it is well settled that, unless the statutes otherwise provide, all The trial court ruled in favor of the government holding that the amended
pending suits and actions by and against a corporation are abated by a complaint was precisely to include FH Burgess, liquidator of the company, as
dissolution of the corporation. Section 77 of the Corporation Law provides party defendant.
that the corporation shall "be continued as a body corporate for three (3)
years after the time when it would have been ... dissolved, for the purpose of ISSUE: WON the case should prosper?
prosecuting and defending suits By or against it ...," so that, thereafter, it
shall no longer enjoy corporate existence for such purpose. For this reason, HELD: Yes. It is to be recalled that the assessments against appellant
Section 78 of the same law authorizes the corporation, "at any time during corporation for deficiency taxes due for its operations since 1947 were made
said three years ... to convey all of its property to trustees for the benefit of by the Bureau of Internal Revenue on October 15, 1953, September 13, 1954
members, Stockholders, creditors and other interested," evidently for the and November 8, 1954, such that the first was before its dissolution and the
purpose, among others, of enabling said trustees to prosecute and defend last two not later than six months after such dissolution. Thus, in whatever
suits by or against the corporation begun before the expiration of said period way the matter may be viewed, the Government became the creditor of the
corporation before the completion of its dissolution by the liquidation of its
When Insular Sawmill, Inc. was dissolved on December 31, 1960, under assets. Appellant F.H. Burgess, whom it chose as liquidator, became
Section 77 of the Corporation Law, it still has the right until December 31, in law the trustee of all its assets for the benefit of all persons
1963 to prosecute in its name the present case. After the expiration of said enumerated in Section 78, including its creditors, among whom is
period, the corporation ceased to exist for all purposes and it can no longer the Government, for the taxes herein involved. To assume
sue or be sued. otherwise would render the extra-judicial dissolution illegal and
void, since, according to Section 62 of the Corporation Law, such
However, a corporation that has a pending action and which cannot be kind of dissolution is permitted only when it "does not affect the
terminated within the three-year period after its dissolution is authorized rights of any creditor having a claim against the corporation." It is
under Section 78 to convey all its property to trustees to enable it to immaterial that the present action was filed after the expiration of three
prosecute and defend suits by or against the corporation beyond the Three- years after April 23, 1954, for at the very least, and assuming that judicial
year period. Although private respondent did not appoint any trustee, enforcement of taxes may not be initiated after said three years despite the
yet the counsel who prosecuted and defended the interest of the fact that the actual liquidation has not been terminated and the one in charge
corporation in the instant case and who in fact appeared in behalf of thereof is still holding the assets of the corporation, obviously for the benefit
the corporation may be considered a trustee of the corporation at of all the creditors thereof, the assessment aforementioned, made within the
least with respect to the matter in litigation only. Said counsel had three years, definitely established the Government as a creditor of the
been handling the case when the same was pending before the trial corporation for whom the liquidator is supposed to hold assets of the
court until it was appealed before the Court of Appeals and finally to corporation. And since the suit at bar is only for the collection of taxes finally
this Court. We therefore hold that there was a substantial assessed against the corporation within the three years invoked by
compliance with Section 78 of the Corporation Law and as such, appellants, their assignment of error cannot be sustained.
If, indeed, the sociedad has long become defunct, it should behoove The said phrase was inserted by framers of the law only as a condition
petitioners, or anyone else who may have any interest in the corporation, to precedent to the grant of a license to do business in the Philippines.
take appropriate measures before a proper forum for a peremptory
settlement of its affairs. We might invite attention to the various modes INCORPORATION TEST: is applied in determining whether a corporation is
provided by the Corporation Code (see Sees. 117-122) for dissolving, domestic or foreign. If it is incorporated in another state, it is a foreign
liquidating or winding up, and terminating the life of the corporation. Among corporation, while if it is registered under Philippine laws, it is deemed a
the causes for such dissolution are when the corporate term has expired or Filipino or domestic corporation irrespective of the nationality of its
when, upon a verified complaint and after notice and hearing, the Securities stockholders.
and Exchange Commission orders the dissolution of a corporation.
Thus, a corporation registered under the Foreign Investments Act of 1991
The corporation continues to be a body corporate for three (3) years after its (RA No. 7074) or the Trade Liberalization Law of 2000 (RA No. 8762) with
dissolution for purposes of prosecuting and defending suits by and against it 100% foreign equity is considered a Filipino or domestic corporation and not
and for enabling it to settle and close its affairs, culminating in the disposition foreign.
and distribution of its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that period. The CONTROL TEST: In times of war and for purposes of security of the state,
termination of the life of a juridical entity does not by itself cause however, the “control test” would apply in determining the corporate
the extinction or diminution of the rights and liabilities of such nationality, i.e., the citizenship of the controlling stockholders determines the
entity (see Gonzales vs. Sugar Regulatory Administration, 174 SCRA 377) nationality of the corporation.
nor those of its owners and creditors. If the three-year extended life has
expired without a trustee or receiver having been expressly designated by the CORPORATE PERSONALITY BEYOND BORDERS:
corporation within that period, the board of directors (or trustees) itself,
following the rationale of the Supreme Court's decision in Gelano vs. Court of B. APPLICATION FOR LICENSE
Appeals (103 SCRA 90) may be permitted to so continue as "trustees" by
legal implication to complete the corporate liquidation. Still in the absence Under Sec. 123, a foreign corporation cannot transact business in the
of a board of directors or trustees, those having any pecuniary Philippines unless it has obtained a license or permit to do so in accordance
interest in the assets, including not only the shareholders but with the laws of the country and a certificate of authority from the
likewise the creditors of the corporation, acting for and in its behalf, appropriate government agency such as the Banko Sentral ng Pilipinas for
might make proper representations with the Securities and banking institutions or the Office of the Insurance Commission for insurance
Exchange commission, which has primary and sufficiently broad companies, etc.
jurisdiction in matters of this nature, for working out a final
settlement of the corporate concerns. A certificate of authority from the Board of Investments is no longer required
under RA 7042. Said certificate of authority is only necessary for the purpose
WHEREFORE, the decision appealed from is AFFIRMED. of availing the incentives granted and allowed under the Omnibus
Investments Code.
ISSUE AS TO CLEMENTE CASE: The SC should have applied Sec. 122,
such that, in the absence of a known stockholder, member of the BOD or The manner in which a foreign corporation may obtain a license to do
creditor, the properties should have been escheated in favor of the local business in the Philippines is laid down in Sec. 125:
government. Following the rule laid down in Clemente will open the door to
fraud in a way that any person claiming interest as heir of the corporation Sec. 125. Application for a license. - A foreign corporation applying for a
may still go to the SEC to make proper representations with the SEC for license to transact business in the Philippines shall submit to the Securities
working out a final settlement. Moreover, the corporation being non-existent and Exchange Commission a copy of its articles of incorporation and by-laws,
for all intents and purposes, after the expiration of the three year period certified in accordance with law, and their translation to an official language
provided by law, could not have legally transferred such property to any of the Philippines, if necessary. The application shall be under oath and,
person. The Gonzales case is misapplied, because SRA was a successor of unless already stated in its articles of incorporation, shall specifically set forth
Philsucom, while in the Gelano case, there was a lawyer who prosecuted the the following:
case who was deemed as trustee. In the Clemente case, there was no such
successor nor a lawyer who can be deemed a trustee. 1. The date and term of incorporation;
CHAPTER 18: FOREIGN CORPORATIONS 2. The address, including the street number, of the principal office of the
corporation in the country or state of incorporation;
A. DEFINITION: As to the Philippines, any corporation, which owe its
existence to the laws of another state, government or country is a 3. The name and address of its resident agent authorized to accept summons
“foreign corporation”. Elsewise stated, a foreign corporation is one and process in all legal proceedings and, pending the establishment of a local
created or organized under the laws of any state or government other office, all notices affecting the corporation;
than those of the forum.
4. The place in the Philippines where the corporation intends to operate;
Sec. 123. Definition and rights of foreign corporations. - For the
purposes of this Code, a foreign corporation is one formed, organized or 5. The specific purpose or purposes which the corporation intends to pursue
existing under any laws other than those of the Philippines and whose laws in the transaction of its business in the Philippines: Provided, That said
allow Filipino citizens and corporations to do business in its own country or purpose or purposes are those specifically stated in the certificate of authority
state. It shall have the right to transact business in the Philippines after it issued by the appropriate government agency;
shall have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the appropriate 6. The names and addresses of the present directors and officers of the
government agency. corporation;
“AND WHOSE LAWS ALLOW FILIPINO CITIZENS AND 7. A statement of its authorized capital stock and the aggregate number of
CORPORATIONS TO DO BUSINESS IN ITS OWN COUNTRY OR shares which the corporation has authority to issue, itemized by classes, par
STATE”: is not an accurate inclusion in the definition as any corporation value of shares, shares without par value, and series, if any;
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
Within sixty (60) days after the issuance of the license to transact business in
8. A statement of its outstanding capital stock and the aggregate number of the Philippines, the license, except foreign banking or insurance corporation,
shares which the corporation has issued, itemized by classes, par value of shall deposit with the Securities and Exchange Commission for the benefit of
shares, shares without par value, and series, if any; present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds
9. A statement of the amount actually paid in; and or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or
10. Such additional information as may be necessary or appropriate in order controlled corporations and entities, shares of stock in "registered
to enable the Securities and Exchange Commission to determine whether enterprises" as this term is defined in Republic Act No. 5186, shares of stock
such corporation is entitled to a license to transact business in the in domestic corporations registered in the stock exchange, or shares of stock
Philippines, and to determine and assess the fees payable. in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred
Attached to the application for license shall be a duly executed certificate thousand (P100,000.) pesos; Provided, however, That within six (6) months
under oath by the authorized official or officials of the jurisdiction of its after each fiscal year of the licensee, the Securities and Exchange
incorporation, attesting to the fact that the laws of the country or state of the Commission shall require the licensee to deposit additional securities
applicant allow Filipino citizens and corporations to do business therein, and equivalent in actual market value to two (2%) percent of the amount by
that the applicant is an existing corporation in good standing. If such which the licensee's gross income for that fiscal year exceeds five million
certificate is in a foreign language, a translation thereof in English under oath (P5,000,000.00) pesos. The Securities and Exchange Commission shall also
of the translator shall be attached thereto. 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
The application for a license to transact business in the Philippines shall actual market value at the time they were deposited. The Securities and
likewise be accompanied by a statement under oath of the president or any Exchange Commission may at its discretion release part of the additional
other person authorized by the corporation, showing to the satisfaction of the securities deposited with it if the gross income of the licensee has decreased,
Securities and Exchange Commission and other governmental agency in the or if the actual market value of the total securities on deposit has increased,
proper cases that the applicant is solvent and in sound financial condition, by more than ten (10%) percent of the actual market value of the securities
and setting forth the assets and liabilities of the corporation as of the date at the time they were deposited. The Securities and Exchange Commission
not exceeding one (1) year immediately prior to the filing of the application. may, from time to time, allow the licensee to substitute other securities for
Foreign banking, financial and insurance corporations shall, in addition to the those already on deposit as long as the licensee is solvent. Such licensee
above requirements, comply with the provisions of existing laws applicable to shall be entitled to collect the interest or dividends on the securities
them. In the case of all other foreign corporations, no application for license deposited. In the event the licensee ceases to do business in the Philippines,
to transact business in the Philippines shall be accepted by the Securities and the securities deposited as aforesaid shall be returned, upon the licensee's
Exchange Commission without previous authority from the appropriate application therefor and upon proof to the satisfaction of the Securities and
government agency, whenever required by law. Exchange Commission that the licensee has no liability to Philippine residents,
including the Government of the Republic of the Philippines.
Foreign corporations already issued a license to transact business in the
Philippine prior to the effectivity of the Code continues to have such authority OBJECTIVE OF LICENSE: is not to prevent the foreign corporation from
under the terms and conditions of the license. Sec. 124 provides: performing isolated or single act, but to prevent it from acquiring a domicile
for the purpose of pursuing its business without taking steps to render it
Sec. 124. Application to existing foreign corporations. - Every foreign amenable to suit in the local courts. If the foreign corporation transacts
corporation which on the date of the effectivity of this Code is authorized to business in the Philippines without the requisite license, its officers may be
do business in the Philippines under a license therefore issued to it, shall subjected to the penal provisions of Sec. 144 of the Code.
continue to have such authority under the terms and condition of its license,
subject to the provisions of this Code and other special laws.
C. MODE OF ENTRY OF FOREIGN CORPORATIONS
Upon compliance with the provision of Sec. 125, other special laws and the
rules and regulations implementing them, the SEC shall thereafter issue the 1. Branch Office – of a foreign corporation is one which carries out the
license. business activities of the foreign corporation itself and derives income
from the Philippines (Sec. 1, C, IRR of RA No. 7042). As such, the
Within 60 days after the issuance of the license, a foreign corporation, except juridical entity involved is one and the same;
those engaged in foreign banking or insurance, shall deposit with the SEC, for
the benefit of creditors, securities consisting of (1) bonds or other evidence 2. Representative or Liason Office – one which deals directly with the
of indebtedness of the Philippine government or its political subdivision, or of clients of the parent company but does not derive income from the host
a GOCC, (2) shares of stock in “registered enterprises” as this term is defined country and is fully subsidized by the head office. It undertakes activities
under RA 5186, (3) shares of stock in domestic corporations registered in the such as but not limited to information dissemination and promotion of
stock exchange and (4) shares of stock in domestic insurance companies and the company’s products;
banks or any combination thereof with an actual market value of
P100,000.00. 3. Local Subsidiary – A foreign corporation may form or organize a
separate corporation under the Foreign Investment Act (RA 7042) by
Additional securities may be required by the SEC if the market value of the making at least a majority of the investments therein. The corporation
securities n deposit has decreased by at least 10%. Sec. 126 provides: thus formed becomes known as a local subsidiary of the investing
foreign corporation which becomes a legally independent unit governed
Sec. 126. Issuance of a license. - If the Securities and Exchange by the laws of the Philippines. Ballantine calls it “domestication” in the
Commission is satisfied that the applicant has complied with all the sense that the foreign corporation is granted the right to obtain a
requirements of this Code and other special laws, rules and regulations, the charter or organize itself into a domestic corporation under the general
Commission shall issue a license to the applicant to transact business in the laws of the other state;
Philippines for the purpose or purposes specified in such license. Upon
issuance of the license, such foreign corporation may commence to transact 4. Regional or Area Headquarters – is an office whose purpose is to
business in the Philippines and continue to do so for as long as it retains its act as an administrative branch of a multinational company engaged in
authority to act as a corporation under the laws of the country or state of its international trade which principally serves as a supervision,
incorporation, unless such license is sooner surrendered, revoked, suspended communications and coordinating center for its subsidiaries, branches or
or annulled in accordance with this Code or other special laws. affiliates in the Asia-Pacific Region and other foreign markets and which
does not earn or derive income in the Philippines (Sec. 2(2), RA 8756).
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
It cannot in any manner, participate in the management of any shall be without any resident agent in the Philippines on whom any summons
subsidiary or branch office in the Philippines nor shall it market goods or other legal processes may be served, then in any action or proceeding
and services in behalf of its mother company, branches or affiliates. 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
5. Regional Operating Headquarters – is a foreign business entity Securities and Exchange Commission and that such service shall have the
which is allowed to derive income in the Philippines by performing same force and effect as if made upon the duly-authorized officers of the
qualifying services exclusively to its affiliates, subsidiaries or branches in corporation at its home office."
the Philippines, in the Asia-Pacific Region and in other foreign markets
(Sec. 2(3), RA 8756). Whenever such service of summons or other process shall be made upon the
Securities and Exchange Commission, the Commission shall, within ten (10)
Qualifying services, under RA 8756, include among others: general days thereafter, transmit by mail a copy of such summons or other legal
administration and planning, business planning and coordination, process to the corporation at its home or principal office. The sending of such
sourcing or procurement of raw materials and components, corporate copy by the Commission shall be necessary part of and shall complete such
finance advisory services, marketing control and sales promotion, service. All expenses incurred by the Commission for such service shall be
training and personnel management, logistic service, research and paid in advance by the party at whose instance the service is made.
development services and the like.
In case of a change of address of the resident agent, it shall be his or its duty
The Regional or Area Headquarters and Regional Operating to immediately notify in writing the Securities and Exchange Commission of
Headquarters are granted certain tax incentives such as exemption from the new address.
all kinds of local taxes, fees or charges imposed by local government
units except real property tax on land improvements; tax and duty-free As to who may be appointed as resident agent, the Corporation Code
importation of training materials and equipment; and importation of provides:
motor vehicles.
Sec. 127. Who may be a resident agent. - A resident agent may be
6. Regional Warehouse – one whose activities are limited to serving as either an individual residing in the Philippines or a domestic corporation
supply depot of Regional or Area Headquarters or Regional Operating lawfully transacting business in the Philippines: Provided, That in the case of
Headquarters in the Philippines, after securing a license therefor from an individual, he must be of good moral character and of sound financial
the Philippine Economic Zone Authority (PEZA) or the concerned standing.
ecozone authorities. The regional warehouse shall only be used for the
storage, deposit and safekeeping of its spare parts, components, Culled from the provisions of Sec. 128 is that the necessity of the
marking, labelling and cutting or altering to customer’s specifications but appointment of a resident agent is only for the purpose of receiving
shall not directly engage in trade nor solicit business, promote any sale summons and other legal processes in any legal action or proceeding against
nor enter into contracts for the sale or disposition of goods in the the foreign corporation. And, when a foreign corporation has designated a
Philippines, except those for delivery to an authorized distributor in the person to receive summons in judicial proceedings affecting the corporation
country. that designation is exclusive and service of summons is without force and
effect unless made on him (Poizat vs. Mogan). Thus, while the law allows
7. Joint Venture – is a one-time grouping of two or more persons, service upon the SEC (Sec. 128), or any of its officers or agents within the
natural or juridical, for carrying out a specified undertaking. Under Sec. Philippines (Sec. 13, Rule 14, Rules of Civil Procedure), the latter two modes
1, L of RA 7042, it is combination of property, money, efforts, skill or may become effective only if the foreign corporation failed or neglected to
knowledge to carry out a single business enterprise for profit, which is designate such a person or an agent. In a decision, therefore, rendered by
duly registered with the SEC as a corporation or partnership. No license the SC in the case of General Corporation of the Philippines vs. Union
to do business is required on the part of the foreign corporation entering Insurance Soc. Of Canton Ltd (87 Phil 313), it was held that “where such
into such kind of a business venture since mere investment does no foreign corporation actually doing business here has not applied for a license
constitute doing business as per the Implementing Rules and to do and has not designated an agent to receive summons, then service of
Regulations of RA 7042 unless, of course, the foreign corporation summons on it will be made pursuant to the provisions of the Rules of
actively participates in the management thereof. Court”. If such foreign corporation has a license to do business, then
summons to it will be served on the agent designated by it for the purpose,
D. RESIDENT AGENT or otherwise in accordance with the Corporation Law.
As a condition precedent to the grant of license to do or transact business in E. DOING BUSINESS WITHOUT LICENSE AND ITS EFFECT
the Philippines, the foreign corporation is required to designate its resident
agent on whom summons and other legal processes my be served in all A foreign corporation must secure the necessary license before it can transact
actions or legal proceedings against such corporation. Sec. 128 provides: or do business in the Philippines. This is the clear import of Sec. 123 when it
states that it shall have the right to transact business in the Philippines after
Sec. 128. Resident agent; service of process. - The Securities and it shall have obtained a license. Without such a license, the law provides for
Exchange Commission shall require as a condition precedent to the issuance certain consequences:
of the license to transact business in the Philippines by any foreign
corporation that such corporation file with the Securities and Exchange Sec. 133. Doing business without a license. - No foreign corporation
Commission a written power of attorney designating some person who must transacting business in the Philippines without a license, or its successors or
be a resident of the Philippines, on whom any summons and other legal assigns, shall be permitted to maintain or intervene in any action, suit or
processes may be served in all actions or other legal proceedings against proceeding in any court or administrative agency of the Philippines; but such
such corporation, and consenting that service upon such resident agent shall corporation may be sued or proceeded against before Philippine courts or
be admitted and held as valid as if served upon the duly authorized officers administrative tribunals on any valid cause of action recognized under
of the foreign corporation at its home office. Any such foreign corporation Philippine laws.
shall likewise execute and file with the Securities and Exchange Commission
an agreement or stipulation, executed by the proper authorities of said RESPONSIBLE OFFICERS: of a foreign corporation doing business in the
corporation, in form and substance as follows: Philippines without the requisite license may be subject to the penal
sanctions provided for in Sec. 144 of the Code which may either be
"The (name of foreign corporation) does hereby stipulate and agree, in imprisonment or fine.
consideration of its being granted by the Securities and Exchange
Commission a license to transact business in the Philippines, that if at any CAPACITY TO SUE and BE SUED: The corporation may not likewise sue or
time said corporation shall cease to transact business in the Philippines, or intervene in any action, suit or proceeding in any court or administrative
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
agency of the Philippines while it may be sued or proceeded against before such corporation; nor appointing a representative or distributor domiciled in
such court or agency on any valid cause of action recognized under the law. the Philippines which transacts business in its own name and for its own
account.
WHETHER OR NOT IT CAN SUE:
1. A foreign corporation transacting or doing business in the Philippines ISOLATED TRANSACTION: even if it is pursuant of the usual business
with a license can sue before Philippine Courts; does not constitute doing business the doing of which would not bar a
2. Subject to certain exceptions, a foreign corporation doing business in foreign corporation from access to Philippine Courts (Facilities Mgt. vs. Dela
the country without a license cannot sue in Philippine Courts; and Osa)
3. If it is not transacting business in the Philippines, even without a license,
it can sue before the Philippine Courts. THE MENTHOLATUM CO., INC., ET AL., petitioners,
vs.
“It is not the lack of required license but doing business without a ANACLETO MANGALIMAN, ET AL., respondents
license which bars a foreign corporation from access to our courts” (G.R. No. L-47701; June 27, 1941)
(Universal Shipping vs. IAC)
FACTS: A complaint was filed by herein petitioner, a foreign corporation
EXCEPTIONS: having Philippine-American Drug Co. as its sole distributor, for infringement
1. Foreign corporations can sue before the Philippine Courts if the act or of trademark for its product “Mentholatum” and unfair competition alleging
transaction involved is an “isolated transaction” or the corporation is that herein respondents Anacleto and Florencio Mangaliman prepared a
not seeking to enforce any legal or contractual rights arising from, or medicament and salve named “Mentholiman” which they sold to the public
growing out of, any business which it has transacted in the Philippines packed in the same size, color and shape as its product Metholatum.
(Western Equipment Supply vs. Reyes)
2. Neither is a license required before a foreign corporation may sue before ISSUE: WON petitioner corporation is transacting business in the Philippines?
the forum if the purpose of the suit is to protect its trademark, trade
name, corporate name, reputation or goodwill; (Western Equipment HELD: No. No general rule or governing principle can be laid down
Supply vs. Reyes) as to what constitutes "doing" or "engaging in" or "transacting"
3. Or where it is based on a violation of the Revised Penal Code (Le business. Indeed, each case must be judged in the light of its
Chemise Lacoste, SA vs. Fernandez); peculiar environmental circumstances. The true test, however,
4. Or merely defending a suit filed against it (Time, Inc. vs. Reyes) seems to be whether the foreign corporation is continuing the body
5. Or where a party is estopped to challenge the personality of the or substance of the business or enterprise for which it was
corporation by entering into a contract with it (Communications organized or whether it has substantially retired from it and turned
Materials and Design, Inc. vs. CA and ITEC) it over to another. (Traction Cos. v. Collectors of Int. Revenue [C. C. A.
Ohio], 223 F. 984, 987.) The term implies a continuity of commercial dealings
WHETHER OR NOT IT CAN BE SUED: and arrangements, and contemplates, to that extent, the performance of acts
1. A foreign corporation transacting business in the Philippines with the or works or the exercise of some of the functions normally incident to, and in
requisite license can be sued in Philippine Courts; progressive prosecution of, the purpose and object of its organization. (Griffin
2. A foreign corporation transacting business in the Philippines without a v. Implement Dealers' Mut. Fire Ins. Co., 241 N. W. 75, 77; Pauline Oil & Gas
license can be sued in Philippine Courts; Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111; Automotive
3. If it is not doing business in the Philippines, it cannot be sued in Material Co. v. American Standard Metal Products Corp., 158 N. E. 698, 703,
Philippine Courts for lack of jurisdiction. 327 III. 367.)
“DOING BUSINESS”: As to what constitutes “doing business” or In its decision of June 29, 1940, the Court of Appeals concluded that "it is
“transacting business” which would bar a foreign corporation from access to undeniable that the Mentholatum Co., through its agent, the Philippine-
our courts, no general rule or governing principle can be laid down. Indeed, American Drug Co., Inc., has been doing business in the Philippines by selling
such case must be judged in the light of its peculiar environmental its products here since the year 1929, at least." This is assailed by petitioners
circumstance. However, the TRUE TEST seems to be whether the foreign as a pure conclusion of law. This finding is predicated upon the testimony of
corporation is continuing the body or substance of the business or enterprise Mr. Roy Springer of the Philippine-American Drug Co., Inc., and the pleadings
for which it was organized or whether it has substantially retired from it and filed by petitioners. The complaint filed in the Court of First Instance of
turned it over to another. The term implies a continuity of commercial Manila on October 1, 1935, clearly stated that the Philippine-American Drug
dealings and arrangements and contemplates, to the extent, the performance Co., Inc., is the exclusive distributing agent in the Philippine Islands of the
of acts or works or the exercise of some functions normally incident to and in Mentholatum Co., Inc., in the sale and distribution of its product known as
progressive prosecution of, the purpose and objects of its organization the “Mentholatum." The object of the pleadings being to draw the lines of
(Metholatum, Inc. vs. Mangaliman) battle between litigants and to indicate fairly the nature of the claims or
defenses of both parties, a party cannot subsequently take a position
PRESENT STATE OF LAW AS TO “DOING BUSINESS”: under the contradictory to, or inconsistent with, his pleadings, as the facts therein
Foreign Investment Act (Sec. 3, d), “doing business” would include: admitted are to be taken as true for the purpose of the action. It follows that
1. Soliciting orders, service contracts; whatever transactions the Philippine-American Drug Co., Inc., had executed
2. Opening offices, whether called “liason offices” or branches;; in view of the law, the Mentholatum Co., Inc., did it itself. And, the
3. Appointing representatives or distributor domiciled in the Philippines or Mentholatum Co., Inc., being a foreign corporation doing business in the
who in any calendar year stay in the country for a period or periods Philippines without the license required by section 68 of the Corporation Law,
totalling 180 days or more; it may not prosecute this action for violation of trade mark and unfair
4. Participating in the management, supervision or control of any domestic competition.
business, firm, entity or corporation in the Philippines;
5. Any other act that imply a continuity of commercial dealings or The writ prayed for should be, as it hereby is, denied, with costs against the
arrangements, and contemplate to that extent the performance of acts petitioners.
or works, or the exercise of functions normally incident to and in
progressive prosecution of commercial gain or of the purpose and object ISOLATED TRANSACTION
of the business organization.
MARSHALL-WELLS COMPANY, plaintiff-appellant,
Provided, however, that the phrase “doing business” shall not be deemed to vs.
include mere investment as a shareholder by a foreign entity in domestic HENRY W. ELSER & CO., INC., defendant-appellee
corporations duly registered to do business, and/or exercise of rights as such (G.R. No. 22015; September 1, 1924)
investor, nor having a nominee director or officer to represent its interest in
ISSUE: WON a corporation not engaged in business in the Philippines can HELD: No. The respondents challenge the petitioner's capacity to sue, it
institute an action before our courts? being admittedly a foreign corporation without license to engage in business
in the Philippines, citing section 69 of the Corporation Law. It must be
HELD: Yes. This issue is already well-settled in this jurisdiction. In Aetna stated however that this section is not applicable to a foreign
Casualty and Surety Co. vs. Pacific Star Lines, 80 SCRA 635, is a case similar corporation performing single acts or "isolated transactions." There
to the present one in that the action is also one for recovery of damages is nothing in the record to show that the petitioner has been in the
sustained by cargo shipped on defendants' vessels. Defendants set up the Philippines engaged in continuing business or enterprise for which it was
defense that plaintiff is a foreign corporation not duly licensed to do business organized, when the sixteen bundles were erroneously discharged in Manila,
in the Philippines and, therefore, without capacity to sue and be sued. In for it to be considered as transacting business in the Philippines. The fact is
overruling said defense, this Court said: that the bundles, the value of which is sought to be recovered, were
landed not as a result of a business transaction, "isolated" or
It is settled that if a foreign corporation is not engaged in otherwise, but due to a mistaken belief that they were part of the
business in the Philippines, it may not be denied the right to file shipment of forty similar bundles consigned to persons or entities in
an action in Philippine courts for isolated transactions.
In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:
xxx xxx xxx
FACILITIES MANAGEMENT CORPORATION, J. S. DREYER, and J. V. (2) Appointing a representative or distributor who is domiciled in
CATUIRA, petitioners, the Philippines, unless said representative or distributor has an
vs. independent status, i.e., it transacts business in its name and for
LEONARDO DE LA OSA AND THE HONORABLE COURT OF its own account, and not in the name or for the account of the
INDUSTRIAL RELATIONS, respondents principal.
(G.R. No. L-38649; March 26, 1979)
xxx xxx xxx
FACTS: Respondent Leonardo dela Osa filed a petition for reinstatement with (4) Opening offices, whether called 'liaison'offices, agencies or branches,
recovery of his overtime compensation, swing shift and graveyard shift unless proved otherwise.
differentials. xxx xxx xxx
Petitioner corporation filed a letter-answer interposing special defenses: (10) Any other act or acts that imply a continuity of commercial dealings or
1. Facilities Management Corporation and JS Deyer are domiciled in Wake arrangements, and contemplate to that extent the performance of acts or
Islands and is beyond the territorial jurisdiction of the Philippine works, or the exercise of some of the functions normally incident to, or in
Government; and the progressive prosecution of, commercial gain or of the purpose and
2. JV Catuira, though an employee of respondent corporation and objective of the business organization
stationed in Manila does not have power and authority of legal
representation; and Indeed, if a foreign corporation, not engaged in business in the Philippines, is
3. The employment of respondent is with approval of the Department of not banned from seeking redress from courts in the Philippines, a fortiori,
Labor of the Philippines. that same corporation cannot claim exemption from being sued in Philippine
courts for acts done against a person or persons in the Philippines.
Subsequently, a motion to dismiss was filed which was denied.
WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS AGAINST
ISSUE: WON petitioner, FMC, has been doing business in the Philippines to THE PETITIONERS
vest the Philippine court with jurisdiction?
SINGLE ACT WITH INTENTION TO CONTINUE DOING BUSINESS
HELD: Yes. From the facts of record, the petitioner may be considered as
doing business in the Philippines within the scope of Section 14, Rule 14 of FAR EAST INTERNATIONAL IMPORT and EXPORT CORPORATION,
the Rules of the Court which provide: plaintiff-appellee,
vs.
SEC 14. Service upon private foreign corporations. If the defendant is a NANKAI KOGYO CO. LTD., ET AL., defendants,
foreign corporation or a non-resident joint stock company or association: NANKAI KOGYO CO., LTD., defendant-appellant
doing business in the Philippines, service may be made on its resident agent (G.R. No. L-13525; November 30, 1962)
designated in accordance with law for that purpose or, if there be no such
agent, on the government official designated by law to that effect, or on any FACTS: Plaintiff Far East entered into a contract with herein appellant Nankai
of its officers or agents within the Philippines. for the sale of steel scrap. Only 1,058.6 metric tons were delivered upon the
expiration of the export license of Far East.
Indeed, the petitioner, in compliance with Act 2486 as implemented by
Department of Labor Order No. IV dated May 20, 1968 had to appoint Jaime Far East later on wrote to Everett Steamship Corporation, requesting the
V. Catuira, 1322 A. Mabini, Ermita, Manila as agent for FMC with authority to issuance of a complete set of the Bill of Lading for the shipment, in order that
execute Employment Contracts and receive, in behalf of that corporation, payment thereof be effected against the letter of credit opened by Nankai.
legal services from and be bound by processes of the Philippine Courts of
Justice, for as long as he remains an employee of FMC (Annex 'I', rollo, p. For failure of Nankai and the shipping agent to comply, Far East filed a
56). It is a fact that when the summons for the petitioner was served on complaint for specific performance.
Jaime V. Catuira he was still in the employ of the FMC.
Nankai filed a motion to dismiss, on the ground of lack of jurisdiction over its
In his motion to dismiss Annex B', p. 19, Rollo), petitioner admits that Mr. person and the subject matter, which was denied.
Catuira represented it in this country 'for the purpose of making
arrangements for the approval by the Department of Labor of the ISSUE: WON the trial court acquired jurisdiction over the subject matter and
employment of Filipinos who are recruited by the Company as its own over the person of the defendant-appellant through the proper service of
employees for assignment abroad.' In effect, Mr. Catuira was an officer summons?
representing petitioner in the Philippines.
HELD: Yes. Defendant contends that Philippine Courts have no jurisdiction to
Under the rules and regulations promulgated by the Board of Investments take cognizance of the case because the Nankai is not doing business in the
which took effect Feb. 3, 1969, implementing Rep. Act No. 5455, islands; and that while it has entered into the transaction in question, same,
which took effect Sept. 30, 1968, the phrase 'doing business' has however, does not constitute "doing business", so as to make it amenable to
been exemption with illustrations, among them being as follows: summons and subject it to the Court's jurisdiction. It bolstered this claim by a
provision in the contract which provides that "In case of disputes, Board of
xxx xxx xxx Arbitration may be formed in Japan. Decision of the Board of Arbitration shall
be final and binding on both BUYER and SELLER".
(f) the performance within the Philippines of any act or combination of acts
enumerated in section l(l) of the Act shall constitute 'doing business' The rule pertinent to the questions in issue provides —
therein. in particular, 'doing business includes:
SEC. 14. Service upon private foreign corporations. — If the defendant is a
foreign corporation, or a non-resident joint stock company or association,
The above rule indicates three modes of effecting service of COMMUNICATION MATERIALS AND DESIGN, INC., ASPAC MULTI-
summons upon a private, foreign corporation, viz: (1) by serving TRADE, INC., (formerly ASPAC-ITEC PHILIPPINES, INC.) and
upon the agent designated in accordance with law to accept service FRANCISCO S. AGUIRRE, petitioners,
of summons; (2) if there is no resident agent, by service on the vs.
government cial designated by law to that effect; and (3) by serving THE COURT OF APPEALS, ITEC INTERNATIONAL, INC., and ITEC,
on any officer or agent of said corporation with Philippines. The INC., respondents
plaintiff complied with the third stated above, for it has been shown that Mr. (G.R. No. 102223; August 22, 1996)
Ishida, who personally signed the contract for the purchase of the scrap in
question in behalf of the Nankai Kogyo, the Trade Manager of said Company, FACTS: Respondent ITEC entered into a contract with petitioner ASPAC
Mr. Tominaga the Chief of the Petroleum Section of the same company and referred to as “Representative Agreement” where ASPEC was assigned as
Mr. Yoshida was the man-in-charge of the Import Section of the company's ITEC’s “exclusive representative” in the Philippines for the sale of ITEC’s
Tokyo Branch. All these three, including the first two who were served with products.
Summons, were officers of the defendant company.
By virtue of said contract, ASPAC sold electronic products exported by ITEC,
Not only did appellant allege non-jurisdictional grounds in its pleadings to to their sole customer PLDT. ASPAC and PLDT executed a document entitled
have the complaint dismissed, but it also went into trial on the merits and “PLDT-ASPAC/ITEC PROTOCOL” which defined the project detais for the
presented evidence destined to resist appellee's claim. Verily, there could not supply of ITEC’s Interface Equipment in connection with the 5 th Expansion
be a better situation of acquired jurisdiction based on consent. Consequently, Program of PLDT.
the provision of the contract wherein it was agreed that disputes should be
submitted to a Board of Arbitration which may be formed in Japan (in the ITEC later on terminated its representative agreement with ASPAC and fied a
supposition that it can apply to the matter in dispute - payment of the scrap), complaint alleging that the latter and another corporation Digital Base
seems to have been waived with appellant's voluntary submission. Apart from Communications, Inc. (DIGITAL), the president of which is Francisco Aguirre
the fact that the clause employs the word "may". who is also the president of ASPAC, used knowledge and information of
ITEC’s product specifications to develop their own line of equipment and
From the proven facts obtaining in this particular case, the appellant's product support, which are similar, if not identical to ITEC’s own and offering
defense of lack of jurisdiction appears unavailing. The case of Pacific them to ITEC’s customers.
Micronesian Line, Inc. v. Baens del Rosario, et al., G.R. No. L-7154, October
23, 1954, relied upon in the Motion to Dismiss and other pleadings presented Defendants filed a motion to dismiss on the ground that ITEC had no legal
by defendant-appellant, stand on a different footing. Therein, We made the capacity to sue as it is a foreign corporation doing business in the Philippines
following pronouncements: without the required license, which was denied. On appeal, the CA affirmed
the decision of the trial court.
. . . . And the only act it did here was to secure the services of Luceno
Pelingon to act as cook and chief steward in one of its vessels authorizing ISSUE: WON private respondents ITEC is an unlicensed corporation doing
to that effect the Luzon Stevedoring Co., Inc., a domestic corporation, and business in the Philippines, and WON it is barred from invoking the injunctive
the contract of employment was entered into on July 18, 1951. It further authority of the courts?
appears that petitioner has never sent its ships to the Philippines nor has it
transported nor even solicited the transportation passengers and cargoes HELD: Yes and No (by estoppel). Generally, a "foreign corporation" has
to and from the Philippines. In words, petitioner engaged the services of no legal existence within the state in which it is foreign. This
Pelingon not as part of the operation of its business but merely to employ proceeds from the principle that juridical existence of a corporation
him as member of the crew in one of its ships. That act apparently is an is confined within the territory of the state under whose laws it was
isolated one, incidental, or casual, and "not of a character to indicate a incorporated and organized, and it has no legal status beyond such
purpose to engage in business" within the meaning of the rule. (Emphasis territory. Such foreign corporation may be excluded by any other state from
ours.) doing business within its limits, or conditions may be imposed on the exercise
of such privileges. Before a foreign corporation can transact business in this
ISSUE2: WON the single act done in this case can be considered as doing country, it must first obtain a license to transact business in the Philippines,
business in the Philippines? and a certificate from the appropriate government agency. If it transacts
business in the Philippines without such a license, it shall not be
HELD: Yes. In the instant case, the testimony of Atty. Pablo Ocampo that permitted to maintain or intervene in any action, suit, or proceeding
appellant was doing business in the Philippines corroborated by no less than in any court or administrative agency of the Philippines, but it may
Nabuo Yoshida, one of appellant's officers, that he was sent to the Philippines be sued on any valid cause of action recognized under Philippine
by his company to look into the operation of mines, thereby revealing the laws.
defendant's desire to continue engaging in business here, after
receiving the shipment of the iron under consideration, making the In a long line of decisions, this Court has not altogether prohibited foreign
Philippines a base thereof. corporation not licensed to do business in the Philippines from suing or
maintaining an action in Philippine Courts. What it seeks to prevent is a
The rule stated in the preceding section that the doing of a single act foreign corporation doing business in the Philippines without a license from
doesnot constitute business within the meaning of statutes prescribing the gaining access to Philippine Courts.
conditions to be complied with the foreign corporations must be qualified
to this extent, that a single act may bring the corporation. In such a The purpose of the law in requiring that foreign corporations doing
case, the single act of transaction is not merly incidental or casual, but is business in the Philippines be licensed to do so and that they appoint an
of such character as distinctly to indicate a purpose on the part of the agent for service of process is to subject the foreign corporation doing
foreign corporation to do other business in the state, and to make the business in the Philippines to the jurisdiction of its courts. The object
state a basis of operations for the conduct of a part of corporation's is not to prevent the foreign corporation from performing single acts, but to
ordinary business. (17 Fletchers Cyc. of Corporations, sec. 8470, pp. 572- prevent it from acquiring a domicile for the purpose of business without
573, and authorities cited therein.) (Emphasis ours.) taking steps necessary to render it amenable to suit in the local courts. The
implication of the law is that it was never the purpose of the legislature to
exclude a foreign corporation which happens to obtain an isolated order for
Thus, a foreign corporation with a settling agent in the Philippines which The "No Competing Product" provision of the Representative Agreement
issued twelve marine policies covering different shipments to the Philippines between ITEC and ASPAC provides: "The Representative shall not represent
and a foreign corporation which had been collecting premiums on or offer for sale within the Territory any product which competes with an
outstanding policies were regarded as doing business here. existing ITEC product or any product which ITEC has under active
development." Likewise pertinent is the following provision: "When acting
The same rule was observed relating to a foreign corporation with an under this Agreement, REPRESENTATIVE is authorized to solicit sales within
"exclusive distributing agent" in the Philippines, and which has been selling the Territory on ITEC's behalf but is authorized to bind ITEC only in its
its products here since 1929, and a foreign corporation engaged in the capacity as Representative and no other, and then only to specific customers
business of manufacturing and selling computers worldwide, and had and on terms and conditions expressly authorized by ITEC in writing."
installed at least 26 different products in several corporations in the
Philippines, and allowed its registered logo and trademark to be used and When ITEC entered into the disputed contracts with ASPAC and
made it known that there exists a designated distributor in the Philippines. TESSI, they were carrying out the purposes for which it was
created, i.e., to market electronics and communications products.
In Georg Grotjahn GMBH and Co. vs. Isnani, it was held that the The terms and conditions of the contracts as well as ITEC's conduct indicate
uninterrupted performance by a foreign corporation of acts that they established within our country a continuous business, and not
pursuant to its primary purposes and functions as a regional area merely one of a temporary character.
headquarters for its home office, qualifies such corporation as one
doing business in the country. Notwithstanding such finding that ITEC is doing business in the country,
petitioner is nonetheless estopped from raising this fact to bar ITEC from
These foregoing instances should be distinguished from a single or instituting this injunction case against it.
isolated transaction or occasional, incidental, or casual transactions,
which do not come within the meaning of the law, for in such case, A foreign corporation doing business in the Philippines may sue in Philippine
the foreign corporation is deemed not engaged in business in the Courts although not authorized to do business here against a Philippine
Philippines. citizen or entity who had contracted with and benefited by said corporation.
To put it in another way, a party is estopped to challenge the
Where a single act or transaction, however, is not merely incidental or casual personality of a corporation after having acknowledged the same by
but indicates the foreign corporation's intention to do other business in the entering into a contract with it. And the doctrine of estoppel to deny
Philippines, said single act or transaction constitutes "doing" or "engaging in" corporate existence applies to a foreign as well as to domestic corporations.
or "transacting" business in the Philippines. One who has dealt with a corporation of foreign origin as a corporate entity is
estopped to deny its corporate existence and capacity: The principle will be
In determining whether a corporation does business in the Philippines or not, applied to prevent a person contracting with a foreign corporation from later
aside from their activities within the forum, reference may be made to the taking advantage of its noncompliance with the statutes chiefly in cases
contractual agreements entered into by it with other entities in the country. where such person has received the benefits of the contract.
Thus, in the Top-Weld case (supra), the foreign corporation's LICENSE AND
TECHNICAL AGREEMENT and DISTRIBUTOR AGREEMENT with their local The rule is deeply rooted in the time-honored axiom of Commodum ex injuria
contacts were made the basis of their being regarded by this Tribunal as sua non habere debet — no person ought to derive any advantage of his own
corporations doing business in the country. Likewise, in Merill Lynch Futures, wrong. This is as it should be for as mandated by law, "every person must in
Inc. vs. Court of Appeals, etc., the FUTURES CONTRACT entered into by the the exercise of his rights and in the performance of his duties, act with
petitioner foreign corporation weighed heavily in the court's ruling. justice, give everyone his due, and observe honesty and good faith."
With the above-stated precedents in mind, we are persuaded to conclude Concededly, corporations act through agents, like directors and officers.
that private respondent had been "engaged in" or "doing business" in the Corporate dealings must be characterized by utmost good faith and fairness.
Philippines for some time now. This is the inevitable result after a scrutiny of Corporations cannot just feign ignorance of the legal rules as in most cases,
the different contracts and agreements entered into by ITEC with its various they are manned by sophisticated officers with tried management skills and
business contacts in the country, particularly ASPAC and Telephone legal experts with practiced eye on legal problems. Each party to a corporate
The parties are charged with knowledge of the existing law at the time they 2. On the other hand, Western Electric Company, Inc, also organized and
enter into a contract and at the time it is to become operative. (Twiehaus v. existing under the laws of Nevada, was not issued such license but it
Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW 2d 98). Moreover, a person was alleged that it has never engaged in business herein.
is presumed to be more knowledgeable about his own state law than his alien
or foreign contemporary. In this case, the record shows that, at least, 3. That a Philippine corporation known as Electric Supply Company, Inc.,
petitioner had actual knowledge of the applicability of R.A. No. 5455 at the where defendant Henry Herman was president, has been importing the
time the contract was executed and at all times thereafter. This conclusion is manufactures of plaintiff Western Electric Company, Inc.
compelled by the fact that the same statute is now being propounded by the
petitioner to bolster its claim. We, therefore sustain the appellate court's view 4. That defendant Henry Herman signed and filed AOI with the defendant
that "it was incumbent upon TOP-WELD to know whether or not IRTI and Fidel Reyes, as Director of BCI, with the intention to organize a domestic
ECED were properly authorized to engage in business in the Philippines when corporation to be known as “Western Electric Company, Inc.” for the
they entered into the licensing and distributorship agreements." The very purpose, among others things, of manufacturing, buying, selling and
purpose of the law was circumvented and evaded when the petitioner dealing generally in electrical and telephone apparatus and supplies” in
entered into said agreements despite the prohibition of R.A. No. 5455. The violation of a trademark over “Western Electric” existing in Washington,
parties in this case being equally guilty of violating R.A. No. 5455, they are in DC.
pari delicto, in which case it follows as a consequence that petitioner is not
entitled to the relief prayed for in this case. The lower court decided in favor of plaintiffs.
The doctrine of lack of capacity to sue based on the failure to ISSUE: WON plaintiff corporation can maintain an action to restraint
acquire a local license is based on considerations of sound public residents and inhabitants of the Philippines from organizing a corporation,
policy. The license requirement was imposed to subject the foreign when said inhabitants have knowledge of the existence of such foreign
corporation doing business in the Philippines to the jurisdiction of its courts. corporation?
It was never intended to favor domestic corporations who enter
into solitary transactions with unwary foreign firms and then HELD: Yes. In the case of Marshall-Wells Co. vs. Henry W. Elser & Co. (46
repudiate their obligations simply because the latter are not Phil., 70, 76), this court held:
licensed to do business in this country.
The noncompliance of a foreign corporation with the statute may be
In Antam Consolidated Inc. vs. Court of Appeals, et al. we expressed our pleaded as an affirmative defense. Thereafter, it must appear from the
chagrin over this commonly used scheme of defaulting local companies which evidence, first, that the plaintiff is a foreign corporation, second, that it is
are being sued by unlicensed foreign companies not engaged in business in doing business in the Philippines, and third, that it has not obtained the
the Philippines to invoke the lack of capacity to sue of such foreign proper license as provided by the statute.
companies. Obviously, the same ploy is resorted to by ASPAC to prevent the
injunctive action filed by ITEC to enjoin petitioner from using knowledge If it had been stipulated that the plaintiff, Western Electric Company, Inc.,
possibly acquired in violation of fiduciary arrangements between the parties. had been doing business in the Philippine Islands without first obtaining a
license, another and a very different question would be presented. That
By entering into the "Representative Agreement" with ITEC, Petitioner is company is not here seeking to enforce any legal or contract rights arising
charged with knowledge that ITEC was not licensed to engage in business from, or growing out of, any business which it has transacted in the
activities in the country, and is thus estopped from raising in defense such Philippine Islands. The sole purpose of the action:
incapacity of ITEC, having chosen to ignore or even presumptively take
advantage of the same. "Is to protect its reputation, its corporate name, its goodwill,
whenever that reputation, corporate name or goodwill have,
In Top-Weld, we ruled that a foreign corporation may be exempted from the through the natural development of its trade, established
license requirement in order to institute an action in our courts if its themselves." And it contends that its rights to the use of its corporate
representative in the country maintained an independent status during the and trade name:
existence of the disputed contract. Petitioner is deemed to have acceded to
such independent character when it entered into the Representative Is a property right, a right in rem, which may assert and protect against all
Agreement with ITEC, particularly, provision 6.2 (supra). the world, in any of the courts of the world — even in jurisdictions where it
does not transact business — just the same as it may protect its tangible
IN VIEW OF THE FOREGOING PREMISES, the instant Petition is hereby property, real or personal, against trespass, or conversion. Citing sec. 10,
DISMISSED. The decision of the Court of Appeals dated June 7, 1991, Nims on Unfair Competition and Trade-Marks and cases cited; secs. 21-22,
upholding the RTC Order dated February 22, 1991, denying the petitioners' Hopkins on Trade-Marks, Trade Names and Unfair Competition and cases
Motion to Dismiss, and ordering the issuance of the Writ of Preliminary cited." That point is sustained by the authorities, and is well stated in
Injunction, is hereby affirmed in toto. Hanover Star Milling Co. vs. Allen and Wheeler Co. (208 Fed., 513), in which
they syllabus says:
TRADEMARK INFRINGEMENT
Since it is the trade and not the mark that is to be protected, a
WESTERN EQUIPMENT AND SUPPLY COMPANY, WESTERN trade-mark acknowledges no territorial boundaries of
ELECTRIC COMPANY, INC., W. Z. SMITH and FELIX C. REYES, municipalities or states or nations, but extends to every market
plaintiffs-appellees, where the trader's goods have become known and identified by
vs. the use of the mark
FIDEL A. REYES, as Director of the Bureau of Commerce and
Industry, HENRY HERMAN, PETER O'BRIEN, MANUEL B. DIAZ, It is very apparent that the purpose and intent of Herman and his associates
FELIPE MAPOY and ARTEMIO ZAMORA, defendants-appellants. in seeking to incorporate under the name of Western Electric Company, Inc.,
(G.R. No. L-27897 December 2, 1927) was to unfairly and unjustly compete in the Philippine Islands with the
Western Electric Company, Inc., in articles which are manufactured by, and
Tradenames of persons described in the first paragraph of this section shall In contradistinction, the present case involves a complaint for violation
be protected without the obligation of filing or registration whether or not of Article 189 of the Revised Penal Code. The Leviton case is not
they form part of marks. applicable.
We, therefore, hold that the petitioner had the legal capacity to file the action Asserting a distinctly different position from the Leviton argument, Hemandas
below. argued in his brief that the petitioner was doing business in the Philippines
but was not licensed to do so. To support this argument, he states that the
SUING FOR VIOLATION OF THE PENAL CODE AND AGENT DOING applicable ruling is the case of Mentholatum Co., Inc. v. Mangaliman: (72
BUSINESS UNDER ITS OWN NAME Phil. 524) where Mentholatum Co. Inc., a foreign corporation and Philippine-
American Drug Co., the former's exclusive distributing agent in the Philippines
LA CHEMISE LACOSTE, S. A., petitioner, filed a complaint for infringement of trademark and unfair competition
vs. against the Mangalimans.
HON. OSCAR C. FERNANDEZ, Presiding Judge of Branch XLIX,
Regional Trial Court, National Capital Judicial Region, Manila and The argument has no merit. The Mentholatum case is distinct from and
GOBINDRAM HEMANDAS, respondents. inapplicable to the case at bar. Philippine American Drug Co., Inc., was
(G.R. No. L-63796-97; May 2, 1984) admittedly selling products of its principal Mentholatum Co., Inc., in the
latter's name or for the latter's account. Thus, this Court held that "whatever
GOBINDRAM HEMANDAS SUJANANI, petitioner, transactions the Philippine-American Drug Co., Inc. had executed in view of
vs. the law, the Mentholatum Co., Inc., did it itself. And, the Mentholatum Co.,
HON. ROBERTO V. ONGPIN, in his capacity as Minister of Trade and Inc., being a foreign doing business in the Philippines without the license
In the present case, however, the petitioner is a foreign corporation not ISSUE3: WON petitioner has a right to maintain a suit for infringement of
doing business in the Philippines. The marketing of its products in the trademarks?
Philippines is done through an exclusive distributor, Rustan Commercial
Corporation. The latter is an independent entity which buys and then markets HELD: Yes. We are moreover recognizing our duties and the rights of foreign
not only products of the petitioner but also many other products bearing states under the Paris Convention for the Protection of Industrial Property to
equally well-known and established trademarks and tradenames. In other which the Philippines and France are parties. We are simply interpreting and
words, Rustan is not a mere agent or conduit of the petitioner. enforcing a solemn international commitment of the Philippines embodied in
a multilateral treaty to which we are a party and which we entered into
The rules and regulations promulgated by the Board of Investments pursuant because it is in our national interest to do so.
to its rule-making power under Presidential Decree No. 1789, otherwise
known as the Omnibus Investment Code, support a finding that the petitioner The Paris Convention provides in part that:
is not doing business in the Philippines. Rule I, Sec. 1 (g) of said rules
and regulations defines "doing business" as one" which includes, inter alia: ARTICLE 2
(2) Nationals of each of the countries of the Union shall as regards the
(1) ... A foreign firm which does business through middlemen protection of industrial property, enjoy in all the other countries of the
acting on their own names, such as indentors, commercial brokers or Union the advantages that their respective laws now grant, or may
commission merchants, shall not be deemed doing business in the hereafter grant, to nationals, without prejudice to the rights specially
Philippines. But such indentors, commercial brokers or commission provided by the present Convention. Consequently, they shall have the
merchants shall be the ones deemed to be doing business in the same protection as the latter, and the same legal remedy against any
Philippines. infringement of their rights, provided they observe the conditions and
formalities imposed upon nationals.
(2) Appointing a representative or distributor who is domiciled in
the Philippines, unless said representative or distributor has an xxx xxx xxx
independent status, i.e., it transacts business in its name and for its
account, and not in the name or for the account of a principal. Thus, ARTICLE 6
where a foreign firm is represented by a person or local company which (1) The countries of the Union undertake, either administratively if their
does not act in its name but in the name of the foreign firm the latter is legislation so permits, or at the request of an interested party, to refuse or
doing business in the Philippines. to cancel the registration and to prohibit the use of a trademark which
xxx xxx xxx constitutes a reproduction, imitation or translation, liable to create
confusion, of a mark considered by the competent authority of the country
Applying the above provisions to the facts of this case, we find and of registration or use to be well-known in that country as being already the
conclude that the petitioner is not doing business in the Philippines. mark of a person entitled to the benefits of the present Convention and
Rustan is actually a middleman acting and transacting business in its own used for Identical or similar goods. These provisions shall also apply when
name and or its own account and not in the name or for the account of the the essential part of the mark constitutes a reproduction of any such well-
petitioner. known mark or an imitation liable to create confusion therewith.
ISSUE2: WON the criminal case can be maintained even if the foreign xxx xxx xxx
corporation is doing business without a license?
ARTICLE 8
HELD: Yes. But even assuming the truth of the private respondent's A trade name shall be protected in all the countries of the Union without
allegation that the petitioner failed to allege material facts in its petition the obligation of filing or registration, whether or not it forms part of a
relative to capacity to sue, the petitioner may still maintain the present suit trademark.
against respondent Hemandas. As early as 1927, this Court was, and it xxx xxx xxx
still is, of the view that a foreign corporation not doing business in
the Philippines needs no license to sue before Philippine courts for ARTICLE 10bis
infringement of trademark and unfair competition. (1) The countries of the Union are bound to assure to persons entitled to
the benefits of the Union effective protection against unfair competition
Our recognizing the capacity of the petitioner to sue is not by any means
novel or precedent setting. Our jurisprudence is replete with cases illustrating A treaty or convention is not a mere moral obligation to be enforced
instances when foreign corporations not doing business in the Philippines or not at the whims of an incumbent head of a Ministry. It creates a
may nonetheless sue in our courts. In East Board Navigation Ltd, v. Ysmael legally binding obligation on the parties founded on the generally
and Co., Inc. (102 Phil. 1), we recognized a right of foreign corporation to accepted principle of international law of pacta sunt servanda which
sue on isolated transactions. In General Garments Corp. v. Director of has been adopted as part of the law of our land. (Constitution, Art.
Patents (41 SCRA 50), we sustained the right of Puritan Sportswear Corp., a II, Sec. 3).
foreign corporation not licensed to do and not doing business in the
Philippines, to file a petition for cancellation of a trademark before the Patent We have carefully gone over the records of all the cases filed in this Court
Office. and find more than enough evidence to sustain a finding that the petitioner is
the owner of the trademarks "LACOSTE", "CHEMISE LACOSTE", the crocodile
More important is the nature of the case which led to this petition. What or alligator device, and the composite mark of LACOSTE and the
preceded this petition for certiorari was a letter complaint filed before the NBI representation of the crocodile or alligator. Any pretensions of the private
charging Hemandas with a criminal offense, i.e., violation of Article 189 of the respondent that he is the owner are absolutely without basis. Any further
Revised Penal Code. If prosecution follows after the completion of the ventilation of the issue of ownership before the Patent Office will be a
preliminary investigation being conducted by the Special Prosecutor the superfluity and a dilatory tactic.
information shall be in the name of the People of the Philippines
and no longer the petitioner which is only an aggrieved party since The records show that the goodwill and reputation of the petitioner's
a criminal offense is essentially an act against the State. It is the products bearing the trademark LACOSTE date back even before 1964 when
latter which is principally the injured party although there is a private right LACOSTE clothing apparels were first marketed in the Philippines. To allow
violated. Petitioner's capacity to sue would become, therefore, of not Hemandas to continue using the trademark Lacoste for the simple reason
much significance in the main case. We cannot snow a possible violator that he was the first registrant in the Supplemental Register of a trademark
EFFECT OF NON-PLEADING: If the dismissal of the case is based on the The orders appealed from are affirmed, with costs against plaintiffs-
failure of the foreign corporation to aver its capacity to sue, would not, appellants
however, bar the institution of the same action, dismissal should not be
allowed, especially so if it would be an idle, circuitous ceremony considering OLYMPIA BUSINESS MACHINES CO. (PHIL.) INC. and CALIFORNIA
the absence of any meritorious substantial defense of the defendant. INSURANCE CO., LTD., petitioners,
Technical rules should not be accorded undue importance to frustrate and vs.
defeat a plainly valid claim (Olympia Business Machines vs. E. Razon, Inc.) E. RAZON, INC., TOYO LINE, LTD., and SEA BRIDGE CONTAINER
SHIPPING LINES, INC., respondents.
COMPLAINT BASED ON VIOLATION OF RPC OR THE CORPORATION (G.R. No. 75631; October 28, 1987)
IS MERELY DEFENDING ITSELF: averment of capacity to sue is not
likewise necessary as laid down in the case of Chemise Lacoste vs. FACTS: Olympia Office Machines, Ltd., a foreign corporation with offices at
Fernandez, or when the foreign corporation is not suing or maintaining a suit Hongkong, shipped 300 portable typewriters to its sister company in Manila,
but is merely defending itself from one filed against it (Times, Inc. vs. Olympia Business Machines Company (Phil.), Inc., such shipment insured
Reyes). with California Insurance Co., Ltd. another foreign corporation.
ATLANTIC MUTUAL INSURANCE COMPANY and CONTINENTAL The typewriters were discharged at North Harbor, Manila into the custody of
INSURANCE COMPANY, plaintiffs and appellants, the carrier’s agent which in turn turned it over to E. Razon, Inc. While in the
vs. latter’s possession, part of the shipment was stolen. California Insurance was
CEBU STEVEDORING CO., INC., defendant and appellee subrogated to the claim for loss after paying Olympia (Phil).
(G.R. No. L-18961; August 31, 1966)
Both Olympia (Phil.) and California thereafter brought a suit against E. Razon,
FACTS: Plaintiff-appellants, organized and existing under the laws of the US, Inc., the carrier and the container company, which had earlier refused to
sued herein defendant-appellee, as subrogee to the shipper and consignee, make good the loss of the goods.
alleging that the latter undertook to carry a shipment of copra for delivery to
P&G Company at Cebu City but upon discharge, a portion of the copra was For E.Razon’s failure to appear at the pre-trial and after ex-parte reception of
found damaged. evidence, the trial court decided for California. On Razon’s motion, the order
was set aside and Razon amended his answer that California is a foreign
Defendant moved to dismiss on the ground that the complaints on the corporation doing business in the Philippines without a license to do so and
ground of failure to allege compliance with Sec. 69 of the Corporation Law that it cannot maintain suit in this jurisdiction. But once again, Razon failed to
which was granted after failure of the plaintiff to comply with the amendment appear at the pre-trial, as a result, the trial court revived the decision.
of the complaint.
On appeal, the IAC reversed the decision holding, among others, that
ISSUE: WON plaintiff-appellants have the right to sue as to the defects n the California failed to allege in the complaint its capacity to sue.
pleadings and procedures?
ISSUE: WON the failure of California to aver its capacity to sue is fatal?
HELD: No. It should be noted that insofar as the allegations in the complaint
have a bearing on appellants' capacity to sue, all that is averred is that they HELD: The slightest reflection will however immediately make — Tear that
are both foreign corporations existing under the laws of the United States. between the factual settings of the Atlantic Mutual case and the case at bar,
This averment conjures two alternative possibilities: either they are engaged there are distinctions of no little significance. In the former, Atlantic Mutual
in business in the Philippines or they are not so engaged. If the first, they Insurance Co. and Continental Insurance Co., two (2) American firms,
must have been duly licensed in order to maintain this suit; if the second, if brought suit as subrogees of the shipper and/or consignee of the goods
the transaction sued upon is singular and isolated, no such license is ensured without joining the latter. In the case at hand, the action was
required. In either case, the qualifying circumstance is an essential part of instituted by both the subrogee, California Insurance Co., Ltd., and
the element of plaintiffs' capacity to sue and must be affirmatively pleaded. the subrogor, a domestic corporation, Olympia (Philippines) about
whose capacity to sue no dispute exists. In Atlantic Mutual, the
To be sure, under the Rules of Court (Section 11, Rule 15) in force prior to plaintiffs' lack of capacity to sue was raised by the defendant at the
the promulgation of the Revised Rules on January 1, 1964, it was not earliest opportunity, through a motion to dismiss filed within the
necessary to aver the capacity of a party to sue except to the extent required reglementary period to answer in accordance with Rule 16 of the
to show jurisdiction of the court. In our opinion, however, such rule does not Rules of Court. In the case at bar, the defendant was twice declared
apply in all situations and under all circumstances. The theory behind a in default, and the defense of lack of capacity to sue, was not raised
similar rule in the United States is "that capacity ... of a party for purpose of until after 'the first declaration of default had been lifted. Moreover,
These circumstances proscribe the application to the controversy at bar of A foreign corporation may, by writ of prohibition, seek relief against the
the doctrine in Atlantic Mutual. The defendant's conduct in this case wrongful assumption of jurisdiction. And a foreign corporation seeking
strongly indicates the absence of any valid defense on its part a writ of prohibition against further maintenance of a suit, on the
against the plaintiffs' claims: the defendant failed to appear for pre-trial ground of want of jurisdiction in which jurisdiction is not bound
despite notice, not once, but twice and was in consequence twice declared in by the ruling of the court in which the suit was brought, on a
default. The lack of any meritorious defense on its part was in fact confirmed motion to quash service of summons, that it has jurisdiction.
by the declaration of the Court of Appeals, which it has not challenged, that
three (3) errors attributed by it to the Trial Court were "unmeritorious except WHEREFORE, the writs applied for are granted: the respondent Court of First
the second," i. e., plaintiff's lack of capacity to sue. Even assuming incapacity Instance of Rizal is declared without jurisdiction to take cognizance of its Civil
on the part of California, no such incapacity may be attributed to its co- Case No. 10403; and its orders issued in connection therewith are hereby
plaintiff, Olympia Business Machines Co. (Phil.), Inc. And if strictly necessary, annulled and set aside,. Respondent court is further commanded to desist
the latter could quite easily execute a cancellation of the deed of subrogation from further proceedings in Civil case No. 10403 aforesaid. Costs against
or of re-assignment of the right of action from California back to Olympia. private respondents, Antonio J. Villegas and Juan Ponce Enrile.
Moreover, the dismissal of the case at this stage, would not bar the
institution by California of the same action, this time alleging in its complaint G. LAWS GOVERNING FOREIGN CORPORATIONS
that it was suing on a single, isolated transaction. But this would be an Idle,
circuitous ceremony in the light of the unchallenged declaration by the Court Sec. 129. Law applicable. - Any foreign corporation lawfully doing
of Appeals of the absence of any meritorious substantial defense on the part business in the Philippines shall be bound by all laws, rules and regulations
of defendant Razon. This would be to accord undue importance and applicable to domestic corporations of the same class, except such only as
significance to technical rules, to allow an inflexible, unreasoning adherence provide for the creation, formation, organization or dissolution of corporations
to such technical rules to frustrate and defeat a plainly valid claim. or those which fix the relations, liabilities, responsibilities, or duties of
stockholders, members, or officers of corporations to each other or to the
WHEREFORE, the judgment of the Intermediate Appellate Court subject of corporation.
the appeal is reverse and that of the Trial Court, dated February 1, 1980
reinstated and affirmed, with costs against the respondents. M. E. GREY, plaintiff-appellant,
vs.
TIME, INC., petitioner, INSULAR LUMBER COMPANY, defendant-appelle
vs. (G.R. No. L-45144; April 3, 1939)
HON. ANDRES REYES, as Judge of the Court of First Instance of
Rizal, ELISEO S. ZARI, as Deputy Clerk of Court, Branch VI, Court of FACTS: Herein defendant-appellee Insular Lumber Company is a corporation
First Instance of Rizal, ANTONIO J. VILLEGAS and JUAN PONCE existing and organized under the laws of the State of New York licensed to
ENRILE, respondents. engage business in the Philippines.
(G.R. No. L-28882; May 31, 1971)
The plaintiff-appellant Grey, holder of 57 shares (which is less than 3% of the
FACTS: Herein respondents Antonio Villegas and Juan Ponce Enrile sought to outstanding capital stock of defendant corporation), was denied access to the
recover from herein petitioner damages upon an alleged libel arising from a books and records of the company because, as alleged, the laws of New York
publication of Time (Asia Edition) magazine, in its issue entitled “Corruption provide that only a stockholder who own at least 3% of the outstanding
in Asia”. capital stock of a corporation may make a written request to the treasurer or
other fiscal officer for a statement of its affairs; that plaintiff neither has the
Petitioner filed a motion to dismiss on lack of jurisdiction and improper venue 3% requirement nor made the written request.
which was deferred until after the trial of the case.
Plaintiff raises the Corporation Law which does not provide such
ISSUE: WON the petition for certiorari and prohibition will prosper? requirements and gives any stockholder the right to examine the books of the
corporation. Such law, being the law upon which the defendant corporation
HELD: The dismissal of the present petition is asked on the ground that the was issued a license to do business in the Philippines.
petitioner foreign corporation failed to allege its capacity to sue in the courts
of the Philippines. Respondents rely on section 69 of the Corporation law, ISSUE: WON appellant, as a stockholder, is entitled to inspect and examine
which provides: the books and records of transactions of appellee?
SEC. 69. No foreign corporation or corporations formed, organized, or HELD: Under ection 77 Stock Corporation Law of New York. Under this law,
existing under any laws other than those of the Philippines shall be plaintiff has the right to be furnished by the treasurer or other fiscal officer of
permitted to ... maintain by itself or assignee any suit for the recovery of the corporation with statement of its affairs embracing a particular account of
any debt, claim, or demand whatever, unless it shall have the license all its assets and liabilities. In the third place, inasmuch as plaintiff, either at
prescribed in the section immediately preceding. ..." ...; the hearing or in his motion for new trial, did not ask to have the stipulation
of facts altered or changed, he cannot now, for the first time on appeal, raise
They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc. 7 that the question that aside from the right conferred upon him by section 77 of
no foreign corporation may be permitted to maintain any suit in the local the Stock Corporation Law of New York, he also entitled under the common
courts unless it shall have the license required by the law, and the ruling in law to examine and inspect the books and records of the defendant
Atlantic Mutual Ins. Co., Inc. vs. Cebu Stevedoring Co., Inc. 8 that "where ... corporation. In the fourth place, neither can this right under the common law
the law denies to a foreign corporation the right to maintain suit unless it has be granted the defendant in the present case, since the same can only be
previously complied with a certain requirement, then such compliance or the granted at the discretion of the court, under certain conditions, to wit:
fact that the suing corporation is exempt therefrom, becomes a necessary
averment in the complaint." We fail to see how these doctrines can be a (a) That the stockholder of a corporation in New York has the right to
propos in the case at bar, since the petitioner is not "maintaining inspect its books and records if it can be shown that he seeks information
any suit" but is merely defending one against itself; it did not file for an honest purpose (14 C. J., 853), or to protect his interest as
any complaint but only a corollary defensive petition to prohibit the stockholder. (In re Steinway, 159 N. Y., 250; 53 N. E., 1103; 45 L. R. A.,
lower court from further proceeding with a suit that it had no 461 [aff. 31 App. Div., 70; 52 N. Y. S., 343]).
jurisdiction to entertain.
Sec. 131. Amended license. - A foreign corporation authorized to transact The Securities and Exchange Commission shall also mail to the corporation at
business in the Philippines shall obtain an amended license in the event it its registered office in the Philippines a notice of such revocation
changes its corporate name, or desires to pursue in the Philippines other or accompanied by a copy of the certificate of revocation.
additional purposes, by submitting an application therefor to the Securities
and Exchange Commission, favorably endorsed by the appropriate L. WITHDRAWAL OF FOREIGN CORPORATIONS
government agency in the proper cases.
Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws
J. MERGER/CONSOLIDATION and regulations, a foreign corporation licensed to transact business in the
Philippines may be allowed to withdraw from the Philippines by filing a
Sec. 132. Merger or consolidation involving a foreign corporation petition for withdrawal of license. No certificate of withdrawal shall be issued
licensed in the Philippines. - One or more foreign corporations authorized by the Securities and Exchange Commission unless all the following
to transact business in the Philippines may merge or consolidate with any requirements are met;
domestic corporation or corporations if such is permitted under Philippine
laws and by the law of its incorporation: Provided, That the requirements on 1. All claims which have accrued in the Philippines have been paid,
merger or consolidation as provided in this Code are followed. compromised or settled;
Whenever a foreign corporation authorized to transact business in the
Philippines shall be a party to a merger or consolidation in its home country 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
or state as permitted by the law of its incorporation, such foreign corporation Philippine Government or any of its agencies or political subdivisions have
shall, within sixty (60) days after such merger or consolidation becomes been paid; and
effective, file with the Securities and Exchange Commission, and in proper
cases with the appropriate government agency, a copy of the articles of 3. The petition for withdrawal of license has been published once a week for
merger or consolidation duly authenticated by the proper official or officials of three (3) consecutive weeks in a newspaper of general circulation in the
the country or state under the laws of which merger or consolidation was Philippines.
effected: Provided, however, That if the absorbed corporation is the foreign CHAPTER 19: MISCELLANEOUS PROVISIONS (TITLE XVI)
corporation doing business in the Philippines, the latter shall at the same time
file a petition for withdrawal of it license in accordance with this Title. Sec. 137. Outstanding capital stock defined. - The term "outstanding
capital stock", as used in this Code, means the total shares of stock issued
K. REVOCATION OF LICENSE under binding subscription agreements to subscribers or stockholders,
whether or not fully or partially paid, except treasury shares.
Sec. 134. Revocation of license. - Without prejudice to other grounds
provided by special laws, the license of a foreign corporation to transact Sec. 138. Designation of governing boards. - The provisions of specific
business in the Philippines may be revoked or suspended by the Securities provisions of this Code to the contrary notwithstanding, non-stock or special
and Exchange Commission upon any of the following grounds: corporations may, through their articles of incorporation or their by-laws,
designate their governing boards by any name other than as board of
1. Failure to file its annual report or pay any fees as required by this Code; trustees.
2. Failure to appoint and maintain a resident agent in the Philippines as Sec. 139. Incorporation and other fees. - The Securities and Exchange
required by this Title; Commission is hereby authorized to collect and receive fees as authorized by
law or by rules and regulations promulgated by the Commission.
3. Failure, after change of its resident agent or of his address, to submit to
Cesar Nickolai F. Soriano Jr.
Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
members, directors, trustees, or officers, shall be removed or impaired either
Sec. 140. Stock ownership in certain corporations. - Pursuant to the by the subsequent dissolution of said corporation or by any subsequent
duties specified by Article XIV of the Constitution, the National Economic and amendment or repeal of this Code or of any part thereof.
Development Authority shall, from time to time, make a determination of
whether the corporate vehicle has been used by any corporation or by Sec. 146. Repealing clause. - Except as expressly provided by this Code,
business or industry to frustrate the provisions thereof or of applicable laws, all laws or parts thereof inconsistent with any provision of this Code shall be
and shall submit to the Batasang Pambansa, whenever deemed necessary, a deemed repealed.
report of its findings, including recommendations for their prevention or
correction. Sec. 147. Separability of provisions. - Should any provision of this Code
or any part thereof be declared invalid or unconstitutional, the other
Maximum limits may be set by the Batasang Pambansa for stockholdings in provisions, so far as they are separable, shall remain in force.
corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals Sec. 148. Applicability to existing corporations. - All corporations
related to each other by consanguinity or affinity or by close business lawfully existing and doing business in the Philippines on the date of the
interests, or whenever it is necessary to achieve national objectives, prevent effectivity of this Code and heretofore authorized, licensed or registered by
illegal monopolies or combinations in restraint or trade, or to implement the Securities and Exchange Commission, shall be deemed to have been
national economic policies declared in laws, rules and regulations designed to authorized, licensed or registered under the provisions of this Code, subject
promote the general welfare and foster economic development. to the terms and conditions of its license, and shall be governed by the
provisions hereof: Provided, That if any such corporation is affected by the
In recommending to the Batasang Pambansa corporations, business or new requirements of this Code, said corporation shall, unless otherwise
industries to be declared vested with a public interest and in formulating herein provided, be given a period of not more than two (2) years from the
proposals for limitations on stock ownership, the National Economic and effectivity of this Code within which to comply with the same.
Development Authority shall consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the geographic location, the Sec. 149. Effectivity. - This Code shall take effect immediately upon its
extent of Filipino ownership, the labor intensity of the activity, the export
approval.
potential, as well as other factors which are germane to the realization and
promotion of business and industry.