CORPORATION LAW

IV. CONTROL AND MANAGEMENT OF A CORPORATION

LEVELS OF CORPORATE CONTROL

Tri-Level Structure – The standard operating procedure for corporations,

frequently referred to as a corporate norm, might be described as pyramidal in form.

a) At the base are the shareholders or members whose vote is required to

elect the board of directors or trustees and to pass on other major corporate actions.

b) The next level is represented by directors who constitute the policy-

making body of the corporation and select the officers annually, as a rule. The keystone
or corporate procedure is the provision common to most corporate laws that the
business of a corporation shall be managed by its board of directors.

c) Finally, on top of the pyramid are the officers who have some discretion
but in general deemed to execute policies formulated by the board.

BOARD OF DIRECTORS/TRUSTEES

1. GENERAL POWERS OF THE BOARD (SEC. 23,CC)

Section 23 of the Corporation Code clearly states that, unless otherwise provided
in the Code, the powers of a corporation formed shall be exercised, all business
conducted, and all property of such corporation controlled and held, by the Board of
Directors or Trustees to be elected from among the holders of stocks, or where there are
no stocks, from among the members of the corporation, who shall hold office for one (1)
year until their successors are elected and qualified.

The Supreme Court has characterized the power of the board of directors as
follows:

Under the Corporation Code, unless otherwise provided by said Code, corporate
powers such as the power to enter into contracts, are exercised by the board of directors.
However, the Board may delegate such powers to either an executive committee or
officials or contracted managers. The delegation, except for the executive committee,
must be for specific purposes. The delegation to officers makes the latter agents of the
corporation; accordingly, the general rules of agency as to the binding effects of their
acts would apply. For such officers to be deemed fully clothed by the corporation to
exercise a power of the board, the latter must specially authorize them to do so. (ABS-
CBN v. CA, 301 SCRA 572)

TWO THEORIES ON THE SOURCE OF POWER OF THE BOARD

There are two theories on the source of power of the Board: 1) the theory of
original power, and 2) the theory of delegated power.
1. THEORY OF ORIGINAL POWER

Under the theory of original power, the source of power of the Board comes
directly from the law, and that the Board is originally and directly granted corporate
power as the embodiment of the corporation. This theory has no democratic notions,
but actually is more akin to the principles of autocracy. It recognizes that one of the
attractive features of the corporate vehicle for the efficient and economical management
of corporate affairs is promoted by centralization of control in a small group of decision-
makers, which is the Board of Directors or trustees.

The theory finds support in Section 23 of the Corporation Code which clearly
vests corporate powers in the Board, and only limits such power in narrow situations
when “otherwise provided in the Code.”

2. THEORY OF DELEGATED POWER

Under the theory of delegated power, the authority exercised by the Board is
viewed as derived or delegated authority, delegated to them by stockholders or
members of the corporation. Under such theory, the source of primary theory can
override the decisions of its delegates. Such theory promotes the notion of “democracy”
in the corporate set-up, where the real source of power is the stockholders or members,
and the representatives thereof would be the Board.

Under this view, a corporation has a personality separate and distinct from the
individuals that compose it, but the fact remains that it cannot act without the medium
of human beings. The corporate powers should belong to the stockholders or members
who form the corporation, and who contribute the corporate assets. The stockholders or
members are the real owners of the corporation, and to them the corporate powers must
belong, and that the Board of Directors or Trustees merely acts as their agents or
representatives.

PECULIAR AGENCY ROLE OF THE BOARD

Under Sec. 23 of the Corporation Code, the Board is the main agency by which
all corporate powers and authority are exercised, and strictly speaking any other officer
appointed to represent the corporation, is a mere appointee of the Board.

The Board thus acts as an agent of the corporation, and is bound by the rules
applying to agency relationship.

This line of discussion brings us to the logical crossroad that provides that
although legally the board is the agent of the principal corporation, since the principal
does not have real existence or a mind of its own to make decisions, the board is by its
own exercise of business judgment, the very principal speaking and acting in the
commercial world. The Board stands both as an agent of the corporation, and the very

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personification of the corporation in the commercial and legal world, and practically
stands almost as the principal for corporate powers and affairs, and that the officers and
representatives that it appoints are its own agents.

2. BUSINESS JUDGMENT RULE

The corporate principle recognizing corporate power and competence to be

lodged primarily with the Board of Directors is embodied in the “business judgment
rule.” A resolution or transaction pursued within the corporate powers and business
operations of the corporation, and passed in good faith by the Board of Directors, is
valid and binding, and generally the courts have no authority to review the same or
substitute their own judgment, even when the exercise of such power may cause losses
to the corporation or decrease the profits of a department.

In the case of Montelibano v. Bacolod-Murcia Milling Co. Inc., 5 SCRA 36,

established the principle that when a resolution is passed in good faith by the board of
directors, it is valid and binding and whether or not it will cause losses or decreases the
profits of the corporation, the court has no authority to review them, adding that it is
well-known rule of law that questions of policy or management are left solely to the
honest decision of officers and directors of a corporation, and the court is without
authority to substitute its judgment for that of the board of directors; the board is the
business manager of the corporation, and so long as it acts in good faith its orders are
not reviewable by the courts.

The business judgment rule as an integral part of the role of the Board of
Directors: “They hold such office charged with the duty to act for the corporation
according to their best judgment, and in doing so they cannot be controlled in the
reasonable exercise and performance of such duty. It is a well-known rule of law that
questions of policy or of management are left solely to the honest decisions or officers
and directors of a corporation, and the other court is without authority to substitute its
judgment of the board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are not reviewable by the
courts.

Two (2) Applications of the Rule

The business judgment rule actually has two (2) applications, namely:

1) Resolutions and transactions entered into by the Board of Directors within

the powers of the corporation cannot be reversed by the courts not even on the behest of
the stockholders of the corporation; and

2) Directors and officers acting within such business judgment cannot be

held personally liable for the consequences of such acts.

The business judgment rule is not only a substantial rule of law, but also a rule of
evidence. Whenever any action is brought to question the validity of a board resolution
or corporate transaction approved by the Board, the general rule is once it has been

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entered into by the Board by virtue of the exercise of its judgment, and it will be
presumed to be valid.

The other branch of the business judgment rule is that corporate officers cannot
be held personally liable for corporate debts or obligations incurred in the exercise of
the business judgment. However, when directors or trustees violate their duties, he can
be held personally liable, thus:

a) When the director wilfully and knowingly vote for patently unlawful acts
of the corporation;

b) When he is guilty of gross negligence or bad faith in directing the affairs

of the corporation;

c) When he acquires any personal or pecuniary interest in conflict with his

duty as such director.

3. QUALIFICATIONS OF THE BOARD MEMBERS (SEC. 23 & 27, CC)

Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the books
of the corporation. No person shall be elected as trustee unless he is a member of the
corporation. (Section 92)

Any director who ceases to be the owner of at least one (1) share of the stock of
the corporation of which he is a director shall thereby cease to be a director. A majority
of the directors or trustees of all corporations organized under this Code must be
residents of the Philippines.

The fact that a director is only holding the share as a nominee of another person
does not disqualify him as a director. What the law requires is that he has legal title to
the share. Under the Old Corporation Law it was required that every director must own
“in his own right” at least one share of the capital stock of the corporation. Under the
present Section 23 of Corporation Code, it requires only that the share of a director
“shall stand in his name on the books of the corporation.

In stock corporations – The qualifications of directors of a stock corporation are as

follows:

a) every director must own at least one share of the capital stock;

b) the share of stock held by the director must be registered in his name on
the books of the corporation;

c) every director must continuously own at least a share of stock during his
term; otherwise, he shall automatically cease to be a director; and

d) a majority of the directors must be residents of the Philippines.

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In a non-stock corporation – Trustees of non-stock corporations must be members in
good standing thereof and like in the stock corporations, a majority of them must be
residents of the Philippines.

Disqualification (Sec. 27)

A director must not have been convicted of an offense punishable by

imprisonment of exceeding six (6) years or has not committed any violation of the
Corporation Code within five (5) years prior to his election.

The by-laws of the corporation can provide other qualifications and

disqualifications in addition to those provided in the Corporation Code.

4. ELECTION OF THE BOARD MEMBERS (SEC. 24 & 26, CC); SEE CUMULATIVE VOTING
PROCEDURE

Under Section 24 of the Corporation Code, at all elections of directors or trustees,

there must be present, either in person or by representatives authorized to act by
written proxy, the owners of the majority of the outstanding capital stock, or if there be
no capital stock, a majority of the members entitled to vote.

The election must be by ballot if requested by any voting stockholder entitled to

vote shall have the right to vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name on the stock books of the
corporation, or where the by-laws are silent, at the time of the election. No delinquent
stock shall be voted.

Any meeting of the stockholders or members called for an election may 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 are no present or represented by proxy, at the meeting, the
owners of a majority of the outstanding capital stock, or if there be no capital stock a
majority of the members entitled to vote.

Cumulative Voting

Section 24 of the Corporation Code expressly provides for cumulative voting in

the election of the directors of stock corporations. The provisions for cumulative voting
are mandatory.

Under the section, at all elections of directors, a stockholder may vote such
number of shares for as many persons as there are directors to be elected or he may
cumulate said shares and give one candidate as many votes as the number of directors
to be elected multiplied by the number of his shares shall equal, or he may distribute
them in the same principle among as many candidates as he shall see fit, provided that
the total number of votes cast by him shall not exceed the number of shares owned by
him in the books of the corporation multiplied by the whole numbers of directors to be
elected.

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 Cumulative voting therefore is a voting procedure wherein a stockholder is
allowed to concentrate his votes and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall equal. The policy of
cumulative voting is to allow minority stockholders the capacity to be able to elect
representatives to the board of directors. No exception is provided for in Section 24 so
that the articles may not provide for restriction or suppression of the principle of
cumulative voting in stock corporations.

In contrast to cumulative voting, which allows for an opportunity for minority

representation in the Board, straight voting allows a simple majority of the shareholders
to elect the entire board of directors leaving the minority shareholders unrepresented.
Under straight voting, each stockholder simply votes the number of shares he owns for
each director nominated.

Classic formula:

S1 = S X D1† 1
D† 1

*S1 - number of shares owned by some shareholders or group of shareholders.

D1 - number of directors Bloc I desires to elect
S - total number of shares voting at the meeting
D - total number of directors to be elected at the meeting

For example:
Mr. Cruz owns 66 shares of stock of MDB Corp., if there are 5 directors to be
chosen, Mr. Cruz is entitled to 330 votes obtained by multiplying 66 by 5. Mr. Cruz is at
liberty to distribute any or all of the votes he is entitled to cast among any of the
candidates.

Straight Voting

By this voting method, every stockholder “may vote such number of shares for
as many persons as there are directors” to be elected.

The votes are distributed equally among the candidates without preference.

CUMULATIVE VOTING BY DISTRIBUTION

By this method, a stockholder may cumulate his shares by multiplying also the
number of his shares by the number of directors to be elected and distribute the same
among as many candidates as he shall see fit.

In electing directors by cumulative voting, “the total number of votes cast by a

stockholder shall not exceed the number of shares owned by him as shown in the books
of the corporation multiplied by the whole number of directors to be elected.”

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ELECTION OF BOARD OF TRUSTEES

Non-stock corporations may, through their articles of incorporation or their by-

laws, designate their governing boards by any name than the Board of Trustees.

Under Section 92 of the Corporation Code, unless otherwise provided in the

articles of incorporation or the by-laws, the Board of Trustees of non-stock corporations,
which may be more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as 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 shall be held annually and trustees so elected shall have a term of
three (3) years. Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired period.

Under Section 24, “unless otherwise provided in the article of incorporation, or

in the by-laws,” members of corporations which have no capital stock may cast as many
votes as there are trustees to be elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of votes shall be declared elected.

In non-stock corporations, the default rule in the election of trustees is straight

voting. Unlike the mandatory rule for cumulative voting for stock corporations, in non-
stock corporations, it is possible to provide for other types of voting in either the articles
of incorporation or the by-laws of the corporation.

5. TERM OF OFFICE; HOLD-OVER PRINCIPLE

The term of office of the members of the Board in a stock corporation shall be one
(1) year and until their successors are elected and qualified.

In the event that no new Board is elected and qualified after the original one-year
term of the Board of Directors, then under the hold-over principle, the existing Board, if
still constituting a quorum, is still a legitimate Board with full authority to bind the
corporation.

In one case, Ponce v. Encarnacion, 94 Phil 81, the Supreme Court held that where
no meeting is called by the Board for the stockholders to elect new set of directors, one
may be called by the stockholders by a petition filed in the courts and the remedy for
calling a stockholder’s meeting is similar to a preliminary injuction – it is possible for
the courts to set it as an ex-parte hearing for granting it and there is no denial of due
process.

6. QUORUM REQUIREMENT IN BOARD MEETINGS (SEC. 25, CC)

Kinds of meetings

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1) Regular Meeting - which are held by the board monthly, unless the by-
laws provide otherwise.

2) Special Meeting - those held by the board at any time upon the call of
the president, or as provided in the by-laws. It may be held at any time upon the call be
held anywhere in and outside the Philippines, unless otherwise provided in the by-
laws. (sec. 54)

The president shall preside at all meetings of the board.

The quorum in the meeting of the Board shall be the presence of a majority of the
number of directors as fixed in the articles of incorporation.

The required vote to pass a resolution shall be a majority vote of the directors
present at such meeting where quorum is achieved.

In the election of officers, however, the vote of the majority of all the members of
the Board is necessary.

Requisites for a valid Board Meeting

a) Meeting of the Directors or Trustees duly assembled as a Board, at the

place, time, and manner provided in the by-laws;

b) Presence of the required quorum; and

c) Decision of the majority of the quorum or, in other cases a majority of the
entire Board.

On account of their responsibility to the corporation, directors or trustees cannot

validly act by proxy. They must attend meetings of the Board and act in person and as a
body. Each director or trustee is required by law to exercise his personal judgment and
he cannot delegate his powers or assign his duties.

In case of abstention during a board meeting on a vote taken on any issue, the
general rule is that an abstention is counter in favor of the issue that won the majority
vote; since by their act of abstention, the abstaining directors are deem to abide by the
rule of the majority.

7. REMOVAL OF BOARD MEMBERS (SEC. 28, CC)

Under Section 28, any director of trustee of a corporation may be removed from
office by a vote of the stockholders holding or representing two thirds (2/3) of the
outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of
two-thirds (2/3) of the members entitled to vote: Provided, that such removal shall take
place either at a regular meeting of the corporation or at a special meeting called for the
purpose of removal of directors or trustees, or any of them, must be called by the
secretary on order of the president or on the written demand of the stockholders

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representing or holding at least a majority of the outstanding capital stock, or , it is be
non-stock corporation, on the written demand of a majority of the members by any
stockholder or member of the corporation signing the demand.

Notice of the time and place of such meeting, as well as of the intention to
propose such removal, must be given by publication or by written notice as prescribed
in the Corporation code.

The vacancy resulting from removal may be filled by election at the same
meeting without further notice, or at any regular or at any special meeting called for the
purpose, after giving notice as prescribed in the Code. Removal may be with or without
cause; however, removal without cause cannot be used to deprive minority
stockholders or members of the right of representation to which they may be entitled
under Section 24 of the Corporation Code requiring cumulative voting.

The general rule therefore is that any director may be removed from office by a
vote of the stockholders holding or representing two-thirds (2/3) of the outstanding
capital stock. When removal is for a cause, the two-thirds (2/3) vote is the minimum
requirement to remove a director.

When removal is without cause, the two-thirds (2/3) vote is also enough to
remove a director. The exception is that when the director is elected by the minority
through cumulative voting, he may not be removed without cause even if there is two-
thirds (2/3) vote.

8. VACANCIES IN THE BOARD (SEC. 29, CC)

Section 29, any vacancy occurring in the Board of Directors or Trustees other
than by removal by the stockholders or members or by expiration of term, may be filled
by the vote of at least majority of the remaining directors or trustees, if still constituting
a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill vacancy
shall be elected only for the unexpired term of his predecessor in office.

Any position in the Board to be filled by reason of an increase in the number of

directors or trustees shall be filled only by an election at a regular or at a special meeting
of stockholders or members duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in the notice of the meeting.

Therefore, vacancies in the Board other than by removal or expiration of term

may be filled by the vote of majority of remaining directors or trustees, if there is a
quorum; in there is a quorum, it may be filled by stockholders or members in a regular
or special meeting called for that purpose.

Vacancy by reason of an increase in members of the Board can be filled-up only

by election of the stockholders or members of the corporation.

9. COMPENSATION OF BOARD MEMBERS (SEC. 30, CC)

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 Under Section 30 of the Corporation Code, in the absence of any provision in the
by-laws fixing their compensation, the directors shall not receive any compensation, as
each director, except for reasonable per diems. However, the section also provides that
such compensation, other than per diems, may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a regular
or special stockholders’ meeting.

In no case shall the total yearly compensation of directors, as such directors,

exceed ten percent (10%) of the net income before income tax of the corporation during
the preceding year.

When it comes to officers, no specific prohibition is found in the Corporation

Code.

Generally, dividends and compensation policies represent areas of conflicts-of-

interests. In cases where there is a danger of conflict situation, and the Board will be in a
position to choose between their personal interests and those of the corporation, and
other persons namely the corporate creditors, it grants court’s jurisdiction to intervene
in the exercise of judicial powers, in order to make sure that the members of eh Board
will not abuse the powers granted to them. Conflicts-of-interests situations are clearly
an exception to the business judgment rule.

The law therefore draws a clear distinction between the functions of directors
and trustees, on one hand, and the officers on the other. In Western Institute of
Technology, Inc. v. Salas, 278 CRA 216, the Court held that directors and trustees are not
entitled to salary or other compensation when they perform nothing more than the
usual and ordinary duties of their office, founded on the presumption that directors and
trustees render service gratuitously, and that the return upon their shares adequately
furnishes the motives for service, without compensation. It held that under Section 30 of
the Corporation Code, there are two (2) ways by which members of the board can be
granted compensation apart from reasonable per diems: a) when there is a provision in
the by-laws fixing their compensation; and b) when the stockholders representing a
majority of the outstanding capital stock at a regular or special meeting agree to give
them compensation, and concluded that from the language of Section 30, it may also be
deduced that members of the board may also receive compensation, when they render
services to the corporation in a capacity other than as directors or trustees of the
corporation.

The Court in Western Institute of Technology that position of being chairman and
vice-chairman, like that of Treasurer and Secretary, were considered by the officers as
not mere directorship position, but officership position that would entitle the occupants
to compensation. Likewise, the limitation placed under Section 30 of the Corporation
Code that directors cannot receive compensation exceeding 10% of the net income of the
corporation, would not apply to the compensation given to such positions since it is
being given in their capacity as officers of the corporation and not as Board members.

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CORPORATE OFFICERS

1. Concept of Corporate Officers

Although Section 23 of the Corporation Code provides that the power and
responsibility to decide whether the corporation should enter into a contract that will
bind the corporation is lodged in the Board, nevertheless, just as a natural person may
authorize another to do certain acts for and on his behalf, the Board of Directors may
validly delegate some of its functions and powers to officers, committees, or agents. The
authority of such individuals to bind the corporation is generally derived from law,
corporate by-laws, and authorizations from the Board, either expressly or impliedly by
habit, custom, or acquiescence in the general course of business.

Consequently, the general principles of agency govern the relation between the
corporations and its officers or agents, subject tot the articles of incorporation, by-laws,
or relevant provisions of law. The Supreme Court has therefore held: “A corporate
officer or agent may represent and bind the corporation in transactions with third
persons to the extent that the authority to do so has been conferred upon him, and this
includes powers which have been intentionally conferred, and also such powers as, in
the usual course of the particular business, are incidental to, or may be implied from,
the powers intentionally conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe that it has
conferred.” (San Juan Structural and Steel Fabricators, Inc. v. CA, 296 SCRA 631)

Two Levels of Discussions of Corporate Officership

In Corporate Law, there are two levels of discussions when it comes to the
coverage of “corporate officers.”

A. The first level, relates to the power of the Board of Directors to hire and
terminate officers in the exercise of business judgment, as contrasted from non-officers
who are protected by the security of tenure policy under Labor Law, a policy embodied
in the Constitution. The test of “officers” under first level is based on an arbitrary
formula, and does not necessarily go into the nature or importance of the position held;
and that the nature of the office is not essential in determining such type of
“officership.”

B. The second level of determination of who are corporate officers deals on

the distinction of corporate officers from non-officers to determine who are bound by
the duties of loyalty and diligence. Under Section 31 of the Corporation Code, both
director and officers are jointly and severally liable for assenting to patently unlawful
acts of the corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict with
their duty as such directors or officers. Non-officers therefore are not generally imposed
any duty loyalty or diligence. The differentiation of such “officers” from non-officers
must necessarily lie on the nature of the office held by them.

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 2. Validity and binding effect of acts of corporate officers

An officer’s authority to act for the corporation in a particular matter is

determined by his actual office and not by the description he may use in acting for the
corporation.
This authority may be derived from 1) some provision of statute or 2) the articles
of incorporation. It may contained in 3) a by-law, assuming that the by-law is deemed
not to violate some rules of law such as the provision of the Code vesting powers of
management in the board of directors or trustees. Authority may also be conferred on
an officer by 4) a resolution of the board of trustees or directors, provided that the
resolution does not attempt to delegate non-delegable powers.

Corporate officers shall perform the duties and functions enjoined by them by
law and the by-laws of the corporation. However, powers of corporate officers under
the by-laws are always subject to the rule in Section 23 that the board of directors or
trustees is the governing body of the corporation. By virtue of Section 23, the board may
in its best judgment and for the best interest of the corporation, appoint or authorize the
President or another officer or agent to act for and in behalf of the corporation, but in all
cases such officers shall be under the ultimate direction of the board. One may be an
agent of a private domestic corporation although he is not an officer thereof. It has been
held that where the real party-in-interest is a body corporate, neither the administration
of the agency or a project manager could sign the certificate against forum shopping
without being duly authorized by resolution of the board of directors.

A. Determination of Authority

The full extent of the powers or authority of any particular officer of a

corporation is to be determined by inquiring into: a) the authority which he has by
virtue of his office; b) the authority which is expressly conferred upon him or is
incidental to the effectualness of such express authority; and c) as to third persons
dealing with him without notice of any restriction thereof, the authority which the
corporation holds the officer out as possessing or is estopped to deny. In the
determination of the authority which certain officers may exercise by virtue of their
office; d) the nature of the corporate business must also be taken into consideration.

In addition to the foregoing, e) the act of an officer though originally

unauthorized, may become binding upon the corporation by a subsequent ratification.

3. Doctrine of apparent authority

When in the usual course of business of the corporation, an officer or agent is

held out by such corporation, or has been permitted to act for it in such a way as to
justify third persons who deal with him in assuming that he is doing an act or making a
contract within the scope of his authority, the corporation is bound thereby even though
such officer or agent does not have the actual authority to do such act or make such
contract. This authority is known as apparent or ostensible authority.

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

In Ramirez v. Orientalist, Co., 38 Phil. 634, the court discussed the rationale for
the doctrine of apparent authority granted to corporate officers sufficient to bind the
corporation that “in dealing with corporations, the public at large is bound to rely on a
large extent upon outward appearances. If a man is found acting for a corporation with
the external indicia of authority, any person, not having notice of want of authority,
may usually rely upon those appearances; and if it be found that the directors had
permitted the agent to exercise that authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will be bound,
notwithstanding the actual authority may never have been granted.”

In the same case, the Court further held that the public is not supposed nor
required to know the transactions which happen around the table where the Board of
Directors or the stockholders are from time to time convoked, and that whether a
particular officer actually possesses the authority which he assumes to exercise is
frequently known to very few, and the proof usually is not readily accessible to the
stranger who deals with the corporation on the faith of the ostensible authority
exercised by some of the corporate officers. It is therefore reasonable, in a case where an
officer of a corporation has made a contract in its name, that the corporation should be
required, since by that means the plaintiff is apprised of the fact that the agent’s
authority is contested; and he is given an opportunity to adduce evidence showing
either that the authority existed or that the contract was ratified and approved.

Further, in the case of PNB v. Court of Appeals, 94 SCRA 357, a bank was held
bound by the acts of its branch manager, since the Court considered well-settled the
rule that if a private corporation intentionally or negligently clothes its officers or agents
with apparent power to perform acts for it, the corporation will be estopped to deny
that such apparent authority is real as to innocent third parties dealing in good faith
with such officers or agents.

Liability of directors, trustees and officers

1. Instances when corporate officers/directors are held solidarily liable (Sec. 31,
CC)

The general rule is that officers of a corporation are not personally liable for their
official acts unless it is shown that they exceeded their authority. Section 31 enumerates

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the occasions when a director or trustee may be held liable for damages and thus, the
veil of corporate fiction be pieced, as follows:

1. When directors and trustees or, in appropriate cases, the officers of the
corporation:

a) He wilfully and knowingly votes or assents to patently unlawful acts of the

corporation;
b) He is guilty of gross negligence (not mere “want of ordinary prudence”) or
bad faith in directing the affairs of the corporation; and
c) He acquires any personal or pecuniary interest in conflict with his duty as such
director or trustee.

In the above instances, the erring board members or officers shall be held jointly
and severally (or solidary) liable for all damages resulting therefrom suffered by the
corporation, its stockholders or members, or other persons.

Further, 2) when a director has consented to the issuance of watered stocks or

who, having knowledge thereof, did not forthwith file with corporate secretary his
written objection thereto;

3) When the director, trustee, or officer has contractually agreed or stipulated

to hold himself personally and solidarily liable with the corporation;

4) When a director, trustee, officer is made, by specific provisions of law,

personally liable for his corporate actions.

The liability of guilty directors shall be jointly and severally, the claim for
solidary obligation is available not only to the corporation but also stockholders and
others who might suffer from such wrongful act.

The liability is such that a director need to have voted for in order to be liable,
but mere assent to a wrongful act or contract would make him liable. Therefore, when
an unlawful act or contract is for decision of the Board, it is not enough that the director
abstains from voting; it is important to cast a negative vote and allow such to be placed
of record in order to escape liability.

2. Self-dealing directors/officers (Sec. 32, CC)

Self-dealing directors/trustees/officers – those who personally contract with the

corporation in which they are directors. It is discouraged because the directors, trustees,
and officers have fiduciary relationship with the corporation and there can be no real
bargaining where the same is acting on both sides of the trade.

The contract between the corporation and the self-dealing director/trustee/ officer
is voidable unless the following requirements for its validity are present:

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 1) The presence of such director/trustee in the board meeting approving the
contract was not necessary for constituting a quorum for such meeting;

2) The vote of such director/trustee in the board meeting approving the contract
was not necessary for the approval of the contract;

3) The contract is fair and reasonable under the circumstances;

4) In the case of an officer, there was previous authorization by the board of

directors or trustees.

However, even if the requirements are not present, the contract with the self-
dealing director, trustee, or officer may still be ratified by a vote of stockholders
representing at least 2/3 of Outstanding Capital Stock or by the vote of the stockholders
representing at least 2/3 of the members in a meeting called for the purpose, provided
that:

1. Full disclosure of the adverse interest of the directors/officer involved is made

on such meeting,

2. The contract is fair and reasonable under the circumstances.

3. Contracts involving inter-locking directors (Sec. 33, CC)

Under Section 33 of the Corporation Code, except in cases of fraud, and provided
the contract is fair and reasonable under the circumstances, a contract between two or
more corporations having interlocking directors shall be invalidated on that ground
alone. However, if the interest of the interlocking directors in one corporation or
corporations is merely nominal, he shall be subject to the same ratificatory vote required
from stockholders and members, as in the case of dealing of directors, trustees and
officers with their corporation.

Stockholdings exceeding twenty percent (20%) of the outstanding capital stock

shall be considered substantial for purpose of interlocking directors.

There is an interlocking director in a corporation when one (or some or all) of the
directors in one corporation is (for are) a director in another corporation.

a) If the interests of the interlocking director in the corporations are both

substantial (stockholdings exceed 20% of Outstanding Capital Stock)

General Rule: A contract between two or more corporations having interlocking

directors shall NOT be invalidated on that ground alone.

Exception: If the contract is fraudulent or not fair and reasonable.

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 b) If the interest of the interlocking director in one of the corporations is
nominal while substantial in the other (stockholdings 20% or more), the contract shall
be valid, provided the following conditions are present:

1) The presence of such director/trustee in the board meeting in which the

contract was approved was NOT necessary to constitute a quorum for such meeting;

2) That the vote of such director/trustee was not necessary for the approval of the
contract;

3) That the contract is fair and reasonable under the circumstances.

Where (1) and (2) are absent, the contract can be ratified by the vote of the
stockholders representing at least 2/3 of Outstanding Capital Stock or by the vote of the
stockholders representing at least 2/3 of the members in a meeting called for the
purpose. Provided, that:

1) Full disclosure of the adverse interest of the directors/trustees involved is

made on such meeting;

2) The contract is fair and reasonable under the circumstances.

Outstanding Capital Stock – the total shares of stock issued to subscribers or

stockholders, whether or not fully or partially paid except treasury shares so long as
there is a binding subscription agreement (Sec. 137, CCP)

4. Doctrine of corporate opportunity (Sec. 34, CC)

Under Section 31 of the Corporation Code, directors or trustees who acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, it stockholders or members and other persons.

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

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

On the other hand, under Section 34, where a director, by virtue of his office,
acquires for himself a business opportunity which should belong to the corporation,
thereby obtaining profits which should belong to the corporation, he must “account to
the latter for all such profits by refunding the same, unless his act has been ratified by a
vote of the “stockholders” owning or representing at least two-thirds (2/3) of the
outstanding capital stock.” This provision shall be applicable, notwithstanding the fact
that the director risked his own funds in the venture.

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 The difference between the second paragraph of Section 31 and Section 34 are
therefore as follows:

a) While they both cover the same subject matter which is business opportunity
but their concern are different personalities; Section 34 is only applicable to directors
and not to officers, while Section 31 is applicable to directors, trustees and officers.

b) Section 34 allows a ratification of a transaction by a self-dealing director by the

vote of stockholders representing two-thirds (2/3) of the outstanding capital stock.

If there is presented to a corporate officer or director a business opportunity

which:

a) corporation is financially able to undertake;

b) From its nature, is in line with corporations business and is of practical

advantage to it; and

c) One in which the corporation has an interest or a reasonable expectancy.

By embracing the opportunity, the self-interest of the officer or director will be

brought into conflict with the interest of his corporation. Hence, the law does not permit
him to seize the opportunity even if he will use his own funds in the venture.

If he seizes the opportunity thereby obtaining profits to the expense of the

corporation, he must account all the profits by refunding the same to the corporation
unless the act has been ratified by a vote of the stockholders owning or representing at
least two –thirds (2/3) of the outstanding capital stock (sec. 34, CCP).

Executive committee (Sec. 35, CC)

Under Section 35 of the Corporation Code, the by-laws of a corporation may

create an executive committee, composed of not less than three (3) members of the
board, to be appointed by the board. The executive committee may act, by majority vote
of all its members, on such specific matters within the competence of the Board, as may
be delegated to it in the by-laws or on a majority vote of the Board, except with respect
to:

a) Approval of any action for which shareholders’ approval is also required;

b) The filing of vacancies in the Board;

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

d) The amendment or repeal of any resolution of the Board which by its express
terms is not so amendable or repealable; and

e) Distribution of cash dividends to the shareholders.

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 The executive committee can do any act because the power of the board to
delegate certain specific acts is unlimited. However, by the language of Section 35 of the
Corporation Code, ultimate power must remain with the Board of Directors, and it
would be against corporate principles to empower the executive committee with
authority that the Board itself cannot countermand.

Nothing in the Corporation Code prevents the creation of an executive

committee by a board resolution, even in the absence of an enabling clause in the by-
laws. The creation of such executive committee would be in line with full authority of
the Board to appoint agents and delegates. But taking the cue from Section 35 of the
Code, such executive committee, its composition and powers, would be subject to the
same limitations provided for by the Code, since the Board by mere resolution cannot
create an executive committee that will have greater power than one sanctioned by law.

The SEC, however, in an opinion held that by virtue of Section 35 of the

Corporation Code, an executive committee can only be created by virtue of a provision
in the by-laws and that in the absence of such by-law provision; the Board of Directors
cannot simply create or appoint an executive committee to perform some of its
functions.

V. CORPORATE POWERS

Doctrine of limited capacity;

Under the Corporation Code, the underlying doctrine on corporate powers and
capacity is covered by the theory of concession which looks at a corporation simply as a
mere creature of, a completely within the control of the State. Section 2 of the Code
defines a corporation as only having “the powers, attributes and properties expressly
authorized by law or incident to its existence.”

Different Kinds of Powers of a Corporation

a) Express – those expressly authorized by the Corporation Code and other

laws, and its articles of incorporation or charter.

b) Implied Powers – those that can be inferred from or necessary for the
exercise of the express powers.

c) Incidental Powers – those that are incidental to the existence of the

corporation.

Express powers

a) General Powers

1. Sue and be sued in its corporate name

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2. Succession;
3. Adopt and use a corporate seal;
4. Amend articles of incorporation;
5. To adopt, amend or repeal by-laws;
6. For Stock Corporation – issue stocks to subscribers and to sell treasury stocks; for
non-stock corporations – admit members;
7. Purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage, and
otherwise deal with real and personal property, pursuant to its lawful business;
8. Enter into merger or consolidation;
9. To make reasonable donation for public welfare, hospital, charitable, cultural,
scientific, civil or similar purposes. Prohibited: for partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of directors,
trustees, officers and employees;
11. Other powers essential or necessary to carry out its purposes.

Specific powers (sec. 37 to sec. 44, Corporation Code)

1. Power to extend or shorten corporate term (sec. 37, CCP);

2. Increase/Decrease Corporate Stock (sec. 38, CCP);
3. Incur, create bond indebtedness (sec. 38, CCP);
4. To deny pre-emptive right (sec. 39, CCP);
5. Sell, dispose, lease, encumber all or substantially all of corporate assets (sec. 40, CCP);
6. Purchase or acquire own shares (sec. 41, CCP);
7. To invest in another corporation, business other than the primary purpose (sec. 42,
CCP);
8. To declare dividends (sec. 43, CCP);
9. To enter into management contract (sec. 44, CCP);
10. To amend the articles of incorporation (sec. 16, CCP).

Concept of Ultra Vires Act (Sec. 45, CC)

Section 45 of the Corporation Code, embodies in statutory from the ultra vires
doctrine as it provides that no corporation “shall possess or exercise any corporate
powers except those conferred by this Code or by its articles of incorporation and
except such as are necessary or incidental to the exercise of the powers so conferred.”
During the early history of Philippine Corporate Law, it was the accepted notion that
any contract made or by-law provision adopted by a corporation in contravention of
law were ultra vires and void. The ultra vires doctrine is based on two corporate
principles.

Firstly, the ultra vires doctrine stems in part from the principle that a corporation
is a creature of law, and has only such powers and privileges as are granted by the
State. Since the corporation is considered a legal creature, the doctrine finds it hard to
accommodate the notion that a corporation can be more than just an entity of limited
capacities and powers, and could hold powers or privileges not emanating from the
State. In other words, the ultra vires doctrine is really a product of the theory of
concession, which is expressed in the Corporation Code’s ancient definition of a
corporation in Section 2.

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 Second, the ultra vires doctrine upholds the duty of trust and obedience owed by
the corporation’s directors and officers to the stockholders or members. Such duty of
obedience dictates that the corporation engage, only in transactions to which the
stockholders and members bind themselves, by way of the provisions of the purpose
clause of the articles of incorporation. In addition, the duties of corporate directors and
officers must necessarily include an obligation not to enter into transactions which
violate the law.

In the case of Atrium Management Corporation v. Court of Appeals, G.R. No.

109491, February 28, 2001, an ultra vires act is one committed outside the object for
which a corporation is created as defined by the law of its organization and therefore
beyond the power conferred upon it by law.

Three (3) types of Ultra Vires Cases

1. Acts done beyond the powers of the corporation as provided for in the law or
its articles of incorporation;

2. Acts or contracts entered into in behalf of the corporation by persons who have
no corporate authority; and

3. Acts or contracts which are per se illegal as being contrary to law.

Effects of Ultra Vires Act

1. executed contract – courts will not set aside or interfere with such contracts;

2. Executory contracts – no enforcement even at the suit of either party (void and
unenforceable);

3. Part executed and part executory – principle against unjust enrichment shall
apply.

Ultra Vires Act v. Illegal Acts

The term ultra vires act is distinguished from an illegal act for the former is
merely voidable which may be enforced by performance, ratification, or estoppels,
while the latter is void and cannot be validated.

The distinctions between acts and contracts which are illegal per se, and those
which are not, as to their legal effects, have been recognized in the case of Pirovano v.
Dela Rama Steamship Co., 96 Phil 335, the Supreme court held that “illegal acts” of a
corporation contemplate the doing of an act which is contrary to law, morals, or public
order, or contravenes some rules of public policy or public duty, and re, like similar
transactions between individuals, void. Such acts or contracts cannot serve as basis of a
court action, nor acquire validity by performance, ratification or estoppels. On the other

20
hand, ultra vires acts or those which are not illegal and void ab initio but are within the
scope of the articles of incorporation are merely voidable and may become binding and
enforceable when ratified by stockholders. It was further held that the ratification by
stockholders of an ultra vires act which is not illegal, cures the infirmity of the corporate
act, and makes it perfectly valid and enforceable, specially so if it is not merely
executory but executed and consummated, and no creditors are prejudiced.

Trust fund doctrine (acquisition of corporate shares sec. 41, CCP)

The capital stock, property and other assets of the corporation are regarded as
equity in trust for the payment of the corporate creditors. The subscribed capital stock
of the corporation is a trust fund for the payment of debts of the corporation which the
creditors have the right to look up to satisfy their credits. Corporation may not dissipate
this and the creditors may sue stockholders directly for the unpaid subscription. (Phil.
Trust Co. v. Rivera, 44 Phil. 469)

However, money received for subscription of increase of authorized capital is not

covered by the trust fund doctrine prior to the approval of such increase by the SEC
(Central Textile Mills v. NWPC, 260 SCRA 368).

Examples of cases where trust fund doctrine is violated

1. When the corporation releases or condones payment of the unpaid

subscription;

2. When there is payment of dividends without unrestricted retained earnings;

3. When properties are transferred in fraud of creditors; and

4. When properties are disposed or undue preference is given to some creditors

even if the corporation is insolvent.

Distribution of Assets and the Trust Fund Doctrine

The Trust Fund Doctrine provides that subscriptions to the capital stock of a
corporation constitute a fund to which the creditors have a right to look for the
satisfaction of their claims. This doctrine is the underlying principle and/or articulated
in the following:

a) Procedure for the distribution of capital assets, embodied in the Corporation

Code, which allows the distribution of corporate capital only in three instances: 1)
amendment of the Articles of Incorporation to reduce the authorized capital stock; 2)
purchase of redeemable shares by the corporation, regardless of the existence of
unrestricted/retained earnings, and 3) dissolution and eventual liquidation of the
corporation;

b) Section 41 on the power of a corporation to acquire its own shares; and

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 c) In section 122 on the prohibition against the distribution of corporate assets
and property unless the stringent requirements therefore are complied with.

The distribution of corporate assets and property cannot be made to depend on

the whims and caprices of the stockholders, officers, or directors of the corporation, or
even, for that matter, on the earnest desire for the court a quo “to prevent further
squabbles and future litigations” unless the indispensable conditions and procedures
for the protection of corporate creditors are followed. Otherwise, the “corporate peace”
laudably hoped for by the court will remain nothing but a dream because this time, it
will be the creditors’ turn to engage in “squabbles and litigations” should the court
order an unlawful distribution in blatant disregard of the Trust Fund Doctrine. (Ong
Yong v. David S. Tiu, GR No. 144476, April 8, 2003)

VI. CORPORATE BY-LAWS

Concept, use and nature of by-laws

Relatively permanent and continuing rules of action adopted by the corporation

for its own government and that of the individuals composing it and those having the
direction, management and control of its affairs, in whole or in part, in the
management and control of its affairs and activities (China Banking Corporation v. CA,
270 SCRA 503)

By-laws may be defined as the rules of action adopted by a corporation (or

association) for its internal government and for the government of its stockholders and
control of its affairs in their relation to the corporation and as among themselves,
including rules for routine matters such as calling meetings and the like.

By-laws in relation to articles of incorporation

By-laws are subordinate to the charter of the corporation and part of its charter is
its articles of incorporation.

1) In order for by-laws to be valid, they must be consistent with the terms and
spirit of the charter of the corporation – the word “charter” being here used in its
broadest sense and as having reference to the statutory right to be a corporation without
regard to whether such right be obtained by special act or under general statutes. A
corporation cannot by a by-law vest the entire management of its business in an
executive committee, when the charter or enabling act vests the management in the
board of directors or trustees.

2) A by-law can neither enlarge the rights and powers conferred by the charter
nor restrict the duties and liabilities imposed thereby, and in case it attempts to do so,
the charter will prevail.

3) A by-law prohibiting acts which are within the powers conferred, expressly or
impliedly, by its charter, affects the authority of its officers, but does not render such

22
acts ultra vires. By-laws of a corporation are not enforced by avoiding contracts made in
violation of them.

4) By-laws must be consistent with the nature, purposes and objects of the
corporation; otherwise, they will be invalid. Thus, where there is nothing in the articles
of incorporation which suggests power in the corporation to control, regulate, or
interfere with its stockholders in the conduct of their separate individual business, by-
laws which assume to do this are beyond the scope of the corporation purpose and are
void.

By-Laws is distinguished from Articles of Incorporation

1) the former are merely rules and regulations adopted by the corporation; while
the latter constitutes the charter or fundamental law of the corporation;

2) the former is usually executed after incorporation by the stockholders or

members; while the latter is executed before the incorporation by the incorporators;

3) the filing of the former is a condition subsequent; while the filing of the latter
is a condition precedent to corporate existence.

Adoption of by-laws (Sec. 46, CC); effect of non-filing within the prescribed period

Under Section 46 of the Corporation Code, within one month after receipt of
official notice of the issuance of its incorporation with the SEC, adopt a code of by-laws
for its government not inconsistent with the Code.

By-laws may also be adopted and filed prior to incorporation; in such case, such
by-laws shall be approved and signed by all the incorporators and submitted to the
SEC, together with the articles of incorporation.

For the adoption of by-laws, the affirmative vote of stockholders representing at

least a majority of the outstanding capital stock or at least majority of the members in
the case of non-stock corporations, shall be necessary.

The by-laws shall be signed by the stockholders or members voting for them and
shall be kept in the principal office of the corporation, subject to the inspection of the
stockholders or members during office hours. A copy thereof, duly certified to by a
majority of the directors or trustees and countersigned by the secretary of the
corporation, shall be filed with the SEC which shall be attached to the original articles of
incorporation.

In all cases, by-laws shall be effective only upon the issuance of the SEC of a
certification that the by-laws are not inconsistent with the Corporation Code.

The failure to adopt and file the by-laws does not automatically operate to
dissolve a corporation, but is considered a ground by which the SEC may seek the
corporation’s dissolution. Under Section 6(l)(5) of PD 902-A, the SEC may suspend,

23
revoke, after proper notice and hearing, the franchise or certificate of registration of a
corporation for its failure to file by-laws within the period required by law.

Contents of by-laws;

The following matters are the basic contents of by-laws as enumerate under
Section 47, CCP:

a) time, place and manner of calling and conducting regular and special meetings
of directors or trustees; places for meetings of directors or trustees may be outside the
Philippines if it is so provided in the by-laws;

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

c) required quorum in meetings of stockholders and the manner of voting;

d) forum for proxies of stockholders and members and manner of voting;

e) qualifications, duties and compensation of directors/trustees, officers, and

employees;

f) time for holding annual election of directors or trustees, mode and manner of
giving notice thereto;

g) manner of election or appointment and the term of office of all officers except
directors or trustees;

h) penalties for violation of by-laws;

i) manner of issuing stock certificate; and

j) such other matters necessary for the proper means of corporate business and
affairs.

Requisites of a valid by-law provision

1) it must be consistent with the Corporation Code, other pertinent laws and
regulations;
2) it must be consistent with the Articles of Incorporation, hence, in case of
conflict, the Articles of Incorporation prevails;

3) it must be reasonable and not arbitrary or oppressive;

4) it must not disturb vested rights, impair contract or property rights of

stockholders or members or create obligations unknown to law.

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Amendment to by-laws (Sec. 48, CC)

May be made by the 1) Stockholders together with the Board, or 2) Board only.

1) Stockholders together with the Board: majority of the board plus majority of
outstanding capital stock.

2) By the Board as delegated by 2/3 of outstanding capital stock or 2/3 of

members.

By-laws in relation to third parties

It is not binding, unless there is actual knowledge. Third persons are not even
bound to investigate the content because they are not bound to know the By-laws which
are merely provisions for the government of a corporation and notice to them will not
be presumed. (China Banking Corp. v. CA, 270 SCRA 503)

VII. CORPORATE MEETINGS

Kinds of corporate meetings

1) Meetings of stockholders or members – it may be:

a) regular or those held annually (Sec. 24) on a date fixed in the by-laws, or if not
so fixed, on any date in April or every year as determined by the board of directors or
trustees. It is held principally for the purpose of electing another set of directors or
trustees; or

b) Special or those held at any time deemed necessary or as provided in the by-
laws (secs. 49, 50)

2) Meetings of directors or trustees – it may be:

a) Regular or those held by the board monthly unless the by-laws provide
otherwise; or

b) Special or those held by the board at any time upon the call of the president or
as provided in the by-laws (secs. 49, 53).

Requirements of a meeting

The following requisites must be complied with in order that there will be a valid
meeting of stockholders or members:

1) It must be held at the proper place (Sec. 51);

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 2) It must be held at the stated date and at the appointed time or at a reasonable
time thereafter;

3) It must be called by the proper person (Sec. 50, last par);

4. There must be a previous notice (secs. 50, 51)

5. There must a quorum (sec. 52).

If the meeting is held at an unauthorized place or without proper notice and not
all the stockholders or members are present, those who have a right to complain may
take steps to set aside any action taken at such meetings even though a majority of the
stockholders or members were present in the absence of waiver, estoppels or
ratification.

Right to vote of stockholders

A stockholder is given the right to participate in the corporate affairs by giving

him the right to attend meetings after due notice and the right to vote thereat in person
or through a proxy or trustee.

1. instances when voting right not available

a) Where the articles of incorporation provides for classification of shares

pursuant to Sec. 6, non-voting shares are not entitled to vote except as provided for in
the last paragraph of Sec. 6.

b) Preferred or redeemable shares may be deprived of the right to vote unless

otherwise provided in the Code (Sec. 6, CCP).

c) Fractional shares of stock cannot be voted unless they constitute at least one
full share (sec. 41, CCP).

d) Treasury shares having no voting rights as long as they remain on the treasury
(sec. 57. CCP).

e) Holders of stock declared delinquent by the board of directors for unpaid

subscription are not entitled to vote or a representation at any stockholder’s meeting
(sec. 67, CCP).

f) A transferee of stock cannot vote if his transfer is not registered in the stock
and transfer book of the corporation (SEC. 63, CCP).

g) A stockholder is still entitled to vote even if the shares are mortgaged or

pledged unless he authorized the creditor in writing to vote.

2. rules on:

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 a. delinquent shares; (Sec. 71, CC)

Under Section 71, no delinquent stock shall be voted for or be entitled to vote or
to representation at any stockholder’s meeting, nor shall the holder thereof be entitled
to any rights or a stockholder except the right to dividends in accordance with the
provisions of the Code, until and unless he pays the amount due on his subscription
with accrued interest and the costs and expenses of advertisement, if any.

Delinquency, is achieved in either one of two ways:

a) Failure to pay the subscription on the date mentioned in the call; or

b) Failure to pay the subscription on the date specified on the contract of

subscription.

Once a stock has become delinquent, it has the following effects on its holder:

a) It disqualifies the stockholder to be voted for or be entitled to vote or to

representation at any stockholder’s meeting;

b) It disqualifies the stockholder to exercise any rights of a stockholder

except the right to dividends, until and unless he pays the amount due on his
subscription with accrued interest and the costs and expenses of advertisement, if any.

The holders of delinquent shares shall not be entitled to notice of the regular or
special meeting of the stockholders, nor shall the shares be included in the
determination of a quorum for shareholdings’ meetings. The only right remaining to a
delinquent stockholder is the right to receive dividends under Section 71 of the
Corporation Code, but the cash dividend due shall first be applied to the unpaid
balance, while stock dividend shall be withheld until the unpaid balance is fully paid.
In effect, the stockholder’s right to dividend is even restricted.

b. escrow shares;

These are shares subjected to an agreement by virtue of which the shares are
deposited by the grantor or his agent with a third person to be held by the latter until
the performance of a certain condition. The beneficiary of the agreement is not yet a
stockholder until the performance of such conditions and is not therefore entitled to the
rights of shareholders (SEC Opinion, November 20, 1989)

c. unpaid shares; (Sec. 72, CC)

In case of unpaid shares, before unpaid shares become delinquent, the holder
thereof is not considered to have violated any contract with the corporation and, as a
general rule, he has all the rights of a stockholder, which rights include the right to vote
and to participate in dividends based on his total subscription. Such rights commence

27
from the time his subscription is accepted by the corporation or if the offer to subscribe
is made by the corporation, from the time such offer is accepted by the subscriber.
However, he is liable for interest on his unpaid subscription of so required by the by-
laws (Sec. 66)

May one be considered a stockholder even without full payment of the

subscription?

Under Section 72, full payment of subscription is not required to make one a
stockholder. If should not be construed, however, to preclude the implementation of the
policy of the Central Bank relative to the registration of foreign investments for
purposes of repatriation and/or remittances of earnings. It is the Central Bank’s position
that foreign investors’ subscriptions are not entitled to any dividends prior to actual
remittance of the full payment of their subscriptions (SEC Opinion, Dec. 14, 1989).

d. sequestered shares;

Who May Vote the Sequestered Shares of Stock?

Simply stated, the gut substantive issue to be resolved in the present Petition is:
"Who may vote the sequestered UCPB shares while the main case for their reversion to
the State is pending in the Sandiganbayan?"

This Court holds that the government should be allowed to continue voting
those shares inasmuch as they were purchased with coconut levy funds – that are prima
facie public in character or, at the very least, are "clearly affected with public interest."

General Rule: Sequestered Shares

Are Voted by the Registered Holder

At the outset, it is necessary to restate the general rule that the registered owner of the
shares of a corporation exercises the right and the privilege of voting. This principle
applies even to shares that are sequestered by the government, over which the PCGG as
a mere conservator cannot, as a general rule, exercise acts of dominion. On the other
hand, it is authorized to vote these sequestered shares registered in the names of private
persons and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered
test devised by the Court in Cojuangco v. Calpo and PCGG v. Cojuangco Jr.,28 as follows:

(1) Is there prima facie evidence showing that the said shares are ill-gotten and thus
belong to the State?

(2) Is there an imminent danger of dissipation, thus necessitating their continued

sequestration and voting by the PCGG, while the main issue is pending with the
Sandiganbayan?

Sequestered Shares Acquired with Public Funds are an Exception

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From the foregoing general principle, the Court in Baseco v. PCGG (hereinafter "Baseco")
and Cojuangco Jr. v. Roxas ("Cojuangco-Roxas") has provided two clear "public character"
exceptions under which the government is granted the authority to vote the shares:

(1) Where government shares are taken over by private persons or entities who/which
registered them in their own names, and

(2) Where the capitalization or shares that were acquired with public funds somehow
landed in private hands.

The exceptions are based on the common-sense principle that legal fiction must
yield to truth; that public property registered in the names of non-owners is affected
with trust relations; and that the prima facie beneficial owner should be given the
privilege of enjoying the rights flowing from the prima facie fact of ownership.

In Baseco, a private corporation known as the Bataan Shipyard and Engineering

Co. was placed under sequestration by the PCGG. Explained the Court:

"The facts show that the corporation known as BASECO was owned and
controlled by President Marcos 'during his administration, through nominees, by taking
undue advantage of his public office and/or using his powers, authority, or influence,'
and that it was by and through the same means, that BASECO had taken over the
business and/or assets of the National Shipyard and Engineering Co., Inc., and other
government-owned or controlled entities."31

Given this factual background, the Court discussed PCGG's right over BASECO
in the following manner:

"Now, in the special instance of a business enterprise shown by evidence to have

been 'taken over by the government of the Marcos Administration or by entities or
persons close to former President Marcos,' the PCGG is given power and authority, as
already adverted to, to 'provisionally take (it) over in the public interest or to prevent * *
(its) disposal or dissipation;' and since the term is obviously employed in reference to
going concerns, or business enterprises in operation, something more than mere
physical custody is connoted; the PCGG may in this case exercise some measure of
control in the operation, running, or management of the business itself."

Citing an earlier Resolution, it ruled further:

"Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents' calling and holding of a stockholders' meeting for the election of directors
has authorized by the Memorandum of the President * * (to the PCGG) dated June 26,
1986, particularly, where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right or even any shareholding
in said corporation." (Italics supplied)

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 The Court granted PCGG the right to vote the sequestered shares because they
appeared to be "assets belonging to the government itself." The Concurring Opinion of
Justice Ameurfina A. Melencio-Herrera, in which she was joined by Justice Florentino P.
Feliciano, explained this principle as follows:

"I have no objection to according the right to vote sequestered stock in case of a
take-over of business actually belonging to the government or whose capitalization comes
from public funds but which, somehow, landed in the hands of private persons, as in the case of
BASECO. To my mind, however, caution and prudence should be exercised in the case
of sequestered shares of an on-going private business enterprise, specially the sensitive
ones, since the true and real ownership of said shares is yet to be determined and
proven more conclusively by the Courts." (Italics supplied)

The exception was cited again by the Court in Cojuangco-Roxas in this wise:

"The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of
strict ownership of sequestered property. It is a mere conservator. It may not vote the
shares in a corporation and elect the members of the board of directors. The only
conceivable exception is in a case of a takeover of a business belonging to the government or
whose capitalization comes from public funds, but which landed in private hands as in
BASECO." (Italics supplied)

The "public character" test was reiterated in many subsequent cases; most
recently, in Antiporda v. Sandiganbayan. Expressly citing Conjuangco-Roxas, this Court
said that in determining the issue of whether the PCGG should be allowed to vote
sequestered shares, it was crucial to find out first whether these were purchased with
public funds, as follows:

"It is thus important to determine first if the sequestered corporate shares came
from public funds that landed in private hands."

In short, when sequestered shares registered in the names of private individuals

or entities are alleged to have been acquired with ill-gotten wealth, then the two-tiered
test is applied. However, when the sequestered shares in the name of private
individuals or entities are shown, prima facie, to have been (1) originally government
shares, or (2) purchased with public funds or those affected with public interest, then
the two-tiered test does not apply. Rather, the public character exceptions in Baseco v.
PCGG and Cojuangco Jr. v. Roxas prevail; that is, the government shall vote the shares.
(Republic v. COCOFED, G.R. No. 147062-64, December 14, 2001)

e. pledgor, mortgagor, or administrator of shares (Sec. 55,CC)

As to pledgees or mortgagees of shares in stock corporations, they shall have the

right to attend and vote at meetings of stockholders only when expressly given such
right in writing by the pledgor or mortgagor, as the latter remains the owner of the
stock pledged or mortgaged. The authorization is required by the Code to be recorded
on the appropriate corporate books by such pledgor or mortgagor. However, if the

30
pledgor or mortgagor of the shares of stock is disqualified to vote it, the disqualification
extends as well to the pledge or mortgagee.

f. shares jointly owned (Sec. 56, CC)

In case of shares of stock owned jointly by two or more persons, Section 56
required the consent of all the co-owners in order to vote such stock. Such consent is not
necessary where:

a) There is a written proxy executed by the joint-owners authorizing one or some

of them or any other person to vote for all; and

b) The shares are owned in an “and/or” capacity by the holders thereof, in which
case any one of the joint-owners can vote said shares or appoint a proxy therefore.

Where the property relation between husband and wife is governed by the
system of absolute community of property, the same shall be governed by the rules on
co-ownership. Consequently, as co-owners of shares of stock, they shall be considered
as one stockholder.

Concept of proxy and voting trust agreement (Sec. 58 & 59, CC)

a) Proxy

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

Stockholders or members (sec. 58, CCP).

Nature of Proxy Relationship

A proxy is a special form of agency and governed by the Law on Agency.

Consequently, being strictly fiduciary relation, a proxy is essentially revocable in
nature; and any attempt or stipulation to render it irrevocable would be to no avail.
Generally, proxies, even those with irrevocable terms, have always been considered as
revocable, unless coupled with an interest, and their revocation may be by formal
notice, orally, or by conduct as by the appearance of the stockholder or member giving
the proxy, or the issuance of a subsequent proxy, or the sale of shares.

As a rare exception, a proxy coupled-with-interest may be rendered non-

revocable where the proxy has parted with value or incurred liability at the
stockholder’s request, the essence being that the exercise of the proxy as the means of
reimbursement or indemnity. Therefore, it is not the giving of onerous consideration
that make a proxy coupled-with-interest, but that the proxy is an integral part of the
security by which a loan or indebtedness is to be paid or liquidated.

The SEC has appropriately observed that a person acting as proxy for a
stockholder is in the eye of the law, the latter’s agent and as such, a mere fiduciary who
has the duty of acting in strict accord with requirements of a fiduciary relation; and that
accordingly, the proxy holder must act in accordance with the instructions given

31
him/her by the stockholder and any violation of such fiduciary duty shall be governed
by the pertinent laws on Agency, not by the Corporation Code.

Requisites for Valid Proxy

In order to be valid and enforceable, a proxy must comply with the following
requisites:

a) The proxy shall be in writing;

b) Signed by the stockholder or member; and

c) Filed before the scheduled meeting with the corporate secretary.

The SEC has opined that if the by-laws f the association do not prescribe a
particular form for proxy, the imposition of a particular form by the corporation would
be void, and the members may use other forms of proxies as long as they are executed
in accordance with Section 58 of the Corporation Code, which provides that proxies
shall be in writing, signed by the stockholder or member and filed before the scheduled
meeting with the corporate secretary.

For purposes of determining quorum and entitlement to vote or to participate in

stockholders meeting, the proxy must filed/registered with the corporate secretary prior
to the stockholders meeting, and unless filed in accordance with the provisions of the
Corporation Code of the by-laws, the proxy holder is not entitled to any right.

Finally, when the by-laws of a corporation are silent on the time of submission of
proxies, the corporation cannot fix the deadline since it is clear under Section 58 that
when no deadline or period of filing/submission of the proxies is provided for in the by-
laws, then proxies may be filed anytime before the scheduled meeting.

Period of Effectivity of Proxy

Unless otherwise provided in the proxy, it shall be valid only for the meeting for
which it is intended. No proxy shall be valid and effective for a period longer than five
(5) years at any one time.

Who may be appointed as proxy

Section 58 of the Corporation Code imposes no limitation as to the persons who

may be appointed as proxy and by-law provisions restricting the right of a stockholder
to appoint a proxy would be void.

However, in the case of non-stock corporation, Section 89 of the Corporation

Code the articles of incorporation or by-laws may restrict the right of a member to vote
by proxy. The SEC has opined that under Section 89 the right of members to vote by
proxy may be denied entirely by appropriate provisions in the articles of incorporation
or by-laws of a non-stock corporation.

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Voting Trust Agreement

Nature

The voting trust device involving the complete surrender by the shareholder of
his voting rights to a trustee or trustees, appears to have been effective in the
rehabilitation of insolvent corporations, as well as in irrevocably committing groups of
shareholders to the continuation of fixed business policies.

Under a voting trust agreement, a stockholder of a stock corporation parts with

the voting power only but retains the beneficial ownership of the stock. A voting trustee
is only a share owner vested with colourable and fictitious title for the sole purpose of
voting upon stocks that he does not own. Consequently, the transferring stockholder,
although he has ceased to be a stockholder of record, retains the right of inspection of
corporate books which he can exercise concurrently with the voting trustee.

By its very nature, a voting trust agreement results in the separation of the voting
rights of a stockholder form his other rights such as the right to receive dividends, the
right to inspect books of the corporation, the right to sell certain interests in the assets of
the corporation and other rights to which a stockholder may be entitled until the
liquidation of the corporation.

Requisites of Valid Voting Trust Agreement

Under Section 59 of the Corporation Code, one or more stockholders of a stock

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

A voting trust agreement shall be ineffective and unenforceable unless:

a) It is in writing and notarized, and shall specify the terms and conditions
thereof; and

b) A certified copy of such agreement shall be filed with the corporation and with
the SEC.

The certificate or certificates of stock covered by the voting trust agreement shall
be cancelled and new ones shall be issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. In the books of the corporation, it shall
be noted that the transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement. The trustee or trustees shall execute and deliver transferor
voting trust certificates, which shall be transferable in the same manner and with the
same effect as certificates of stock.

33
 The trustee is the legal title holder or owner of the shares so transferred under
the agreement. He is, therefore, qualified to be a director.

Differences between Proxy and Voting Trust Agreement

Lee v. Court of Appeals, gave the following criteria “to distinguish a voting trust
agreement from proxies and other voting pools and agreements:”

a) The voting rights of the stock are separated from the other attributes of
ownership;

b) The voting rights granted are intended to be irrevocable for a definite period
of time; and

c) The principal purpose of the grant voting rights is to acquire voting control of
the corporation.

The other differences between a voting trust agreement and a proxy are as
follows:

a) Proxy is essentially an agency relationship based on personal qualifications

and preferences, and therefore, essentially revocable; whereas, a voting trust agreement
is a contractual relationship based on the Law of Trust, and exist by virtue of a property
relationship, and is not revocable, although it may be lawfully terminated based on
breach of trust.

b) Both the proxy and the voting trust agreement are fiduciary in nature. A
voting trust agreement is not revocable because the parties are bound by the contractual
relationship created. A proxy is, however, generally revocable unless coupled with an
interest. This feature of irrevocability provides for stability on the voting trust
relationship.

c) A proxy can only act the specified stockholders’ or members’ meeting (if the
proxy is not continuing in nature), while a trustee is not limited to any particular
meeting.

d) The proxy has no right to receive dividends; whereas, a trustee will receive the
dividends declared on the shares held in trust, but with obligation to dispose of them
for the benefit of the beneficial owner.

e) The proxy does not have the right to inspect and such right was not granted
under the proxy; whereas, in a voting trust arrangement, trustee is the person entitled
to exercise the right to inspect.

f) The proxy does not have the appraisal right; in a voting trust agreement, it is
trustee, as the naked owner of the shares, who will exercise the appraisal right, but
subject to his trust obligations with the beneficial owner.

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Derivative suit; concept and requisites

The legal standing of stockholders to bring derivative suits for and in behalf of
their corporation is not a civil law right; in fact, the Corporation Code contains no
provision recognizing or regulating the filing of derivative suits. It is a common law
right of stockholders and members; it exists by virtue of Philippine jurisprudence
adopted from Anglo-American jurisprudence.

A derivative suit is one which is instituted by a shareholder or a member of a

corporation, for an din behalf of the corporation for its protection from acts committed
by directors, trustees, corporate officers, and even third persons.

Requisites for filing of Derivative Suit

As decided in the case of San Miguel Corporation v. Kahn, 176 SCRA 447, the
Supreme Court put together the requisites for a proper derivative suit, to wit:

1. The party bringing the suit should be a shareholder as of the time of the
act or transaction complained of, and at the time of the filing of the suit, the number of
his shares not being material;

2. The party has tried to exhaust intra-corporate remedies, and has made a
demand on the board of directors for the appropriate relief, but the latter has failed or
refused to heed his plea; and

3. The cause of action actually devolves on the corporation, the wrongdoing

or harm having been, or being caused to the corporation and not to the particular
stockholder bringing the suit.

Proper forum for Derivative Suit

The proper forum for a derivative suit used to be with the SEC under Section 5
(b) of Presidential Decree 902-A; however, pursuant to Section 5.2 of the Securities
Regulation Code, all intra-corporate disputes under Section 5 of PD 902-A have been
transferred to the jurisdiction of the Regional Trial Courts (RTC).
____________________________________________________

VIII. SUBSCRIPTION CONTRACT

Ways to become a stockholder of a corporation

A person becomes a stockholder of a corporation the moment he:

1) enters into a subscription contract with an existing corporation (he is a

stockholder upon acceptance of the corporation of his offer to subscribe whether the
consideration is fully paid or not);

2) purchase treasury shares from the corporation; or

35
 3) acquires shares from existing shareholders by sale or any other contract.

Concept of subscription contract

Any contract for the acquisition of unissued stock in an existing corporation or a

corporation still to be formed is a subscription contract. It is considered as such
notwithstanding the fact that the parties refer to it as purchase or some other contract
(Sec. 60, CCP).

Kinds of subscription (pre and post incorporation subscription, Sec. 61, CC)

1. Pre-incorporation subscription - entered into before the

incorporation and irrevocable for a period of six (6) months from the date of
subscription unless all other subscribers consent or if the corporation failed to
materialize. It cannot also be revoked after filing the Articles of Incorporation with the
SEC.

2. Post-incorporation subscription - entered into after the incorporation.

Consideration for the issuance of shares (Sec. 62, CC)

The valid considerations are:

a) Case;
b) Property;
c) Labor or services actually rendered to the corporation;
d) Prior corporate obligations;
e) Amounts transferred from unrestricted retained earnings to stated capital
(in case of declaration of stock dividends)
f) Outstanding shares in exchange for stocks in the event of reclassification
or conversion.

NOTE: Promissory notes or future services are not valid considerations.

Payment of subscription

1. remedies to enforce payment of subscription (Sec. 68, 69 & 70, CC)

a) Extra-judicial sale at public auction - This is the first and most

special remedy and it consists in permitting the corporation to put up unpaid stock for
sale and dispose of it for the account of the delinquent subscribers. In this case, the
provisions of Sections 67 to 69, inclusive, are applicable and must be followed.

b) Judicial Action - This other remedy is by court action under

Section 70. The statutory right to sell the subscriber’s stock is merely a remedy in
addition to that which proceeds by action in court.

36
 2.when shares are considered delinquent (Sec. 67, CC)

A stock becomes delinquent and shall be subject to extrajudicial sale at public

auction, unless the board of directors orders otherwise, upon failure of the stockholder
to pay the unpaid subscription or balance thereof within the grace period of 30 days
from the date specified in the contract of subscription (without need of prior call or
board action demanding payment) or in the absence of a date fixed in the contract of
subscription, from the date stated in the call made by the board of directors. The
delinquency takes place automatically after such failure (Sec. 67, par. 2)

The power or right of corporations to sell shares for the payment of stockholders’
debts should be considered subject to the procedure laid down in Section 67-69, or
enforceable by judicial action as provided in Section 70. This being so, such power or
right is limited to delinquent subscription and does not extend to any other debt of
stockholders to corporations.

Delinquency Sale

Under Section 68, the Board of Directors may, by resolution, order the sale of
delinquent stock and shall specifically state the amount due on each subscription, plus
all accrued interest, and the date, time and place, of the sale which shall not be less than
thirty (30) days, nor more than sixty (60) days from the date the stocks become
delinquent.

Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The notice shall
furthermore be published once a week in two (2) consecutive weeks in a newspaper of
general circulation in the province or city where the principal office of the corporation is
located.

Under Section 67, it is specifically provided that the unpaid subscription “shall
be made o n the date specified in the contract of subscription or on the date stated in the
call made by the board. If within thirty (30) days from the said date no payment is
made, all stocks covered by said subscription shall thereupon become “delinquent.” The
SEC has ruled that the use of the word “shall” shows that a prior call or board
resolution demand payment is not necessary if a specific date of payment is specified in
the subscription contract; and neither is there a need of a formal declaration of the
board for an unpaid subscription to become delinquent in the event of failure to pay the
unpaid subscription within the prescribed 30 day period from the date specified in the
subscription contract.

Certificate of Stock (Sec. 63, CC)

It is a written evidence of the shares of stock but it is not the share itself (Lincoln
Philippines Life v. Court of Appeals, 293 SCRA 92 [1981]).

37
 The certificate is merely a prima facie evidence of ownership and evidence can be
presented t determine the real owner of the shares (Bitong v. Court of Appeals, 292
SCRA 503 [1998]). Delivery is also essential for its issuance.

1. doctrine of indivisibility of subscription contract

The said doctrine has its basis under Section 64 which provides that no certificate
of stock shall be issued to a subscriber until the full amount of his subscription together
with the interest and expenses, if any is due, has been paid. A subscriber must first
totally pay his subscription before a certificate of stock covering shares subscribed and
paid for could be issued to him.

The purpose of the prohibition is to prevent the partial disposition of a

subscription which is not fully paid, because if it is permitted, and the subscriber
subsequently becomes delinquent in the payment of his subscription, the corporation
may not be able to sell as many of his subscribed shares as would be necessary to cover
the total amount due from him, which is authorized under section 68, CCP; thus,
making the subscription contract indivisible

2. certificate of stock, quasi-negotiable transfer of shares

In Delos Santos v. Republic, 96 Phil 577, a certificate of stock is not a negotiable

instrument, but is regarded as quasi-negotiable in the sense that it may be transferred
by endorsement, coupled with delivery, but it is not negotiable because the holder
thereof takes it without prejudice to such rights or defenses as the registered owners or
transferor’s creditor may have under the law, except insofar as such rights or defenses
are subject to the limitations imposed by the principles governing estoppel.

Lost and destroyed certificate of stock (Sec. 73, CC)

Under Section 73, the following procedures shall be followed for the issuance by
a corporation of new certificate(s) of stock in lieu of those which have been lost, stolen
or destroyed.

The registered owner of certificate(s) of stock in a corporation or his legal

representative shall file with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate(s) were lost, stolen or destroyed, he
number of shares represented by each certificate, the serial number(s) of the
certificate(s) and the name of the corporation which issued the same. He shall also
submit such other information and evidence which he may deem necessary.

After verifying the affidavit and other information an evidence with the books of
the corporation, said corporation shall publish a notice in a newspaper of general
circulation published in the place where the corporation has its principal office, once a
week for three (3) consecutive weeks at the expense of the registered owner of the
certificate(s) of stock which have been lost, stolen or destroyed.

38
 The notice shall state the name of said corporation, the name of the registered
owner and the serial number(s) of said certificate(s) and the number of shares
represented by such certificate(s), and that after the expiration of one (1) year from the
date of publication, if no contest has been presented to said corporation regarding said
certificate(s) of stock, the right to make such contest shall be barred and said
corporation shall cancel in its books the certificate(s) of stock which have been lost,
stolen or destroyed and issue in lieu thereof new certificate(s) of stock, unless the
registered owner files a bond or other security in lieu thereof as may be required,
running for period of one (1) year for a sum and in such form and with such sureties as
may be satisfactory to the board of directors, in which case a new certificate may be
issued even before the expiration of one (1) year period provided therein.

If a contest has been presented to said corporation or if an action is pending in

court regarding the ownership of said certificate(s) of stock which have been lost, stolen
or destroyed, the issuance of the new certificate(s) of stock in lieu thereof shall be
suspended until the final decision by the court regarding the ownership of said
certificate(s) of stock which have been lost, stolen or destroyed.

Except in case of fraud, bad faith, or negligence on the part of the corporation
and its officers, no action may be brought against any corporation which shall have
issued certificate(s) of stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above described.

IX. CORPORATE BOOKS AND RECORDS

Books required to be kept by a corporation (Sec. 74, CC)

Under Section 74, a stock corporation must keep a book to be known as the
“stock and transfer book,” in which must be kept a record of:

a) All stocks in the names of the stockholders alphabetically arranged;

b) The instalment paid and unpaid on all stock for which subscription has been
made, and the date of payment of any instalment;

c) A statement of every alienation, sale or transfer of stock made; and

d) Such other entries as the by-laws may prescribe.

The stock and transfer book shall be kept in the principal office of the corporation
or in the office of its stock transfer agent and shall be open for inspection to any director
or stockholder of the corporation at reasonable hours on business days.

Right to inspect corporate books

1. Basis and extent of the right of inspection

39
 The rights pertaining to a stockholder or member as such would be of little value
if he did not have access to information on corporate affairs. His right to participate in
management through the exercise of his voting powers would be useless if he had no
means of gaining information upon which he could render informed and intelligent
judgment. Moreover, it would be highly difficult for a stockholder or member to protect
his own individual rights from the actions of those in power if he could not compel
management to open the books and records for his inspection. Hence, the right to
information is founded on his beneficial interest through ownership of shares or
membership, and granted by common law for the purpose of protecting his individual
interests.

In the case of Gokongwei, Jr. v. SEC, 89 SCRA 336, the Supreme Court held that
the stockholder’s right of inspection of the corporation’s books and records is based
upon the ownership of the assets and property of the corporation. It is therefore an
incident of the corporate property, whether this ownership or interest is termed an
equitable ownership, a beneficial ownership, or quasi-ownership. This right is
predicated upon the necessity of self-protection.

2. Limitations on the right of inspection

The right to inspect by a stockholder, member, director or trustee is subject to the

following doctrinal rulings:

a) The demand for inspection should cover only reasonable hours on business
days;

b) The stockholder, member, director, or trustees demanding the exercise of the

right is one who has not improperly used any information secured through any
previous examination of the records of the corporation or any other corporation;

c) The demand must be accompanied with statement of the purpose of the

inspection, which must show good faith or legitimate purpose; and

d) If the corporation or its officers contest such purpose or contend that there is
evil motive behind the inspection, the burden of proof is with the corporation or such
officer to show the same.

In an opinion, the SEC has succinctly summarized the legal basis and the extent
of the right to inspect:

The right of the stockholders to inspect the corporate books and records is based
on the principle that a stockholder has the right to be fully informed as to the status and
condition of the corporation, the manner its affairs are conducted and how its capital to
which they have contributed is employed or managed. Said right may be exercised
either by himself or by any proper representative or attorney-in-fact, who may be an
accountant or a lawyer or any other person who can help the stockholder understand
and interpret the corporate records, and either with or without the attendance of the
stockholder. The right to inspect is not absolute and the corporation may show in

40
defense that the stockholder is acting from wrongful motives, since the exercise of the
right to inspect should be for a legitimate purpose, which means that it must be
germane to the interest of the stockholder as such, as where the purpose is to find out
the actual financial condition of the corporation and how his investment is being used.
Likewise, the purpose should not be contrary to the interest of the corporation nor
should it be made merely to gratify a stockholder’s curiosity.

3. Remedies to enforce right of inspection

a) Mandamus
Where the corporation has not established the impropriety of the shareholder’s
request to inspect the records of the corporation but the corporation still refuses to
allow the shareholder, member, director or trustee the right to inspect, the right may be
enforced by mandamus.

b) Damages
The stockholder or member who was wrongfully denied such right may also file,
in the same action, for damages against the director, trustee, shareholder or member
who denied him the right.

c) Criminal Suit
The stockholder or member who was wrongfully denied his right of inspection
may also bring criminal suit against the offending officer punishable under Section 144
of the Corporation Code.

Under Section 74 of the Corporation Code, any officer or agent of the corporation
who shall refuse to allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from its records or minutes, in accordance
with provision of the Code, shall be liable to such director, trustee, stockholder or
member for damages, and in addition, shall be guilty of offense which shall be
punishable under Section 144 of the Corporation Code. If such refusal is pursuant to a
resolution or order of ht board of directors or trustees, the liability under said section
for such action shall be imposed upon the directors or trustees who voted for such
refusal.

d) Procedural Rules on Suits Brought

The specific rules governing suits covering the inspection of corporate books and
records are now provided under Rule 7 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies.

The suits involving the rights of stockholders or members to inspect the books
and records and/or be furnished with financial statements of a corporation are
summary in nature, with the trial courts mandated within two (2) days from the filing
of the complaint, upon a consideration of the allegations thereof, to dismiss the
complaint outright if it is not sufficient in form and substance, or if it is sufficient, order
the issuance of summons which shall be served together with a copy of the complaint,
on the defendant within two (2) days from its issuance; and the defendant having a
period of ten (10) das within which to file an answer. The parties are mandated to attach

41
to their pleadings the affidavits of witnesses, documentary and other evidence in
support thereof. The courts are required to render a decision based on the pleadings,
affidavits and documentary and other evidence within fifteen (15) days from receipt of
the last pleadings; and the decisions are immediately executory.

X. MERGER AND CONSOLIDATION

Concept of merger and consolidation

Since merger or consolidation affects the juridical personalities of the

participating corporations, neither merger nor consolidation is deemed to be within the
inherent powers of corporations, and the power to merge or consolidate must be
expressly granted by law. Unlike the Old Corporation Law which contained no express
provisions on merger or consolidation, now Section 76 of the CCP expressly authorizes
two or more corporations to merge into a single corporation which shall be one of the
constituent corporations or to consolidate into a new single corporation which shall be
the consolidated corporation.

Consolidation is the union of two or more existing corporations to form a new

corporation called the consolidated corporation. It is a combination by agreement
between two or more corporations by which their rights, franchises, privileges and
properties are united and become those of a single, new corporation, composed
generally, although not necessarily, of the stockholders of the original corporations.

Merger, on the other hand, is a union whereby one or more existing corporations
are absorbed by another corporation which survives and continues the combined
business.

The parties to a merger or consolidation are called constituent corporations. In

consolidation, all the constituent corporations are dissolved and absorbed by the new
consolidated enterprise. In merger, all constituent corporations, except the surviving
corporation, are dissolved.

In both cases, there is no liquidation of the assets of the dissolved corporations,

and the surviving or consolidated corporation assumes ipso jure the liabilities of the
dissolved corporations, regardless of whether the creditors have consented or not to
such merger or consolidation.

Requisites of and procedure for merger and consolidation (Sec.77, CC)

a) Plan of Merger or Consolidation

Section 76 of the Corporation Code, expressly empowers the Board of Directors

or Trustees of each corporation, party to the merger or consolidation, to approve a plan
of merger or consolidation setting forth the following:

1) The names of the constituent corporations proposing to merge or consolidate;

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 2) The terms of the merger or consolidation and the mode of carrying the same
into effect;

3) A statement of the changes, if any, in the articles of incorporation of the

surviving corporation in case of merger and with respect to the consolidated
corporation in case of consolidation, all the statements required to be set forth in the
articles of incorporation organized under the Corporation Code; and

4) Such other provisions with respect to the proposed merger or consolidation as

are deemed necessary or desirable.

b) Stockholders’ or Members’ Approval

Upon approval by majority vote of each of the Boards of Directors or Trustees of

the constituent corporations of the plan of merger or consolidation, the same shall be
submitted for approval by the stockholders or members of each of such corporations at
separate corporate meetings duly called for the purpose.

Notice of such meetings shall be given to all stockholders or members of the

respective corporations, at least two (2) weeks prior to the date of the meetings, either
personally or by registered mail. Said notice shall state the purpose of the meeting and
shall include a copy or a summary of the plan of merger or consolidation, as the case
may be.

The affirmative vote of stockholders representing at least two-thirds (2/3) of the

outstanding capital stock of each corporation in the case of stock corporations, or at
least two-thirds (2/3) of the members in the case of non-stock corporations, shall be
necessary for the approval of such plan.

c) Right of Appraisal of Dissenting Stockholders

Any dissenting stockholder in stock corporations may exercise his appraisal

right, provided that if after the approval by the stockholders of such plan, the Board of
Directors should decide to abandon the plan, the appraisal right shall be extinguished.

d) Amendment of Plan of Merger or Consolidation

Any amendment to the plan of merger or consolidation may be made, provided

such amendment is approved by majority vote of the respective Board of Directors or
Trustees of all the constituent corporations and ratified by the affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding stock, or of two-
thirds (2/3) of the members, of each of the constituent corporations.

e) Articles of Merger or Consolidation

After the approval by the stockholders or members of the merger or

consolidation, articles of merger or articles of consolidation shall be executed by each of

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the constituent corporations, to be signed by the president or vice-president and
certified by the secretary or assistant secretary of each corporation setting forth:

1) The plan of the merger or the plan of consolidation;

2) As to stock corporations, the number of shares outstanding, or in the case of

non-stock corporations, the number of members; and

3) As to each corporation, the number of shares or members voting for and

against such plan, respectively.

f) Submission of Financial Statements Requirements

Under current SEC Rules, the applying constituent corporations are required to
submit their respective financial statements which serve as the basis of fixing the shares
to be issued in favor of the merged corporation vis-a-vis the net assets to be absorbed by
the surviving corporation as of a specific date. The date is important because it indicates
the values of said assets as of that date. In fact, it is required that the articles of merger
or consolidation should be filed not more than 120 days from the date of the long form
audit report for each of the constituent corporations.

g) Approval by SEC

The articles of merger or consolidation, signed and certified as required by law,

shall be submitted to the SEC in quadruplicate for its approval.

Effects of merger or consolidation (Sec. 80, CC)

Section 80 of the CCP provides for the following legal effects of a merger or
consolidation:

a) The constituent corporations shall become a single corporation which, in case

of merger, shall be the surviving corporation designated in the plan of merger; and in
case of consolidation, shall be the consolidated corporation designated in the plan of
consolidation;

b) The separate existence of the constituent corporations shall cease, except that
of the surviving or consolidated corporation;

c) The surviving or the consolidated corporation shall thereupon and thereafter

possess all the rights, privileges, immunities and franchise of each of the constituent
corporations;

d) All property, real or personal, and all receivables due on whatever causes of
action, and all the every other interest of, or belonging to, or due to each constituent
corporation, shall be taken and deemed to be transferred to and vested in such
surviving or consolidated corporation without further act or deed; and

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 e) The surviving consolidated corporation shall be responsible and liable for all
the liabilities and obligations of each of the constituent corporations in the same manner
as if such surviving or consolidated corporation had itself incurred such liabilities or
obligations;

f) Any claim, action or proceeding pending by or against any of such constituent

corporations may be prosecuted by or against the surviving or consolidated
corporation, as the case may be; and

g) Neither the rights of creditors nor any lien upon the property of any of each
constituent corporation shall be impaired by such merger or consolidation.

XI. RIGHT OF APPRAISAL

Concept of appraisal right

Appraisal right refers to a stockholder’s right to demand payment of the fair

value of his shares after dissenting from a proposed corporate action involving a
fundamental change in the corporate setting, in the specific cases provided for in the
Corporation Code.

The appraisal right is given to a stockholder in a particular situation where there

has been a radical change in the contractual relationship presumably agreed upon
between the stockholder and the corporation, a change which the dissenting
stockholder could not have reasonably anticipated may happen at the time he invested
into or created his contractual relationship with the corporation.

Instances of appraisal right (Sec. 81, Sec. 77, Sec. 42, CCP)

Sections 37, 42 and 81 of the Corporation Code enumerate the instances when a
stockholder may exercise his appraisal right, thus:

a) In case any amendment to the articles of incorporation has the effect of

changing or restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class;

b) In case of extending or shortening the term of corporate existence;

c) In case of sale, lease, exchange, transfer, mortgage, pledge, or other disposition

of all or substantially all of the corporate property and assets;

d) In case the corporation decides to invest its funds in another corporation or

business outside of its primary purpose; and

e) In case of merger or consolidation.

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 Although Section 81 expressly allows the existence of appraisal right even in case
of shortening or corporate term, nevertheless Section 37, governing the extension or
shortening of corporate life, provides for appraisal right only in case of extension of
corporate term.

Requirements for a valid exercise of appraisal right (Sec. 82, CC)

The appraisal right may be exercised by any stockholder who shall have voted
against the proposed corporate action, by making a written demand on the corporation
within thirty (30) days after the date on which the vote was taken for payment of the
fair value of his shares. The failure to make demand within such period shall be deemed
a waiver of the right.

Effects of exercising appraisal right (Sec. 83, CC)

From the time of demand of payment of the fair value of stockholder’s shares,
until righter the abandonment of the corporate action involved or the purchase of the
said shares by the corporation, all rights accruing to such shares, including voting and
dividend rights, shall be suspended, except the right of such stockholder to receive
payment of the fair value thereof. If the dissenting stockholder is not paid the value of
his shares within thirty (30) days after the award, his voting and dividend rights shall
immediately restored.

Within ten (10) days after demanding payment for his shares, a dissenting
stockholder shall submit the certificate(s) of stock representing his shares to the
corporation for notation thereon that such shares are dissenting shares. Reason for the
surrender of the certificate so that it may be marked by the corporation as a dissenting
stock. His failure to do so shall, at the option of the corporation, terminate his appraisal
right.

If shares represented by the certificates bearing such notation are transferred,

and the certificates consequently cancelled, the rights of the transferor as a dissenting
stockholder shall cease and the transferee shall have all the rights of a regular
stockholder, and all dividend distributions which would have accrued on such shares
shall be paid to the transferee.

XII. NON-STOCK CORPORATIONS

Definition and purposes of a non-stock corporation (Sec. 87 & 88, CC)

Section 87 of the Corporation Code provides that a non-stock corporation is one

where on part of its income is distributable as dividends. Under the Code, a non-stock
corporation in one where no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions on dissolution, provided that
any profit which a non-stock corporation may obtain as an incident to its operations
shall, whenever necessary or proper be used for the furtherance of the purpose or

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purposes for which the corporation was organized subject to the provisions of the
Corporation Code.

Section 88 provides that non-stock corporations may be formed or organized for

charitable, religious, educational professional, cultural, recreational, fraternal, literary,
scientific, social, civic service, or similar purposes like trade, industry, agriculture and
like chambers, or any combination thereof, subject to the special provisions of this title
governing particular classes of non-stock corporations.

XIII. CLOSE CORPORATIONS

Concept; distinguished from open corporations (Sec. 96, 97,101, & 102, CC)

Under american jurisprudence, close corporations are those in which the major part of
the persons to whom the powers have been granted, on the happening of vacanvies
among them, have the right of themselves to appoint others to fill such vacancies,
without allowing to the stockholders in general any vote or choice in the selection of
such new officers; or where the business policy and activities are entirely dominated for
practical purposes by the majority stock ownership of a family whose stock is not
traded in any market and is very infrequently sold.

The SEC opined that the main distinction between close corporation form other
corporations is the identity of stock ownership and active management, all or most of
the stockholders are active in the corporate business either as directors, officers or other
key men in management.

Statutory Definition (section 96)

Section 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1) All the
corporation's issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20); (2)
all the issued stock of all classes shall be subject to one or more specified restrictions on
transfer permitted by this Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its stock of any class. Notwithstanding
the foregoing, a corporation shall not be deemed a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, except mining or oil

companies, stock exchanges, banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with public interest in accordance
with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided, That
the provisions of other Titles of this Code shall apply suppletorily except insofar as this
Title otherwise provides.

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Permissive provisions in the articles of incorporation (Sec. 97,CC)
Restrictions on transfer of shares (Sec. 98 & 99 CC)

Section 97 (1) provides that the articles of incorporation of the close corporations may
provide for “a classification of shares or rights and the qualification for owning or
holding the same and restrictions on their transfers as may be stated therein.” In turn,
Section 98 provides that restrictions on the right to transfers shares must appear in the
articles of incorporation, in the by-laws, as well as in the certificate of stock ... Shall not
be more onerous than granting the existing stockholders of the corporation the option
to purchase the shares of the transferring stockholder with such reasonable terms,
conditions or period stated therein.”

The classification of shares or rights and qualification for owning or holding the same is
not a feature peculiar only to close corporations. Under Section 6 of the Corporation
Code, even publicly held corporations may their shares “divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights, privileges,
or restrictions as may be stated in the articles of incorporation.”

The restriction on the transferability of shares of stock in a close corporation is limited

to what is called a “right of first refusal.” and from the wordings of Section 98, it would
be the most onerous restriction allowed. The right of first refusal is a control scheme
essential to a close corporation which allows the existing stockholders the power to
maintain the character of delectus personae (choice of the person) and thereby prevent
an outsider from coming into and interfering with the affairs of the corporation.

The right of first refusal feature in a close corporation setting is meant to provide a
default feature which need not be the subject of costly bargaining procedures, where
clearly the intention of the parties is to limit the management of the underlying
corporate enterprise only among the investors themselves, much similar to the delectus
personarum principle in partnership. It is a feature that insures to the other investors
that they would not have within their midst a person who might not possess the
requisite trust in management skill, which is one of the primary reason why the original
investors came together in the first place.

XIV. CORPORATE DISSOLUTION/LIQUIDATION

Dissolution

Dissolution of a corporation signifies the extinguishment of its franchise and the

termination of its corporate existence for business purpose. The mere fact that the
corporation has ceased to do business does not necessarily constitute a dissolution, if it
is still solvent and has not gone into liquidation.

The dissolution of a corporation may either be de jure or de facto. A de jure dissolution

is one adjudged and determined by administrative or judicial sentence, or brought
about by an act of the sovereign power, or which results from the expiration of the

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charter period of corporate life. A de facto dissolution is one which takes place in
substance and in fact when the corporation by reason of insolvency, cessation of
business, or suspension of all its operations, as the case may be, goes into liquidation,
still retaining its primary franchise to be a corporation. This is actually a dissolution
only of the “business enterprise”, while leaving intact the juridical entity.

Methods of voluntary corporate dissolution and the requirements therefor

A corporation formed or organized under the corporation Code may be dissolved either
voluntary or involuntary. There are three modes of voluntary dissolution:

A) where no creditors are affected by the dissolution, by an administrative application

for dissolution filed with the SEC;
B) Where creditors are affected by dissolution, by a formal petition for dissolution filed
with the SEC, with due notice, and hearing to be duly conducted; and
C) Shortening of corporate term by the amendment of the articles of incorporation.
(section 120)

Voluntary dissolution where no creditors are affected is provided under section 118

Voluntary dissolution where creditors are affected is provided under section 119

Involuntary Dissolution
A corporation may be dissolved by the SEC upon filing of a verified complaint and after
proper notice and hearing on grounds provided by existing laws, rules and regulations.

The grounds for involuntary dissolution of corporations are scattered in various

provisions of law and provided for in jurisprudence, namely:

A) If the corporation does not formally organize and commence the transaction of its
business or the construction of its works within two years from the date of its
incorporation shall be deemed dissolved (section 22, CC)
B) If the corporation has commenced the transaction of its business, but subsequently
becomes continuously inoperative for a period of at least 5 years, the same shall be a
ground for the suspension or revocation of its corporate franchise or certificate of
incorporation;
C) When the corporation fails to adopt and file a code of by-laws in the manner
provided by law;
D) When the corporation has offended against a provision of a law for its creation or
renewal;
E) When it has committed or omitted an act which amounts to a surrender of its
corporate rights, privileges, or franchises;
F) When it has misused a right, privilege, or franchise conferred upon it by law, or
when it has exercised a right, privilege, or franchise in contravention of law, such as
commission by the corporation of ultra vires or illegal act;
G) When on the basis of findings and recommendations of a duly appointed
management committee or rehabilitation receiver, or based on the SEC’s own findings,
the continuance of the business of the corporation would not be feasible or profitable

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not work to the best interest of the stockholders, parties-litigants, creditors, or the
general public;
H) When the corporation is guilty of fraud in procuring its certificate of registration;
I) When the corporation is guilty of serious misrepresentation as to what the
corporation can do or is doing to the great prejudice of or damage to the general public;
J) Refusal of the corporation to comply with or defiance of any lawful order of the SEC
restraining commission or acts which would amount to a grave violation of its
franchise; and
K) Failure of the corporation to file the required reports in appropriate forms as
determined by the SEC within the prescribed period.

Nature of Liquidation

Liquidation is the settlement of the affairs of a corporation consists of adjusting the

debts and claims, that is, of collecting all that is due the corporation, the settlement and
adjustment of claims against it and the payment of its just debts.

Liquidation is the process by which all the assets of the corporation are converted into
liquid assets (cash) in order to pay for all claims of corporate creditors, and the
remaining balance, if any, is to be distributed to the stockholders or members of the
corporation. A liquidation proceeding is a proceeding in rem so that all other interested
persons whether known or not ma be bound by such proceedings.

Methods
A) liquidation through the board of directors or trustees (Section 122)

B) liquidation through trustee

Under section 122 of the CC, at any time during the three years of liquidation, a
corporation is authorized and empowered to convey all of its property to trustees for
the benefit of stockholders, members, creditors, and other persons in interest. In such
cases, the three year limitation will not apply provided the designation of the trustee is
made within said period. Unless the trusteeship is limited in its duration by the deed of
trust, there is no limit which the trustee must finish the liquidation, and he may sue or
be sued even beyond the three year period.

C) liquidation through receiver

A receiver in liquidation stands on a different legal basis from a trustee in liquidation, a

trusteeship is basically contractual relationship governed by the law on trust, and
generally centered upon property, such that the trustee assumes naked title to the
property placed in trust. It is therefore a relationship that can be created by a
corporation through its Board of Directors, without need of judicial authorization. The
trustee in liquidation is not appointed by court, but he is actually a transferee who
holds legal title to the corporate assets and he is accountable under the terms of the trust
agreement.

A receivership, is created by means of judicial or quasi judicial appointment of the

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receiver. The receiver is actually an officer of the court and must therefore be
accountable to the court.

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