You are on page 1of 46

Glen Aid Corporation Law apply where the evidence didn't prove that the business has

continued for so long a time that it has become of consequence


Atty. Barot
and acquired good will of considerable value such that its articles
The Corporation Code – Campos and produce have acquired a well-known reputation, and confusion
will result by the use of the disputed name.
- Lyceum of the Philippines has not gained exclusive use of
Contract theory of corporation law – the articles of incorporation is in “Lyceum” by long passage of time; it didn't present evidence, which
the nature of a contract; 3 contracts – provided that the word “Lyceum” acquired secondary meaning
B/w the corp and the SHs It would be practical for the incorporators, before adopting a name in their
B/w the corp and the State AoI, to first inform the SEC of the name; in any case, SEC requires
Among SHs incorporators to submit a written undertaking to change the corporate
name in case of a possible conflict; if the name is legally permissible the
FORMATION & ORGANIZATION OF CORPORATION incorporators may be allowed by SEC to reserve it for a reasonable period;
Articles of incorporation [AoI] [Sec. 14, CC] [notes for arts. 7, 8, & 9 are the law requires the corps to append the word “Corporation” or “Inc.” to its
dubious] chosen name; corp may amend such name in accordance w/ the Code
1st article; corporate name – through it, corps can sue and be sued and 2nd; purpose clause – a corp has only such powers as are expressly
perform all legal acts; means of identity granted to it by law and by its AoI, those incidental to such conferred
powers, those reasonably necessary to accomplish its purpose, and those
Code does not allow it to adopt a name – w/c may be incidental to its existence
- Identical or deceptively or confusingly similar to that of any existing A corp may have as many purposes as it may wish to include in its AoI,
corp; or subject to the ff. conditions –
- Contrary to laws
- The AoI must specify w/c is the primary purpose and w/c are the
Philips Export BV vs. CA [1992] - A corp’s right to use its corporate and secondary purposes; not required that the secondary be related to
trade name is a property right, a right in rem, which it may assert and the main
protect against the world - Corps governed by special laws can have only the purpose
- In determining the existence of confusing similarity in corporate peculiar to them and no other; educational corps cannot engage in
name, the test is whether the similarity is such as to mislead a the export/import business; neither insurance corp be at the same
person using ordinary care and discrimination time a commercial bank
- Proof of actual confusion need not be shown; It suffices that - Purpose/s must be lawful
confusion is probably or likely to occur - A corp may not be formed for the purpose of practicing a profession
like law, medicine, or accountancy
Lyceum vs. CA [1993] – dispute b/w Lyceum of the Phil. and Lyceum of
Apari 3rd; principal office of the corp – must be w/in the Phil.; it’s just the
principal office; does not mean the place wherein business is conducted
- Both are educational institutions
- Doctrine of secondary meaning - a word or phrase originally Significance of determining the principal office – purposes of venue
incapable of exclusive appropriation with reference to an article in requirement in suits, since it is considered the residence of the corp
the market, because geographical or otherwise descriptive might - Determining the province where a chattel mortgage of shares
nevertheless have been used for so long and so exclusively by one should be registered
producer with reference to this article that, in that trade and to that - Meeting place of SHs
group of purchasing public, the word or phrase has come to mean
that the article was his produce. The doctrine cannot be made to
1
Corpo Glen Aid
4th; term of existence [Sec. 11, CC] - original term specified in the AoI The AoI must show the names, nationalities, & residences of the original
should not exceed 50 years, although extendable for unlimited number of subscribers, the amount subscribed by each, & how much each has paid
times by amendment thereof, provided each extension does not exceed on his subscription; if non-stock corp, the amount of its capital, w/ the
50 yrs.; 50 years counted from the date of incorporation [when the names, nationalities, & residences of the contributors as well as the
certificate of incorporation is issued]; no extension can be made earlier amount contributed by each
than 5 years prior to the expiry date, except for justifiable reasons
5 scenarios –
determined by SEC
A. If there is par value – AKS in peso amount, # of shares per par
5th; incorporators; number & qualifications -
a. Ex. AKS = P1M, divided into 1M shares, at 1P par value
At least 5 incorporators – incorporators must be signatories to the AoI each
B. If no par value shares –
- Natural persons
a. Ex. AKS = # of shares only [impliedly issued at P5 each;
- Must be of legal age
issued value]
- Majority are residents of the Phil.
C. Where there are both par shares and no par shares – A + B
- No citizen requirements, except if the corp is for public utility, retail
D. AKS = Different classes of shares [preferred shares, common
trade, banks, investment houses, etc.
shares, etc.]
The AoI must give the names, nationalities, & residences of the a. P1M
incorporators, and the directors/trustees who will act as such until the 1st i. P500k, prefs 5k, P100 each
regular directors/trustees are elected ii. P500k, comms 10k, P50 each
E. AKS = D + A + B
It seems that the AoI may be amended after incorporation to increase the
a. AKS = 2+ groups/combination
# of its directors to more than 15
i. With par value – P1M, 5k prefs, P100 each, and/or,
An incorporator/ director must own at least one share of stock P1M, 10k comms, P50 each
ii. No par – P1M with 500k prefs no par, and, 500k
- * In wholly owned subsidiary, the whole 25% subscription is
comms no par
practically owned by the parent company; 4 shares are distributed
equally to the other 4 incorporators in trust, in compliance with 1 * You can combine prefs/comms with par/ no par
share per incorporator; keyword is trust
8th; subscription –
AoI must also name the treasurer who will act as such until his successor
25% of AKS must be subscribed
is duly elected
A. 250k subscribed at P1
6th; directors/trustees – Not less than 5, not more than 15
B. 250k subscribed no par
No nationality requirements; except for businesses partially nationalized C. 250k subscribed at 1P par, and 250k subscribed no par
D. P125k for 1,250 prefs at P1, and P125k for 2,500 comms at P50
Residence requirements – same as that of incorporators’
a. The P125k resulted from looking at the P1M; 25% of P1M
Directors need not be the same persons as the incorporators b. Note – the equal subscription for each class of share need
not be followed; subscription to other class of shares may
Directors need not sign the articles of incorporation
be loaded compared to others
7th; authorized capital stock [VERY IMPORTANT] c. In complying w/ the 25% subscription – when there’s par
value, look at the peso sign; if no par value, look at the # of
Authorized capital stock – the maximum number of shares that a corp is
shares
legally permitted to issue, as specified in its AoI
E. Same as D, and, 250k no par

2
Corpo Glen Aid
25 – 25 rule – before incorporation, at least 25% of the authorized capital - Although it may provide for the time, place, & manner for director’s
stock of the proposed corp should be subscribed and at least 25% of such meeting, it can ONLY provide for time and manner for SH’s
subscription should be paid; P5,000 is the minimum to be paid meeting [SH’s meeting should be at the principal office of the corp]
- Should provide for officers specifying their qualifications; law
In case of no par value – in cases B C and E –
requires at least 3 – Pres., Sec., & Treasurer; by-laws may provide
- AKS = P1M 25 – 25 rule applies; but the 2nd 25 is not applicable to for additional officers
no par shares; b/c in no par value shares, subscribed means paid - Code allows adoption & filing of by-laws prior to incorporation but
must be approved by ALL the incorporators and be submitted to
9th; payment – 25% of the total subscription shall be paid; at least P5,000
SEC w/ the AoI
A. P62, 500 at P1 each o Otherwise, corp must do so w/in 1 month after receipt of
B. 62, 000 shares notice of certificate of incorporation; failure to do so may
C. P62, 500, and 62,000 shares result in suspension or revocation of certificate of
D. P31,250, and P31,250 registration; vote required in this case is at least majority of
E. Should be easy the OCS or of the members
- By-laws shall be effective only upon issuance by the SEC of a
The 1 share per incorporator need not split the subscription equally
certification that they are not inconsistent w/ the code; same
amongst themselves
applies for amendment of the by-laws
* 80k AKS is the minimum AKS which will produce a good 25-25 rule; - SC – contracts entered into w/o strict compliance w/ the by-laws
anything lower than 80k will produce paid subscription lower than the limit may, due to long acquiescence and usage, be binding on the corp,
of at least 5k w/c may be deemed to have waived such compliance
- By-laws cannot affect/prejudice 3rd persons who deal w/ the corp,
10th; name of treasurer – TIT [treasurer in trust]
unless they have knowledge of the same
+ Treasurer’s Affidavit – certifying to the fact that the 25-25 rule has been
Loyola Grand Villas Homeowners vs. CA [1997]
complied with
- There can be no automatic corporate dissolution simply b/c the
Grounds when AoI or amendment thereof may be rejected [Sec. 17]
incorporators failed to abide by the required filing of by-laws
- Not substantially in accordance w/ the prescribed form embodied in Section 46 of the Corp Code.
- Purpose/s patently unconstitutional, illegal, immoral, or contrary to - There is no outright “demise” of corporate existence. Proper notice
gov’t rules & regs and hearing are cardinal components of due process in any
- Treasurer’s Affidavit w regard to amount of capital stock democratic institution, agency or society. In other words, the
subscribed and/or paid is false incorporators must be given the chance to explain their neglect or
- W/ regard to some corps [governed by special laws], when omission and remedy the same. Non-filing of the by-laws will not
required percentage of ownership of capital stock to be owned by result in automatic dissolution of the corp. In fact, under the rules
citizens of Phil. not been complied w/ and regulations of the SEC, failure to file the by-laws on time may
be penalized merely with the imposition of an administrative fine
By-laws – [Sec. 36, par. 5, Sec. 46, Sec. 47]
w/o affecting the corporate existence of the erring firm.
- Product of the agreement of the SHs/members and establish the
Commencement of corporate existence [Sec. 19] – upon issuance of
rules for the internal government of the corp
certificate of incorporation by SEC
- By-laws are subordinate to the AoI as well as to the Corp Code and
related statutes; it should not be inconsistent with any of them; Juridical personality distinct and separate from that of the SHs
otherwise, no binding effect
Cranson vs. IBM [1964]

3
Corpo Glen Aid
- A de-facto corp may be formed if there is a good faith effort to an action for and in behalf of its SHs/members for the recovery of
incorporate, and actual exercise of corporate property w/c belongs to them in their personal capacities
powers. Furthermore, under the doctrine of estoppel, a person - Corp, as juridical person, is entitled to immunity against
seeking to hold a corporate officer personally liable may not do so unreasonable search & seizure; the legality of contested warrants
if he has dealt with the association as if it were a legally-existing & seizures cannot be assailed b its individual SHs
corp. IBM dealt with the business as if it were a legitimate corp, - Residence of the president is not the residence of the corp
and relied on its credit rather than that of Cranson. Thus, it is
Stockholders of F. Guanzon and Sons, Inc. vs. Register of Deed [1962]
estopped to assert that the business was not incorporated.
- W/n that certificate merely involves a distribution of the corp’s
Palay Inc. vs. Clave [1983]
assets or should be considered a transfer or conveyance.
- Palay Inc., through its president, Onstott executed a contract of - SC: A transfer or conveyance.
sale w/ resp, Dumpit a parcel of land. A down payment was to be - The act of liquidation made by the SHs of the F. Guanzon and
made and the remaining balance would be paid in monthly Sons, Inc. of the latter's assets is not and cannot be considered a
instalments. partition of community property, but rather a transfer or
- Under the terms of the contract, Par. 6 states an automatic conveyance of the title of its assets to the individual SHs.
extrajudicial recession upon default of payment after the lapse of - The purpose of the liquidation, as well as the distribution of the
90 days following the grace period of 1 month assets of the corp, is to transfer their title from the corp to the SHs
- In the case of UP, the SC said that one must first send a recession in proportion to their shareholdings, and this is in effect the purpose
notice; one cannot unilaterally rescind which they seek to obtain from the RoD of Manila; that transfer
- SC: It is well settled that a corp has a distinct and separate cannot be effected w/o the corresponding deed of conveyance
personality with its SHs and vice versa. “However, the veil of from the corp to the SHs
corporate fiction may be pierced when it is used as a shield to - Where the purpose of the liquidation, as well as the distribution of
further an end subversive of justice; or for purposes that could not the assets of the corp, is to transfer their title from the corp to the
have been intended by the law that created it; or to defeat public SHs in proportion to their shareholdings, that transfer cannot be
convenience, justify wrong, protect fraud, or defend crime; or to effected w/o the corresponding deed of conveyance from the corp
perpetuate fraud or confuse legitimate issues; or to circumvent the to the SHs, and the certificate should be considered as one in the
law or perpetuate deception; or as an alter ego, adjunct or business nature of a transfer or conveyance
conduit for the sole benefit of the SHs.” [principle of piercing the
De facto corporation– Sec. 20; quo warranto
corporate veil]
Elements of a de facto corp –
Corporate entity theory –
- Valid law under w/c the corp may be formed
- A corp has a personality distinct & separate from its individual SHs
or members, and is not affected by the personal rights, obligations, - Colorable compliance w/ the legal requirements in good faith
& transactions of the latter
- User of corporate powers; transaction of business as if it were a
- Corporate property is owned by the corp and the SHs have no
corp –
claim on it as owners, but have merely an expectancy or inchoate
right to the same should any of it remain upon dissolution of the o just a slight evid of conducting business as a corp is
corp after all corporate creditors have been paid deemed sufficient; although mere election of directors &
- Neither can the SH’s property be levied upon for an obligation of officers would not be “user of corporate powers”
the corp, even if he be its President
The due incorporation cannot be collaterally attacked; may be directly
- Corp has no interest in the individual property of its SHs, unless
attack by the state in a quo warranto proceeding
transferred to the corp; corp does not gave the personality to bring
Municipality of Malabang vs. Benito [1969]

4
Corpo Glen Aid
- 1960 – EO386 created municipality of Balabagan, in accordance themselves out as a corp is sufficient to impose corp liability on a
w/ the power granted by Sec. 68 of Admin Code to Pres. to create tort, and reliance or nonreliance by the injured party is irrelevant
municipality - De facto corp doctrine vs. corp by estoppel doctrine
o Where all requisites of a de facto corp are present, then the
- SC promulgated Pelaez repealing Sec. 68 of Admin Code
corp has the status of a de jure corp in all cases brought by
- SC – no de facto law; 1st element missing; no valid law or against it, except only as to the State in a direct
proceeding
o No de facto law nor a de jure one; operative fact doctrine
o If any of the requisites is absent, then estoppel doctrine
applied
applies as illustrated above
Hall vs. Piccio [1950]
Chiang Kai Shek vs. CA [1989]
- Quo warranto proceeding; most of the time brought by the
- Having contracted w/ the resp every year for 32 years and thus
government
represented itself as possessed of juridical personality to do so,
- SC: Even the existence of a de jure corp may be terminated in a the pet is now estopped from denying such personality to defeat
private suit for its dissolution b/w SHs, w/o the intervention of the her claim against it. Art. 1431 of the Civil Code – “through estoppel
state an admission or representation is rendered conclusive upon the
person making it and cannot be denied or disproved as against the
Corporation by estoppel; Sec. 21
person relying on it”
- Although there may not be a de facto corp b/c of serious defects in
Piercing the corporate veil – p. 149-151 Campos
incorporation, still possible that a party may be estopped from
denying corp existence; doctrine of corp by estoppel may apply to - No hard & fast rule to cover all cases where the cop entity theory
a 3rd party or the alleged corp cannot be availed of; each case will have to be considered on its
- 3rd party who dealt w/ an unincorporated association as a corp may merits
be precluded form denying its corp existence on a suit BY the - US juris – a corp will be looked upon as a legal entity as a general
ALLEGED CORP, even if he was ignorant of the defective rule; but when the notion of legal entity is used to defeat public
incorporation – he is deemed to have admitted the existence of the convenience, justify wrong, protect fraud, or defend crime, the law
corp by the fact he dealt w/ it as a corp will regard the corp as an association of persons
- But when business associates fraudulently misrepresent the - SC – separate personality of the corp should be disregarded where
existence of a corp, and a 3rd party contracts w the association as the corp entity was used to evade taxes or other requirements of
a corp, w/o knowledge of the serious defect in its incorporation, law, to confuse the legitimate issue of employer-employee
such 3RD PARTY MAY BRING A SUIT against the associates as if relationship, or to escape liability to 3rd parties
they were general partners and the latter cannot claim that the - Main effect – SHs will be held personally liable for the acts and
plaintiff-3rd party is estopped contracts of the corp whose existence, at least for the purpose of
- Where the associates were ignorant of the defective incorporation, the particular situation involved, is ignored
and a likewise innocent 3rd person dealt w/ the corp as such, latter - Piercing the corp veil vs. de facto corp doctrine
cannot hold the associates personally liable o In the former, it is not its due incorporation w/c is
o But if the 3rd person knew, he is deemed to have chosed to questioned but its use of the privileges w/c attach to the
deal w/ the corp as such and therefore should not be corp entity; the court does not deny the corp existence for
allowed to recover from the individual associates but all purposes, but merely refuses to allow the corp to use
should be limited in his recovery to the corporate assets the corp privilege for the particular purpose involved
- Estoppel doctrine applies even if alleged corp did not deal w/ the
Marvel Building Corporation vs. David [1954; important]
plaintiff who is suing on a tort; the fact that the associates held

5
Corpo Glen Aid
- Piercing the corporate veil is a matter of evidence; here it was corp operated and the individual defendants relationship to that
sufficiently established that Maria owned the whole business; even operation
though the number of shares are spread among other individuals - The separate personality of the corp may be disregarded or the veil
as embodied in the papers, the fact that the certificates of shares of corporate fiction pierced when the corp is merely an adjunct, a
of stocks are in her sole possession was held sufficient to hold that business conduit or an alter ego of another corp
she owns the company
Claparols vs. CIR [1975; w/ piercing]
- The existence of endorsed certificates discovered by internal
revenue agents b/w 1948 and 1949 in the possession of the - A complaint for unfair labor practice was filed by resps workers
Secretary-Treasurer of a supposed corp; the fact that twenty-five against Claparols et al on account of the dismissal of resps from
certificates were signed by its president for no justifiable reason; Claparols Steel and Nail Plant; Claparols Steel and Nail Plant
the fact that two sets of certificates were issued; the undisputed was succeeded by Claparols Corporation; it is very clear that the
fact that its principal SH had made enormous profits and, therefore, latter corp was a continuation and successor of the first entity, and
had a motive to hide them to evade the payment of taxes; the fact its emergence was skillfully timed to avoid the financial liability that
that the other subscribers had no incomes of sufficient magnitude already attached to its predecessor, the Claparols Steel and Nail
to justify their big subscriptions; the fact that the subscriptions were Plant
not receipted for and deposited by the treasurer in the name of the - The 2nd corp seeks the protective shield of a corporate fiction
alleged corp but were kept by the principal SH herself; the fact that whose veil could, and should, be pierced as it was deliberately and
the SHs or the directors never appeared to have ever met to maliciously designed to evade its financial obligation to its
discuss the business of the corp; the fact that she advanced big employees. When the notion of legal entity is used to defeat public
sums of money to the corp w/o any previous arrangement or convenience, justify wrong, protect fraud, or defend crime, the law
accounting; and the fact that the books of accounts were kept as if will regard the corp as an association or persons, or, in the case of
they belonged to her alone—are circumstantial evidence which are 2 corps, will merge them into 1
not only convincing but conclusive that she is the sole and
Kukan International Corp. vs. Reyes [2010; COMPARE FACTS w/
exclusive owner of all the shares of stock of the corp and that the
CLAPAROLS; no piercing]
other partners are her dummies.
- When two business enterprises are owned, conducted and
Concept Builders Inc. vs. CA [1996; instrumentality test]
controlled by the same parties, both law and equity will, when
- The test in determining the applicability of the doctrine of piercing necessary to protect the rights of third parties, disregard the legal
the veil of corporate fiction is as follows: fiction that 2 corps are distinct entities and treat them as identical
o Control, not mere majority or complete stock control, but or as one and the same. Whether the separate personality of the
complete domination, not only of finances but of policy and corp should be pierced hinges on obtaining facts appropriately
business practice in respect to the transaction attacked so pleaded or proved
that the corporate entity as to this transaction had at the - To justify the piercing of the veil of corporate fiction, it must be
time no separate mind, will or existence of its own; shown by clear and convincing proof that the separate and distinct
o Such control must have been used by the defendant to personality of the corp was purposefully employed to evade a
commit fraud or wrong, to perpetuate the violation of a legitimate and binding commitment and perpetuate a fraud or like
statutory or other positive legal duty, or dishonest and wrongdoings
unjust act in contravention of plaintiffs legal rights; and - Mere ownership by a single SH or by another corp of a substantial
o The aforesaid control and breach of duty must proximately block of shares of a corp does not, standing alone, provide
cause the injury or unjust loss complained of sufficient justification for disregarding the separate corporate
- The absence of any one of these elements prevents piercing the personality
corporate veil. in applying the instrumentality or alter ego doctrine, - The circumstance that a single SH owns 40% of the outstanding
the courts are concerned with reality and not form, with how the capital stock of 2 corps, standing alone, is insufficient to establish

6
Corpo Glen Aid
identity—there must be at least a substantial identity of SHs for - The circumstance that the SHs of a building and loan association
both corps in order to consider this factor to be constitutive of do not attend the annual meetings in sufficient number to constitute
corporate identity a quorum does not render the corp subject to dissolution
- Piercing the veil of corporate fiction is frowned upon - Where a building and loan association makes a contract with its
promoter and manager—which contract is expressly ratified in the
Promoters’ contracts prior to incorporation – p 241 Campos
by-laws of the association,—by which the association concedes to
Personal liability of promoter on pre-incorporation contracts – p. 258 him, in consideration of valuable services rendered and to be
Campos rendered, a right to receive 5 per centum of the net earnings of the
association, this court will not, in a quo warranto proceeding where
Cagayan Fishing vs. Sandiko [1937]
there is no allegation that the contract was ultra vires or vitiated 'by
- The transfer made by T to the C, F. D. Co,, Inc., was effected on fraud, order the dissolution of the corp for entering into such
May 31, 1930 and the actual incorporation of said company was contract, on the mere ground that the compensation granted is
effected later on October 22, 1930. In other words, the transfer was excessive; nor will the court enjoin the association from performing
made almost five months before the incorporation of the company. the same
Unquestionably, a duly organized corp has the power to purchase - While the creation of building and loan associations was intended
and hold such real property as the purposes for which such corp to serve the beneficent purpose of enabling people to procure
was formed may permit and for this purpose may enter into such homes of their own, and such associations have been fostered with
contracts as may be necessary. But before a corp may be said to this end in view, nevertheless the lawmaker in this jurisdiction has
be lawfully organized, many things have to be done. Among other not limited the activities of building and loan associations to the
things, the law requires the filing of articles of incorporation. exclusive function of making loans for the building of homes. Home
Although there is a presumption that all the requirements of law building is only one of several purposes proposed in the creation
have been complied with in the case before us it cannot be denied of such associations; and a building and loan association cannot
that the plaintiff was not yet incorporated when it entered into the be dissolved in a quo warranto proceeding. on the ground that it
contract of sale. It was not even a de facto corp at the time. Not has made loans w/o reference to the purpose for which the money
being in legal existence then, it did not possess juridical capacity was intended to be used
to enter into the contract.
NATIONALIZED ACTIVITIES & FOREGN INVESTMENTS
- A corp, until organized, has no life and, therefore, no faculties. This
is not saying that under no circumstances may the acts of In terms of timeline –
promoters of a corp be ratified by the corp if and when
Constitution, Art. XII, sec. 11
subsequently organized. There are, of course, exceptions, but
under the peculiar facts and circumstances of the present case the RA 7042 – Foreign Investments Act
doctrine of ratification should not be extended because to do so Anti-Dummy Law
would result in injustice or fraud to the candid and unwary DOJ and SEC Opinions
2011: PLDT case [Gamboa vs. Teves]
Gov’t vs. El Hogar [1927; IMPORTANT] o 2013: SEC Memorandum Circular No. 8
- 2 advantages/concessions for the building and loan associations 60-40 voting or non-voting applies
o 1st – exemption from usury 2012: Bayantel case [Express Investments vs. Bayantel]
o 2nd - ?? might be asked in the exams 2014: Narra Nickel vs. Redmont
- The circumstance that one of the provisions contained in the by- RA 7042 – Foreign Investments Act as amended by RA 8179
laws of a building and loan association is invalid as conflicting with
the express provision of statute is not a misdemeanor on. the part - Philippine national [Sec. 3(a)] in re sec. 15, art. 7 of Corpo Code
of the corp for w/c the association can be penalized by the forfeiture o Voting right [Sec. 6 of Corpo Code] 1st paragraph & last 2
of its charter paragraphs

7
Corpo Glen Aid
o A corp organized abroad and registered as doing business o Sale to DMCI
in the Phil. under the Corp Code of which one hundred
In control test and grandfather rule, there must always be a holding
percent (100%) of the capital stock outstanding and
company [corporate SH]
entitled to vote is wholly owned by Filipinos
o A trustee of funds for pension or other employee retirement Before these 3 cases, DOJ & SEC Opinions state that the grandfather
or separation benefits, where the trustee is a Philippine should be used
national and at least sixty percent (60%) of the fund will
Today, the grandfather rule will not be used unless there is doubt in the
accrue to the benefit of Philippine nationals
applicability of control test – in both, just consider the shares w/ voting
o Provided, That where a corp and its non-Filipino SHs own
rights
stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the Corporate Powers; Corporate powers in general [Sec. 36; rights,
capital stock outstanding and entitled to vote of each of prerogatives, powers]
both corps must be owned and held by citizens of the
- 2 general restrictions on power of any corp to purchase and hold
Philippines and at least sixty percent (60%) of the
properties, whether real or personal
members of the BoD of each of both corps must be citizens
o Such property must be reasonably and necessarily
of the Philippines, in order that the corp, shall be
required by the transaction of its lawful business
considered a "Philippine national."
o Subject to the limitations prescribed by law & the Consti
Gamboa vs. Teves [2011] Consti – corp cannot acquire available public lands
except by leas of not more than 1k hectres;
- PLDT had common shares [has voting rights] and preferred shares
exploration, development, exploitation, & utilization
[no voting right; although there may be instances where preferred
of natural resources are limited to citizens and
shares have voting rights]
corps at least 60% of the capital of w/c is owned by
- SC: when you determine w/n the company violated the
citizens, and only in a joint venture w/ the State
constitutional limitations, focus only on shares w/ voting rights
- General powers granted by Sec. 36 are, under Sec. 23, to be
[control test]
exercised by the BoD, unless otherwise provided by the Code
Express Investments vs. Bayantel [2012] o Power to decide whether the corp should sue or not
belongs to the board
- Grandfather rule applied – Holding Company 1; Holding Company
o Power to amend the AoI & the by-laws belong to the
2; Bayantel
SHs/members
- Formula – multiply the line for Filipino ownership in the public utility
company; if above 60%, good, otherwise, bad Stonehill vs. Diokno [1967]
- If HC1 is 70-30; HC2 is 58-42; 70 x 58 = Filipino ownership in the
- Power to sue; not by the officers, but the corp [Sec. 36, 1]
subject company
- Officers of certain corps, from which documents, papers and things
- Shares w/ voting rights – meaning right to vote in the election of Ds
were seized by means of search warrants, have no cause of action
Narra Nickel vs. Redmont [2014] [when in doubt, use grandfather rule] to assail the legality of the seizures because said corps have
personalities distinct and separate from those of said officers. The
- Use grandfather rule when “in doubt” – indicia of doubt [not
legality of a seizure can be contested only by the party whose rights
exclusive list]
have been impaired thereby. The objection to an unlawful search
o Source of funds
is purely personal and cannot be availed of by third parties
o Technological support
o Management and preparation of economic viability studies Harden vs. Benguet Consolidated Mining Company [1933]
o More foreign capital
- Where one mining corp acquires a prohibited interest in another
o High par/ low par
such corp, the SHs of the latter cannot maintain an action to annul
8
Corpo Glen Aid
the contract by which such interest was acquired. The remedy A SH may bring either an individual or derivative
must be sought in a criminal proceeding or quo warranto action suit to enjoin a threatened ultra vires act
instituted by the Government. Until thus assailed in a direct If already performed, a derivative suit against the
proceeding the contract by which the interest was acquired will be Ds may be filed, but their liability will depend on
treated as valid, as b/w the parties whether they acted in good faith and w/ reasonable
- Harden, the SH, has no cause of action; it is the government diligence in entering into the contracts; if they did,
instead who has [Sec. 36, 2] then an honest mistake committed in the exercise
- Not a hard and fast rule; in re derivative actions [to be discussed of their business judgment will not give rise to
laterz] liability
- Ultra vires acts may become binding by the ratification of ALL the
Sec. 36, 3 [use of seal; not mandatory]
SHs, unless 3rd parties are prejudiced, or unless the act is illegal
- Seen in stock certificates; used by corporate secretary
Republic of the Phil. vs. Acoje Mining Company, Inc. [1963]
Sec. 36, 6
- There are certain corporate acts that may be performed outside of
- Contemplates the sale of stocks to investors, not among SHs the scope of the powers expressly conferred if they are necessary
to promote the interest or welfare of the corp, such as the
Pirovano vs. De la Rama [1954] [Sec.36, 9]
establishment of a local post office in a mining camp which is far
- The issue on donation then is irrelevant today; making donation is removed from the postal facilities or means of communications
a prerogative expressly granted to corps accorded to- people living in a city or municipality
o Except in aid of any political party or candidate or for - Ultra vires – voidable [can be enforced by performance, ratification
purposes of partisan political activity or estoppel, or on equitable grounds]
- Illegal act – void act [cannot be cured]
Ultra vires acts [Sec. 45]
- In the present case the validity of the resolution of the BoD of the
- Acts w/c are clearly beyond the powers of the corp corp accepting full responsibility in connection w/ funds to be
- Legal consequences received by its postmaster, should be upheld on the ground of
o On the corp itself – under the RoC, corp may be dissolved estoppel
under a quo warranto proceeding instituted by the Sol-Gen
Implied powers Sec. 38, par. 11 – essential or necessary to carry out its
SC in most cases merely enjoined the further
purpose(s) as stated in the AoI
commission of the ultra vires acts
SEC may suspend/revoke certificate of registration - Corp is presumed to act w/in its powers and when a contract is not
o On the immediate parties to the ultra vires contract – on its face necessarily beyond its authority, it will, in the absence
Where the contract is fully executed on both sides, of proof to the contrary, presumed to be valid
parties will be left as they are; no rescission of
NPC vs. Vera [1989]
contract will be granted
If contract is executory on both sides, generally, - The Court must decide whether or not a logical and necessary
neither party can ask for specific performance relation exists b/w the act questioned and the corporate purpose
Where 1 party has performed his part, whether expressed in the NPC charter. For if that act is one which is lawful
partly or completely, and the other has not, the in itself and not otherwise prohibited, and is done for the purpose
latter, having benefited from the former’s of serving corporate ends, and reasonably contributes to the
performance, is estopped from claiming that the promotion of those ends in a substantial and not in a remote and
contract is ultra vires; the contract shall be fanciful sense, it may be fairly considered within the corp’s charter
enforced, provided it is lawful powers
o On the rights of SHs –

9
Corpo Glen Aid
- In the instant case, it is an undisputed fact that the pier located at Election of directors/trustees [Sec. 24]
Calaca, Batangas, which is owned by NPC, receives the various
- Campos “entitled to vote” applies to both owners of a majority of
shipments of coal which is used exclusively to fuel the Batangas
the outstanding capital stock and members; De Leon says it only
Coal-Fired Thermal Power Plant of the NPC for the generation of
applies to members
electric power. The stevedoring services which involve the
unloading of the coal shipments into the NPC pier for its eventual Cumulative voting –
conveyance to the power plant are incidental and indispensable to
- [(XxY)/(Y+1)]+1 = number of VOTES to elect 1 Director
the operation of the plan
o X = no. of shares/stocks of the present SHs in the meeting
- A corp is not restricted to exercise only those powers expressly
o Y = no. of Directors to be elected; vacant seats in the board
conferred upon it by its charter, it may also exercise those powers
basing on the no. of Directors in the AoI
which are reasonably necessary or proper to promote its interests
- After getting the number of VOTES to elect 1 Director, divide it by
and welfare
Y to get no. of SHARES to elect 1 Director [this is the one’s
Madrigal & Co. vs. Zamora [1987; Corporate power to reduce authorized important]
capital stock] - Cumulative voting is mandatory for stock corps
- Madrigal’s employees held a strike As against straight voting –
- Madrigal invoked corporate power to decrease authorized capital
- The one with the highest no. of shares will always get to vote;
stock; reason of Madrigal was b/c of the stoppage in the operation
minority SHs will be sad
- SC: such reason is untenable; Madrigal only made such reduction
- Forbidden; illegal
for retrenchment against the union; such right must be exercised
in good faith; what is due [back wages] to the laborers must be Corporate officers, quorum [Sec. 25]
respected
1st par. – 3 statutory officers [as distinguished from by-laws officers] –
CONTROL & MANAGEMENT OF THE CORPORATION
o President – must be a Director [must own at least a stock];
The board of directors/trustees; corporate power [Sec. 23] term of office is coterminous w/ his term as director
o Secretary – must be a resident & citizen of the Philippines
- The board exercises the corporate powers [sec. 23 in re sec. 36]
o Treasurer
o The business, control of properties – buying/selling land
- No one shall be president & sec or president & treasurer at the
requires a board resolution
same time; an officer may be the sec & treasurer at the same time
- BoD/T to be elected from among SHs/members
- In businesses/industries partially or totally reserved for Filipino
- Every director must own at least 1 share of the capital stock of the
citizens, no alien may be elected as officer, although the law
corp of which he is a director; any director who ceases to be the
permits aliens in the BoD in a number proportional to the alien
owner of at least 1 share of the capital stock of the corp of which
equity allowed in the particular business/industry
he is a director shall thereby cease to be a director
- By-laws may provide for additional officers
o Ownership of 1 share of stock is required at the time the
director assumes office, not at the time of election [tricky] Functions
- Trustees of non-stock corps must be members thereof
- President – presides over all meetings, Board and SHs/members;
- A majority of the directors/trustees of all corps organized under this
by-law may provide for a chairman to perform such function;
Code must be residents of the Phil.
president may be the general manager at the same time
In the corporate hierarchy, there are 3 levels of control - Vice-president – takes over when president is absent or when the
latter’s office is vacant; often times, he is also the general manager
- BoD/T
- Secretary – keeps the corp records; his duties are ministerial and
- Corporate officers
cannot bind the corp by contract, unless named general manager
- SHs/ members
10
Corpo Glen Aid
- Treasurer – receive & keep funds of the corp, and disburse them circumstances must be shown from w/c such knowledge may be
w/in the authority given to him; limited powers; cannot bind the presumed. Ordinarily, the president of a corp has no implied power
corp, unless authorized to do so by ratification to validate a contract w/c has been improvidently
- General manager – day-to-day affairs of the corp entered into on behalf of the corp by an unauthorized
agent/employee. The fact that the president, by the by-laws of the
2nd par. –
corp, is required to sign the documents evidencing contracts of the
If a joint venture b/w A & B w/ 15 BoD – corp, does not give him the power to make contracts
1st part – Business judgment rule –
- Quorum shall be 8; at least 1 shall be representing A/B - If due to the Ds’ fault or negligence, the assets of the corp are
- It is the # fixed in the AoI that will be the reckoning point for the wasted or lost, each of them may be held responsible
quorum, unless the AoI or the by-laws provide for a greater majority - HOWEVER, they cannot be held liable for mistakes or errors in the
o If 15 BoD is fixed in the AoI, but only 9 were elected, the exercise of their business judgment, provided they have acted in
quorum is still 8; if only 7 are elected, there can be no good faith and w/ due care and prudence
quorum – there shall be a SHs/members meeting again - Contracts intra vires entered into by the board are binding upon the
corp and the courts will not interfere unless such contracts are so
2nd part –
unconscionable and oppressive as to amount to a wanton
- With regard to any corporate act, favorable vote of majority of destruction of the rights of the minority
quorum is required - In determining whether reasonable diligence was exercised, the
- Except if election of corporate officers [ex. corporate secretary], particular circumstances of each case must be considered; the
favorable vote of majority of ALL the presently incumbent members NATURE of the business is an important factor
of the board is required
Board of Liquidators vs. Heirs of Kalaw [1967; important]
Yu Chuk v Kong Li Po [1924]
- Pet sues resp alleging that the latter entered into a contract w/o
- W/n the GM has the power to bind the contract he entered into prior approval by the board as required by the by-laws; Nacoco
incurred losses
- No. The general rule is that the power to bind a corp by contract
- A corporate officer entrusted w/ the general management and
lies with its BoD/T, but this power may either expressly or impliedly
control of its business, has implied authority to make any contract
be delegated to other officers or agents of the corp
or do any other act which is necessary or appropriate to the
- Except where the authority to employ servants & agents is conduct of the ordinary business of the corp. As such officer, he
expressly vested in the BoD/T, an officer or agent who has general may, w/o any special authority from the BoD perform all acts of an
control & management of the corp’s business or a specific part ordinary nature, which by usage or necessity are incident to his
thereof, may bind the corp by reasonable contracts of employment office, and may bind the corp by contracts in matters arising in the
of such agents & employees as are usual and necessary in the usual course of business.
conduct of such business - Where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general
- The business manager of the resp had no implied authority to
manager may bind the company w/o formal authorization of the
employ printers for the corp's newspaper for the term of 3 years
BoD. Existence of such authority is established, by proof of the
and upon conditions otherwise so onerous to the corp that the
course of business, the usage and practices of the company and
possibility of it being insolvent was expressly contemplated in the
by the knowledge which the BoD has, or must be presumed to
contract of employment
have, of acts and doings of its subordinates in and about the affairs
- Before a contract can be ratified, knowledge of its existence must of the corp
be brought home to the parties who have the authority to ratify it or

11
Corpo Glen Aid
- Where the practice of the corp has been to allow its GM to must own in his right at least one share of the capital stock of the
negotiate and execute contracts in its copra trading activities for stock corp of which he is a director”
and in Nacoco's behalf w/o prior board approval, and the board - Another reason for upholding a by-law provision that forbids a
itself, by its acts & through acquiescence, practically laid aside the competitor to be elected as corporate director are the laws
by-law requirement of prior approval. The contracts of the GM, prohibiting cartels
under the given circumstances, are valid corp acts - Every SH has the right to inspect corporate books and records.
- Ratification by a corp of an unauthorized at or contract by its - The right of SH to inspect corporate books extends to a wholly-
officers or others relates back to the time of the act or contract owned subsidiary.
ratified and is equivalent to original authority. The corp and the - Purely ultra vires corporate acts of corporate officers to invest
other party to the transaction are in precisely the same position as corporate funds in another business or corp, i.e., acts not contrary
if the act or contract had been authorized at the time. The adoption to law, morals, public order as public policy, may be ratified by the
or ratification of a contract by a corp is nothing more nor less than SHs holding 2/3 of the voting power
the making of an original contract. The theory of corp ratification is
Report of election of directors, trustees and officers [Sec. 26]
predicated on the right of a corp to contract, and any ratification or
adoption is equivalent to a grant of prior authority - W/in 30 days after the election of the directors, trustees and officers
- Business judgment rule – The directors hold such office charged of the corp, the secretary, or any other officer of the corp, shall
with the duty to act for the corp according to their best judgment, submit to the SEC, the names, nationalities and residences of
and in so doing they cannot be controlled in the reasonable those elected
exercise and performance of such duty. Whether the business of a - General information sheet [GIS]
corp should be operated at a loss during a business depression, or - 30 day deadline is strictly observed by SEC
closed down at a smaller loss, is a purely business and economic
Vacancies in the office of director or trustee [Sec. 29]
problem to be determined by the directors of the corp and not by
the court. It is a well-known rule of law that questions of policy of AoI – 15D; quorum is 8
management are left solely to the honest decision of officers and
If presently remaining Ds – 13D/ 2V
directors of a corp, and the court is w/o authority to substitute its
judgment for the judgment of the BoD; the board is the business Present at the BoD Mtg – 8D
manager of the corp and so long as it acts in good faith its orders
- To fill the vacancy, 7 favorable votes from the quorum of 8Ds are
are not reviewable by the courts
required [7 b/c majority of the presently remaining Ds, w/c is 13]
Gokongwei vs. SEC [1979; important; distinguish from Kalaw]
So, if presently – 11D/ 4V
- Business judgment rule – whether the by-law is in conflict w/ the
- To fill the vacancy, 6 favorable votes from the quorum of 8 are
law of the land, or w/ the charter of the corp, or is in a legal sense
required
unreasonable and therefore unlawful is a question of law; this rule
is subject, however, to the limitation that where the reasonableness ^ In filling the vacancy, the majority votes of the remaining Ds is required,
of a by-law is a mere matter of judgment, and one upon w/c provided they still constitute quorum
reasonable minds must necessarily differ, a court would not be
2nd part – filling vacancy due to increase in the # of Ds; SHs will only vote
warranted in substituting its judgment insead of the judgment of
for the D who is in excess provided that the remaining Ds cannot constitute
those who are authorized to make by-laws and who have exercised
quorum
their authority
- A corp may prescribe in its by-laws the qualifications, duties and - Held in a regular/special meeting for that purpose or at the meeting
compensation of directors, officers and employees. This must increasing the # of Ds if so stated in the notice of meeting
necessarily refer to a qualification in addition to that "every director
EPG Construction vs. CA [1992]

12
Corpo Glen Aid
- A corp is invested by law with a personality separate and distinct stock constitute personal property, they do not represent property
from those of the persons composing it as well as from that of any of the corp. The corp has property of its own which consists chiefly
other entity to which it may be related. Mere ownership by a single of real estate. A share of stock only typifies an aliquot part of the
SH or by another corp of all or nearly all of the capital stock of a corp’s property, or the right to share in its proceeds to that extent
corp is not of itself sufficient ground for disregarding the separate when distributed according to law and equity, but its holder is not
corporate personality. The general manager of a corp therefore the owner of any part of the capital of the corp. Nor is he entitled to
should not be made personally answerable for the payment of the the possession of any definite portion of its property or assets. The
employee’s back wages unless he had acted maliciously or in bad SH is not a co-owner or tenant in common of the corporate
faith in terminating the services of the employee property.
- The resp corp has a distinct personality separate from its
Ramirez vs. Orientalist Co. & Fernandez [1918]
members. The corp transacts its business only through its officers
- See p 348 – 349 Campos for the problem [2 signs of Fernandez] or agents. Whatever authority these officers or agents may have is
- The written contract which was the subject of this action contained derived from the BoD or other governing body unless conferred by
the corporate name signed at the lower right-hand corner of the the charter of the corp. An officer’s power as an agent of the corp
contract, in the manner usual with a party signing in the character must be sought from the statute, charter, the by-laws or in a
of principal obligor. The name of another individual was signed delegation of authority to such officer, from the acts of the BoD,
somewhat below and to the left of the corporate signature, after the formally expressed or implied from a habit or custom of doing
customary manner of those who sign in a subsidiary capacity; but business
no words were written to indicate clearly whether this individual - Doctrine of piercing the veil of corporate fiction; The separate
signed as a principal obligor or as surety. Held: That parol evidence personality of the corp may be disregarded only when the corp is
was admissible to show that the intention was that he should be used as a cloak or cover for fraud or illegality or to work injustice
bound as surety and not jointly with the other party or where necessary to achieve equity or when necessary for the
- The power to make corporate contracts resides primarily in the protection of the creditors
company's BoD; but the board may ratify an unauthorized contract
Benguet Electric Coop vs. NLRC [1992]
made by an officer of the corp. Ratification in this case is held to
have occurred when the board, with knowledge that the contract - The Board members and officers of a corp who purport to act for
had been made, adopted a resolution recognizing the existence of and in behalf of the corp, keep within the lawful scope of their
the contract and directing that steps be taken to enable the corp to authority in so acting, and act in good faith, do not become liable,
utilize its benefits whether civilly or otherwise, for the consequences of their acts.
- Where a corporate contract has been effected with the approval of Those acts, when they are such a nature and are done under such
the BoD, a resolution adopted at a meeting of SHs refusing to circumstances, are properly attributed to the corp alone and no
recognize the contract or repudiating it is w/o effect personal liability is incurred by such officers and Board members
Boyer-Roxas vs. CA [1992] Prime White Cement vs. IAC [1993]
- F. Roxas was the majority & controlling SH; he assigned family - A board director or other corporate officer cannot readily enter into
members as officers but in reality, he calls the shots; he died; family a contract with his own corp; Exceptions.—A director of a corp
members passed a board reasolution going against F. Roxas holds a position of trust and as such, he owes a duty of loyalty to
decisions of tolerating 2 families to stay w/in the premises of his corp. In case his interests conflict with those of the corp, he
Hidden Valley cannot sacrifice the latter to his own advantage and benefit. As
- SC – F. Roxas had the authority to do that; but such stay cannot corporate managers, directors are committed to seek the
be permanent; the board resolution must be respected maximum amount of profits for the corp. This trust relationship "is
- Properties registered in the name of the corp are owned by it as an not a matter of statutory or technical law. It springs from the fact
entity separate and distinct from its members. While shares of

13
Corpo Glen Aid
that directors have the control and guidance of corporate affairs intra-corporate dispute which falls within the jurisdiction of the trial
and property and hence of the property interests of the SHs." courts
- On the other hand, a director's contract with his corp is not in all - The BoD has no power to create other corporate offices w/o first
instances void or voidable. If the contract is fair and reasonable amending the corporate by-laws so as to include therein the newly
under the circumstances, it may be ratified by the SHs provided a created corporate office
full disclosure of his adverse interest is made - In determining the existence of an intra-corporate dispute, the
status or relationship of the parties and the nature of the question
Grace Christian High School vs. CA [1997]
that is the subject of the controversy must be taken into account
- The BoD of corps must be elected from among the SHs or
Lopez vs. Ericta [1972]
members
- No provision of the by-laws can be adopted if it is contrary to law - 12 members of Board of Regents; 7 majority votes to effect Dr.
- Practice, no matter how long continued, cannot give rise to any Blanco’s appointment
vested right if it is contrary to law
- 3 voted for Dr. Blanco, 5 against, 4 abstained
Woodchild Holdings Inc. vs. Roxas Electric & Construction Inc [2004]
- Issue: what is the legal effect of the abstentions? Since it is critical
- The property of the corp is not the property of its SHs or members
- An affirmative act is necessary to effect a positive vote; since Dr.
and may not be sold by the SHs/members w/o express
Blanco did not garner the required positive votes, her appointment
authorization from the corp’s BoD
cannot be effected; the nature of an abstention vote shall not be
- Acts done by corporate officers beyond the scope of their authority
further delved into
cannot bind the corp unless it has ratified such acts expressly or
tacitly, or is estopped from denying them Executive committee [Sec. 35] p. 407-408 Campos
Cosare vs. Braodcom Aisa, Inc. [2014] - Committee of the board
- An intra-corporate controversy, which falls within the jurisdiction of If AoI – 15
regular courts, has been regarded in its broad sense to pertain to
Ex Comm – 7
disputes that involve any of the following relationships: (1) b/w the
corp, partnership or association and the public; (2) b/w the corp, - Quorum of excomm is 4; vote required is 4; “majority vote of all its
partnership or association and the state in so far as its franchise, members”
permit or license to operate is concerned; (3) b/w the corp, - May act, by majority vote of all its members, on such specific
partnership or association and its SHs, partners, members or matters w/in the competence of the board, as may be delegated to
officers; and (4) among the SHs, partners or associates, it in the by-laws or on a majority vote of the board, except
themselves [memorize these 5; AFAAD]
- When the dispute involves a charge of illegal dismissal, the action o (1) approval of any action for which SHs’ approval is also
may fall under the jurisdiction of the Labor Arbiters upon whose required;
jurisdiction, as a rule, falls termination disputes and claims for o (2) the filing of vacancies in the board;
damages arising from employer-employee relations as provided in o (3) the amendment or repeal of by-laws or the adoption of
the Labor Code new by-laws;
- Corporate officers’ in the context of PD 902-A are those officers of o (4) the amendment or repeal of any board resolution which
the corp who are given that character by the Corp Code or by the by its express terms is not so amendable or repealable;
corp’s by-laws and
- It is only when the officer claiming to have been illegally dismissed o (5) a distribution of cash dividends to the SHs.
is classified as such corporate officer that the issue is deemed an 3 types of dividends; cash, stock, & property
Obligations of Directors, Trustees, or Officers – Sec. 31
14
Corpo Glen Aid
Ds/Ts who willfully and knowingly vote for or assent to patently unlawful to the prejudice of San Miguel Corp and its SHs, that the
acts of the corp or who are guilty of gross negligence or bad faith in questioned amendment of the by-laws was made. Certainly, where
directing the affairs of the corp or acquire any personal or pecuniary two corps are competitive in a substantial sense, it would seem
interest in conflict with their duty shall be liable jointly and severally for all improbable, if not impossible, for the director, if he were to
damages suffered by the corp, its SHs/members and other persons discharge effectively his duty, to satisfy his loyalty to both corps
and place the performance of his corporate duties above his
“Other persons” – labor, etc.
personal concerns
“willfully and knowingly” - Sound principles of corporate management counsel against
sharing sensitive information with a director whose fiduciary duty
Pool vs. Pool [1945]
to loyalty may well require that he disclose this information to a
- Resps cannot be said to have been negligent under the competitive rival. These dangers are enhanced considerably
circumstances. They did not know that the earnings in dividends where the common director such as the petitioner is a controlling
had to be distributed before a certain date and that failure to SH of two of the competing corps. It would seem manifest that in
distribute said earnings would lead to their paying surtax. such situations, the director has an economic incentive to
Defendants had a right to rely upon the advice of a certified public appropriate for the benefit of his own corp the corporate plans and
accountant and a lawyer whom they had employed to look after policies of the corp where he sits as director.
these legal and technical matters. - Another reason for upholding a by-law provision that forbids a
- Pet as a director himself has a duty to inform his co-directors of the competitor to be elected as corporate director are the laws
consequence of non-distribution of earnings. This he failed to do prohibiting cartels
and he cannot burden the other directors of reimbursing him the
Steinberg vs. Velasco [1929]
surtax he paid.
- The creditors of a corp have the right to assume so long as there
“gross negligence or bad faith”
are debts and liabilities, the BoD of the corp will not use its assets
Strong vs. Repide [1906; important; see mi digest] to purchase its own stock or to declare dividends to its SHs when
the corp is insolvent.
- US SC 1909 – Even though a director may not be under the
- The directors of a corp are bound to care for its property and
obligation of a fiduciary nature to disclose to a SH his knowledge
manage its affairs in good faith, and for a violation of their duties
affecting the value of the shares, that duty may exist in special
resulting in waste of its assets or injury to its property, they are
cases, and it did exist upon the facts in this case
liable to account the same as any other trustee.
o Special facts doctrine
- If the directors of a corp do acts clearly beyond their power, by
Under this doctrine, Repide had the responsibility
reason of which a loss ensued, or dispose of its property w/o
to disclose to Strong, failure of which constituted
authority, they will be required to make good the loss out of their
fraud
private estate.
2nd par. - A director of a corp is bound to exercise ordinary skill and judgment
and cannot excuse his negligence or unlawful acts on the ground
Gokongwei vs. SEC [1979]
of ignorance or inexperience
- A director stands in a fiduciary relation to the competition and its
PSE vs. CA [1997; business judgment rule extended]
SHs. The disqualification of a competition from being elected to the
BoD is a reasonable exercise of corporate authority - Questions of policy and of management are left to the honest
- It is obviously to prevent the creation of an opportunity for an officer decision of the officers and directors of a corp, and the courts are
or director of San Miguel Corp, who is also the officer or owner of w/o authority to substitute their judgment for that of the BoD—the
competing corp, from taking advantage of the information which he board is the business manager of the corp, and so long as it acts
acquires as director to promote his individual or corporate interests in good faith, its orders are not reviewable by the courts.

15
Corpo Glen Aid
- Notwithstanding the regulatory power of the SEC over the PSE, - Whether or not a valid and binding resolution passed by the BoD,
and the resultant authority to reverse the PSE’s decision in matters will cause losses or decrease the profits of the corp, may not be
of application for listing in the market, the SEC may exercise such reviewed by the courts
power only if the PSE’s judgment is attended by bad faith
Sec. 32 [Dealings of Ds, Ts, or officers w/ the corp] – a contract of the copr
- The SEC had acted arbitrarily in arrogating unto itself the discretion
w/ 1 or more of its Ds or Ts or officers is voidable, at the option of such
of approving the application for listing of Puerto Azul Land, Inc.,
corp, unless all the following conditions are present –
since this is a matter addressed to the sound discretion of the PSE,
a corporate entity, whose business judgments are respected in the - The presence of such D or T in the board mtg in w/c the contract
absence of bad faith was approved was not necessary to constitute a quorum
- The question as to what policy is, or should be relied upon in - The vote of such D or T was not necessary for the contract’s
approving the registration and sale of securities in the PSE is not approval
for the Supreme Court to determine, but is left to the sound - The contract is fair and; and
discretion of the SEC - In case of an officer, the contract has been previously authorized
by the BoD/BoT
Otis & Co. vs. Pennsylvania R. Co. [1944; ???]
^ Where any of the 1st 2 conditions is absent, in the case of a contract with
- Business judgment rule applied; ruled in favor of the directors
a D or T, such contract may be ratified by the vote of the SHs representing
Litwin vs. Allen [1940] at 2/3 of the OCS or of at 2/3 of the members in a meeting called for the
purpose – disclosure of the adverse interest of the Ds or Ts involved must
- The transaction was tainted w/ improvidence; no win case, sure
be made at such mtg.
loss
- It is against public policy for a bank to purchase securities and give WHEN STOCKHOLDERS’ ACTION IS NECESSARY [make table 4 this]
the seller the option to buy them back at the same price thereby
Election of Directors [Sec. 24]
incurring the entire risk of loss with no possibility of gain other than
the interest derived from the securities in the interim. Any benefit Board vote – n/a
of a rise in price is assured to the seller and any risk of heavy loss
Quorum in meetings [Sec. 52] – majority of outstanding capital stock
is inevitably assumed by the bank
- The ratification by the directors is equivalent to prior acquiescence o Example –
and should result in liability AKS [authorized] = P1M, 1M shares, 1Php/share
OCS [outstanding] = 500K shares – the quorum will
Montelibano vs. Bacolod-Murcia Milling Co., Inc. [1962]
be 250,001 shares
- It is a question, therefore, in each case, of the logical relation of the - Quorum and attendance are 2 different terms
act to the corporate purpose expressed in the charter. If that act is - Once quorum is established, it continues until the end of the
one which is lawful in itself, and not otherwise prohibited, is done meeting
for the purpose of serving corporate ends, and is reasonably
SHs’ vote – cumulative voting
tributary to the promotion of those ends, in a substantial, and not
in a remote and fanciful, sense, it may fairly be considered within Non-voting shares [relate to art. 7 of AoI] – they don’t vote, but they can
charter powers. The test to be applied is whether the act in attend meetings
question is in direct and immediate furtherance of the corp’s
Meeting required? Yes
business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corp has the power to do it; W/n the subscription is fully paid, it is still considered outstanding capital
otherwise, not. stock

16
Corpo Glen Aid
- In the example above, if only 125k of the 500k subscribed shares Meeting required? – yes
have been paid, the 500k shares will still be considered as OCS;
Appraisal right – no
there may still be quorum
Others – this concerns compensation other than per diem;
Appraisal right – right to be paid for his investments; stockholders have no
right Directors contract w/ the corporation itself Sec. 32 & 33
Others – by ballot, if requested by any voting SH Board vote – see others (1)
Removal of Directors [Sec. 28] Quorum – 2/3 of OCS [entitled to vote]
Board vote – n/a SHs’ vote – 2/3 of OCS [entitled to vote]
Quorum – 2/3 of outstanding capital stock [entitled to vote] Non-voting shares – no
Stockholders’ vote – 2/3 of OCS [entitled to vote]; no cumulative voting Meeting required? yes
Non-voting shares – no Appraisal right no
Meeting required? Yes Others – 1) applies only if corp cannot muster quorum and vote at board
level b/c affected director not counted 2) full disclosure of director’s
Appraisal right – no
adverse interest 3) contract fair & reasonable 4) see sec. 33 on contracts
Others – Removal shall be for a cause, if director elected by minority [???] b/w corps w/ interlocking directors
Vacancy in the board [Sec. 9] Directors’ acquisition of business opportunity Sec. 34
Board vote – see others Board vote – majority of present, provided there’s quorum
Quorum – Majority of OCS [entitled to vote] Quorum – 2/3 OCS [entitled to vote]
SHs’ vote – cumulative voting SH’s vote – 2/3 OCS [entitled to vote]
Non-voting shares – no Non-voting shares – no
Meeting required? yes Meeting required? – yes
Appraisal right – no Appraisal right – no
Others – vacancy may be filled up by remaining Directors, if there’s still Others
quorum. But not if vacancy is due to –
Amendment of AoI Sec. 16
(i) Articles amendment increasing # of Directors; or
Board vote – majority
(ii) Removal of Director; or
(iii) Expiration of term Quorum – 2/3 of ALL OCS
Directors’ compensation – Sec. 30 Stockholders’ vote – 2/3 of ALL OCS [Sec. 6]
Board vote – n/a Non-voting shares – yes [Sec. 6]
Quorum – majority of OCS [entitled to vote] - AKS = P2M, 1M shares, 1Php/share – COMMON
10M shares, 0.10/share – PREF
SHs’ vote – majority of OCS [entitled to vote]
11M OCS
Non-voting shares – no Quorum = 2/3 of 11M = 7.26M shares

17
Corpo Glen Aid
If attendance is 9M, 7.26M shares is the majority vote [b/c 2/3 Appraisal right – Yes [Sec. 81(1)]
of ALL OCS]
Others – Regulatory approvals [primary regulator, and SEC]
Meeting required? No. Written assent is ok. Exceptions –
Voluntary – no creditors affected [???]
- (a) increase/decrease of capital stock [art. 7]
Same as previous except, NO appraisal right
- (b) extension or shortening of corporate term
Voluntary – creditors affected Sec. 119
Appraisal right – yes for certain amendments [Sec. 81(1)]
Same as previous except – there’s petition hearing and SEC approval
Others – regulatory approvals [primary regulator and SEC]; there are some
provisions in the AoI that are not subject to amendment – names of Amendment of by-laws Sec. 48
incorporators, etc.; see sec. 17
Board vote – majority
Increase/decrease of capital stock; bonded indebtedness [Sec. 38]
Quorum – majority of ALL OCS
- What it contemplates is an amendment to art. 7, and not merely
SHs’ vote – majority of ALL OCS
increase decrease of what has already been authorized [careful]
Non-voting shares – yes [Sec. 6]
Board vote – majority [in practice, majority of the board as PRESENTLY
CONSTITUTED, not of the attending directors, and not of the # of directors Meeting required? Yes
indicated in AoI]
Appraisal right – no
Quorum – 2/3 of ALL OCS
Others – regulatory approvals [primary regulator & SEC];
SHs’ vote – 2/3 of ALL OCS [Sec. 6]
- 2/3 of outstanding shares may delegate to Board; revoke
Non-voting shares – yes [Sec. 6] delegation by majority
Meeting required? Yes SLEMPO [sale, lease, exchange, mortgage, pledge or other
disposition] of all assets [Sec. 40]
Appraisal right – No. exception – if increase in capital stock includes
preference superior to outstanding shares [Sec. 81(2)] - “all assets” – qualitative standard [as to render the corp unable to
pursue its line of business], not quantitative standard
Others – regulatory approvals [primary regulator, and SEC]; when
amended, 25-25 rule shall be complied with again for the increase [new Board vote – majority
shares]
Quorum – 2/3 of ALL OCS
Dissolution – 3 types
SHs’ vote – 2/3 of ALL OCS
By shortening corporate term [Sec. 120, 16]
Non-voting shares – Yes [Sec. 6]
- Amending art. 4 of AoI
Meeting required? Yes
- Ex. From 50 years to 16 years
Appraisal right – yes [Sec. 40, 81(2)]
Board vote – majority
Others – illegal combinations and monopolies [anti-trust, competition laws]
Quorum – 2/3 of ALL OCS
Investment in another business or corporation [Sec. 42]
SHs’ vote – 2/3 of ALL OCS [Sec. 6]
- If the investment covers the primary purpose of the investing
Non-voting shares yes [Sec. 6]
company, only BoD majority is needed [majority of the present
Meeting required? Yes directors at the meeting, provided there is a quorum]
18
Corpo Glen Aid
- If the investment covers the secondary purpose, SHs’ action is Management contract [Sec. 44; applies to both corps]
needed; majority of the presently constituted board, together with
Board Vote – majority of present, provided quorum
2/3 of shares even non-voting
- If investment covers neither primary or secondary purpose, it is an Quorum – see SHs’ vote
ultra vires act [Sec. 45]; it cannot invest in such company, unless
SHs’ Vote – majority of OCS [entitled to vote]
they amend the AoI
- But if same interest controls 1/3 of managing corp – majority of
Board Vote – majority
OCS [entitled to vote] of MANAGING corp
Quorum – 2/3 of ALL OCS - If interlock of majority directors – 2/3 of OCS [entitled to vote] of
MANAGED corp
SHs’ Vote – 2/3 of ALL OCS
Meeting required – yes
Non-voting shares – Yes [Sec. 6]
Appraisal right – note
Meeting required – yes
Others – maximum term = 5 years
Appraisal right – yes [Sec. 42]
Consideration for no-par shares [Sec. 62]
Others – but see also Sec. 36(7)
Board Vote – majority of present, provided quorum
Merger or consolidation [Sec. 77]
Quorum – majority of OCS [entitled to vote]
- Merger – Corp A + Corp B = Corp A [surviving corp]
- Consolidation – Corp A + Corp B = Corp C SHs’ Vote – majority of OCS [entitled to vote]
Board Vote – majority Non-voting shares – no
Quorum – 2/3 of ALL OCS Meeting required – yes
SHs’ Vote – 2/3 of ALL OCS Appraisal right – no
Non-voting shares – Yes [Sec. 6] Others – only if issue prices is not fixed (i) in the AoI, or (ii) by the Board
pursuant to authority under AoI or By-Laws [the 2 must be absent for Sec.
Meeting required – yes
62 to apply]
Appraisal right – yes [Sec. 40, 81(3)]
- This is also a control device
Others – regulatory approvals [primary regulator, SEC] [Sec. 79]
Where non-voting shares are entitled to vote [8 instances] –
- Illegal combinations and monopolies [Anti-trust, competition laws]
- Amendment of the AoI
Stock dividends [Sec. 43] - Adoption and amendment of by-laws;
- SLEMPO of all or substantially all of the corporate property;
Board Vote – majority of preset at the meeting, provided quorum
- Incurring, creating or increasing bonded indebtedness;
Quorum – 2/3 of OCS [entitled to vote] - Increase/decrease of capital stock;
- Merger/consolidation
SH’s vote – 2/3 of OCS [entitled to vote]
- Investment of corporate funds in another corp or business in
Non-voting shares – no accordance with the Code
- Dissolution
Meeting required – yes
CONTROL DEVICES
Appraisal right – no

19
Corpo Glen Aid
Proxy [Sec. 58] – may refer to – o Kept at its principal office
o Minutes – intimate details or summary of meetings of
- The person
SHs/members/BoD/BoT
- The document
- Stock and transfer books
It’s like an agent, but may not be valid for more than 5 years – remedy, to o Only PCD Nominee Corporation [not open for public] ???
renew the proxy w/ stock certificate ???
o Does not reflect transactions in PSE
- General proxy [at liberty]
o 1st part – journal
- Limited proxy [w/ constraints]
o 2nd part – ledger [payments, alienation, dates, who
Formalities – buyer/seller]
- In writing Refusing officer, or director who voted to refuse will be held liable; except
- Signed by the SH/member [defenses for refusing] –
- Filed before the scheduled meeting w/ the Corp Sec
- Demander has improperly used any info secured through any prior
Proxy is revocable, except if coupled w/ interest [???] examination of the records/minutes; or
- Not acting in good faith or for a legitimate cause
Voting trusts [Sec. 59] [see Sec. 20 of SRC and rule 20 of IRR]
Sec. 75 – 2 financial statements only; but SEC actually requires 4
- Not exceeding 5 years; except loan [automatically expires upon full
payment] - Balance sheet
- P&L statement [profit & loss]
Formalities –
- Cash flow
- In writing - Changes in equity
- Notarized
Pardo vs. Hercules Lumber Co. [1924]
- Agreement [VTA] filed w/ the corp and SEC
- A resolution of the BoD of a corp limiting the right of SHs to inspect
Consequences
its records to a period of ten days shortly prior to the annual SHs’
- Legal title [held by trustee] vis-à-vis beneficial title [held by meeting is an unreasonable restriction on the right of inspection;
transferor] evidenced by VTA certificate the right of inspection can be exercised "at reasonable hours." This
- Stock certificates will be canceled and new stock certificates means that the right of inspection may be exercised at reasonable
issued to the trustee hours on business days throughout the year, and not merely during
- If there’s a supplement to the VTA, the conditions in the original an arbitrary period of a few days chosen by the director
will apply to the subsequent
Gonzales vs. PNB [1983]
Founders’ shares [Sec. 7]
- It is now expressly required as a condition for such examination
Hierarchy of shares as to voting rights – Founders’ shares [Sec. 7] > that the one requesting it must not have been guilty of using
Common shares > Preferred shares improperly any information secured through a prior examination,
and that the person asking for such examination must be “acting in
THE RIGHT TO INSPECT; CORPORATE BOOKS & RECORDS
good faith and for a legitimate purpose in making his demand.”
Sec. 74 – Director/trustee/SH/members may inspect at reasonable hours - SH has the duty of showing good motive or purpose for demanding
on business days an examination of corporate books. One who acquired one share
of stock of a bank to be able to examine its books can hardly be
2 books
said to have been motivated with good faith or proper purpose in
- Record of all business transaction and minutes

20
Corpo Glen Aid
demanding inspection of the bank’s transactions before he became
a SH
Veraguth vs. Isabela Sugar Co. [1932]
- Board resolution requiring prior approval/permission from the
president before exercising the right to inspect is invalid
WG Philpotts vs. Phil. Manufacturing Co. & Berry [1919]
- The right of examination into corporate affairs may be exercised
either by the SH in person or by any duly authorized representative,
considering that the technicalities of such records may require the
interpretation skills of experts like accountants, lawyers, etc.
Gokongwei vs. SEC [979]
- The right of SH to inspect corporate books extends to a wholly-
owned subsidiary
- Considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corp and, therefore, under its control, it
would be more in accord with equity, good faith and fair dealing to
construe the statutory right of petitioner as SH to inspect the books
and records of the corp as extending to books and records of such
wholly owned subsidiary which are in respondent corp’s
possession and control
Slay vs. Polania Publishing Co. [1930; ???]
Yujuico vs. Quaimbao [2007]
- The second and fourth paragraphs of Section 74, including the first
paragraph of the same section, can only be violated by a corp. It is
clear then that a criminal action based on the violation of the
second or fourth paragraphs of Section 74 can only be maintained
against corporate officers or such other persons that are acting on
behalf of the corporation
- Violations of the second and fourth paragraphs of Section 74
contemplates a situation wherein a corp, acting thru one of its
officers or agents, denies the right of any of its SHs to inspect the
records, minutes and the stock and transfer book of such corp

21
Corpo Glen Aid
CORPORATE GOVERNANCE: DERIVATIVE SUITS o The party bringing suit should be a SH as of the time of the
act or transaction complained of, the number of his shares
Suits by SHs /members of a corp based on wrongful or fraudulent acts of
not being material
Ds or other persons may be classified into –
Exception – transfers by operation of law
- Individual suits [denial of the right of inspection; such right is [succession; Pascal vs Orozco]
personal to each SH] AND at the time the suit is filed [AM No. 01-2-04-
- Class suits [wrong is done to a group of SHs; where preferred SH’s SC; interim rules governing commercial cases;
rights are violated] Rule 8, Sec. 1(1)]
- Derivative suits [see cases below] o He has tried to exhaust intra-corporate remedies, ex. – has
made a demand on the BoD the appropriate relief but the
General principles/requisites
latter has failed or refused to heed his plea
- SH/member bringing the suit must have exhausted his remedies o The cause of action actually devolves on the corp, the
w/in the corp wrongdoing or harm having been, or being caused to the
- SH/member must have been one at the time the transaction or act corp and not to the particular SH bringing the suit
complained of took place - Number of shares is immaterial in re harassment/ nuisance suits
- Any benefit recovered by the SH/member as a result of the [AM No. 01-2-04-SC; Rule 1, Sec. 1(b)]; the court shall consider
derivative suit must be accounted for to the corp, the real party in the ff. –
interest o Extent of the shareholding or interest of the initiating SH or
- If the suit is successful, plaintiff is entitled to reimbursement from member
the corp for the reasonable expenses of litigation including
o Subject matter of the suit
attorney’s fees
o Legal and factual basis of the complaint
Liken vs. Shaffer [1946] o Availability of appraisal rights for the act or acts complained
- 3 types of SH action of
o Individual suit o Prejudice or damage to the corp in re to the relief sought
o Derivative suit [SH on behalf of the corp] - Jurisdiction is vested in regular courts and not in SEC; RTC w/c
o Class suit has jurisdiction over the principal office of the corp [AM No. 01-2-
- Derivative suit – 04-SC, Rule 1, Sec. 5]
o The corp itself had sued
o If there’s no cause of action, no recovery Pascual vs. Orozco [1911]
o Any defense good against the corp is good against the SH - Even the innocent transferee from an equally innocent transferor
o Conduct of a particular SH is not material – courts will has no right to bring a derivative suit; the plaintiff must have been
refuse relief to those suitors who do not come into equity a SH at the time the transaction complained of took place
w/ clean hands, or who have ratified or acquiesced in the - Exception to the rule that the SH must have been a SH at the time
wrong complained of [guilty of laches]; the fact that one SH the act/transaction complained of occurred – transfers by operation
has discovered fraud and is guilty of laches does not of law [succession]
prevent another SH who is not guilty of laches from - Notwithstanding the compliance with the rule that the SH must
instituting a SH’s derivative suit have been a SH at the time the act/transaction complained of
SMC vs. Kahn [1989; IMPORTANT] occurred, it will not be entertained if the SH’s purpose of owning
such stocks is to harass the corp
- Requisites of a derivative suit
Evangelista vs. Santos [1950]

22
Corpo Glen Aid
- The SHs have brought the action not for the benefit of the corp but brought about by their own wrong doing. Only after such period of
for their own benefit, since they ask that the defendant make good time had elapsed could resp conclude that the directors were
the losses occasioned by his mismanagement and pay to them the remiss in their duty to protect the corp property and business
value of their respective participation in the corporate assets on the [applicability of estoppel]
basis of their respective holdings. Clearly, this cannot be, done - As regards the exhaustion of intra-corporate remedies, it is
until all corporate debts, if there be any, are paid and the existence sufficient to allege that there was an actual exhaustion or that it is
of the corp terminated by the limitation of its charter or by lawful futile to resort to such remedy
dissolution Cua vs. Tan [2009; good read to see corp transactions]
- Since the pet SHs themselves were asking for the value that has
been dissipated, it violates the trust fund doctrine – creditors must - Backdoor listing – occurs when a privately-held company that may
be paid first, not SHs not qualify for the public offering process purchases a publicly-
- The pets should have amended the complaint and sought relief on traded company; the privately-held company avoids the public
behalf of the corp offering process and gains automatic inclusion on a stock
exchange; occurs when a private company acquires a publicly
Republic Bank vs. Cuaderno [1967] traded company and thus “goes public” w/o an initial public offering
- A suit need not be authorized by the corp where its objective is to - Requisites for filing a derivative suit [Rule 8, Section 1 of the Interim
nullify the action taken by its manager and the BoD, in w/c case Rules of Procedure for Intra-Corporate Controversies (IRPICC)]
any demand for intra-corporate remedy would be futile o He was a SH/member at the time the acts or transactions
- In a derivative suit filed by a SH, whether the corp should be joined subject of the action occurred and at the time the action
as a plaintiff or a defendant is not important. What is important is was filed;
that the corp should be made a party in order to make the court’s o He exerted all reasonable efforts, and alleges the same
judgment binding upon it and thus bar future relitigations of the with particularity in the complaint, to exhaust all remedies
issues available under the articles of incorporation, by-laws, laws
or rules governing the corp or partnership to obtain the
Reyes vs. Tan [1961] relief he desires;
- The importation of textiles instead of raw materials as well as the o No appraisal rights are available for the act or acts
failure of the BoD to take actions against those directly responsible complained of; and
o The suit is not a nuisance or harassment suit
for the misuse of the dollar allocations constitute fraud or consent
- The right to information which includes the right to inspect
thereto on the part of the directors. Therefore, a breach of trust was
corporate books and records is a right personal to each SH
committed which justifies the minority SHs to institute a derivative - The corp is the real party in interest in a derivative suit and the
suit on behalf of the corp suing SH is only a nominal party
- Where corporate directors are guilty of a breach of trust — not of o For a derivative suit to prosper, it is required that the
mere error of judgment or abuse of discretion — and intracorporate minority SH suing for and on behalf of the corp must allege
remedy is futile or useless, a SH may institute a suit in behalf of in his complaint that he is suing on a derivative cause of
himself and other SHs and for the benefit of the corp, to bring about action on behalf of the corp and all other SHs similarly
a redress of the wrong inflicted directly upon the corp and indirectly situated who may wish to join him in the suit
upon the SHs Holmes vs. Camp [1917; US case]
- The claim that resp did not take steps to remedy the illegal
importation for a period of 2 years is also w/o merit. During that - 3 corps
period of time, resp had the right to assume and expect that the - Doe Rum Lead owned 97% by St. Joseph, subsidiary of Doe Rum
- Plaintiffs are SHs in Doe Rum
directors would remedy the anomalous situation of the corp

23
Corpo Glen Aid
- US SC – the SHs of Doe Rum may file a derivative suit w/ respect organization of the corp or afterwards, and upon w/c it is to conduct
to alleged anomalies committed in St. Joseph [remember, this is its operations
not the case in the Phil.] o Remains the same unless the AoI are amended to increase
or decrease it
Gamboa vs. Victoriano [1979]
- Outstanding capital stock – total shares of stock issued under
- An individual SH is permitted to institute a derivative suit on behalf binding subscription agreements to subscribers or SHs, w/n fully
of the corp wherein he holds stock in order to protect or vindicate or partially paid, except treasury shares
corporate rights, whenever the officials of the corp refuse to sue, - Capital – actual property of the corp, including cash, real &
or are the ones to be sued or hold the control of the corp. In such personal property
actions, the suing SH is regarded as a nominal party, with the corp
as the real party in interest. Here, however, the plaintiffs are Equity securities / Shares of stocks; Kinds
alleging and vindicating their own individual interests or prejudice, A share of stock represents the interest of the holder thereof to participate
and not that of the corp in the management of the corp, to share proportionally in the profits of the
- The well-known rule is that courts cannot undertake to control the business and, upon liquidation, to obtain an aliquot part of the corporate
discretion of the BoD about administrative matters as to w/c they assets after all corporate debts have been paid
have legitimate power of action, and contracts intra vires entered
into by the BoD are binding upon the corp and courts will not - The holding/owning of a stock does not make him the owner of any
interfere UNLESS such contracts are so unconscionable and specific property of the corp, nor a creditor of such corp
oppressive as to amount to a wanton destruction of the rights of - His shares are his own personal property w/c he may SLEMPO
the minority Certificate of stock / stock certificate – different from a share of stock;
- Pre-emptive right – ability of the SH to subscribe/buy new shares merely evidence the interest of the SH in the corp
in proportion to his shares before new shares are issued to another
entity; this right is personal to the SH Founders’ vs. common vs. preferred shares
- Hierarchy of economic rights
o Preferred [senior]
CORPORATE FINANCE o Founders’ [5 years only]
Sources of Financing – o Common
- Hierarchy of voting rights
- Contributions of its SHs [equity of SHs/ equity investment] o Founders’ – exclusive right to vote or be voted for; 5 years
- Loans/advances by creditors only
- Profits w/c the corp may earn o Common – always have voting rights except when there
Capital structure of the corp refers to the aggregate of the securities issued are founders’ shares [5 years]
by the corp – 2 types o Preferred

- Shares of stock Preferred stocks – PAID AHEAD of common shares – note: most of the
- Debt securities features of preferred shares may be present in hybrids

Capital stock vs. capital - 2 limitations [Sec. 6] –


o Must always have par value
- Authorized capital stock – the maximum number of shares that a o Preferences must be in AoI and stock certificate
corp is legally permitted to issue, as specified in its AoI AoI may authorize the BoD to fix the terms &
- Capital stock – amount fixed, usually by the corporate charter, to conditions of preferred stocks, provided that these
be subscribed and paid in or secured to be paid in by the SHs of a shall become effective only upon the filing of a
corp, either in money or property, labor, or services, at the certificate thereof w/ the SEC
24
Corpo Glen Aid
- Preference – A preferred SH may also be given preference in the
o As to dividends [to be paid, the income must be truly distribution of the corporate assets upon
realized; cannot be income on paper; issued only when liquidation; in the absence of any provision granting
there are unrestricted realized earnings; BoD has the such preference, he participates pro rata w/ the
discretion to determine w/n dividends are to be declared] common SHs
Cumulative vs. non-cumulative If the preferred stock is cumulative, the liquidation
Always going to be paid whether there’s preference oftentimes includes arrears in
delay or not; not going to be paid if the corp cumulative dividends
fails to pay in the prior year FIRST, unpaid dividends are paid
If in any given year/s no dividends are SECOND, the value of the share – Par [P5]
declared, regardless of the reason, the vs. issue price [anything higher than P5]
arrears for such year/s have to be made up THIRD, w/ regard to excess; participating
in subsequent years before any dividends vs. non-participating
can be paid to the common stocks [corp w/ o Prefs will have a share in the
steady cash flow]; dividends depend upon excess; no share to the excess [all
the existence of profit for the year. If there to the common]
were no profits in a previous year, the - Preferred SH is not a creditor; he can get his investment back only
“dividends” w/c could not be given for that upon liquidation of the corp, provided there are enough assets left
year do not have to be made up in later after paying all creditors
years [corp w/ volatile cash flow] - Convertible securities; stock options – contract of security holder
may give him the privilege to exchange his class of securities w/
In the absence of any express stipulation,
another class; will usually provide for the ratio of conversion and
preferred stocks are deemed cumulative the period w/in w/c the privilege may be exercised
Participating vs. non-participating – dividends of o Ex. from preferred stocks or bonds to common stocks
preferred will be paid first, then common, then – - May be classified into series & sub-series
The remaining will be divided b/w the 2; the o A – 1, A – 2, etc. 2 – E, 2 – F
remainder will all go to the common SHs
Common stocks – most commonly issued by corps
Preferred stocks are non-participating,
unless expressly otherwise provided - Entitles the owner to an equal pro rata division of profits, if there be
o As to voting rights any, one SH has no advantage, priority, or preference over any
Preferred stocks are usually denied the right to other SH in the same class
vote, unless such right is clearly withheld - In the presence of preferred stocks, the common stocks are usually
Non-voting stocks have the right to vote in vested w/ the exclusive right to vote and have the residuary rights
specified instances involving major changes in the to the profits [passive income] and the net assets upon liquidation,
corp – *See ^ “WHEN STOCKHOLDERS’ ACTION after the preferences have been complied with
IS NECESSARY”
AoI may include provisions w/c will subject a non- Par vs. no-par
voting share to a suspensive condition to convert it - Par – par value of a share is fixed in the AoI, and is the minimum
to voting share issue price of such share; value must be stated in the stock cert,
Voting feature cannot be a feature of hybrids w/c cannot be issued until subscription is paid in full; cannot be
o Upon liquidation [at the end of corporate life] issued/sold at less than par, otherwise, “watered stock” and the SH

25
Corpo Glen Aid
would still be liable for the difference; they may be issued/sold at - Total shares of stock issued under binding subscription
higher than par agreements to subscribers or SHs, whether or not fully or partially
- No-par – issued price is not stated in the cert, but may be fixed in paid, except treasury shares
the AoI, or by the BoD when so authorized by the AoI or by-laws,
Issued – includes treasury shares; includes partially paid shares
or in the absence thereof, by the SHs
o Limitations on the issuance of no-par stock Redeemable shares [Sec. 8] – like a share w/ a term
Once issued, deemed fully paid; corp can no longer
- May be issued by the corp when expressly provided in the AoI
increase the price of issued no-par shares
- May be purchased by the corp upon the expiration of a fixed period,
Consideration cannot be less than P5
regardless of the existence of unrestricted retained earnings, and
Cannot be issued as preferred shares; no-par only
upon such terms & conditions provided in the AoI w/c must also be
applies to common stocks
stated in the certificate of stock
Cannot be issued by –
o However, SEC ruled that there must remain in the corp
Banks sufficient assets to cover debts & liabilities, inclusive of
Trust companies capital stock
Insurance companies
Public utilities Founders’ shares [Sec. 7] – exclusive right to vote and be voted for in the
Building & loan associations election of directors
AoI must state the fact that the corp issues no-par - Not to exceed 5 years subject to the approval of the SEC; 5-year
shares, and the no. of such shares starts from the date of the SEC approval
- Whether the shares are w/ or w/o par value, the subscriber must
pay its full consideration for them to be issued Valuation of shares
- To see the advantages of both types of shares, see p. 30-31 - Par value
Campos, Corpo Code, Vol. II
- Book value [unlisted shares]
Stock Split / Reverse Stock Split – relevant only for par-value shares
- Market value [listed shares]
- AKS = P100M; 100m shares; P1.00/share
Valuation methodologies – done by the experts – chartered financial
- Stock split = P100m; 200m shares; P.50/share analysts, appraisers, auditors, accountants [certificate of valuation]
- Reverse stock split = P100m; 50m shares; P2/share Valuation of assets, businesses, etc.
Treasury shares [Sec. 9] Debt Securities
- Shares of stock which have been issued and fully paid for, but Debt securities [most senior papers]
subsequently reacquired by the issuing corp by purchase,
redemption, donation or through some other lawful means [ex. - Notes
exercise of appraisal right] - Bonds [usually secured by a mortgage/pledge of corporate
- While in treasury, they don’t have dividend or voting rights property]

- May be reissued, even less than par, since they’ve previously been - Debenture [issued on the general credit of the corp]
fully paid Hybrid securities; “perps” [2nd most senior]
- Can be declared as STOCK dividends ??? - B/c preferred shares and bonds are created by contract, it is
Outstanding Capital Stock – OCS [Sec. 137] possible to create stock w/c approximates the characteristics of

26
Corpo Glen Aid
debt securities; the determination w/n the hybrid security is truly a o Before CoI, the parties are the incorporators
bond or just another kind of preferred share may be crucial for – o Subject to suspensive condition [approval by SEC]
- Must be in writing as can be implied from various provisions of the
o Tax purposes
Code
o Leverage [???] - Subscription price need not be paid in full at the time of the contract
- Partial payment can only apply to par-shares; although par-shares
Trust indenture – similar to loan agreements; 3 parties
may also be fully paid; no-par shares must always be fully paid
- Debtor-corp - No interest is payable, unless the by-laws so provide
- Creditor-bondholder o Rate either fixed in by-laws or, in the absence thereof, the
- Trustee as representative of all the bondholders legal rate
- Once a subscription contract is perfected the SH becomes a debtor
Documentation of bonds and hybrids [BP 178; Revised Securities Act]
to the corp and may be liable to pay any unpaid portion thereof
- Subject to certain exemptions, the Securities Act requires the upon call by the BoD
registration of securities w/ the SEC before a corp can offer them - Delinquency [Sec. 67-68]
for sale [applicable only to securities to be offered publicly]
Pre-incorporation subscription [Sec. 61 in re Sec. 13] – irrevocable for at
- Securities include, among others, shares of stock, bonds, least 6 months [may stipulate for a longer period, but not shorter] from the
debentures, investment contracts, voting trust certs., etc. date of subscription, unless –
- Registration of brokers, dealers, and salesmen o ALL of the other subscribers consent to the revocation; or
o Incorporation of said corp fails to materialize
- Registration of stock exchange [any org w/c provides/maintains a
- Provided, that no pre-incorporation subscription may be revoked
market place of facilities for bringing together purchasers and
after the submission of the AoI to the SEC
sellers of securities]
- Sec. 13 – 25-25 rule; paid-up capital shall not be less than P5,000
Underwriting securities – underwriting is the act/process of guaranteeing - After the 6-month or agreed longer period, a pre-incorporation
the distribution and sale of securities of any kind issued by another corp; 3 subscriber may revoke his subscription agreement w/o the consent
ways [see p. 138, Campos, Vol. II] of the other subscribers, provided, the AoI have not yet been
submitted to the SEC for approval
SUBSCRIPTION CONTRACT [Sec. 60]
After subscription is fully paid, stock certificate signed by the Pres. OR VP,
- 2 ways how one becomes a SH of a corp –
countersigned by the secretary or assistant secretary, and sealed with the
o Subscription
seal of the corp shall be issued in accordance with the by-laws [Sec. 63]
o Acquisition of already issued shares from a SH
- Subscription – a contract; in re art. 8th & 9th ; for the acquisition of - If subscription agreement is Jan. 1, but stock cert. issued on Aug.
unissued stock of a corp whether existing or still to be formed; in 1, stock and transfer book should reflect Aug. 1 – 2 entries; journal
effect, the contribution or promised contribution of a person to the entry and ledger entry; done by the corporate secretary
capital of the corp
o Stock transfer agent is like the Register of Deeds
- Subscribe/subscription – newly issued securities that an investor
has agreed or stated his or her intent to buy prior to the issue date; Sec. 64 – stock cert. is not issued until subscription is fully paid
mutual agreement of subscribers to take and pay for the stock of a
- Read this in re last par. of sec. 63 - No shares of stock against
corp
which the corp holds any unpaid claim shall be transferable in the
- Subject matter is the unissued stocks/shares; different from
books of the corp
acquiring issued shares w/c fall under purchase of shares
- Timeline – Certification of Incorporation; applicable to corps still to - Remedy – you can divide the subscription contract
be formed and to corps already existing

27
Corpo Glen Aid
o You can divide the P1M subscription to 5 subscriptions of - Amounts transferred from unrestricted retained earnings to stated
P200k each; consideration – if stocks are issued, the capital – stock dividends
holder reaps its benefits, + appreciation - Outstanding shares exchanged for stocks in the event of
reclassification or conversion in re convertibility features or options
CONSIDERATION FOR ISSUANCE OF SHARES [Sec. 62]
- Where the consideration is other than actual cash, or consists of
- Cash intangible property such as patents of copyrights, the valuation
- Property, tangible or intangible [trademarks, patents, etc.], actually thereof shall initially be determined by the incorporators or the
received by the corp and necessary or convenient for its use and BoD, subject to approval by the SEC
lawful purposes [need not be actually used by the corp] at a fair
Liability on watered stocks [Sec. 65]
valuation [valuation methodologies] equal to the par or issued
value of the stock issued - Watered stocks – those w/c are issued as fully paid up in
o Does not need to be equal to par; it can be higher – but not consideration of property at an overvaluation
lower, otherwise, it would be a case of watered stocks - SHs of watered stocks are liable to the corp and its creditors and
o Watered stock – issuing shares lower than the par value; makes the directors or officers who consented to the issuance of
absolutely not allowed; otherwise there will be liability on such stocks solidarily liable w/ them
the part of the SH concerned & directors/officers, except o Except for those who did not consent AND immediately
for those who did not consent AND immediately expressed expressed their objection in writing w/ the corp-sec
their objection in writing, filed w/ the corp-sec [Sec. 65 – - Liability will be to ALL creditors, whether they became such prior
liability therefor] or subsequent to the issuance of the watered stocks
o Additional paid-in capital [APIC; difference b/w the par - Fraud is not made an element of liability
value and the issue value; higher issue value than par - Even no-par stocks can be watered stocks where they are issued
value; legal; important concept] for less than their issued value as fixed by the corp
- Labor/ services ALREADY performed – PRE-EMPTIVE RIGHT [Sec. 39]
o Applies only to unissued shares, if the transferee is not a
SH - All SHs of a stock corp shall enjoy pre-emptive right to subscribe
o If transferee is a SH, such restriction ^ will not apply; SH to all issues or disposition of shares of any class, in proportion to
may receive stock dividends their respective shareholdings, unless such right is denied by the
- Shares of stock shall not be ISSUED in exchange for promissory AoI or an amendment thereto
notes or future service - Personal to the SH; Remedies for injunction and mandamus may
o If A issues PN to XYZ corp for the latter can issue shares be initiated through a personal or class suit
to A, this is not allowed - “all issues or disposition” – includes –
o However, if XYZ owes A, and issues a PN in favor of A, o New shares issued in pursuance of an increase of capital
and A wants XYZ to issue shares to him, this is allowed stock
o In sum, this restriction only applies if the issuer of the PN o Issue of previously unissued shares w/c form part of the
is the investor existing AKS
o If par value is P500; P1 cash, 499 PN; this is still valid o Disposition of treasury shares
subscription contract, although the stock shall not yet be - Pre-emptive right shall not extend to [Sec. 39] –
issued o Shares to be issued in compliance with laws requiring
- Part of the par or issued value may be paid in cash and the rest in stock offerings or minimum stock ownership by the public;
property, or in services previously rendered or
- Promissory notes and future services are not allowable o Shares to be issued in good faith with the approval of the
consideration b/c their realization is not certain SHs representing 2/3 of the OCS [non-voting shares not
- Previously incurred indebtedness of the corp included], w/c must be –

28
Corpo Glen Aid
in exchange for property needed for corporate - Chu Sing was a SH of a bank and a Guarantor/surety for a debt in
purposes; or favor of the bank; he claims compensation/ set-off
in payment of a previously contracted debt - The shares of stock of a banking corp do not constitute an
- Purpose – to avoid dilution of the SH’s interest in the corp by the indebtedness thereof to the SH and, therefore, the latter is not a
subsequent issuance of shares creditor of the former for such shares
- Amendment to the AoI requires 2/3 of the OCS including non- - A SH’s indebtedness to a banking corp cannot be compensated w/
voting shares the amount of his shares in the same institution, there being no
- “any class” in re preferred SHs vis-à-vis- common SHs; where the relation of creditor and debtor w/ regard to such shares
capital structure of a corp is complex, w/ several classes of shares, - A capital stock is a trust fund
practical difficulties can be avoided by an express denial/limitation o Trustor – SHs
of the right in the AoI o Trustee – corp
- Waiver of preemptive right must be reflected in the AoI to bind all o Beneficiary – creditors
the SHs, even subsequent ones; if ALL the SHs unanimously Datu Benito vs. SEC [1983]
agree to a waiver, although for some reason no amendment of the
AoI is made, no one among them can later complain by estoppel, - Case was before the Corp Code
but it would not bind future SHs - SC then – 2 kinds of shares
- Even if preemptive right does not exist, an issue of shares may still o Authorized but unissued – no pre-emptive right
be objectionable if the Ds have acted in breach of trust o Increased capital stock – w/ pre-emptive right
- TODAY, Sec. 39 will apply; pre-emptive right applies to all issued
TRUST FUND DOCTRINE – the capital stock of a corp is a trust fund for shares; even authorized but unissued shares have pre-emptive
the payment of its debts, and as substitute for the lack of personal liability right
of the SH for such debts; fund for the benefit of the corp’s creditors;
corporate officers have a fiduciary duty to deal w/ them properly – applies Dunlay vs. Avenue M. Garage [US case; 1930]
only to capital stock + APIC - In re to this case, in the Phil. TODAY, Sec. 39 of Corp Code will
Capital stock, SH equity, properties, & other assets of a corp forms part of apply; all issued shares have pre-emptive right, subject to some
the trust fund [equity held in trust for the payment of corporate creditors] exceptions
- US SC had a different approach [???]
Ex.
Jordan Co. vs. Allen, CIR [US case 1949; ???]
P1M at P1/par share; issued at P5/share
- Classifying a security as whether debt or equity has tax
Capital stock 1M shares = P1M implications
APIC – P4M - Debenture stock is a debt security
Restricted earnings [amount of equity that must stay in the Bayla vs. Silang Traffic Co. [1942]
company] – P3M - Subscription contract vs. purchase contract
- The trust fund doctrine contemplates capital stock + APIC =, does o Unissued shares; issued shares
not include RE - Such distinction is not relevant anymore under Corp Code; relevant
only in re treasury shares
Hay vs. Hay – [US case; 1951; ???]
Meritt-Chapman & Scott Corp. vs. New York Trust Co [US case; 1950; ???]
- Dividend in re liquidation
- Warrant – option to buy unissued shares
Garcia vs. Lim Chu Sing [1934] o The contention is that upon issuance, there will be dilution
- SC – ???

29
Corpo Glen Aid
o One Justice recommended to adjust the purchase price In the meantime, [effect of delinquency; from Feb.
[Barot: prevailing practice now] 1 – March 3], if A, B,C,D,E receives cash dividends,
B,D,E’s dividends will be applied to their
Miranda vs. Tarlac Rice Mill Co., Inc. [1932]
subscription’s unpaid portion [P18.75]; if they
- Alberto Miranda paid P10k for subscription in the company; received stock dividends, B,D,E’s share will be
administratrix sought to recover the paid amount due to the withheld; also, they cannot vote; BDE cannot have
violation of the corp officers of the terms of the power of attorney any transfer of their shares registered in the
in mortgaging the land corporate books
- “Call” important concept in corporate finance – directors asking Remember, unless the shares have become
SHs to pay any subscriptions that remain unpaid; BoDs of every delinquent, holders of unpaid shares enjoy all the
corp may at any time declare due and payable to the corp unpaid privileges of a SH
subscriptions to the capital stock and may collect the same w/ ** subscription contracts are INDIVISIBLE
interest accrued thereon or such percentage of said unpaid If the delinquent is a director, he will stay as such
subscriptions as it may deem necessary until the delinquency sale [majority &
- SC – since Alberto prepaid the subscription before their due date, academicians’ view]
he cannot anymore recover; no call was made or is needed, since The delinquency sale will be held through a public
the installment payment dates were already specified in the bidding for 25 shares [whole amount; b/c
contract; “on or before” – if debtor pays prior to the date, creditor subscription contracts are indivisible]
has the right to keep the payment [oblicon]; neither the fact that the Delinquency sale [Sec. 68]; if B’s share is to be sold
corp has ceased to do business, nor the fact that the other SHs in public auction, and X bids for 20 shares, Y – 15,
have not been required to pay for their shares, in accordance with & W – 25, Y wins [lowest # of shares]; he pays
their subscription agreement, would justify an order re-quiring the P18.75 for 15 shares; the 10 [remaining] is credited
corp to return to the plaintiff the amount paid by the SH to the delinquent [B]
Sec. 68 should be related to Sec. 41; If corp has
Da Silva vs. Aboitiz & Co., Inc [1923]
unrestricted retained earnings, the corp may buy
- 2 remedies of the corp in case of delinquency back its own shares; it forms part of the treasury
o Sell the delinquent share [foreclose; delinquency sale] shares w/c may be subsequently disposed of by
o Sue on the principal obligation [debt; collection suit] the corp [it should be for the whole unpaid shares;
25]; delinquent B will not get anything
COURT ACTION TO RECOVER UNPAID SUBSCRIPTION [Sec. 70]
If corp has no unrestricted retained
W/o stipulation as to when the subscription should be paid, it should be earnings, corp can go to court for collection
due upon – suit, or conduct subsequent biddings
- Call – by the BoD [business judgment] Sec. 41 is not exhaustive – corp can also buy back its own shares through
o Equal treatment w/ regard to SHs redemption [Sec. 8]
o Ex. – A,B,C,D,E subscribed for 25 shares each worth P25
each; they already paid P6.25 [25%]; unpaid is P18.75; on - Difference b/w Sec. 8 & 41 – 41 needs unrestrained retained
Jan. 1, BoD made a call to pay P1.25 before Feb. 1, and earnings; 8 operates regardless
only A&C paid, B,D,E’s subscription will be declared - Redeemable shares shall be specified in the AoI [Sec. 8]
delinquent
B,D,E will be given 30 days [until March 3] to pay, - If capital stock is made up only of common shares & redeemable
otherwise, the corp may then sell their delinquent shares, the common shares are the only ones covered by the trust
subscription fund doctrine
Under Sec. 41, there are 3 instances for the corp to buy back shares
30
Corpo Glen Aid
- To eliminate fractional shares [corp buys the fraction part] o If subscribed/paid is 300; then corp declares 50% stock
o Fractional shares may result from dividends, 150 will be newly issued; since there is excess,
stock dividends 25-25 rule shall be complied with for the increase of AKS
reverse stock split
Modern view – APIC cannot be declared as dividend [any kind of dividend]
delinquency share
- To purchase delinquent shares Sec. 43 – Power to declare dividends is lodged w/ the Board in re business
- To pay dissenting SHs who exercise their appraisal right judgment
Lost or destroyed certificates [Sec. 73] - If the BoD decides that the corporate earnings should be used to
expand the business, or any other matters, provided they are not
2 remedies
tainted w/ bad faith, fraud, or gross negligence, SHs have no right
- Wait for 1 year for the corp to issue anew to complain
- Limitation –
- Post bond/ other security even before the 1 year [more common;
o If the BoD, in deciding to capitalize profits, will issue stock
since transferability is valuable]
dividends, prior approval of the SHs representing at least
If there is contest, issuance of a new cert. will be suspended until final 2/3 of the OCS would be needed
decision of the court o Cannot use surplus profits unreasonably [w/ bad faith,
fraud, or gross negligence]
DIVIDENDS – portion of corporate profits set aside for distribution to the
o Surplus profits cannot exceed 100% of the corp’s paid in
SHs in proportion to their subscription to the capital stock of the corp
capital stock [Sec. 43]; except
Form of dividends When justified by corporate expansion/projects
approved by the BoD
- Cash – most common form
When the corp is prohibited under any loan
- Property
agreement from declaring dividends w/o creditor’s
- Stock – corporate profits/earnings are transferred to capital stock
consent, and its/his consent has not yet been
and shares of stock representing the increase in capitalization are
secured
distributed
When it clearly shows that such retention is
o Stock dividends cannot be declared w/o first increasing the
necessary under special circumstances [ex.
capital stock, unless there are available unissued shares
special reserve for probable contingencies]
of the corp
o New shares are then issued to the SHs in proportion to Retained earnings; a.k.a earned surplus – net accumulated earnings of the
their interests corp out of transactions w/ individuals or firms outside of the corp
o Cannot be issued in favor of persons other than SHs
- Limitations on appropriation of retained earnings
Treasury shares cannot be stock dividends; if the corp declared them as o Trust fund doctrine – a corp has no power to declare
dividends, they are considered property dividends ??? dividends unless its legal or stated capital is maintained;
for the protection of creditors
Sec. 60 in re 62(5) – only newly issued shares may be stock dividends
o Agreements w/ creditors
- Ex. – AKS = 400 o Impositions by law or SEC
o If subscribed/paid is 100; the unissued 300 shares may be - Do not include –
stock dividends; they may also be subscribed o APIC [additional paid in capital; a.k.a. premium on par
If corp declares 50% stock dividends, there will be stock; difference b/w the par value and the higher price for
currently 150 issued shares; [50% of 100 issued] w/c the stock is sold by the corp]
Nevertheless, SEC has allowed the declaration of
stock dividends out of such premium, since stock
31
Corpo Glen Aid
dividend does not involve any distribution of - Regular [annual] and special dividends [dividends on top of the
corporate assets to the SHs but merely gives them annual] were being issued by Ford; Dodge wanted special
tangible evidence of the increase in their equity dividends
o Transactions involving treasury stock - Can Ford be compelled to declare special dividends instead of
o Donations regular dividends
o Appreciation of assets - SC – yes; corp’s earnings are for the SHs; the corp should not get
dividends from its SHs for the benefit of the public; basically a corp
Unrestricted retained earnings – retained earnings w/c are not so
is for the maximum profit of SHs and is not a charity
appropriated; only fund out of w/c dividends can be legally paid
- Regarding the expansion of Ford Motor, the court cannot exercise
The amount of w/c each SH receives as his share of the dividends is based authority over it b/c such business decision of expansion is vested
on the amount of stock held by him, regardless of w/n he has paid his full to the Ds, therefore a valid exercise of their function and judges are
subscription not business experts to intervene w/ the business decisions of
corps.
- However, if his shares became delinquent, any cash dividends due
his shares will first be applied to the amount of the delinquency + Nielson & Company, Inc. v Lepanto Consolidated [1968]
costs & expenses. If the dividends consist of stock, the SH will not
- Nature of stock dividends – can be issued only to SHs; it is like SH
get the same until he has paid his full subscription [applies only to
are forced to buy shares of stock of the corp
delinquent SH]
- If he is not delinquent, he gets all his stock dividends, although he SALE OF SHARES
has not fully paid his subscription
- Primary sales of shares – unissued stock
o No-par shares must be fully paid in order to be considered
- Secondary sales of shares – sale of already issued stock
as issued; thus, until they are fully paid, the holders thereof
o Resale
are not entitled to dividends
The endorser is always the SH; or the attorney-in-
Keough vs. St. Paul Milk Co. [US case; 1939] fact
o Sale in stock exchange
- W/n a dividend may be compelled by the Court over objection of
those in control of corporate affairs? Yes Purchase by corp of its own shares
- General rule – SC will not interfere w/ the declaration of dividends
- The corp should have adequate amount of unrestricted earnings to
o Except – judicial review may be secured when abuses
support the cost of redemption/repurchase, except –
contravening the SHs’ rights manifest themselves; A court
o For redeemable shares or reqcquisition pursuant to the
would only compel a dividend when the Ds act fraudulently,
conversion right of convertible shares, expressly provided
unjustly or unreasonable so as to impair the rights of the
for in its AoI and certificates of stock;
complaining SHs to their just proportion of corporate profit
o When shares are reacquired to effect a decrease in the
- Generally, a large corporate surplus that exist does not warrant an
capital stock of the corp as approved by SEC
automatic equitable intervention. The test resolves itself into an
o When the shares are reacquired by a close corp pursuant
examination of good faith and reasonableness of the policy of
to the order of the SEC acting to arbitrate a deadlock
retainings that w/c otherwise is available for dividends
- Based on the facts, it is clear that the corp did not have a Santamaria vs. HSBC [1951; ???]
reasonable need for the large surplus accumulated. There were no
- If the shares of stock become valueless, the negligent party bears
substantial obligations to be met. In short, the surplus was easily
the loss [oblicon & negotiable instruments principle]
available for dividends, if the Ds so elected.
- Santamaria delivered the stock certificates to a 3rd person w/
Dodge vs. Ford Motor Co. [US case; 1919] endorsement [Santamaria was negligent]
Delos Santos & Astraquillo vs. Republic [1955; compare w/ Santamaria]
32
Corpo Glen Aid
- Shares of stock are personal property and may be transferred by a corporate entity, whose business judgments are respected in the
endorsement of the corresponding stock certificate, coupled with absence of bad faith
its delivery. However, the transfer shall not be valid, except as b/w - The question as to what policy is, or should be relied upon in
the parties, until it is entered and noted upon the books of the corp approving the registration and sale of securities in the PSE is not
- Where the plaintiffs were, at the time of the alleged sales in their for the SC to determine, but is left to the sound discretion of the
favor of the shares stock in question, aware of sufficient facts to SEC
put them on notice of the need of inquiring into the regularity of the - In registration of securities w/ SEC, full disclosure [policy] of
transactions and the title of the opposed vendors, they cannot material facts and information is applied [Sec. 12]
validly claim, against the registered SH, the status of purchasers in - PSE continues to adopt the suitability rule [they have certain
good faith standards]
- Atty. Barot – the more monopolistic power the entities have, the
Chua Guan vs. Samahang Magsasaka, Inc. [1935]
more State invention is going to happen – PSE is a monopoly
- Chattel mortgage must be registered in the Register of Deeds of o PSE is an equity securities exchange company [stocks];
the place where the principal office of the business is AND where PDEX is a debt securities exchange [bonds]
the personal property may be found
Securities
- Shares of stock is deemed to be located in the principal place of
business of the corp Registration [Secs 8 & 12]
- W/ regard to pledge, see NCC
- 8.1 – Securities shall not be sold/offered for sale or distribution w/in
POWERS & FUNCTIONS of the SEC [RA 8799; Securities Regulation the Philippines, w/o a registration statement duly filed with and
Code; ] approved by the Commission; applies only to shares offered to the
PUBLIC
Regulator and adjudicative [Sec. 70]
Exempt Securities [Sec. 9]
PSE vs. CA, Puerto Azul [1997]
Exempt Transactions [Sec. 10]
- The SEC is the entity with the primary say as to w/n securities,
including shares of stock of a corp, may be traded or not in the - 10(e) talks about shares w/ pre-emptive right
stock exchange o If not all shares subject to pre-emptive right are bought;
- The PSE’s management prerogatives are not under the absolute underwriting – group of banks commit that whatever is not
control of the SEC, for the PSE is, after all, a corp authorized by its bought will be bought by them w/ charges/fees against the
corporate franchise to engage in its proposed and duly approved corp
business
Carlos vs. Mindoro Sugar [1932]
- Notwithstanding the regulatory power of the SEC over the PSE,
and the resultant authority to reverse the PSE’s decision in matters - Mindoro Sugar [bankrupt entity] issued “junk” bonds, and
of application for listing in the market, the SEC may exercise such transferred all its assets to Philtrust; Philtrust sold the bonds to the
power only if the PSE’s judgment is attended by bad faith public and guaranteed them
- As the primary market for securities, the PSE had established its
- SC – even a holder of the bonds selling it to public are registerable
name and goodwill, and it has the right to protect such goodwill by
under SRC
maintaining a reasonable standard of propriety in the entities who
choose to transact through its facilities; The concept of gov’t o But since Philtrust is a bank, it is exempted under Sec. 9 in
absolutism is a thing of the past, and should remain so re S8 of the SRC w/ regard to registration
- The SEC had acted arbitrarily in arrogating unto itself the discretion
Securities Exchanges, Brokers, Dealers – [Secs 3, 33]
of approving the application for listing of Puerto Azul Land, Inc.,
since this is a matter addressed to the sound discretion of the PSE,

33
Corpo Glen Aid
- 3.3 – Broker – person engaged in the business of buying/selling o Periodically/quarterly reports; and
securities for the account of others o Current reports on significant developments [current
- 3.4 – Dealer – any person who buys/sells securities for his/her own events]
account in the ordinary course of business.
Independent Directors – Sec. 38
- 3.7 – Exchange – organized market place or facility that brings
together buyers and sellers and executes trade of securities and/or - At least 2 independent directors are required
commodities.
MERGERS & ACQUISITIONS [M&As] Corpo Code Secs 76-80
- 33 – registration of exchanges
Sec. 76 – statutory merger – ex. Corp A & Corp B
Fraud, Manipulation, Insider Trading – [Secs 3.8, 24, 26, 27]
- Consideration
Insider trading – selling of shares prior to the bad news/info being publicly
o In merger – Corp A [surviving corp] issues shares to SHs
announced; but what if it is beneficial [buying of shares b/c of a prospect
of Corp B [absorbed company]
rise of shares’ value]? Atty. Barot thinks the rules must be amended
o In consolidation – Corp C is formed; Corp C issues shares
Protection of Investors to SHs of Corp A & Corp B
o In sale of assets [Sec. 40] – the subject is the assets;
Tender offer – Sec. 19
consideration is –
- A tender offer is an offer by the acquiring person to SHs of a public Money
company for them to tender their shares therein on the terms Stocks of Corp A [buying corp] to Corp B [B
specified in the offer [Cemco] becomes SH of Corp A]
- To protect minority SHs against any scheme that dilutes the share Bonds of Corp A to Corp B
value of their investments. It gives the minority SHs the chance to Corp A assumes liabilities of Corp B
exit the company under reasonable terms, giving them the
Sec. 77 – Mergers – approvals needed
opportunity to sell their shares at the same price as those of the
majority SHs [Cemco] - BoDs of each corp [majority of the present BoD; each corp needs
the required majority]
Cemco Holdings vs. National Life [2007; not necessarily a good law]
- SHs of each corp [2/3 vote; even non-voting participates]
- Sec. 19 [tender offers] talks only about shares of listed companies - Regulator [if regulated]
- SEC
- SC – but even on unlisted company, tender offer may still apply b/c
of Sec 5.1(n) [powers of SEC]– Exercise such other powers as may ^ embodied in the Plan of Merger
be provided by law as well as those w/c may be implied from, or
- Corpo Code does not provide for the statement of share swap ratio
w/c are necessary or incidental to the carrying out of, the express
b/w the merging corps
powers granted the Commission to achieve the objectives and
- Share swap ratio – exchange rate of the shares of the corps that
purposes of these laws
would undergo a merger [also embodied in the plan of merger]
o A public company is defined as a corp w/c is listed on an
Relevant documents [PARC]
exchange, OR a corp w/ assets exceeding P50M and with
200 or more SHs, at least 200 of them holding not less than - Plan of merger/consolidation [BoD level]
100 shares of such company o Includes – amendment to the AoI of the surviving corp, if
any; AoI if consolidation
- Atty. Barot – registration is w/ SEC; listing is w/ PSE
- Articles of merger/consolidation [SHs level]; 2/3 vote of SHs
Disclosure rules – Sec. 17, 18, 23 representing the OCS
o Both SHs of corps whether in merger or consolidation have
- Sec. 17 – Disclosure
Appraisal Right
34
Corpo Glen Aid
- Recommendation/endorsement [Regulator level; ex. BSP] o (2) where the transaction amounts to a
- Certificate of merger/consolidation [SEC level] consolidation/merger of the corps;
o Merger/consolidation shall be effective only upon issuance o (3) where the purchasing corp is merely a continuation of
of the certificate the selling corp; and
o (4) where the transaction is entered into fraudulently in
Bank of Commerce vs. Radio Philippines Network, Inc. [2014]
order to escape liability f or such debts
- W/n Bank of Commerce is liable for the debts & liabilities of the
P&A [purchase & assumption] / Asset Purchase Agreement [Sec. 40];
transferor in re sec. 80(3) assuming of liability by the surviving corp
requirements –
o Only recommendation/endorsement has been complied
with; cannot be considered a merger; Bank of Commerce - BoD resolution of both corps [to buy/sell]
cannot be held liable - SHs – only resolution of selling corp is required; only SHs of selling
- P&A [purchase & assumption] / Asset Purchase Agreement [Sec. corp have appraisal rights
40]; for the assuming corp to be liable – - Recommendation [if applicable]
o The purchaser expressly or impliedly agrees to assume
APPRAISAL RIGHT [Sec. 81] – a SH who dissented and voted against
such debts;
the proposed corporate action may choose to get out of the corp by
o Transaction amounts to a consolidation/merger
demanding payment of the fair value of his shares
o Purchasing corp is merely a continuation of the selling
corp; and Instances of appraisal right [sec. 81]– [ASIM]
o Transaction is entered into fraudulently in order to escape
- Amendment of AoI w/c has the effect of –
liability for such debts
o Changing/restricting the rights of any SH or class of
Merger vs. consolidation shares;
o Authorizing preferences in any respect superior to those of
- Merger – 1 corp is absorbed by the surviving corp
outstanding shares of any class; or
o Absorbed corp has to give up their shares [dissolved] for
o Extending/shortening the term of corporate existence
the shares of the surviving corp
- Sale or other disposition of substantially all corporate assets
- Consolidation – both corps ceases to exist [dissolved] and form 1
- Investment in another business or corp for EITHER primary or
new corp [consolidated corp]
secondary purpose [Sec. 42]
o Shares of both corps are given up for new shares
o If the investment is neither for the primary nor secondary
- In both, there is no liquidation of the assets of the dissolved corps
purpose, it is not covered by the appraisal right; SH can
- In both, the surviving/consolidated corp assumes the liabilities of
assail such act for being ultra vires
the dissolved corps, regardless of whether the creditors have
- Merger & consolidation
consented or not to such merger/consolidation
- Parties to a merger/consolidation – constituent corps Sec. 81(1) – mere increase in capital stock does not give rise to the
- Transfer/exchange of shares pursuant to a merger/consolidation is exercise of appraisal right; EXCEPT – if increase in capital stock includes
exempt from registration under the Securities Act preference superior to outstanding shares; ex. –
Nell vs. Pacific Farms [1965] o Non-voting preferred – 500 shares
o Voting common – 500 shares
- Generally, where one corp sells or otherwise transfers all of its
assets to another corp, the latter is not liable for the debts and - If 500 preferred is increased to 1000, it won’t give rise to appraisal
liabilities of the transferor, except: right
o (1) where the purchaser expressly or impliedly agrees to
- However, if preferred shares are pegged at 10% dividend rate, and
assume such debts;
the additional shares will have 15% dividend rate, then it gives right
to appraisal right
35
Corpo Glen Aid
2 Elements Effectivity of amendment
- SH must dissent either by attending SH meeting or via his proxy - Upon approval thereof by the SEC
[agent] o But approval/rejection by the SEC must be made w/in 6
- There must be unrestricted retained earnings to cover it months of the filing of the amendment, otherwise it shall
take effect even w/o such approval, unless delay is due to
Marcus vs. RH Macy [US case; 1947]
a cause attributable to the corp
- Here, the ground for the exercise of appraisal right was 81(1) – o In the absence of approval/rejection w/in 6 months, the
o Here, amendment granting the right to vote to holders of amendment takes effect as of the date of filing
preferred shares; holders of common shares will have
Reminders
weaker voting power [restricting the rights of any SH]
- Sec. 16 in re Sec. 42 – corp’s power to add a purpose entirely
Sec. 82 – 86 – how right is exercised
different form its original one; however, will not automatically allow
- SH mtg – Jan. 1 the corp the right to invest in the new business w/o approval of the
- Stock cert. notation – Jan. 10 SHs, unless the new purpose has, by the amendment, become the
- Written demand – Jan. 30 primary purpose of the corp
o b/w Jan. 1 – 30, he receives dividend; he has right to vote - Amendment to increase/decrease capital stock and
- Starting Jan. 31 – voting & dividend rights are suspended extend/shorten corporate term require a meeting
- How price is determined
Docs required
o Corp may offer a price, SH accept; or SH may offer, corp
accept [consensual] - Certificate of Amendment – amended AoI [from the corp]
o Appraisal Team [dispute resolution] - Certificate of Increase [Sec. 38]
o Courts o Treasurer’s Affidavit
- March 1 – award date - Recommendation [in case of corps governed by special laws]
- March 30 – payment; voting & dividend rights are lost; shares - Certificate of Filing of Amendment of AoI [from SEC]
become treasury shares [there must be unrestricted retained o Certificate of Increase/Decrease
earnings in re trust fund doctrine]; so if there is no URE, tell the
Increase of capital stock
dissenting SH that do not dissent, b/c he will not get paid
- If SEC does not approve the merger, all things go back to where - Cannot take effect w/o prior approval by SEC; approval – issuance
they come from; even if the shares have already become part of of a cert. that the cert. of increase/reduction of capital stocks has
the treasury shares, the previous holder will then be again a SH of been duly filed w/ SEC
the corp - Cert. of increase/reduction must be attached BY THE SEC to the
orig. AoI; corp need not file a copy of the amended AoI
CORPORATE POWERS & CHARTER AMENDMENTS
- Cert. of increase will not be accepted unless accompanied by the
Contract theory – the AoI is a contract b/w or among – treasurer’s affidavit attesting tot the matters required by law
- Sec. 38 – requires that at least 25% of the PROPOSED
- SHs
INCREASE must be subscribed and 25% of such subscription
- Corp & State
must be paid
o How the State acts – Congress, through new legislations,
- 3 ways of increasing stock
has the power to make changes in existing corps
Par value increased w/o increasing # of shares
o Corps may opt for dissolution if they do not want the new
# of shares increased w/o increasing par value
law
Increase in both
- Corp & SHs
o ^ no appraisal right, but SHs have preemptive right; but if
Grounds for rejection [see p. 3] the increase would result in the creation of shares w/
36
Corpo Glen Aid
preferences superior to those of existing one, a dissenting - Capital stock divided into shares; and
SH would have appraisal right - Authorized to distribute to its SHs dividends out of its surplus profits
on the basis of the shares held
Reduction of capital stock – the corp may have a capital deficit w/c may be
o Even if such distribution of surplus profits be at the time of
wiped out by such reduction thus creating the possibility of earnings out of
the dissolution, it is still a stock corp
w/c future dividends may be paid
Non-stock corp –
Phil. Trust Co. vs. Rivera [1923]
- Unable to declare/distribute dividends from surplus profits [Sec. 87;
- Filing of the certificate with the Bureau of Commerce and Industry
main difference/distinction from stock corp]
was not complied with; hence, no valid reduction of capital stock;
- AoI/by-laws may provide for the distribution of its assets among its
as against creditors a reduction of the capital stock can take place
members upon its dissolution
only in the manner an under the conditions prescribed by the
- May have shares of stock [sec. 87]
statute or the charter or the AoI; strict compliance w/ the statutory
- Sec. 15 [forms of AoI] refers to both stock & non-stock corps
regulations is necessary
o Art. 7 [no-par shares] – can be adopted by non-stock corps
- Decrease in capital stock shall not prejudice the rights of the
- Sec 88 – Purposes [not exclusive list]
creditors – there can be no reduction of capital stock w/c will in
o Religious, educational, charitable, trade, agricultural, etc.
effect release the SHs from the payment of the balance of their
subscription if it will adversely affect the right of creditors in CIR vs. Club Filipino [1962]
collecting their claims
- The bar inside the club was used incidental to its primary purpose
QUASI-REORGANIZATION [???] [bowling, golf, etc.]; the earnings earned therefrom is only
incidental to its primary purpose
Ex. –
- A non-stock non-profit corp is not prohibited from realizing profits,
Corp A
provided –
- Assets – P800k
o It is only incidental to its primary purpose
- Liabilities – 0 o No distribution of its profits to its members
- Capital stock – P1M
Corporations w/ special charter [Sec. 4]
o Shares – 100k
o Par – P10 - Governed by special charters made by Congress, supplemented
- Deficit – P200k by the provisions of the Corp Code
- Public interest is involved
1st part – par will be decreased to P1 = 100k shares = P100k capital stock;
- GOCCs
in re art. 7 to be amended
Close corporation [Sec. 96]
- APIC = P900k – P200k [deficit] = P700k
o Dividends must be earned income; APIC is contributed - Restrictions on transfer of shares
capital, not counted as earnings - # of SHs is limited to 20
- Normally used in Joint Ventures
2nd part – [???]
Special corps [Title XIII]
All these in compliance with Sec. 38
- Educational corps [Secs. 106-108]
TYPES OF CORPORATIONS
- Religious corps
Stock corp; 2 Elements – o Corporation sole [Secs. 110, 111]
o Religious societies [Sec. 116]
37
Corpo Glen Aid
NON-STOCK CORPORATIONS Sec. 3 & 87; Title XI Doctrine of piercing the corporate veil applies to non-stock corps
Legal relevance of characterizations of corps into stock & non-stock corp Sec. 28 [removal of trustees] –
- Applicability of mandatory and permissive [default rule] laws - May be removed from office by vote of at least 2/3 of the members
entitled to vote at a regular/special meeting w/ notice to members
Sec. 93 – While SHs’ meeting must be conducted in the principal place of
for such purpose of removal
business of the corp; members may meet anywhere, provided it is w/in the
- Special meeting for such purpose must be called by the Sec. upon
Phil. and there is notice [date, time, place]
written demand of the majority of the members entitled to vote
Sec. 92 – AoI may provide for more than 15 members in the BoT - Removal may be w/ or w/o cause; provided removal w/o cause may
not be used to deprive minority SHs/members of the right of
Default rule – the board in a non-stock corp is called Board of Trustees;
representation to w/c they may be entitled under Sec. 24 [election
Sec. 138 allows any other name
of Ds & Ts]
Voting rights [Sec. 89] –
Sec. 31-32 [obligations & dealings of Ts w/ the corp] applies to non-stock
- Default rule: 1 member, 1 vote corps [see p. 13 & 15, respectively]
o But AoI or by-laws may broaden, limit, or deny voting rights
Sec. 33 [contracts b/w corps w/ interlocking Ds] – notwithstanding the lack
Broaden [ex. voting shares]
of mention, it still applies to non-stock corps
- Sec. 6, 6th par. [where non-voting shares are entitled to vote]
applies to non-voting shares of non-stock corps Sec. 34 [disloyal Ds] – also applies to non-stock corps
- Sec. 24 [ELECTION of TRUSTEES] –
Merger/consolidation also applies to non-stock corps
o Majority of the members entitled to vote must be present
[they may use proxy] Appraisal right does not apply to non-stock corps – payment of appraisal
o Default rule – members may cast as many votes as there are rights come from unrestricted retained earnings; since, non-stock corps
are trustees to be elected but may not cast more than 1 don’t have URE, there can be no appraisal rights
vote for 1 candidate
Term of office of Trustees – 3 years
Unless otherwise provided in the AoI/by-laws
AoI or by-laws of non-stock corps may even allow - Default rule – election of Ts is made annually; the term of 1/3 of
cumulative voting to apply the Board expires annually; meaning, 1/3 of the Board will be
o In stock corps, cumulative voting is mandatory elected annually
o But AoI/by-laws may provide otherwise
Sec. 15, art. 8 – in practice, in re 25-25 rules, the 2nd 25 does not apply to
non-stock corps; in practice, full payment of subscription is almost always SPECIAL CORPORATIONS
required
Educational corps [Secs. 106-108]
While non-stock corps are prohibited from distributing dividends out of
- Governed by [in order] –
surplus profit, it is still possible that members may earn profit; through
o Special laws
secondary sale of shares [Makati Sports Club case]
o Special provisions of Corp Code
Sec. 92 – election and term of trustees o General provisions of Corp Code
- May be stock / non-stock
- Default rule – trustees elect officers
- At least 60% of the capital stock must be owned by Filipino citizens;
o The AoI/by-laws/BoT may provide that members may elect
Congress may increase this requirement [Consti, Sec. 4(2)];
officers
control & administration of these corps must be vested exclusively
- In stock corps, it is mandatory that the directors elect the officers
in Phil. citizens; no alien may be elected as member of the Board,
- To be elected as trustee, one must be a member
nor be appointed as principal thereof

38
Corpo Glen Aid
Sec. 107 similar w/ Sec. 17 – favorable recommendation of Ministry of - Family businesses
Education & Culture is required before approval of the AoI/by-laws by the - Joint venture corps [2 or more distinct entities]
SEC
Requirements [Sec. 96; 4 mandatory requirements]; always a stock corp
Sec. 108 [Board of Trustees] – cannot be less than 5, or more than 15;
- No more than 20 SHs
must be multiples of 5 [5,10,15; applicable only to educational non-stock
- Stocks are subject to one or more specified restrictions on transfer
corps]
- Shall not list in any stock exchange or make any public offering of
- Term of office – 5 years; 1/3 of the Board will be elected every year any of its stock
[default rule]; but the corp may express in their AoI/by-laws - Shall not be deemed a close corp when at least 2/3 of its voting
otherwise stock or voting rights is owned or controlled by another corp w/c is
- Unless otherwise provided in the AoI/by-laws, the BoT of not a close corp
educational institutions, as soon as organized, so classify
Sec. 98 [Validity of restrictions on transfer of shares; right of first refusal;
themselves that the term of office of 1/5 of their number shall expire
ROFR] – formal and substantial requirements
every year
- For educational institutions organized as stock corps, the number - Formal – must appear in the AoI, by-laws, and in the certificate of
& term of Ds shall be governed by the provisions on stock corps stock; otherwise, not be binding on any purchaser in good faith
- Substance – shall not be more onerous than granting the existing
Preemptive right in re non-stock corps
SHs or the corp the option to purchase the shares of the
Default rule [Sec. 39] – they have such right; unless denied in AoI transferring SH w/ such reasonable terms, conditions or period
stated therein
Religious corps
Types of share transfer restrictions [does not only apply to close corps]
Corporation sole [Secs. 109-115]
- Absolute; lock-up [generally not allowed]
- Purpose – administering & managing the affairs, property, and
- Put/call options –
temporalities of the religious institution
o Put – seller may compel buyer to buy
- No Trustee or Director; only 1 corporation sole [bishop, priest,
o Call – buyer may compel seller to sell
minister, or presiding elder of a religious sect, etc.]
- Right of first refusal [ROFR]
- Has a different kind of AoI
o AoI may provide for 1st, 2nd, so on rounds to exercise such
- No annual SH meeting to elect a corp sole; has its own rules on
right; ex. –
succession; succession must be filed w/ the SEC
19 shares to be sold to the other SHs; 10 was
- It is not the nationality of the corp sole that determines the
bought in 1st round; those 10 buyers may further
nationality of the corp, but the nationality of its members
participate in the 2nd or 3rd round until the shares
Religious society [Sec. 116] have all been bought
o Pre-emptive right vs. ROFR
- Same purpose ^; state will not step in to rule on religious matters
Both pro rata
- AoI does not follow Sec. 15 [form of AoI]; it has its own
In pre-emptive right, corp is the seller; in ROFR, the
- BoT – 5-15 members
SH sells
- At least 2/3 of its membership must have given their written
In pre-emptive right, corp’s value increases; in
consent or have voted to incorporate, at a duly convened mtg. of
the body ROFR, the corp’s value stays the same
o Right of first offer – no buyer yet, but there are already
CLOSE CORPORATIONS [Sec. 96] conditions; contractual obligation by the owner of an asset
Possible purposes to a rights holder to negotiate the sale of an asset w/ the
rights holder before offering the asset for sale to 3rd parties.
39
Corpo Glen Aid
If the rights holder is not interested in purchasing the asset o If there’s violation, the corp may, AT ITS OPTION, refuse
or cannot reach an agreement w/ the seller, the seller has to register the transfer of stock in the name of the
no further obligation to the rights holder and may sell the transferee
asset freely ^ will not apply if consent of all SHs is had, or AoI
- Tag-along rights – [similar w/ put] – The right assures that if the is amended
majority SH sells his stake, minority holders have the right to join Sec. 101 – When board meeting is unnecessary; Ds of a close corp may
the deal and sell their stake at the same terms & conditions as validly act even w/o a meeting if –
would apply to the majority SH. This right protects minority SHs
- Bring-along rights – [similar w/ call] – The right assures that if the - Before/after such action is taken, written consent thereto is signed
majority SH sells his stake, minority holders are forced to join the by all the Ds; or
deal. This right protects majority SHs o Usually, the signing is made after [for safety purposes]
- No restrictions
- All the SHs know of the action and make no written objection
Permissive provisions [Sec. 97] – AoI of close corp may provide for – thereto;
- Classification of shares or rights and the qualifications for owning - Such Ds have been accustomed to do so w/ the acquiescence of
or holding the same and restrictions on their transfers all SHs; or
o Ex. – family line - All Ds have express/implied knowledge of the action and none of
- Classification of Ds into one or more classes, each of whom may them promptly objects in writing
be voted for and elected solely by a particular class of stock Sec. 102 – Pre-emptive right in close corps
o May make cumulative voting applicable for each class
- Quorum for close corps - Difference w/ ordinary corp – the 2 exceptions in sec. 39 is not
o Usually, it is required that each class of Director applicable; pre-emptive right in close corps is broader
representing a class of shares should be present - Exceptions in sec. 39
- AoI of a close corp may provide that the business of the corp shall o Property needed for corp purposes
be managed by the SHs of the corp rather than by a BoD o Payment of a previously contracted debt
o Close corp need not have BoD - The preemptive right of SHs in close corps is broadened to include
- AoI may likewise provide that all officers or employees or that all issues, w/o exception, unless otherwise denied/limited by the
specified officers or employees shall be elected or appointed by AoI
the SHs, instead of by the BoD
Sec. 105 – withdrawal of SH; versus ordinary corp
Sec. 98 – 3 docs embodying the restriction on transfer of shares
- for ANY reason, SH of a close corp may compel the corp to buy his
- AoI share
- By-laws o In ordinary corps, SHs may compel the corp only if
- Certificate of stock appraisal right is applicable
Sec. 99 [Effects of issuance or transfer of stock in breach of qualifying - ^^ provided, when the corp has sufficient assets to cover its debts
conditions] – and liabilities exclusive of capital stock
o In ordinary corps, URE is required
- If a stock certificate of any close corp conspicuously shows a
restriction on transfer of stock of the corp, the transferee of the Sec. 104 – Deadlocks [the votes BoD/SHs required for any corporate
stock is conclusively presumed to have notice of the fact that he action cannot be obtained, w/ the consequence that the business and
has acquired stock in violation of the restriction, if such acquisition affairs of the corp can no longer be conducted to the advantage of the SHs]
violates the restriction

40
Corpo Glen Aid
- The SEC, upon written petition by any SH, shall have the power to - The true tests, however, seem to be whether the foreign corp is
arbitrate the dispute; SEC has the authority to make such order as continuing the body or substance of the business or enterprise for
it deems appropriate w/c it was organized or whether it has substantially retired from it
- Among others, SEC may appoint a provisional director and turned it over to another
o Impartial person who is neither a SH nor a creditor of the - Jurisprudence has, however, held that the term implies a continuity
corp or of any subsidiary or affiliate of the corp; of commercial dealings and arrangements, and contemplates, to
qualifications may further be determined by SEC; he has that extent, the performance of acts or works or the exercise of
all the rights & powers of a duly elected director of the corp some of the functions normally incident to or in progressive
prosecution of the purpose and subject of its organization
FOREIGN CORPORATIONS
- There is no showing that pets are doing, transacting, engaging in
Sec. 123 [Definition & rights of foreign corps] or carrying on business in the Philippines as would require
obtention of a license before they can seek redress from our courts
- One formed, organized or existing under any laws other than those
- A foreign corp will not be regarded as doing business in the State
of the Phil.; and whose laws allow Filipino citizens and corps to do
simply because it enters into contracts with residents of the State,
business in its own state
where such contracts are consummated outside the State
- Shall have the right to transact business in the Phil. after it shall
- The mere institution and prosecution or defense of a suit, do not
have obtained a license to transact business in this country in and
amount to the doing of business in the State
a certificate of authority from the appropriate gov’t agency
o Certificate of reciprocity – will have to pass through the General Garments vs. Dir of Patents [1971]
Phil. consular officer who has jurisdiction in the alien
- A foreign corp w/c has never done business in the Phil. and w/c is
country
unlicensed and unregistered to do business here, but is widely and
Sec. 133 [Doing business w/o a license] – favorably known in the Islands through the use therein of its
products bearing its corporate and trade name has a legal right to
- Not permitted to maintain or intervene in any action, suit or
maintain an action in the Islands
proceeding in any court or administrative agency of the Phil.
- But the foreign corp may be sued Le Chemise Lacoste vs. Fernandez [1984]
Important concepts [check cases below] - Pet is not doing business in the Philippines. Rustan is actually a
middleman acting and transacting business in its own name and/or
- Doing business
its own account and not in the name or for the account of the pet
- Isolated transaction
- A foreign corp not doing business in the Phil. needs no license to
Marshall-Wells Co. vs. Elser [1924] sue in the Phil. for trademark violations
- A state may restrict the right of a foreign corp to engage in business Litton Mills vs. CA [1996]
w/in its limits, and to sue in its courts
- A court need not go beyond the allegations in the complaint to
Columbia Pictures vs. CA [1996] determine w/n a defendant foreign corp is doing business for the
purpose of R14, S14 [Service upon defendant whose identity or
- It is not the absence of the prescribed license but “doing business”
whereabouts are unknown]
in the Phil. w/o such license which debars the foreign corp from
- ”Doing Business” – where a single act or transaction of a foreign
access to our courts
corp is not merely incidental or casual but is of such character as
- No general rule or governing principles can be laid down as to what
distinctly to indicate a purpose on the part of the foreign corp to do
constitutes “doing” or “engaging in” or “transacting” business. Each
other business in the state, such act will be considered as
case must be judged in the light of its own peculiar environmental
constituting doing business
circumstances

41
Corpo Glen Aid
- A foreign corp’s act of purchasing soccer jerseys is w/in its ordinary isolated transaction or on a cause of action entirely
course of business where it is engaged in the manufacture of independent of any business transaction
uniforms o (3) if a foreign corp does business in the Phil. w/o a license,
- Service of summons made through a foreign corp’s agent in the a Phil. citizen or entity which has contracted w/ said corp
Phil. is valid may be estopped from challenging the foreign corp’s
- No voluntary appearance by a foreign corp can be inferred from corporate personality in a suit brought before Phil. courts;
the acts of a lawyer who filed an answer for such corp, where the and
latter does not claim to have directly conferred w/ the former, there o (4) if a foreign corp does business in the Phil. w/ the
is no evidence to show that he notified it of his appearance in its required license, it can sue before Philippine courts on any
behalf, or that he furnished it with copies of pleadings or the answer transaction.
he filed
Merryl Lynch Futures, Inc. vs. CA [1992]
Mentholatum vs. Mangaliman [1941]
- Estoppel – a foreign corp doing business in the Phil. may sue in
- Concept of continuity in business transactions; continuity test Phil. courts although not authorized to do business here against a
- No general rule or governing principles can be laid down as to what Phil. citizen who had contracted w/ and been benefited by said corp
constitutes "doing" or "engaging in" or "transacting" business.
Top Weld Manufacturing, Inc. vs. ECED [1985]
Indeed, each case must be judged in the light of its peculiar
environmental circumstances. The true test, however, seems to be - It is incumbent upon the local counter-party to check w/n a foreign
whether the foreign corp is continuing the body or substance of the corp is licensed or not; if it continues to deal w/ a foreign corp w/o
business or enterprise for w/c it was organized or whether it has a license despite such knowledge, and tries to raise as a defense
substantially retired from it and turned it over to another. The term the lack of the foreign corp’s personality, it will not be upheld [in
implies a continuity of commercial dealings and arrangements, and pari delicto]
contemplates to that extent, the performance of acts or works or - A contract entered into by a Phil. corp w/ a foreign corp for
the exercise of some of the functions normally incident to, and in manufacture and marketing of the latter’s product is illegal if the
progressive prosecution of, the purpose and object of its same was not previously licensed with the BOI under R.A. 5455.
organization For being in pari delicto, the Phil. corp cannot ask our courts to
- The Mentholatum Co., Inc., being a foreign corp doing business in prohibit the foreign corp from terminating their contract and giving
the Phil. w/o the required license, it may not prosecute this action the license to produce and market its products to another
for violation of trade mark and unfair competition. Neither may the - A foreign corp w/ a settling agent in the Phil. w/c issued 12 marine
Philippine-American Drug Co., Inc. maintain the action here for the policies covering different shipments to the Phil., and a foreign corp
reason that the distinguishing features of the agent being his w/c had been collecting premiums on outstanding policies were
representative character and derivative authority, it cannot now, to regarded as doing business here.
the advantage of its principal, claim an independent standing in - ^ The acts of these corps should be distinguished from a single or
court isolated business transaction or occasional, incidental and casual
transactions w/c do not come within the meaning of the law. Where
Agilent Technologies Singapore Ltd. v Integrated Silicon Technology
a single act or transaction, however, is not merely incidental or
Philippines Corporation [2004; IMPORTANT]
casual but indicates the foreign corp’s intention to do other
- The principles regarding the right of a foreign corp to bring suit in business in the Philippines, said single act or transaction
Phil. courts condensed in 4 statements: constitutes “doing” or “engaging in” or “transacting” business in the
o (1) if a foreign corp does business in the Phil. w/o a license, Phil.
it cannot sue before the Phil. courts; - A foreign corp doing business in the Phil. must secure a prior
o (2) if a foreign corp is not doing business in the Phil., it license from the BOI under R.A. 5455
needs no license to sue before Philippine courts on an
Cargill, Inc. vs. Intra Strata Assurance Corporation [2010]
42
Corpo Glen Aid
- Where a foreign corp does business in the Phil. w/o the proper - General rule – minority SHs of a corp cannot sue and demand its
license, it cannot maintain any action or proceeding before Phil. dissolution
Courts o Exception – if such minority are unable to obtain redress
- The determination of whether a foreign corp is doing business in and protection of their rights w/in the corp; wherein the
the Phil. must be based on the facts of each case; Court gives intervention of the State, for one reason or another, cannot
emphasis to the importance of the element of continuity of be obtained, as when the State is not interested because
commercial activities to constitute doing business in the Phil.
the complaint is strictly a matter b/w the SHs
- To constitute “doing business,” the activity undertaken in the Phil.
should involve profit-making; “Soliciting purchases” has been Sec. 120 [Dissolution by shortening corporate term] –
deleted from the enumeration of acts or activities which constitute
“doing business.” - Amend AoI
- A foreign corp that merely imports goods from a Phil. exporter, w/o - SEC requires tax clearance [from BIR]
opening an office or appointing an agent in the Phil. is not doing
business in the Phil. Rules –
Antam Consolidated vs. CA [1986] - If the shortened term expires before the approval by SEC, the corp
- Where the 3 transactions indicate no intent by foreign corp to will dissolve only upon approval by SEC
engage in a continuity of transactions, they do not constitute doing - If SEC approves before such shortened term expires, dissolution
business in the Phil. takes effect only upon the expiration of such shortened period
- 1 agreement does not constitute continuity; it is an isolated - If SEC fails to act w/in 6 months from the filing of the amended AoI
transaction and the shortened term does not expire until after 6 months, corp
- Foreign corp. not doing business in the Phil., not required to obtain will dissolve when the term expires
a license to do business to have capacity to sue o Unless the lack of action on the part of SEC was due to the
fault of the corp, in w/c case, corp will not dissolve even
DISSOLUTION – Title XIV
after the expiration of the shortened period [in re Sec. 16,
Instances/methods of dissolution – last par.]
- Expiration of corporate term - When shortened term expires before the end of 6-month period,
- Merger [absorbed corp]; consolidation [both corps] corp will not be dissolved until the end of the 6-month period
- By voluntary surrender o Unless the lack of action on the part of SEC was due to the
- Revocation of its registration or certificate of incorporation by SEC fault of the corp, in w/c case, corp will not dissolve even
o Failure to organize & commence business w/in 2 years after the expiration of the shortened period [in re Sec. 16,
from incorporation [not automatic; there’s a procedure w/ last par.]
SEC to declare it to dissolve] - Appraisal right is available to a SH dissenting to the
o Not filing of reportorial documents w/ the SEC extension/shortening of the corporate term
o Non-compliance w/ 25-25 rule
o Continuously inoperative for a period of at least five (5) Ex. – Corp amended AoI – corporate term until Dec. 31, 2016
years
- If SEC approves on Nov. 1, corp will be dissolved on Dec. 31, 2016
o Etc.; grounds provided by law
o In all cases of revocation, notice & hearing are required [Sec. 120, last sentence]
- Quo warranto proceedings - If SEC approves on Feb. 1, 2017, corp will dissolve on Feb. 1, 2017

Financing Corporation of the Phil. vs. Teodoro [1953] Sec. 118 [Voluntary dissolution where no creditors are affected] –

43
Corpo Glen Aid
- Directors’ certificate [signed by Ds & corp-sec] o Beneficiary – claimants [SHs, members, creditors and
o Board Resolution [majority vote] others in interest]
o SH resolution [2/3 of OCS vote] - Any asset distributable to any creditor/SH/member who is unknown
- SEC then issues certificate of dissolution or cannot be found shall be escheated [transferred] to the
city/municipality where such assets are located
Sec. 119 – [Voluntary dissolution where creditors are affected] – - Except by decrease of capital stock and as otherwise allowed by
- Petition for dissolution the Code, no corp shall distribute any of its assets or property
o Board resolution [majority vote] except upon lawful dissolution and after payment of all its debts &
o SH resolution [2/3 of OCS vote] liabilities
- Claims/Hearing Gonzales vs. Sugar Regulatory Administration [1989]
- Judgment
- Not exclusive forum for instituting claims against the corp - The termination of the life of a juridical entity does not by itself imply
the diminution or extinction of rights demandable against such
China Banking Corp. vs. Michelin [1933] juridical entity
- Appointment of a receiver upon voluntary dissolution is permissive, - The abolition of the PHILSUCOM and the transfer of its assets to
not mandatory the Sugar Regulatory Administration by virtue of EO 18 should not
- If Michelin wanted to be a preferred creditor, it could file for impair contractual obligations entered into by PHILSUCOM before
involuntary dissolution and invoke provisions on preference & its abolition; claimants of Philsucom have a right to follow
concurrence of credit [credtrans] Philsucom’s assets in the hands of the Sugar Regulatory
Administration
Republic vs. Bisaya Land Transportation Co., Inc. [1978] - SC – To avoid such a result, we believe and so hold that should
the assets of Philsucom remaining in Philsucom at the time of its
- SC found that the controversy b/w the parties was more personal
abolition not be adequate to pay for all lawful claims against
than anything else and did not at all affect public interest – quo
Philsucom, respondent SRA must be held liable for such claims
warranto dissolution of the private corp opposed by the OSG
against Philsucom to the extent of the fair value of assets actually
- Solicitor General’s power to discontinue State’s litigation and to
taken over by the SRA from Philsucom, if any. To this extent,
have quo warranto against private corp dismissed is subject to
claimants against Philsucom do have a right to follow Philsucom’s
court approval and exceptions [ex. – where the answer sets up a
assets in the hands of SRA or any other agency for that matter
counterclaim which cannot stand independently of the main action]
Pepsi-Cola Products Phil. Inc., vs. CA [2004]
Sec. 122 [liquidation after dissolution] –
- If the 3-year extended life has expired w/o a trustee or receiver
- After dissolution, corp shall nevertheless be continued as a body
having been expressly designated by the corp, w/in that period, the
corporate for 3 years, for the purpose of prosecuting/defending
BoD/T itself, may be permitted to so continue as “trustees” by legal
suits by or against it and enabling it to settle and close its affairs,
implication to complete the corporate liquidation
to dispose of and convey its property and to distribute its assets,
but not for the purpose of continuing its business National Abaca & Other Fibers Corporation vs. Pore [1961]
- During the 3 years, corp may convey its properties to trustees
[trust] – - In the absence of statutory provision to the contrary, pending
o Trustor – corp actions by or against a corp are abated upon expiration of the
o Trustee – recipient of the assets period allowed by law for the liquidation of its affairs

44
Corpo Glen Aid
- The 3-year period of liquidation extends beyond that time by - A corporation sole is already a trustee; when dissolved, another
transferring of corporate assets to a trustee [here, the Board of trustee MUST be named to take over; in ordinary corp,
Liquidators] appointment of trustee is permissible
- W/ regard to educational corps, it depends whether it is a stock or
Republic vs. Marsman Development Company [1972] non-stock [pertinent provisions apply]
- While Sec. 77 of the Corporation Law provides for a 3-year period Dissolution of a foreign corporation [Sec. 136]
for the continuation of the corporate existence of the corp for
purposes of liquidation, there is nothing in said provision w/c bars - Withdrawal of license; no certificate of withdrawal shall be issued
an action for the recovery of the debts of the corp against the by the SEC unless all the ff. requirements are met –
LIQUIDATOR thereof, after the lapse of the said three-year period o All claims which have accrued in the Phil. have been paid,
compromised or settled;
Tan Tiong Bio vs. CIR [1962] o All taxes, imposts, assessments, and penalties, if any,
- The creditor of a dissolved corp may follow its assets once they lawfully due to the Phil. Gov’t have been paid; and
passed into the hands of the SHs o The petition for withdrawal of license has been published
- That the hands of the government cannot, of course, collect taxes once a week for 3 consecutive weeks in a newspaper of
from a defunct corp, it loses thereby none of its rights to assess general circulation in the Phil.
taxes which had been due from the corp, and to collect them from - If absorbed corp is foreign, it files a petition for withdrawal of license
persons who, by reason of transactions w/ the corp, hold property
against which the tax can be enforced and that the legal death of
the corp no more prevents such action than would the physical
death of an individual prevent the gov’t from assessing taxes
against him and collecting them, from his administrator who holds
the property w/c the decedent had formerly possessed

Dissolution of non-stock corporations [Sec. 94]


Dissolution of close corporations [Sec. 105]
- Any SH may, by written petition to the SEC, compel the dissolution
of such corp whenever any of acts of the Ds, officers or those in
control of the corp is illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to the corp or any SH, or
whenever corporate assets are being misapplied or wasted
- When there’s deadlock, [votes required for any corporate action
cannot be obtained, with the consequence that the business and
affairs of the corp can no longer be conducted to the advantage of
the SHs] the SEC may, upon written petition by any SH, order the
dissolution of the corp

Dissolution of special corporations [Sec. 115]

45
Corpo Glen Aid
*De Leon –
- p.139 middle part #1 is a wrong!
- p.327 power to acquire shares & securities.. 1(b) 2nd sentence..
“the shares must be limited.. only natural..” is a wrong! (c) [last par.]
paid in full, no par is correct. w/ par, 25% only!
- Read 928 or 982 for remedies

46
Corpo Glen Aid