CHAPTER I - INTRODUCTION
  JOINT VENTURE PARTNERSHIP
No personality Has a personality
KINDS OF BUSINESS ORGANIZATION distinct and separate Separate and
from the persons Distinct
A. SOLE PROPRIETORSHIP composing it
Single or Particular Usually has a
- One conducted for profit by a lone or undertaking general business of
single individual who owns all the particular kind
assets, personally owes and answers all Corporations may Generally,
the liabilities or suffers all the losses and enter into joint Corporations can’t
enjoys all the profits to the exclusion of ventures enter into
others. Partnership.
- It eliminates the bureaucratic process
common corporations. The proprietor
make his own decision and can act GENERALLY, Corporations can’t enter into
without any delay. Partnership.
- Unlimited personal liability for all debts - Reason: identity of the corpo is lost or
and obligation, can be held liable merged with that of another and
beyond his capital, even personal discretion of the officials is placed in
properties not used in business can be other hands not permitted by law of its
attached or foreclosed. creation.
EXCEPTION allowed if the ff. are met:
B. PARTNERSHIP 1. Articles of incorporation expressly
authorized the corporation to enter
- Two or more persons bind themselves into Partnership.
to contribute money, property, or 2. The agreement of the Articles of
industry to a common fund with the Partnership must provide that all the
intention of dividing the profits among partners will manage the
themselves. (Article 1767 NCC) partnership.
- It may be brought about by express or 3. The article of Partnership must
implied contract. stipulate that all the partners are
- There is personal relationship and shall be jointly and severally
(Fiduciary) among partners. For this liable for all obligations of the
reason, Death and Incapacity of one of partnership.
the partners would result in its
dissolution. D. CORPORATION

C. JOINT VENTURE - B.P. 68

- Partakes the nature of a Partnership
Contract and it is created for the
purpose of prosecuting a particular
business transaction.
- It does not entail a continuing
relationship among parties.
- However, this is not entirely true
because partnership can be particular or
universal. In effect, a joint venture is a
form of partnership and should be
governed by the law of Partnership.
- Corporation is an artificial being, created
by operation of law, having the right of
succession and the powers, attributes
and properties expressly authorized by
law or incident to its existence. (Section
2)
HISTORY
England and in Rome > Spanish Law “sociedad
anonimas > Code of Commerce of Spain
extended in Philippines (1988) > American
Regime- Corporation Law (April, 1906) > B.P. 68
Corporation Code (approved May 1, 1980).

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CHAPTER II – DEFINITION AND DISADVANATGES OF THE CORPORATE

ATTRIBUTES FORM OF BUSINESS

1. For a Valid Corporate Act, FORMAL

Corporation - Corporation is an artificial being, PROCEEDINGS, such as board
created by operation of law, having the right of meetings are required.
succession and the powers, attributes and 2. Business transaction is limited to the
properties expressly authorized by law or State of Incorporation unless it has
incident to its existence. (Section 2) obtained a license or authority in the
foreign State.
Four ATTRIBUTES of a Corporation 3. Shareholder’s limited liability tends to
limit the credit available to the
1. ARTIFICIAL BEING, has a personality corporation as a separate legal entity.
separate and distinct from the persons 4. Shares of stocks are transferable and
composing it. may result to conflicting interest.
2. CREATED BY OPERATION OF LAW, 5. Minority shareholder practically has no
consent of State is needed and not by say
mere agreement only. 6. Large scale enterprises, stockholders
3. RIGHT OF SUCCESSION, death, voting rights may become merely
incapacity of civil interdiction does not fictitious and theoretical because of
result to dissolution. disinterest in management, wide-scale
4. POWERS, ATTRIBUTES AND ownership and inaccessible place of
PRPERTIES EXPRESSLY meeting.
AUTHORIZED BY LAW OR 7. Double Taxation
INCIDENT TO OTS EXISTENCE, 8. Subject to governmental regulation such
as submission of reportorial
Q: Can Corporation Recover Moral requirements.
Damages?
LBC Express, Inc vs CA- A Corporation,
CORPORATION PARTNERSHIP
being an artificial being has no feelings, no
emotions, no senses; therefore, it cannot
Created by law or by Created by mere
experience physical suffering and mental
operation of law agreement
anguish.
There must be at Formed by two or
Filipinas Broadcasting Network vs Ago
least 5 incorporators more natural
Madical Education Center- Article 2219 (7) NCC
except Corporation persons
does not qualify whether plaintiff is a natural or
Sole
juridical person.
Can only exercise Can do anything
Article 2219 – Moral Damages may be
such powers and provided not
recovered in the following and analogous cases:
functions granted by contrary to law,
(7) Libel, Slander or any other form of law and those morals, good
defamation. incidental to its customs and public
existence order.
ADVANATAGES OF CORPORATE FORM OF Must transact its GR: Any partners
BUSINESS business through the may transact
board of directors business
1. Capacity to act as a single unit unless validly XPN: If there is a
2. Limited shareholder’s Liability delegated contrary agreement.
3. Continuity of existence Right of Succession No right of
4. Feasibility of greater undertaking succession because
5. Transferability of shares it is based on trust
6. Centralized management and confidence
7. Standardized method of organization, Can ordinary There must be a
management and finance transfer, sell or consent of partners
assign his shares of
stock without
consent of other

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stockholder
Limited Liability Partners are liable CHAPTER III- CLASSIFICATION
Pro rata except if OF CORPORATION
Limited Partner and
after all the
A. Classes of Corporations under the
partnership property
Corporation Code
has been exhausted,
for all partnership
Section 3
liability
Existence is limited May exist for an
1. Stock Corporation
to 50 yrs but indefinite period
renewable subject only to
- Corporations which have capital stock
causes of dissolution
divided into shares and are authorized
provided for by law
to distribute to the holders of such
Cannot be dissolved Partners may
shares dividends or allotments of the
by mere agreement, dissolve it at will or surplus profits on the basis of the shares
the consent of State at any time deem fit. held are stock corporation.
is necessary Requisites
a. Capital Stock divided into
shares
b. They are authorized to
distribute dividends or
allotments as surplus profits
to its stockholders on the
basis of the shares held by
each of them.

2. Non-Stock Corporation

- All other private corporations (s.2)

- Those where no part of their income is
distributable as dividends to its
members, trustees or officers subject to
the provisions on distribution. (s.87)
- Primarily exist for purposes other than
profit but it does not follow that they
cannot make profits as an incident to
their operations. > Distinction is profits
obtained by the Non-stock corp can’t be
distributed as dividends but for
furtherance of their purpose only.

CIR vs Club Filipino

For liability to attach, the operator must
be engaged in the business as a bar keeper and
restaurateur. The term business refers to
activities for profits or livelihood. The Club is not
engaged in business of resto and bar. Profits
obtained by the Bar and Resto of the Club is
used only for the furtherance of its purpose. Also
the club failed to comply with the requisites of
stock corporation.

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B. Corporations created by special laws or

charters 11. Corporation by estoppel

- Corporations created through

legislative act for the interest of the common
good.
- GOCC operate under special law or
charter such that registration with the SEC is not
required to acquire legal personality.

GR: Not immune from suits because

once it enters into contract it divests itself of its
sovereign character.
XPN: Unless expressly provided.

PNOC-EDC vs NLRC

The law that will govern the employees

of a GOCC will depend on manner of its
creation. If created by-
1. Special Law or Charter- It is
governed by Civil Service Law
2. Corporation Code- governed by
Labor Code

C. Other Classes of Corporations

1. Public and Private Corporations

2. Ecclesiastical or Lay Corporations

Ecclesiastical
a. Religious societies
b. Corporation Sole

Lay Corporations
a. Eleemosynary corporations
b. Civil Corporations

3. Aggregate and Sole Corporations

4. Close and Open Corporations

5. Domestic and Foreign Corporation

6. Parent or Holding Companies and

Subsidiaries and Affiliates

7. Quasi-public Corporation

8. Quasi Corporation

9. De jure Corporation

10. De facto corporation

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CHAPTER IV- FORMATION AND
ORGANIZATION OF CORPORATIONS
3 Stages in the life of a corporation
1. Creation
a. Promotional Stage – Act of getting
a corporation organized including
procurement of subscription to its
capital stock.
Promoter- organizer who brings
persons to unite in forming a
corporation.
b. Process of Incorporation –
Drafting the Articles of
Incorporation, Preparing the
necessary supporting documents
and filing with SEC.
c. Organization and
Commencement of Business –
Overt acts after incorporation such
as adoption of by-laws, election of
corporate officers and other acts
tending show intent of transacting its
business.
2. Reorganization or Quasi-
reorganization
3. Dissolution and Winding Up
a. PROMOTIONAL STAGE
- Organizers/Promoters bring together
persons interested in the business
venture.
- They enter into contract either in their
own name or the proposed corpo. Since
corpo has no legal existence yet at this
stage.
- The corpo may make the contracts its
own after due corporation, and may
become bound by such contracts by
Ø Adopting or ratifying
Ø Accepting its benefits with
knowledge of the terms.
GR: Prometer is Personally Liable
XPN: Promoter is not liable if
1. Promoter make a CONTINUING
OFFER on behalf of the corporation,
which, if accepted after
  5
incorporation, will become a
contract. In this case, promoter will
not assume liability, whether corpo
will accept it or not.
2. The promoter may make a Contract
binding himself, with the
understanding that if the
corporation, once formed, accepts
or adopts the contracts, he will be
relieved of responsibility
3. By Binding himself personally and
assume the responsibility of looking
to the proposed corporation, when
formed, for Reimbursement.
b. PROCESS OF INCORPORATION
Section 14 Contents of Article of
Incorporation
1. PREFATORY PARAGRAPH-
specify the nature (stock or non-stock)
of the corporation to prevent difficulties
of administration and supervision.
Q: Why is there a need for PP?
Because law subjects different
corporation to different requirements.
2. CORPORATE NAME
3. PURPOSE
4. PRINCIPAL OFFICE
5. TERM OF EXISTENCE
- it shall exist for a period not exceeding 50
years from date of incorporation.
-it may be extended for an Unlimited times by
amendment of Articles as long as each
extension does not exceed 50 years.
GR: No extension can be made earlier than 5
years prior to the original or subsequent expiry
dates
XPN: Justifiable reasons for earlier extension as
may be determined by SEC.
6. INCORPORATORS
7. DIRECTOS/ TRUSTEES

8. CAPITALIZATION
9. NO TRANSFER CLAUSE
Although the provision provides that
only corporations who will engage in
business reserved fully or partially to
Filipinos will put it. The SEC still
requires all STOCK corporations to
include the same; to enable the State to
determine whether such a corporation
would contribute to the sound balanced
development of the Phil. Economy.
10. TREASURER
Treasurer elected will receive all
subscriptions, contributions or donations
paid or given by the subscribers or
members until his successor is elected
and qualified.
11. EXECUTION CLAUSE
Incorporators sign the document
with an indication as to where it was
signed and when the same was
executed.
There are 2 disinterested
witnesses who will witness the signing
of incorporators.
12. ACKNOWLEDGEMENT
- Notary Public, and incorporators and
signatories will execute and sign in their
own free, voluntary act and deed.
Articles of Incorporation is a three fold
contract
1. Between the corporation and the
State
2. Corporation- Signatories
3. Signatories- State
CORORATE NAME
-The principal means of distinguishing a
corporation not only from stockholders or
members but also from other firms and entities.
- A corporation once formed cannot use any
other name, unless it has been AMENDED in
accordance with law. This is to avoid
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CONFUSION, FRAUD and EVASION and
difficulties in SUPERVISION.
- seek a “VERIFICATION SLIP” from RD of the
Commission and if name is available they can
Reserve such name.
Section 18
Statutory Prohibition in the use of
Corporate name. To come within the scope,
2 Requisites must be proven
1. That the complaint corporation acquired
PRIOR RIGHT over the use of such
corporate name
2. The proposed name is either:
a. IDENTICAL
b. DECEPTIVELY or COFUSINGLY
similar to that of any existing
corporation or to any other name
already protected by law
c. PATENTLY DECEPTIVE,
CONFUSING or CONTRARY to
existing law. (Philips Export vs CA)
Note: Read page 29 for guidelines imposed by
SEC in implementing Sec 18.
Red Line Transportation vs Rural Transit-
The law give a corporation no express or implied
authority to assume another name that is
unappropriated. A corporation cannot change its
name except in the manner provided by law. A
Corporation cannot assume the name of another
corporation as its trade name.
Universal Mills vs Universal textile Mills- In
this case, the name is not identical but
confusingly similar that even the test of
reasonable care and observation as the public
are generally capable of using and may be
expected to exercise.
Lyceum vs CA- “Doctrine of Secondary
Meaning” a word or phrase originally incapable
of exclusive appropriation with reference to an
article in the market, because geographically or
otherwise descriptive, might nevertheless have
been used so long and so exclusively by one
producer with reference to his article that, in that
trade and to that branch of the purchasing
public, the word or phrase has become to mean
that the article was his product.
Q: What if Western Lyceum (prior
user) filed the case, will the court rule
in their favor?

Philips Export vs CA- Corporation’s right to
use its corporate name is a right in rem. PEBV
are known in the Philippines and abroad as
Philips Group of Companies. Proof of actual
confusion need not be shown. It suffices that
confusion is Probably or likely to occur.
Amendment or Change in Corporate Name
The SEC still needs to approve any
change in corporate name.
Any change upon the corporate identity
or name does not affect the rights of the
corporation or lessen its obligations. It does not
become a new corporation.
PURPOSE CLAUSE
c. Defining the Scope of the authority of
the corporate enterprise or undertaking.
d. Sec. 45 A Corporation has only such
powers as are expressly granted by the
law, articles and those incidental to
such conferred powers, those
reasonably necessary to accomplish its
purpose and incidental to its existence.
e. “Ultra Vires” authority beyond corporate
power.
Reasons for Requiring a statement of
purpose
1. For the STOCKHODER, to know within
lines of business his money is to be put
2. For the BOARD OF DIRECTORS and
MANAGEMENT, to know on what lines
of business they are authorized to act.
3. ANYONE WHO DEALS WITH
COMPANY may ascertain whether a
contract entered is within the general
authority of the management.
Other special laws prohibit certain business
undertaking from having any other purpose
not peculiar to them.
1. Educational, religious, and other non-
stock corporations cannot include any
other purpose which would change or
contradict its nature or to engage in any
enterprise to make profits for its
members.
2. Insurance companies cannot engage in
commercial banking at the same time,
and vice versa (what is prohibited is to
engage in both activity)
  7
3. Stock brokers can have no other line of
business not peculiar to them.
Note: Read pages 39-41
Section 17- If the Corporate purpose includes
any purpose under the supervision of another
government agency, prior clearance and/or
approval of the concerned government agencies
or instrumentalities will be required.
4 General Limitations on the Purpose Clause
1. Lawful
2. Specific or stated concisely
3. If there is more than one purpose, the
primary as well as the secondary ones
must be specified
4. Capable of being lawfully combined
PRINCIPAL OFFICE
f. Located in the Philippines
g. Specify the province, city or
municipality.
h. Principal office is not the same with
Place of Operation
Importance of knowing the residency of the
corporation
a. Chattel mortgage- must be
registered in registry of deeds
where the principal office is
located
b. Validity of summons
c. Validity of the meetings (s.51)-
city or municipality where
principal office is located
d. Venue of actions
Clavacelli Radio System vs
Antillon- If action is not upon a
written contract but based on
Tort, the same must be file in the
municipality where the defendant
or any of the defendants resides
or may be served with summons.
Defendant resides- place of
business
Served with Summons- if the
corporation is not a resident in
Philippines, It may be served

through its agents found in
Philippines.
Q: What if based on written
contract, where will be the
Venue?
INCORPORATORS
Corporators- All persons who compose the
corporation at any given time and need not be
among those who execute the Articles at the
start of the formation and organization.
Incorporators- Those person mentioned in the
articles as originally forming the corporation and
who are signatories of the Articles.
Qualification if Incorporators
1. Natural Person; XPN: Cooperative and
corporations primarily organize to hold
equities in rural banks.
(Note: while corporations cannot qualify
as incorporators they may still be
shareholders)
2. Nlt 5 but nmt 15
3. Legal age, however, to be a shareholder
they must be represented by their
guardian, parents or administrator.
4. Majority are residents of the Philippines
5. Each must own or be a subscriber to at
least 1 share capital stock.
DIRECTORS/TRUSTEES
Directors- Governing board in stock corporation
Trustees- Non-stock
Qualification of D/T
1. Every director must own at least 1 share
of the capital stock of the corporation by
which he is a director.
Trustees of non-stock corpo
must be a member.
2. Majority of D/T must be a Resident in
Philippines
XPN: Aliens, WON residents of the
Philippines, may not qualify or be
elected as such, in any business
  8
undertaking EXCLUSIVE for Filipino
Citizens.
3. Number of D/T must not be less than 5
but nmt 15.
XPN:
a. Educational Corporations registered as
non-stock corporation whose number of
trusted, though nlt5 and nmt 15, must be
divisible by 5
Q: What about IBP it has 21 members?
If a stock corporation it can be more
than 15 members (Sec. 92)
Q: PSBA has 30 boards, are they violating
the law?
Stock corpo can have more than 15
directors. (Sec. 108)
b. In close corporations where all the
stockholders are considered as
members of the board of directors
thereby allowing 20 members in the
board.
c. Sole Corporation
d. Merger of Banks, they can retain their
respective member of boards but not to
exceed 25 D/T
DISQUALIFICATIONS OF D/T
a. Convicted of Final Judgment of an
offense punishable by imprisonment for
a period exceeding 6 years
b. Violation of this Code committed within
5 years prior to the date of his election
or appointment
(NOTE: The Corporation can provide for
additional Qualifications and
Disqualifications)
CAPITALIZATION
Capital- broadly covers all the assets of a
corporation used in the conduct of business.
Authorized Capital- signifies the maximum
amount fixed in the articles to be subscribed and
paid-in or secured to be paid by the subscibers.
A.k.a Maximum number of shares that the
corporation can issue (Unless the Article is
amended)

 

100k  is  the  Paid-­‐up  capital,  which  is    within  25%  of  the  
Subscribed Capital Stock- Total number of subscribed  capital  
shares and its total value for which there are -­‐  it  is  not  required  that  each  of  the  subscribers  will  pay  
contracts for their acquisition or subscription. It 25%  
which  is  250k.  
is the stockholder’s equity account showing that
part of the authorized capital stock which has
been paid or promised to be paid, or that portion Corporation cannot exceed more than 1-
of the authorized capital stock which has been M it is the maximum amount it cannot issue
subscribed by the subscribers or stockholders. more unless Articles will be amended.
Maximum shares it can issue is 1M shares
Q: What is the minimum subscribed unless amended.
capital?
At least 25% of the authorized Penalty: Max Fine of 500M and imprisonment
capital stock must be subscribed. for 20 years.

Paid up Capital- Actual amount or value which Q: What is the Minimum for a
has been actually contributed or paid to the domestic corporation? In no case shall the
corporation in consideration of the subscriptions paid- up capital be less than 5k
made thereon. It may either be in cash, property
or in the form of services actually rendered to Q: Is there a minimum authorized
the corporation. capital imposed by the code? If there is
Section 62 - means that payment to minimum paid-up logically there should also be
subscription to the capital stock of a corporation a minimum capital =5000
may be paid in varied forms (personal or real
property). So long as they are capable of SHARES OF STOCK CORPORATION AND
valuation and is fairly valued. THEIR CLASSIFICATION

Shares of stock- designate the units into which

the proprietary interest in a corporation is
divided. They represent the proportionate
integers or units, the sum of which constitutes
the capital stock of the corporation.
Capital structure It is the interest or right which the
Foundation- minimum paid-up capital stockholder has in the management of the
3M corporation and in the surplus profits and, in
Authorized capital 1 M No. of shares case of dissolution, in all of its assets remaining
1M/share par value 1.00 after the payment of its debts.

Q: Are Corporation authorized to

Subscribed Capital classify their shares? Yes based on section 6.
50 K A Certificate of Stock- Document or instrument
50 K B evidencing the interest of a stockholder in the
C 250K corporation. Merely an evidence of ownership.
D
E Purpose of classification
1. To specify and define the rights and
privileges of the stockholders;

PAID UP =62,500 2. For regulation and control of the

issuance of sale of corporate securities
for the protection of purchasers and
stockholders. (e.g. close corpo)
250k  (outstandibgstock)  is  25%  of  the  authorized   3. As a management control device.
capital  stock  that  is  subscribed.  
(founder’s shares)

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4. To comply with statutory requirements
particularly those which provide for
certain limitations on foreign ownership
and shares like overseas employment
agencies requiring to own at least 75%
of the shares of stock thereof.
5. To better insure return on investment
which can be affected through the
issuance of redeemable shares or
preferred shares, i.e., granting the
holders thereof, preference as to
dividends and/or distribution of assets in
case of liquidation; and,
6. For flexibility in price, particularly, no par
shares may be issued or sold from time
to time at different price depending on
the net worth of the company since they
do not purport to represent an actual of
fixed value.
7.
Q: What Advantage & Privilege will one
have against the other? None, they will be
presumed equal if no restrictions in the Articles
(Note: they are nor presumed common stock)
GR: Equal
XPN: If a specific type of share
is indicated in the Articles.
Ø COMMON STOCKS
-­‐ one which entitles its owner to an equal
pro rata division of profits and without
any preference or advantage in respect
over any other stockholder or class of
stockholders.
-­‐ It usually carries with it the right to vote,
and frequently, the exclusive right to do
so.
-­‐ GR:If there are more than one kind of
  10
share, each share is presumed to be
equal and have the right to vote
XPN: Unless, the articles and the
certificate of stock provide otherwise.
Ø PREFERRED STOCKS
Stock that give a holder a preference over
the holder of common stocks with respect to the
payment, of dividends and/or with respect to
distribution of capital upon liquidation.
YOU MUST STATE THE PREFERENCE
BECAUSE IF NOT THEY ARE PRESUMED TO
BE EQUAL
Q: How can there be a Preferred shares?
a. They can be issued only with stated par
value, and;
b. The preferences must be stated in the
articles of incorporation and in the
certificate of stock, otherwise; each
share shall be presumed equal.
1. Preference as to dividends
-­‐ Holder of such share has the privilege of
being paid with dividend first before any
other stockholders are paid in the event
that there are profits available for
payment of dividends.
-­‐ The guaranty is not absolute because
the BOD has the discretion to determine
whether dividends are to be declared
out of the unrestricted retained earnings
of the corporation.
-­‐ The amount of preference is stated in
the “contract of subscription” and is
usually on a fixed percentage or
specified amount.
-­‐ If after paying the preferred stocks no
more surplus profits remain the not so
preferred stockholders has no recourse.
GR: However, if the remaining surplus
profits substantial, the other
stockholders can possibly receive a
bigger dividends than the preferred
holders. (Preferred dividends is non-
participating)
XPN: Unless there is a stipulation in the
articles on the participation of preferred

 

holder in the surplus profits. possible bias.

I Unless the directors, in failing to
a. Participating Shares and Non-
Participating shares
Participating shares the holders are still
given the right to participate with the
common stockholders in dividends
beyond their stated preference.
A & B- Preferred stockholders as
indicated in the Articles that they will
receive the preference for the amount of
100k
C, D, & E- Common stock holders
declare dividends have abused their
discretion in withholding the declaration,
the dividend right of stockholders of the
particular year cannot be made up in
subsequent years.
b.2 Mandatory if Earned- impose a
positive duty on directors to declare
dividends every year when profits are
earned. It gives the holders the right to
annual profit and leave the directors no
discretion to withhold dividends.
Their right will not be lost by
failure to declare dividends each year.

-Corporation has 150k unrestricted b.3 Earned Cumulative or Dividend

dividend. Pay first A&B 100k credit type –Gives the holder the right to
- if Corpo have a 600k cash dividends. arrears in dividends if there were profits
A&B will be paid 100k and C, D, & E the earned during the previous years but
will divide the remaining 500k. But if A dividends were not declared. The right
&B is participating stockholder they will to receive dividends is merely
also have a share in the surplus profits. postponed.

b. Cumulative and Non-Cumulative

Preferred Shares

Cumulative Preferred Shares- those that

entitle the owner thereof to payment not
only of current dividends but also back
dividends not previously paid whether or
not, during the past years, dividends A and B- Preferred Stock 100k
were declared or paid. C, D, and E- Common shares
In order that a preferred stock 201
may be considered cumulative the same 1 2012 2013 2014
must be indicated in the Articles. 150 Declaration
k 200k 0 400k of dividends
Non-Cumulative Preferred Shares – x x x 400k
those which grant the holders of such 100 100 100 100
shares only to payment of current (14) (14) (14) (14) Cumultive
dividends but not back dividends, when Non-
and if dividends are paid, to the extent 100k Cumulative
agreed upon before any other Discretionar
stockholders are paid the same. 100k y
Advantage- it avoid undue 100k Mandtory
accumulation of arrears of dividends. 100 100(12 (400)1
(11) ) 4 Earned
Types of Non-Cumulative
Preferred Shares Q: What if they did not declare
dividends rights for the previous years? May
b.1 Discretionary Dividend Type- gives they be denied dividend rights because they
the holder the right to have dividends are non holders of non-cumulative? It
paid thereon in a particular year depends on the type on non-cumulative share.
depending on the judgment or discretion NOTE: YOU CANNOT COMPEL THE
of the BOD who might be subject to

  11
 

CORPORATION TO DECLARE DIVIDENDS
UNLESS IT EXCEEDS 100 % PAID UP
CAPITAL SEC. 43
Section 43. Power to declare
dividends. - The board of directors of a stock
corporation may declare dividends out of the
unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock
held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to
the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until
his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued
without the approval of stockholders
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1)
when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with any
financial institution or creditor, whether local or
foreign, from declaring dividends without its/his
consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that
such retention is necessary under special
circumstances obtaining in the corporation, such
as when there is need for special reserve for
probable contingencies. (n)
Earned Cumulative
Cumulative
Allowed to receive Allowed to receive
only if earned. back dividends for
previous years
whether or not
they were earned.
2. Preference as to voting rights
GR: A preferred stockholder have the
right to vote (S.6)
  12
XPN: Unless such vote is clearly
withheld (Preferred or Redeemable
Shares only)
3. Preference Upon Liquidation
-­‐ This preference must also be indicated,
otherwise they are placed in the same
footing with other shareholders.
-­‐ If the preferred stock is cumulative, the
liquidation preference usually includes a
right to any arrears of cumulative
dividends in priority to any distribution of
assets to the common stockholders.
Ø PAR AND NON-PAR VALUE
SHARES
Par- fixed amount
Par Value Shares- those whose value are
fixed in the articles of incorporation.
-To fix a minimum subscription or
original issue price to the shares and
indicates the amount which original
subscribers are suppose to contribute to
the capital as the basis of the privilege
of profits haring with limited liability.
- the par value indicated however is not
the true value of the shares because the
same may fluctuate depending on the
networth of the corporation.
-Par value shares cannot be issued or
sold by the corporation at less than the
par because it will violate the provisions
on “Watered Stock” which are shares
issued at less than the par where the
stockholders will remain liable for the
difference between what he paid and
the actual par value thereof.
No Par Value Shares- those whose issued price
are not stated in the certificate of stock but
which may be fixed in the articles, or by the BOD
when so authorized by the articles and by-laws,
or in the absence, by stockholders themselves.
Code allows a stock corporation to issue
no par value shares but they are subject to
certain limitations provided in S. 6
1. Shares of capital stock issued shall
be deemed fully paid and non-
assessable a

2. That shares without par value may
not be issued for a consideration
less than the value of five (P5.00)
pesos per share
3. That the entire consideration
received by the corporation for its
no-par value shares shall be treated
as capital and shall not be available
for distribution as dividends.
4. They cannot be issued as preferred
stock
5. They cannot be issued by banks,
trust companies, insurance
companies, public utilities and
building and loan association
Advantages of No par value
1. Flexibility in price
2. Evasion of danger of liability upon
waters stock in case of overvaluation
3. Disappearances of personal liability
Ø Voting or Non-Voting Shares
Voting Shares gives the holder the right
to vote and participate in the management of the
corporation through the exercise of such right,
either at the election of the BOD or in any matter
requiring the vote of stockholders.
Non-Voting Shares –holder has no voice
in the election of BOD and some other matters
requiring stockholders vote.
GR: Stockholders can’t be denied of their right
to vote
XPN: Unless provided in the Articles, and only
Preferred, redeemable shares, and those
provided in the code (Founder’s shares) can be
deprived of voting rights.
XPN to XPN: Even if deprived of their right to
vote, they can still vote in the following
instances. (S.6)
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or substantially
all of the corporate property;
4. Incurring, creating or increasing
  13
bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the
corporation with another corporation or other
corporations;
7. Investment of corporate funds in
another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation.
Q: Can stockholders deny the
common shares the right to vote? No, only
Redeemable and preferred shares
Q. May the Common share be
effectively denied of their right to vote? Yes,
if there is Founder’s share for a maximum period
of 5 years (provided in the Code)
Q: Who can vote in the following
instances?
a. Amendment of Articles- holders of
voting and non-voting share
b. Management of Corporation-
those with Voting share only
Ø Distinction between the subscribed
and outstanding stocks?
Section 137. Outstanding capital stock
defined. - The term "outstanding capital stock",
as used in this Code, means the total shares of
stock issued under binding subscription
agreements to subscribers or stockholders,
whether or not fully or partially paid, except
treasury shares. (n)
-­‐ Voting and dividend rights, it refers to
the outstanding capital stocks
-­‐ Only outstanding stocks are allowed to
vote and receive dividends
-­‐ Actually the same
Ø Founder’s Shares
-­‐ Code does not define it
-­‐ Presumed to be shares of stock which

are issued to the founder’s of a
corporation.
-­‐ The five year period fixed by law is non-
extendible because it may result to
perpetual disqualification of other
stockholders to elect and be elected.
Section 7. Founders’ shares. –
Founders’ shares classified as such in
the articles of incorporation may be
given certain rights and privileges not
enjoyed by the owners of other stocks,
provided that where the exclusive right
to vote and be voted for in the election
of directors is granted, it must be for a
limited period not to exceed five (5)
years subject to the approval of the
Securities and Exchange Commission.
The five-year period shall commence
from the date of the aforesaid approval
by the Securities and Exchange
Commission.
Ø Redeemable Shares
-Those issued by a corporation subject
to redemption as may be provided by the terms
of the subscription contract.
-Grants the issuing corporation the right
to purchase or reacquire the shares at its option
or at the option of the holder based on the face
or issued value plus specified premium.
- Redemption may either be optional or
mandatory either at a fixed or future dates.
Generally a corporation can reacquire its own
shares if it has unrestricted retained earnings
Exception: redeemable shares may be
reacquired irrespective of retained earnings
Ø Treasury Capital or Treasury
Shares
-­‐ shares of stock which have been issued
and fully paid for, but subsequently
reacquired by the issuing corporation by
purchase, redemption, donation or
through some other lawful manner.
-­‐ This may again be issued for a price,
even for less than par, and the
purchaser will not be liable to the
  14
creditors of the corporation for the
difference since the full value had
previously been paid in full.
-­‐ Treasury shares have no dividend or
voting rights since such is only granted
to outstanding shares of stock. Treasury
shares may, however, be declared as
dividends since they are properties of
the corporation.
Q: Why is TS not entitled to vote? “Although
authorities may differ on the exact legal and
accounting status of so-called treasury shares,
they are more or less in agreement that treasury
shares are stocks issued and fully paid for and
reacquired by the corporation either by
purchase, donation, forfeiture or other means.
Treasury shares are therefore issued shares but
being in the treasury they do not have the status
of outstanding shares. Consequently, although a
treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or
sold again, such shares, as long as it is held by
the corporation as a treasury share, participates
neither in dividends, because dividends cannot
be declared by the corporation to itself, nor in
meetings of the corporation as voting stock, for
otherwise equal distribution of voting powers
among stockholders will be effectively lost and
the directors will be able to perpetrate their
control of the corporation, though it still
represents a paid for interest in the property of
the corporation. The foregoing essential features
of a treasury stocks are lacking in the
questioned shares.
In this case, and under the terms of the
trust agreement, the shares of stock of Reese
participated in dividends which the trustee
received and the said shares were voted upon
by the trustee in all corporation meetings. They
were not, therefore, treasury shares.”
A
B 50k
C
D
E
If C will not pay on time prescribed then it
will be sold in Public Bidding and if
corporation will win the 50k shares of “C” will
then become Treasury Shares. It will
become the property of the corporation. As

 

a treasury share it don’t have voting and Municipalities 2.5M

dividend rights and once issued they Pawnshop- 100k
become outstanding stocks again.
Q: Is there a minimum capital required?
When the law speaks of outstanding No minimum capital requirement in
rights it does not include treasury shares order that a corporation may be duly
Ø Treasury shares may be reissued incorporated except in special cases and
provided that at least 5K should be paid-in.
-­‐ They are actually assets of the (s.12)
corporation
-­‐ Once re-issued they become
outstanding stocks again Restrictions and Preferences on Transfer of
-­‐ The corporation may cancel them; in Shares
effect there will be a reduction in the GR: Corporations are not required to provide for
outstanding capital stocks restrictions and preferences regarding the
-­‐ The code does not require ordinary transfer, sale, assignment of shares in their
corporations to provide for restrictions, Articles
but it does not likewise prohibit XPN: Close Corporations (s.96)
restrictions XPN to XPN: They can as long as embodied in
-­‐ Example: right of first refusal Articles. Failure to provide in the Articles will not
-­‐ The restriction must be contained in the bind purchaser in good faith even if indicated in
articles of incorporation the by-law.
-­‐ If provided in by-laws but not in the In a Close corporation such restrictions
articles of incorporation then it will not and preferences must be embodied in the
be binding Articles, Stock certificate and by-laws.
-­‐ Restrictions and preferences are
mandatorily required in close
corporations
-­‐ If it does not provide restrictions it is not COMMENCEMENT OF CORPORATE
a close corporation EXISTENCE
-­‐ Specified persons- close corporations
-­‐ If not one of those specified you are not -GR: Reckoned at the time of the issuance of
included because there is exclusivity in Certificate of Incorporation or Registration under
close corporations it’s official seal.
-­‐ Should also be in the by-laws not only in
the articles of incorporation XPN: A Corporation can still exist even if there is
no Certificate
Homeowner’s Association
Cooperatives
CAPITALIZATION Corporation in Special Charter-
S.12 legislature
S.13
Corporation by Estoppel
GR: at least 25% of the subscribe capital
Corporation Sole- exist upon filing of
must be paid
Articles in Sec
XPN: That in no case shall be “Paid-up”
capital be less than 5k
Cagayan Fishing Devt vs Sandiko
A corporation should have a full and
There are instances where the SEC requires
complete organization and existence as an
the payment more than the 25% paid up capital.
entity before it can enter into contract or transact
e.g.
any business.
Holding companies- 100k
Investment House- 300k If the company could not and did not
acquire the four parcels of land here involved, it
Overseas Recruitment Agencies- 3M
follows that it did not have the resultant right to
Financing Companies- w/n MM 10M
dispose the same by the defendant.
Other cities 5M

  15
 

DEFECTIVELY FORMED
CORPORATIONS
1. De Facto Corporation
2. Corporation by Estoppel
DE FACTO CORPORATION
-­‐ one that is so defectively created as
not to be a de jure corporation but
nevertheless exists, for all practical
purposes, as a corporate body, by virtue
of its bona fide attempt to incorporate
under existing statutory authority,
coupled with the exercise of corporate
powers.
-­‐ It exist as corporation separate and
distinct if the following conditions are
met
§ Requisites:
1. There is a valid law under which the
corporation could have been created as
a de jure corporation;
2. An attempt, in good faith, to form
corporation according to the
requirements of law (colorable
compliance);
3. A user of corporate powers; the
transaction in some ways as it were a
corporation.
4. Good faith in claiming to be doing
business as a corporation
- Existence of a de facto corporation cannot
be Collaterally attacked either by the State
or person. However, its existence may be
Directly attacked by the State in Quo
warranto proceeding.
Q: Are rights and obligation of directors etc.
of a de jure corporation same as in a de facto
corporation? Yes, the same law applies. A de
facto corporation is, in all respects, similarly
situated with a de facto corporation except that
the State may question its existence in a direct
proceeding.
  16
It follows therefore that it possess all the
powers, attributes and liabilities that attach to a
de jure corporation in relation with all persons,
except to the State.
Q: What is then the importance if they are
subject to the same right?
Distinctions
De Jure De Facto
Corporate existence Can be Directly
cannot be directly attacked in a Quo
attacked warrranto proceeding.
(Only the State can
institute)
Municipality of Malabang vs Benito
The mere fact that Balabagan was
organized at the time when the statute had not
been invalidated cannot conceivably make it a
de facto corporation, there is no other valid
statute to give color of authority to its creation.
Q: If Certificate of Registration is not ye
issued by SEC, can there be a de facto
corporation? They know that there is no
existing corporation. They can’t claim in GF that
there is a Corporation
Hall vs PICCIO
FELC only signed the Articles but SEC
did not approve its incorporation yet.
SEC has no jurisdiction. First, It did not
obtain a Certificate of Incorporation. They are
not in goof faith. Collateral Attack is applied only
with existence of errors and irregularities, but not
with a TOTAL OR SUBSTANTIAL DISREGARD
OF THE LAW. Second, Not a suit in which
corporation is a party, it is a suit among
stockholders for purposes of dissolution. Even
the existence of de jure corporation may be
terminated in a private suit for its dissolution
between stockholders, without the intervention
of the State.
CORPORATION BY ESTOPPEL
- One that is so defectively formed as not to be
either de jure or de facto corporation but which
are considered as corporations in relation only to
those who cannot deny their corporate existence
due to their agreement, admission, or conduct.
-­‐ serious defects in its incorporation or

organization.
Q: What is the Liability of Directors and
Shareholders? Is there a Shareholder
Limited Liability? No, they will be considered
as General Partners.
Q: May a corporation by estoppel exist
between and among stockholders? Yes, it
applies when persons assumes to form a
corporation and exercise corporate functions
and enter into business relations with Third
person.
Doctrine of Estoppel applies to:
Corporation –
Those who participates in holding out an
association as a corporate body and thereby
induced persons to deal with it as such are
estopped to deny the representation to their
prejudice. They cannot avoid liability on the
ground of lack of personality to be sued.
There must be a representation of corporate
existence or admission of its existence.
Third Party not between stockholders
The mere fact that one contracts or otherwise
deals with an association or its agents will not
estop that person from denying that it is a
corporation, especially if that person does not
know that it claims to be a corporation, but
rather supposes that it be doing business as an
unincorporated association.
Doctrine of corporation by estoppel applies
against a third party only when he tries to
escape liability on a contract from which he has
benefited on the irrelevant ground of defective
corporation.
Lozano vs De los Santos
Jeepney driver’s association case
Corporation by estoppel is founded on
principle of equity and is designed to prevent
injustice and unfairness. It applies when persons
assume to form a corporation and exercise
corporate functions and enter into business
relations with third persons. Where there is no
third person involved and the conflict arises only
  17
among those assuming to form a corporation,
who know that it has not been registered, there
is no corporation by estoppel.
Albert vs. University Publishing Co., Inc.
(Petitioner signed the contract stating that he is
the President of University – a non existing
corporation.
One who has induced another to act upon his
willful misrepresentation that a corporation was
duly organized and existing under the law,
cannot, thereafter set up against his victim the
principle of corporation by estoppel. Such
persons becomes liable for the contracts
entered into by such ostensible corporation.
Salvatierra vs. Garlitos
GR: A person who has contracted or dealt with
an association in such a way as to recognize its
existence as a corporate body is estopped from
denying the same in an action arising out of
such transaction or dealing
XPN1: this doctrine may not be held to be
applicable where fraud takes part in the said
transaction.
Chiang Kai Shek School vs. CA
Persons who have continuously and for
a long period misrepresented themselves as a
corporation as estopped from denying such
personality to defeat claims against it.
Asia Banking Corp. vs. Standard Products
Co., Inc
XPN 2: In the absence of fraud, a person who
has contracted or dealt with an association in
such a way as to recognize and in effect admit
its legal existence as a corporate body is
thereby estopped to deny its corporate existence
in an action leading out of or involving such
contract or dealing, unless the existence is
attacked for causes which have arisen since
making the contract or other dealing relied
on as an estoppel.
International Express Travel & Tours
Services, Inc. vs. CA
XPN2: The doctrine of estoppel applies to a third

party only when he tries to escape liability on a
contract from which he has benefited. It does not
apply when the third party is the one claiming
from the contract.
Q: Does Doctrine of Estoppel applies to
foreign Corporation? Yes. The doctrine of
estoppel applies to foreign as well as domestic
corporations. Foreign corporations doing
business in the Philippines may sue in Philippine
courts although not authorized to do business
here against the Philippine citizen who had
contracted with and been benefited by said
corporation. (Georg Grotjahn GMBH & Co. vs.
Isnani)
If a corporation by estoppel exists and enters
into a contract or transacts business with a third
party, the latter has three remedies:
1. He may file a suit against the ostensible
corporation to recover from the corporate
properties;
2. He may file the case directly against the
associates personally who held out the
association a corporation; and
3. Against both the ostensible corporation and
persons forming it, jointly and severally.
As regards the liability of the associates of
the alleged corporation, only those who actively
participated in holding out the association as a
corporation should be held personally liable.
ORGANIZATION AND
COMMENCEMENT OF BUSINESS
CORPORATE ORGANIZATION
After the issuance of the certificate of
incorporation or registration, the corporation
must formally organize and commence its
business lest it will be deemed dissolved. XPN:
Causes beyond its control
“Formal Organization” Process of structuring
the corporation to enable it to effectively pursue
the purpose for which it was organized. It
includes:
  18
1. Organizational meeting of stockholders
to elect its board of directors
2. Adoption of by-laws
3. Meeting to elect corporate officers,
adopt seal..
Organize or Organization -the election of
officers, providing for the subscription and
payment of capital stock, the adoption of by-
laws, and such other steps as are necessary to
endow the legal entity with the capacity to
transact the legitimate business for which it was
created.
-There must be substantial compliance with
requirements of law.
Commencement of Business Transaction
RULE1: Code requires that corporation to
commence the transaction of its business within
two years from the date of its incorporation,
otherwise, its corporate powers ceases and it
shall be deemed dissolved. Dissolution is
automatic.
XPN: If its failure is due to
causes beyond its control as may be
determined by SEC.
RULE 2: If the Corporation has commenced its
business but subsequently becomes inoperative
continuously for a period of 5years, the same
shall merely be a ground for SUSPENSION or
REVOCATION of franchise or certificate.

 

CHAPTER V- CORPORATE CHARTER CORPORATE ENTITY THEORY

AND ITS AMENDMENTS
As a legal entity, corporation is possessed a
personality separate and distinct from the
individual stockholders or members.

CORPORATE CHARTER The properties it possess belongs

exclusively to the corporation, such that a
“Corporate charter” – an instrument or authority personal creditor of stockholders cannot attach
from the sovereign power, bestowing rights and corporate properties to satisfy their claims.
power.
However, the remaining properties in
The corporate charter is a three-fold contract: dissolution will be distributed to stockholders
(subject to Preference)
1. Between the corporation and the state
Sulo ng Bayan, Inc. vs. Gregoria Araneta,
2. Between the corporation and the stockholders Inc.
or members
A corporation is a distinct legal entity to be
3. Between and among the stockholders or considered as separate and apart from the
members themselves individual stockholders or members who
compose it, and is not affected by the personal
- The common notion is that Charter is Similar to rights, obligations and transactions of its
Article but The charter of corporations created stockholders or members. Conversely, a
under the Corporation Code consists of the corporation has no interest in the individual
articles of incorporation and the Corporation property of its stockholders unless transferred to
Code inclusive of the by-laws adopted the corporation, even in case of a one- man
thereunder and all pertinent provisions of any corporation.
statute governing them.
A corporation has no personality to bring an
Charter Franchise action for and in behalf of its stockholders or
members for the purpose of recovering property
an instrument or Right or Privilege itself which belongs to said stockholders or members
authority from the to be and act as a in their personal capacity.
sovereign power, corporation or to do a
bestowing rights and certain act while There cannot be a cause of action without an
power charter applies to the antecedent primary legal right conferred by law
instrument by which upon a person. There can be no wrong without a
the state vests right or corresponding right.
privilege.
Caram vs CA

Petitioners were not involved in the initial

Kinds of franchises:
2. Primary franchise – the right or privilege of
being a corporation which the state
confers upon the applicant for this
faculty.
3. Secondary franchise – the powers and
privileges vested in, and to be exercised
by the corporate body as such.
stages of the organization of the airline.
Petitioners were merely among financiers whose
interest was to be invited and who were in fact
persuaded, on the strength of the project study,
to invest in the proposed airline.
As a bona fide corporation should alone be
liable for its corporate acts as duly authorized by
its directors and officers

  19
 

Rustan Pulp and Paper Mills, Inc. vs. IAC
The president and manager of a corporation
who entered into and signed a contract in his
official capacity, cannot be made liable
thereunder in his individual capacity in the
absence of stipulation to that effect due to the
personality of the corporation being separate
and distinct from the person composing it.
(Corporations are juridical person and operate
through its officers. Officers only act on behalf of
corporation and can’t be held liable for debts of
corporation)
Cruz vs Dalisay
A corporation has a personality distinct and
separate from its individual stockholders or
members. The mere fact that one is president of
a corporation does not render the property he
owns and possesses the property of the
corporation, since the president, as an
individual, and the corporation are separate
entities.
(Final judgment against corporation can’t be
held against stockholder even if they are
president or the majority stockholder)
Palay Inc. vs. Clave
Mere ownership by a single stockholder or by
another corporation of all or nearly all of the
capital stock of a corporation is not, of itself,
sufficient ground for disregarding the separate
corporate personality.
Soriano vs. CA
In a right of action against the corporation, the
officers may not be held personally liable as long
as they act within the scope of their authority.
PIERCING THE VEIL OF
CORPORATE FICTION
Piercing the veil of the corporate fiction is
resorted to only in cases where the corporation
is used or being used to defeat public
convenience, justify wrong, protect fraud, defend
  20
crime, confuse legitimate issues, or to
circumvent the law or perpetuate deception, or
an alter-ego, adjunct or business conduit for the
sole benefit of a stockholder or a group of
stockholders or another corporation.
Palacio vs Fely Transportation
Calingsan and defendant transportation is
regarded as one person. It is evident that
Calingsan’s main purpose in forming the
corporation is to evade his subsidiary civil
liability resulting from the conviction of his driver.
This is one case where the defendant
corporation should not be heard to say that it
has a personality separate and distinct from its
members when to allow it to do so would
sanction the use of the fiction of corporate entity
as a shield to further an end subversive of
injustice.
Marvel Building Corpo vs David
The fact that twenty-five certificates were
signed by the president of the corporation, for no
justifiable reason, the fact that two sets of
certificates were issued, the undisputed fact that
Maria B. Castro had made enormous profits
and, therefore, had a motive to hide them to
evade the payment of taxes, the fact that the
other subscribers had no incomes of sufficient
magnitude to justify their big subscriptions, the
fact that the subscriptions were not receipted for
and deposited by the treasurer in the name of
the corporation but were kept by Maria B. Castro
herself, the fact that the stockholders or the
directors never appeared to have ever met to
discuss the business of the corporation, the fact
that Maria B. Castro advanced big sums of
money to the corporation without any previous
arrangement or accounting, and the fact that the
books of accounts were kept as if they belonged
to Maria B. Castro alone — these facts are of
patent and potent significance. What are their
necessary implications? Maria B. Castro would
not have asked them to endorse their stock
certificates, or be keeping these in her
possession, if they were really the owners. They
never would have consented that Maria B.
Castro keep the funds without receipts or
accounting, nor that she manages the business
without their knowledge or concurrence, were
they owners of the stocks in their own rights.

Yutivo vs CA
It is an elementary and fundamental principle
of corporation law that a corporation is an entity
separate and distinct from its stockholders and
from other corporation petitions to which it may
be connected. However, "when the notion of
legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime," the
law will regard the corporation as an association
of persons, or in the case of two corporations
merge them into one.
The shareholders in SM are mere nominal
stockholders holding the shares for and in behalf
of Yutivo, so even conceding that the original
subscribers were stockholders bona fide Yutivo
was at all times in control of the majority of the
stock of SM and that the latter was a mere
subsidiary of the former.
SM is under the management and control of
Yutivo by virtue of a management contract
entered into between the two parties.
1. Controlling majority of the Board of
Directors of Yutivo is also the controlling
majority of the Board of Directors of SM.
2. Principal officers of both corporations
are identical.
3. Both corporations have a common
comptroller in the person of Simeon Sy,
who is a brother-in-law of Yutivo's
president, Yu Khe Thai.
4. Cash or funds of SM, including those of
its branches which are directly remitted
to Yutivo , and subject to withdrawal
only by Yutivo. SM’s being under
Yutivo’s control, the former’s operations
and existence became dependent upon
the latter.
5. SM is a branch or department of Yutivo
6. Arrastre charges is paid by Yutivo
7. Yutivo financed principally the business
of SM and actually extended all the
credit to the latter not only in the form of
starting capital but also in the form of
  21
credits extended for the cars and
vehicles.
CIR vs Norton & Harrison
A taxpayer may gain advantage of doing business
thru a corporation, if he pleases, but the revenue
officers in proper cases, may disregarded the separate
corporate entity where it serves but a shield for tax
evasion and treat the person who actually may take
benefits of the transactions as the person accordingly
taxable.
To allow a taxpayer to deny tax liability on the
ground that the sales were made through another and
distinct corporation when it is proved that the latter is
virtually owned by the former or that they are
practically one and the same is to sanction a
circumvention of our tax laws.
La Campana Coffee vs KKM
In the present case Tan Tong appears
to be the owner of the gaugau factory. And the
coffee factory, though an incorporated business,
is in reality owned exclusively by Tan Tong and
his family. As found by the Court of industrial
Relations, the two factories have but one office,
one management and one payroll, except after
July 17, the day the case was certified to the
Court of Industrial Relations, when the person
who was discharging the office of cashier for
both branches of the business began preparing
separate payrolls for the two. And above all, it
should not be overlooked that, as also found by
the industrial court, the laborers of the gaugau
factory and the coffee factory were
interchangeable, that is, the laborers from the
gaugau factory were sometimes transferred to
the coffee factory and vice-versa. In view of all
these, the attempt to make the two factories
appears as two separate businesses, when in
reality they are but one, is but a device to defeat
the ends of the law (the Act governing capital
and labor relations) and should not be permitted
to prevail.
Emilio Cano Enterprise vs CIR
A factor that should not be overlooked is
that Emilio and Rodolfo Cano, are here indicted,
not in their private capacity, but as president and
manager of Emilio enterprises. Having been
sued officially, their connection with the case
must be deemed to be impressed with the

representation of the corporation.
Telephone Engineering Service vs WCC
Petitioner even admitted that TESCO
and UMACOR are sister companies operating
under one single management and housed in
the same building. Although respect for the
corporate personality as such, is the general
rule, there are exceptions. In appropriate cases,
the veil of corporate fiction may be pierced as
when the same is made as a shield to confuse
the legitimate issues.
Tesco’s denial at this stage that it is the
employer of the deceased is obviously an
afterthought, a device to defeat the law and
evade its obligations. This denial also
constitutes a change of theory on appeal which
is not allowed in this jurisdiction.
Claparols vs CIR
Respondent Court's findings that indeed
the Claparols Steel and Nail Plant, which ceased
operation of June 30, 1957, was SUCCEEDED
by the Claparols Steel Corporation…It is very
clear that the latter corporation was a
continuation and successor of the first entity,
and its emergence was skillfully timed to avoid
the financial liability that already attached to its
predecessor…This "avoiding-the-liability"
scheme is very patent, considering that (1) 90%
of the subscribed shares of stocks of the
Claparols Steel Corporation (the second
corporation) was owned by respondent (herein
petitioner) Claparols himself, and (2) all the
assets of the dissolved Claparols Steel and Nail
Plant were turned over to the emerging
Claparols Steel Corporation.
It is very obvious that the second
corporation seeks the protective shield of a
corporate fiction whose veil in the present case
could, and should, be pierced as it was
deliberately and maliciously designed to evade
its financial obligation to its employees.
NAFLU vs Ople
AC Ransom vs NLRC
Concept Builders vs NLRC
  22
The SEC en banc explained the
“instrumentality rule” which the courts have
applied in disregarding the separate juridical
personality of corporations as follows:
“Where one corporation is so organized and
controlled and its affairs are conducted so that it
is, in fact, a mere instrumentality or adjunct of
the other, the fiction of the corporate entity of the
‘instrumentality’ may be disregarded. The
control necessary to invoke the rule is not
majority or even complete stock control but such
domination of finances, policies and practices
that the controlled corporation has, so to speak,
no separate mind, will or existence of its own,
and is but a conduit for its principal. It must be
kept in mind that the control must be shown to
have been exercised at the time the acts
complained of took place. Moreover, the control
and breach of duty must proximately cause the
injury or unjust loss for which the complaint is
made.”
The test in determining the
applicability of the doctrine of piercing the
veil of corporate fiction is as follows:
“1. Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its
own;
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in
contravention of plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements
prevents ‘piercing the corporate veil. ‘ in
applying the ‘instrumentality’ or ‘alter ego’
doctrine, the courts are concerned with reality
and not form, with how the corporation operated
and the individual defendant’s relationship to
that operation. “ (INSTRUMENTALITY RULE)
Mcconel vs CA

While the mere ownership of all or
nearly all of the capital stock of a corporation is
a mere business conduit of the stockholder, that
conclusion is amply justified where it is shown,
as in the case before us, that the operations of
the corporation were so merged with those of
the stockholders as to be practically
distinguishable from them. To hold the latter
liable for the corporation's obligations is not to
ignore the corporation's separate entity, but
merely to apply the established principle that
such entity can not be invoked or used for
purposes that could not have been intended by
the law that created that separate personality.
Tan Boon Bee vs Jarencio
A Corporation can only hold properties
that are necessary to its business (Doctrine of
Limited Liability).
Cease vs CA
The Board of Directors and stockholders
belong to one family the head of which Forrest
L. Cease always retained the majority stocks
and hence the control and management of its
affairs.
The accounts of the corporation and
therefore its operation, as well as that of the
family appears to be indistinguishable and
apparently joined together. As admitted by the
defendants the corporation 'never' had any
account with any banking institution or if any
account was carried in a bank on its behalf, it
was in the name of Mr. Forrest L. Cease.
WHEN PIERCING THE CORPORATE
FICTION IS NOT JUSTIFIED
Remo, JR vs. IAC
Corporate fiction cannot be disregarded in
the absence of intent to defraud in corporate
transactions.
Del Rosario vs NLRC
In this regard we find the NLRC's
decision wanting. The conclusion that Philsa
allowed its license to expire so as to evade
  23
payment of private respondent's claim is not
supported by the facts. Philsa's corporate
personality therefore remains inviolable.
Thus, at the time Philsa allowed its
license to lapse in 1985 and even at the time it
was delisted in 1986, there was yet no judgment
in favor of private respondent. An intent to evade
payment of his claims cannot therefore be
implied from the expiration of Philsa's license
and its delisting.
Neither will the organization of Philsa
International Placement and Services Corp. and
its registration with the POEA as a private
employment agency imply fraud since it was
organized and registered in 1981, several years
before private respondent filed his complaint
with the POEA in 1985.
For the separate juridical personality of a
corporation to be disregarder, the
wrongdoing must be clearly and
convincingly established.
Indophil textile mill union vs Calica
The fact that the businesses of private
respondent and Acrylic are related, that some of
the employees of the private respondent are the
same persons manning and providing for
auxilliary services to the units of Acrylic, and that
the physical plants, offices and facilities are
situated in the same compound, it is our
considered opinion that these facts are not
sufficient to justify the piercing of the corporate
veil of Acrylic.
The legal corporate entity is disregarded
only if it is sought to hold the officers and
stockholders directly liable for a corporate debt
or obligation. In the instant case, petitioner does
not seek to impose a claim against the members
of the Acrylic.
Hence, the Acrylic not being an
extension or expansion of private respondent,
the rank-and-file employees working at Acrylic
should not be recognized as part of, and/or
within the scope of the petitioner, as the
bargaining representative of private respondent.
(Atty. Ladia- La campana an Indophil has
same issues but different facts. In La campana,
2 corporations are located in the same

 

compound, owned and controlled by same if there is more liability then

company, one single payroll and employees are shareholder may be liable
interchangeable) with such liability unlike if
only assets it doesn’t
PNB vs Ritratto include liability.

Mere corporate ownership of all the stocks

of another corporation will not justify their
being treated as single entity.
AMENDMENT OF THE CORPORATE
YU vs NLRC CHARTER

There being not the least indication that
the second corporation is a dummy or
serves as a client of the first corporation, the
fiction of separate and distinct corporate
entities cannot be disregarded and brushed
aside.
The genuine nature of the sale to Twin
Ace is evidenced by the fact that Twin Ace was
only a subsequent interested buyer. At the time
when termination notices were sent to its
employees, TDI was negotiating with the First
Pacific Metro Corporation for the sale of its
assets. Only after First Pacific gave up its efforts
to acquire the assets did Twin Ace or Tanduay
Distillers come into the picture. Respondents-
employees have not presented any proof as to
communality of ownership and management to
support their contention that the two companies
are one firm or closely related. The doctrine of
piercing the veil of corporate entity applies when
the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or
defend crime or where a corporation is the mere
alter ego or business conduit of a person. To
disregard the separate juridical personality of a
corporation, the wrong-doing must be clearly
and convincingly established. It cannot be
presumed.
Steps to be followed for an effective amendment
of the articles of incorporation:
i. Resolution by at least a majority of the board
of directors or trustees. 
ii. 2. Vote or written assent of the stockholders
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of
non-stock corporation. 
iii. Submission and filing of the amendments with
the SEC as follows:
a. The original and amended
articles together shall contain all
the provisions required by law to
be set out in the articles of
incorporation. Such articles, as
amended, shall be indicated by
underscoring the change or
changes made.
b. A copy thereof, duly certified
under oath by the corporate
secretary and a majority of the
directors or trustees stating the
fact that such amendments
have been duly approved by the
required vote of the
stockholders or members.

Q: How to purchase a Corporation? c. Favorable recommendation of

the appropriate government
agency concerned in the case
1. Purchase of existing stocks-
where the corporation is under
Purchaser will merely be a
its supervision.
stockholder
Q: What is the vote required for
2. Purchase of Corporate stockholders? – Vote or Written assent of
assets stockholders representing at least 2/3 of the
Outstanding Capital Stocks.
Shares must be bought
with due diligence because

  24
 

Q: Do you include non-voting shares? – Yes,
Sec 6 of Corpo Code
A- 200k (non-voting)
B- 200k (B-E is Voting stock)
C- 200k
D- 200k
E- 200k
A is absent but gave his written assent; B
objected; B-E are present.
If there will be change in purpose, from
general contractor to realty contractor,
can there be an amendment? Yes, this is
only ordinary amendment and there is vote
and written assent of “A”, so there is 2/3
vote.
Will this apply if there is a decrease in
capital stock?
No, because that is under special
amendment. In that case, ratification in
meeting is needed. Meeting duly called for
that purpose.
Time when the amendments shall take effect:
a. Upon approval of the SEC; or
b. From the date of filing with the SEC if
not acted upon with 6 months from the
date of filing for a cause not attributable
to the corporation. (Note: not applicable
to special amendments because in Sp.
Amendment SEC must approve and
issue Articles)
Q:
Amendment filed in Jan. 31, 2014
It performed a business act on April 8,
2014
The Sec did not act upon it.
  25
Is the business act performed in April 8
an “ultra vires act”?
No, because the SEC did not act
upon it. The effectivity of the amendment
retroacts from date of filing.
Special Amendments:
a. Extension or shortening of corporate
term (Sec. 37)
b. Increase or decrease of capital stock
(Sec. 38)
c. Incurring, creating or increasing
bonded indebtedness (Sec. 38)
From these provisions, it is apparent
that a meeting of the stockholders or members
would be required unlike in Section 16 where the
“written assent” of stockholders or members
would suffice.
The action undertaken under Section
37 & 38 must be voted upon at a duly
constituted meeting. Special amendment is also
subject to the approval of the SEC and may be
rejected or disapproved on grounds provided for
by section 17.
Q: Amendment for decrease in capital stock
is filed last Jan. 31 and up to date August,
2014 SEC did not act upon it. What if the
corporation performed a business act last
April, what will be the effect?
It is an Ultra vires act because
approval of SEC is still needed.
PROVISIONS SUBJECT TO
AMENDMENT
Q: What provisions may be amended?
GR: Section 16 “Unless otherwise provided by
the Code or by special law, any provision or matter
stated in the articles of corporation is subject to
amendment.”
XPN: Matters which are fait accompli are not

subject to change.
• Name of incorporators, D/T (but
number of D/T can be
changed)
• Name of treasurer originally
elected by the subscribers or
members to act as such until
his successor is elected and
qualified
• Number of shares originally
subscribed and paid out of
the original authorized capital
stock
• Date and place of execution of
the articles of incorporation
• Signatories and
acknowledgment
• “no transfer clause”
• Sec. 96 Restrictions and
transfers of shares can be
amended but not in closed
corporation
Q: Articles Executed: Jan, 2000. Maria
mabaho incorporator and resident in tondo
and after she married Mr. Mabango. Can she
amend her name in the Articles?
No, because in the year 2000 when
she signed the Articles her real name is
Mabaho.
Change in Corporate Name
Any change upon a corporate identity
or name does not affect the rights and
obligations of the corporation. (Philippine First
Insurance Co. vs. Hartigan)
Q: May the corporation after 10 years of existence
be amended for 15 years only? Yes, if its shorten
the period. No, if extension. Why?
AMENDMENT OF THE CORPORATE
TERM §
  26
Procedure to amend the corporate term:
1. Approval by a majority vote of the board
or directors or trustees.
2. Written notice of the proposed action
and the time and place of meeting shall
be served to each stockholder or
member either by mail or by personal
service.
3. Ratification by the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members in case of non-stock
corporations.
4. In case of extension of corporate term,
the extension should be for periods not
exceeding 50 years in any single
instance, and provided that no extension
can be made earlier than 5 years prior
to the original or subsequent expiry
date(s) unless there are justifiable
reasons for an earlier extension as may
be determined by the SEC.
5. In cases of extension of corporate term,
a dissenting stockholder may exercise
his appraisal rights.
Q: The term expires today, may you go to
SEC to renew term? No, the term of the
corporation already expired.
(PNB vs CIR) No need to institute a quo
warranto proceeding because term is
already indicated in the Articles
Alhamba Cigar vs SEC
GR: A corporation ipso facto dissolved as
soon as that time expires
XPN: Unless previously amended
To renew a charter- to revive a charte
which has expired
To extend a charter- to increase the
time of his existence.
Extension may be made only before the
term provided in the corporate charter expires.

 

CHAPTER  VI-­‐  BOARD  OF   are reasonable and necessary to carry

out the corporate purpose
DIECTORS/  TRUSTEE  AND  
3. Those that are inherent or acts that go
OFFICERS   with the office (General business, they
can employ those that are necessary in
the conduct of business)
POWERS OF THE BOARD
4. Those that are apparent or those acts
which although not actually granted, the
Board of D/T has authority to
principal knowingly allows or permits it
to be done
1. Exercise corporate powers
5. Power arising out of customs, usage or
2. Conduct all business
emergency (Kalaw case)
3. Control and hold all properties of the
Ramirez vs. Orientalist Co.
corporation
(In this case, there was an informal meeting
Board of D/T is the supreme authority in
made by Fernandez the Secretary of the
matters of management of the regular and
Corporation. Directors is aware of the contract
ordinary business affairs of the corporation.
entered by Fernandez, therefore, there was
apparent authority to bind contract.)
The authority of the board of directors does
not extend to the fundamental changes in the
The fact that the power to make corporate
corporate charter.
contracts is thus vested in the board of directors
does not signify that a formal vote of the board
Equitable Principle: Stockholders may have
must always be taken before contractual liability
all the profits but shall turn over the
can be fixed upon a corporation; for the board
management of the enterprise to the Board of
can create liability, like an individual, by other
Directors.
means than by a formal expression of its will.

The power to make corporate contracts

Classification of Powers of Corporate
agents/officers (Nature of agency
created)
D/T are the chief administrators to whom the
board delegated the power to manage the
corporation. But D/T may delegate them to
individual director, officers or agents.
resides primarily in the company's board of
directors; but the board may ratify an
unauthorized contract made by an officer of the
corporation. Ratification in this case is held to
have occurred when the board, with knowledge
that the contract had been made, adopted a
resolution recognizing the existence of the
contract and directing that steps be taken to
enable the corporation to utilize its benefits.

Corporation is bound by the acts of its
corporate officers if they act within the scope of
the five classification of powers of corporate
agents
1. Those expressly conferred or those
granted by the articles of incorporation,
the by-laws or by official act of the board
of directors
2. Those that are incidental or those acts
as are naturally and ordinarily don which
Where a corporate contract has been effected
with the approval of the board of directors, a
resolution adopted at a meeting of stockholders
refusing to recognize the contract or repudiating
it is without effect.
Barreto vs. La Previsora
Contracts between a corporation and third
persons must be made by or under the authority
of its board of directors and not of it
stockholders.

  27  
  

(All corporate transactions emanates from regarding Education.

Board of Directors and not stockholders.
Stockholders opinion is merely advisory
except for certain instances- merger,
consolidation, voting of D/T, amendment of other
parts of Articles)
Lee vs. CA
In order to be eligible as a director, what is
material is the legal title to, not beneficial
ownership, of the stock as appearing on the
books of the corporation. “In his own right”

Legal right, it is sufficient that he is in the

QUALIFICATIONS AND name of the books insofar as stock ownership is
DISQUALIFICATIONS  concerned.

Qualifications: Q: Should the stockholder be the beneficial

1. Directors must own at least one (1) share of the
capital stock of the corporation. Trustees must be
members.
2. A majority of the directors or trustees must be
residents of the Philippines.
Disqualifications:
1. Conviction by final judgment of an offense
punishable by imprisonment for a period
exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the
date of election or appointment.
owner of the sale?
A (1000/s) assigns to B in trust for C. Is B
qualified to be the director even if he is no
the beneficial owner? Yes, he has legal title
What if he assigns it to his mistress? Not
valid, contrary to law.
Q: Previous PNB case, How can there be
Directors if its share is owned by PNB main
(referring to PNB in HK)?
They assign nominal share to their nominees
in trust for certain period of time.

2. Other disqualifications under applicable Detective and Protective Bureau vs. Cloribel 
special laws.
If no election is conducted or no qualified
Section 23 & 27 are merely minimum candidate is elected, the incumbent director
requirement shall continue to act as such in a hold-over
capacity until the election is held and a qualified
Section 45-additional requirement for candidate is so elected.
member of Board
Valle verde vs Africa
Q: May there be a governing board of
directors created in Phil consisting solely of TERM TENURE
foreigners? Yes, provided majority are
residents in Philippines. However, we need the time during represents the term
to consider our nationalization law which which the officer may during which the
mentions on up to what extent can claim to hold the incumbent actually
office as of right, and holds office
foreigners subscribe in the business.
fixes the interval after
Otherwise, they will violate the Anti Dummy
which the several
Act. incumbents shall
succeed one another.
GR: Foreigner can be a D/T
term is fixed by statute tenure may
XPN: Foreigners can’t sit and it does not change be shorter (or, in case
simply because the of holdover, longer)
XPN to XPN Art. 16 of the Constitution, office may have than the term for

  28  
  

become vacant, nor reasons within or Q: What is the term of office of members of
because the beyond the power of Board?
incumbent holds over the incumbent.
in office beyond the GR: They shall serve for one year until his
end of the term due to successor is qualified and duly elected. This 1
the fact that a year period is only applicable to stock
successor has not corporation because trustees has no
been elected and has determinate time.
failed to qualify.
XPN: 1. Close Corporation

3. Non-stock- 3 years

4. Non-stock educ- 5 years

Based on the above discussion, when

Section 23 of the Corporation Code declares ELECTION AND VOTING
that “the board of directors…shall hold office for
one (1) year until their successors are elected Stock Corporation Non-Stock corporation
and qualified,” we construe the provision to
mean that the term of the members of the Majority of the Majority of the members
board of directors shall be only for one year; outstanding capital stock, entitled to vote,
their term expires one year after election to the in person or by their duly
office. The holdover period – that time from the authorized representative GR: in person or
lapse of one year from a member’s election to authorized as such by
the Board and until his successor’s election and Written proxy, must be XPN by proxy, if
qualification – is not part of the director’s original present at the election. allowed in its articles,
term of office, nor is it a new term; the holdover
must be present in the
period, however, constitutes part of his
election.
tenure. Corollary, when an incumbent member
of the board of directors continues to serve in a
holdover capacity, it implies that the office has GR: Viva Voce same
a fixed term, which has expired, and the
incumbent is holding the succeeding term. XPN: On the request of
any stockholder or
After the lapse of one year from his member, the election
election as member of the VVCC Board, must be by ballot
Makalintal’s term of office is deemed to have
already expired. That he continued to serve in In the election of the GR: No Cumulative
the VVCC Board in a holdover capacity cannot members of the Board of Voting
be considered as extending his term. Directors,
With the expiration of Makalintal’s term of CUMULATIVE XPN: Unless allowed by
office, a vacancy resulted which, by the terms of VOTING is a matter of th articles of
Section 29 of the Corporation Code, must be right incorporation or by-laws
filled by the stockholders of VVCC in a regular or
special meeting called for the purpose. To a member may cast
assume – as VVCC does – that the vacancy is as many votes as
caused by Makalintal’s resignation in 1998, not there are trustees to
by the expiration of his term in 1997, is both be elected but may not
illogical and unreasonable. His resignation as a cast more than one
holdover director did not change the nature of vote for one candidate.
the vacancy; the vacancy due to the expiration
of Makalintal’s term had been created long
before his resignation.

  29
 

No delinquent stock
shall be voted.
The election may be adjourned if, for any
reason, no election is held, or if the required
quorum is not obtained. However, it may not be
adjourned indefinitely.
Candidates receiving the highest number of
votes shall be declared elected.
Cumulative Voting
Is a matter of right granted by law to
stockholders in stock corporation, to multiply his
number of shares to number of directors, the
total number is the total number that he may
cast, Provided, it shall not exceed the number of
shares he can vote.
Vote such number of shares for as
many persons as there are directors to be
elected;
Cumulate said shares and give one
candidate as many votes as the number of
directors to be elected multiplied by the number
of his shares shall equal;
Distribute them on the same principle
among as many candidates as he shall see fit.
Q: What is quorum? Majority of the outstanding
capita stock (person or proxy)
Q: Do you include non-voting shares? No,
they are not entitled to vote and its not included
in Section 6
A-200k
B-200k
C-200k
D-100k
E-100k
F- 50k
  30
G- 50k
H- 50k
I- 50k
________
total 1M
A-E are siblings and holds majority o the
stock
The reason why a cumulative voting
is right granted by law is to allow the minority to
have rightful representation in the BOD.
T or F- there is a specific quorum
requirement in election of Directors but there
is no specific voting requirement. –True (?)
What if A is absent and B-I are present, is
there a quorum? Yes, because B-I are present,
even if A did not give a notice for his proxy.
In the case above, if the shares of all
the minority will be combined (200k*5=1M) and
choose to elect one director they can now have
1 seat who will represent them.
Officers to be elected (Immediately after the
election of D/T, they must formally organize for
the election of officers)
1.President, who shall be a director
2.Treasurer, who may or may not be a director
3.Secretary, who shall be a resident and citizen
of the Philippines
4.Such other officers as may be provided for in
the by-laws.
Any two or more positions may be held
concurrently by the same person at the
same time except the president-
secretary or president-treasurer.

VALIDITY AND BINDING EFFECT OF
ACTIONS OF CORPORATE
OFFICERS

General rule: the quorum requirement for a
valid board meeting is the majority of the
number of the directors or trustees as fixed in
the articles of incorporation.
Exception: The articles of incorporation or the
by-laws may provide for a greater majority.
General rule: To have a valid corporate act, the
decision of at least a majority of the directors or
trustees present at a meeting at which there is a
quorum is required.
Exception: The election of corporate officers
requires the vote of a majority of all the
members.
(Note: An actin of the Board without a meeting
and without the required voting and quorum
requirement will not bind the corporation unless
subsequently ratified, expressly or impliedly.)
General rule: Individual directors cannot bind
the corporation by their individual acts.
Exceptions:
1. By delegation of authority;
2. Where expressly conferred; or
3. Where the officer or agent is clothed with
actual or apparent authority.
Yao Ka Sin Trading vs. CA
Although an officer or agent acts
without, or in excess of, his actual authority if he
acts within the scope of an apparent authority
with which the corporation has clothed him by
holding him out or permitting him to appear as
having such authority, the corporation is bound
thereby in favor of a person who deals with him
in good faith in reliance on such apparent
authority, as where an officer is allowed to
exercise a particular authority with respect to the
business, or a particular branch of it,
continuously and publicly, for a considerable
time.
Also, if a private corporation
intentionally or negligently clothes its officers or
agents with apparent power to perform acts for
it, the corporation will be estopped to deny that
such apparent authority is real, as to innocent
  31
third persons dealing in good faith with such
officers or agents.
This apparent authority may result
from (1) the general manner by which the
corporation holds out an officer or agent as
having power to act or, in other words, the
apparent authority with which it clothes him to
act in general, or (2) the acquiescence in his
acts of a particular nature, with actual or
constructive knowledge thereof, whether within
or without the scope of his ordinary powers.
Lopez vs. Fontecha
Any action of the board without a meeting and
without the required voting and quorum
requirement will not bind the corporation unless
subsequently ratified, expressly or impliedly.
(If not a valid or binding act by the BOT/D it
can be ratified impliedly or expressly.)
Pua Casim & Co. vs. Neumark and Co
GR: A business manager or other officer has no
implied power to borrow money in its behalf.
XPN: Where a general business manager of a
corporation is clothed with apparent authority to
borrow money and the amount borrowed does
not exceed the ordinary requirements of the
business, the authority is implied and that the
corporation is bound..
(In this case, corporation needs a fund and
that the person who contracted the loan is the
president, GM and principal stockholder, in a
sense, to be almost the whole corporation and
was clothed with apparent authority to do
everything necessary for the conduct of
business.
Yu Chuck vs. Kong Li Po
An invalid contract may be validated by the
ratification only of the board of directors; the
president has no authority to ratify such contract.
Francisco vs. GSIS
Silence coupled with acceptance of benefits
constitutes a binding ratification.
Board of liquidators vs. Kalaw

A corporate officer entrusted with the general
management and control of its business, has
implied authority to make any contract or do any
other act which is necessary or appropriate to
the conduct of the ordinary business of the
corporation.
As such officer, he may, without any special
authority from the Board of Directors, perform all
acts of an ordinary nature, which by usage or
necessity are incident to his office, and may bind
the corporation by contracts in matters arising in
the usual course of business. Where similar acts
have been approved by the directors as a matter
of general practice, custom, and policy, the
general manager may bind the company without
formal authorization of the board of directors.
Buenaseda vs. Bowen & Co., Inc.
Lack of repudiation, acquiescence and
acceptance of benefits are equivalent to an
implied ratification by the Board of Directors and
binds the corporation even without formal
resolution passed and recorded.
 Express ratification: through formal board
action.
 Implied ratification: Silence or acquiescence;
Acceptance and/or retention of benefits; or By
recognition or adoption. (Lopez realty by
Estoppel)
REMOVAL AND FILLING UP OF
VACANCIES
Requirements for removal of directors:
1. The removal should take place at a
general or special meeting duly called
for that purpose;
2. The removal must be a vote of the
stockholders representing at least 2/3 of
the outstanding capital stock or 2/3 of
the members in case of non-stock
corporations;
3. Previous notice to the stockholders or
members of the proposed removal and
the time and place of meeting either by
publication or by written notice.
The special meeting must be called
  32
by the secretary, on order of the president or
on the written demand of the stockholders
representing a majority of the outstanding
capital stock, or a majority of the members
entitled to vote. Should the secretary fail or
refuse to call the special meeting upon such
demand or fail or refuse to give notice, or if
there is no secretary, the call for the meeting
may be addressed directly to the
stockholders or members by any
stockholder or member signing the demand.
Q: May the stockholders or members be
remove without just cause? Qaulifiy, General
rule: Directors or trustees may be removed with
or without just cause.
Exception: Removal without just cause
may not be used to deprive minority
stockholders or members of the right of
representation to which they may be entitled
under Sec. 24.
PD 902-A grants the court the power and
authority to remove or oust a director and it can
do so, even motu propio by the appointment of a
management committee.
I n case of a deadlock in a close corporation,
the SEC is authorized to issue an order
cancelling, altering, or enjoining any resolution
or other act of the corporation or its board of
directors or directing or prohibiting any act of the
corporation or the board of directors thereby
effectively taking away the rights of the directors
to act as managers of the corporation.
Q: Is disqualification different from removal?
Yes
Q: May the members of the Board be
disqualified? Yes, Section 23 & 27
Q: May they be removed from offices? Sec 28
Q: Who will preside the meeting in removal?
A- D 200k/s each
E- elected minority representative
E-G 50k/s each
____

1M
May the majority call for stockholders
meeting to oust E? Qualify. No, for unjust
causes. Yes, for just causes.
Q: May the stockholders or members be
remove without just cause? Qaulifiy, Yes if
majority stockholder. No, if removal without just
cause will deprive minority stockholders or
members of the right of representation.
Vacancies
Q: What are the 3 exceptions to the rule that
remaining member of the board may be file-
up the vacancy?
1.Removal
2.Term has expired
3. Vacancy due to removal may be filled by an
election at the same meeting without further
notice.
Requirements in filling up vacancies
Any vacancy occurring in the board of
directors or trustees other than by removal by
the stockholders or members or by expiration of
term, may be filled up by
1. Vote of at least majority of the remaining
D/T, if still constituting a quorum
2. Regular or Special meeting called for
the purpose
3. A D/T elected must only fill the
Unexpired term of his predecessor-in-
interest.
Tenure is only for the unexpired
term. In the event that successor is not
qualified, the law provide that the
supposed predecessor shall hold office
until his successor is duly elected and
qualified. If his successor is not
qualified he continues to cat as a
director in a hold-over capacity.
(Detective vs Cloribel)
Any D/T to be filled by reason of an increase
in the number od D/T shall be filled only by
  33
1. Election of stockholders or members
2. Regular or special meeting duly called
for that purpose
3. Or in the same meeting authorizing the
increase of D/T if so stated in the notice of
the meeting.
Q: When is vacancy filled up? At the same
meeting without further notice or at any
subsequent general or special meeting after
proper notice?
Q: Up to when can they fill-up?
Q Who will fill-up the vacancy by removal?
Vote of majority of stockholders note remaining
Q: If A, B, C, D calls for a meeting and holds
to fill-up the vacancy by removal of F, may
they do so? Yes, because they are not acting
as board but as stockholders.
There are 2 meetings involved
1. Board of D/T meeting
2. Stockholders meeting
Q: Can the Board of D/T fill-up he vacancy in
case of increase in D/T? No, only stockholders
or members.
Q: If there is an increase in D/T, is there a
need for notice?
Yes, same meeting or subsequent meeting.
(compare to the other filling up)
Q: A, B, C, D, E, F are elected a yea ago and
no meeting was called so they hold office as
a Hold over, subsequently F resigned. May
the Board of D elect for the vacancy?
No, only stockholders, sec 29. Why? The
term of office already expired and only holds
office in a hold over capacity.
Q: If the Director is removed from office
when will the vacancy be filled up?
Same meeting or subsequent meeting (is
there notice req)

Section 26- Report of Election of D/T and
officers
1. The secretary, or any other officer of the
corporation shall Submit in SEC a report
within 30 days after the election
2. Submit the names, nationalities and
residences of D/T or officers elected
3. Should a D/T or officers die, resign or in
any manner cease to hold office, his
heirs in case of his death, the secretary,
or any other officer of the corporation, or
the D/T or officer himself, shall
immediately report such fact to the SEC.
Objective of section 26 is to give public
information.
4. § Any change in the
constitution of the board of directors or
trustees must be reported to the SEC.
COMPENSATION OF DIRECTORS
General rule: Directors shall not receive any
compensation, as such directors, except for
reasonable per diems.
Exceptions:
1.When there is a provision in the by-laws fixing
their compensation;
2.When the stockholders, by a majority vote the
outstanding capital stock grant the same; and
3.If the director renders extra-ordinary or
unusual service.
In no case shall the total yearly
compensation of directors, as such directors,
exceed 10% of the net income before income
tax of the corporation during the preceding year.
(it may exceed 10% if not for directors, example
if director is acting as a chairman.
Directors are not entitled to
compensation because their interest in the
corporation is presumed to be the motive for
  34
executing duties of the office.
Whether or not the court can look into
the reasonableness of compensation of directors
and officers? Gr: Court will not review the
fairness of official salaries XPN: wrongdoing,
oppression, or possible abuse of fiduciary
position.
If there is wastage of corporate assets, the
courts may be justified to look into the
reasonableness and fairness of the
compensation despite the fact that the grant
thereof is authorized pursuant to the by-laws
and by the vote of the majority of the holders of
the outstanding capital stock of the corporation.
Central Cooperative Exchange vs. Tibe, Jr.
The board may not grant compensation upon
itself without authorization of the by-laws or in
contravention of the by-laws.
Western Institute of Technology, Inc. vs.
Salas
Members of the board of directors may
receive compensation, in addition to reasonable
per diems, when they render services to the
corporation in a capacity other than as directors
or trustees
Govt. vs. El Hogar Filipino
The fact that the amount paid as
compensation to directors under a by-law
provision has increased beyond what would
probably be necessary to secure adequate
service from them is a matter that cannot be
corrected by the court. The remedy is in the
hands of the stockholders who have the power
at any lawful meeting to change the rule.
(Judicial intervention is not proper, corporation
are artificial being and act through its officers-
Corporate entity doctrine)
Rogers vs Dy
Bonuses given is approved by stockholders.
Much weight is given to the decisions of
stockholders. However, the amount reach up to
83 Million and causes wastage in corporate
assets. The reasonableness and fairness can
then be questioned by court even if included in
by-laws.

LIABILITY OF CORPORATE OFFICERS
GR: Corporate directors, officers or agents are
not generally liable for obligations incurred by
the corporation through their acts if they did so
within the scope of authority and in good faith.
XPN: Personal liability of a corporate director,
trustee or officer along with the corporation may
validly attach, as a rule, only when:
1.He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith, gross
negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2.He consents to the issuance of watered stocks
or who, having knowledge thereof, does not
forthwith file with the corporate secretary his
written objection thereto;
3.He agrees to hold himself personally and
solidarily liable with the corporation; or
4.He is made, by specific provision of law, to
personally answer for his corporate action.
(Tramat Mercantile, Inc. vs. CA)
Sections 31, 32, 34, 65, 74
and also 97, where a stockholder, to the extent
that he takes an active part in the management
and operation of the business affairs of a close
corporation, is liable for corporate torts.
Where a check is drawn by a
corporation, company or entity, the person or
persons who actually signed the check in behalf
of such drawer shall be liable under this Act.
(Sec. 1, BP 22)
In labor cases, corporate directors
and officers are solidarily liable with the
corporation for the termination of employment of
corporate employees done with malice or in bad
faith. (not based in labor code but due to bad
faith) (Uichico vs. NLRC)
THREE-FOLD DUTY OF DIRECTORS
Three-fold duty of directors: 1. Obedience 2.
Diligence 3. Loyalty
Solidarily liability for all damages
suffered by the corporation, its stockholders or
  35
members or other persons shall be imposed
upon directors or trustees:
1. Who willfully and knowingly vote for or
assent to patently unlawful acts of the
corporation; (violation of obedience)
2. Who are guilty of gross negligence or
bad faith in directing the affairs of the
corporation; (violation of diligence).
Directors are required to manage the
corporate affairs with reasonable care
and prudence. This is because the
liability of directors is not limited to willful
breach of trust or excess of power, but
extends also to negligence.
3. Who acquire any personal property or
pecuniary interest in conflict with their
duty as such directors or trustees.
(violation of loyalty)
Business judgment rule – directors
are not liable for losses due to imprudence or
honest error of judgment. Questions of policy
and management are left solely to the honest
decision of the board of directors and the courts
are without authority to substitute its judgment
as against the former.
Montelibano vs. Bacolod Murcia Milling, Co.,
Inc.
Resolutions passed in good faith by
the board of directors are valid and binding, and
whether or not it will cause losses or decrease in
profits are not subject to the review of the court.
General rule: A director is not liable for
misconduct of co-directors or other officers.
Exceptions:
1. He connives or participates in it; or
2. He is negligent in not discovering or acting to
prevent it.
Q: what is duty of loyalty?
D/T/O of private corporation, while not
regarded as trustee are considered in equity as
bearing a “fiduciary relation” to the corporation
and its stockholders. Thus as fiduciaries, they
are expected and are obliged to act with utmost

 

candor and fair dealing or the interest of the any interest adverse to the corporation, he is
corporation and without selfish motives. the corporation in bound to account for
respect to any matter such profits unless his
The duty of loyalty is violated in the reposed in him in act is ratified by the
following instances: confidence as to which stockholders owning or
equity imposes a representing at least
i. When a director or trustee acquires any disability upon him to 2/3 of the outstanding
personal or pecuniary interest in deal in his own behalf capital stock.
conflict with his duty as such director or is not subject to
trustee; ratification by the
stockholders.
ii. When he attempts to acquire or
acquires, in violation of his duty, any If the violation of If the acquisition is
interest adverse to the corporation in loyalty consist of merely that of a
respect to any matter which has been matter which has been business opportunity
reposed in him in confidence, as to reposed in him in which has not been
which equity imposes a disability upon confidence the same is reposed in him in
him to deal in his own behalf; and not subject to confidence, the ssme
ratification may be subject to
iii. When he, by virtue of his office, ratification of
acquires for himself a business stockhlders
opportunity which should belong to the
corporation, thereby obtaining profit to
the prejudice of such corporation.
(maybe ratified)

Forbidden Profits- Section 31 and 34 of the
Code makes reference to forbidden profits.
Forbidden in the sense that directors and
officers are fiduciary representatives of the
corporation and a such they are not allowed to
obtain any personal profit, commission, bonus or
gain for their official actions. They may also refer
to those arising from transactions of directors
with third persons which may involve
misappropriation of corporate opportunities and
disloyal diverting of business.
Realty Corporation and A is the President. A
BLDA company owned by Z is engage in
PDAF. Z approach A to sold his property for
only 100M because they are friends. A
bought the property. Can this be ratified?
This is forbidden profits and violates the
corporate opportunity doctrine. This may be
ratified (s. 34), he merely secure a business
opportunity rightfully belonging to the
corporation.

Corporate opportunity doctrine – It places Q: Z writes a letter to the corporation

a director of a corporation in the position of a
fiduciary and prohibits him from seizing a
business opportunity and/or developing it at the
expense and with the facilities of the
corporation. He cannot appropriate to himself a
business opportunity which in fairness should
belong to the corporation.
Section 31 Section 34
coursed through the President and offered
the said property for sale for 100M. President
calls for directors meeting. They agreed to
purchase it and make a loan. Then E went to
Z and offered him to buy to property for
105M cash. Can this be ratified?
Sec. 31 p (2) They’ve learned that such
property is for sale in the meeting. Since he
already have a knowledge about the transaction
this is a matter reposed in him in confidence.

where a director is where the director Strong vs. Repide

liable to account for acquires for himself a
profits if he attempts to business opportunity Directors are liable for fraud committed by
acquire or acquires which should belong to concealment of information as to the state and

  36
 

probable result of the negotiations for the sale of
corporate assets which may affect the price of
the corporation’s stock.
(Buyer concealed his identity in order to
purchase the property in a lower value)
SELF-DEALING DIRECTORS (loyalty)
One who deals or transacts business with is
own corporation. Such dealings are voidable.
GR: A contract of the corporation with one or
more of its directors or trustees or officers is
voidable, at the option of such corporation,
XPN: Unless all of the following conditions are
present: (Valid and Enforceable))
1. That the presence of such director or
trustee in the board meeting in which
the contract was approved was not
necessary to constitute a quorum for
such meeting;
2. That the vote of such director or
trustee was not necessary for the
approval of the contract;
3. That the contract is fair and
reasonable under the circumstances;
and
4. That in case of an officer, the contract
has been previously authorized by the
board of directors.
XPN to XPN* Where any of the first two
conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or
trustee, such contract may be ratified, provided:
1. The contract is ratified by the vote of
the stockholders representing at least
two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds
(2/3) of the members
2. Such ratification is made at a meeting
called for that purpose;
3. Full disclosure of the adverse interest
of the directors or trustees involved is
made; and
  37
4. The contract is fair and reasonable
under the circumstances.
Q: Assume in the Previous example that
BCDA is now owned by corporation. “A”
offers to acquire BCDA and they agreed to
sell it. What is this situation called? SELF
DEALING DIRECTORS
Q: In the same situation, Corporation is
selling the BCDA to two entities who went to
acquire it for 105M. 50% DP and 50% 5 years
to pay. “A” wants to acquire the same
property but in cash. Board want to sell it to
A. what is the status of the contract? Valid
because following conditions in the exception is
present. No need for ratification because all are
present.
Prime White Cement Corp. vs. IAC
In the absence of express delegation,
a contract entered into by the president, on
behalf of the corporation, may bind the
corporation if the board should ratify the same
expressly or impliedly. Furthermore, the
president as such may bind the corporation by a
contract in the ordinary course of business,
provided the same is reasonable under the
circumstances. These rules only apply where
the president or other officer, purportedly acting
for the corporation, is dealing with a third
person, i.e., person outside the corporation. It
does not apply to self-dealing directors or
officers.
Mead vs. Mc Cullough
A director or officer may in good faith
and for an adequate consideration purchase
from a majority of the directors or stockholders
the property even of an insolvent corporation.
INTERLOCKING DIRECTORS
A director in one corporation who deals
or transact business with another corporation of
which he is also a director.
This may involve a violation of loyalty,
since he occupies the position of a director in
two corporations dealing with each other. There
may be a divided allegiance.

 

Thus, the prevailing view is these construction corporation and “A” owns 22%
contracts are not voidable merely by reason of stock in Y corporation. Is there an
conflicting duties or interest as to corporations interlocking director?
represented, even when a majority or all of the
directors are common to both corporations. It is Yes, A is an interlocking director. Contract is
recognized that such a contract will be upheld if valid because it is both substantial stock.
there is no bad faith or unfairness or collusion.
Without such a rule, contracts between a What if 18% and 20%?
corporation and its subsidiaries would usually be
impossible. X company Y company

Sec. 33. Contracts between corporations with 20% 22% Voidable

interlocking directors. - Except in cases of fraud,
and provided the contract is fair and reasonable 18% 205 Valid
under the circumstances, a contract between
two or more corporations having interlocking 22% 25% Valid
directors shall not be invalidated on that ground
alone: Provided, That if the interest of the
Substantial Substantial Valid
interlocking director in one corporation is
substantial and his interest in the other
corporation or corporations is merely nominal, 20% 20% Valid
he shall be subject to the provisions of the
preceding section insofar as the latter Nominal Nominal Valid
corporation or corporations are concerned.
 
Stockholdings exceeding twenty (20%)
percent of the outstanding capital stock shall be
considered substantial for purposes of
interlocking directors.

GR: Valid
XPN: Void if there if fraud, unfair
unreasonable
XPN to XPN: If however, the interest of the
interlocking director in one corporation is
substantial (more than 20%) and merely nominal
in the other, the contract becomes voidable.
In effect, a director who owns a substantial
interest in one corporation dealing with another
where he has a nominal interest is a regarded
as a self-dealing director in so far as the latter
corporation is concerned.
Q: Is there an instance that it is merely
voidable? If interlocking director has substantial
and nominal share it will be under sec 31 which
is generally voidable.
DERIVATIVE SUIT
and
Suits that stockholders may bring
against erring directors or officers:
1. Individual or personal suit – one
brought by the shareholders for direct
injury to his rights, such as denial of his
right to inspect corporate books and
records or pre-emptive right;
2. Representative of class suit - ; and
3. Derivative suit – an action based on
injury to the corporation – to enforce a
corporate right – wherein the
corporation is joined as a necessary
party, and recovery is in favor of the
corporation.

Q: A stockholder in a corporation who

was not such at the time of the transactions
“A” president of XCO realty owns 20% stock. complained of, or whose shares had not
“A” entered into a contract with “Y” devolved upon him since by operation of law,

  38
 

can not maintain a derivative suit unless such
transactions continue and are injurious to the
stockholder, or affect him specifically in some
other way. (Pascual vs. Orozco, et al.)
When the board is under the
complete control of the principal defendants in
the case, demand upon such board to institute
action and prosecute the same is not required.
The law does not require litigants to do useless
acts. (Everett vs. Asia Banking Corporation)
The corporation should be made a
party, in order to make the court‟s judgment
binding upon it, and thus bar future relitigation of
the issue. On what side the corporation appears
is not important. (Republic Bank vs. Cuaderno)
The minority shareholder who is suing
for and in behalf of the corporation must allege
in his complaint before the proper forum that he
is suing on a derivative cause of action on behalf
of the corporation and all other shareholders
similarly situated who wish to join. This is
necessary to vest jurisdiction upon the tribunal in
line with the rule that it is the allegations in the
complaint that vest jurisdiction upon the court or
quasi-judicial body concerned over the subject
matter and nature of the action. (Western
Institute of Technology, Inc. vs. Salas)
The bona fide ownership by a
stockholder of stock in his own right suffices to
invest him with standing to bring a derivative
action for the benefit of the corporation. The
number of his shares is immaterial since he is
not suing in his own behalf, or for the protection
or vindication of his own particular right, or the
redress of a wrong committed against him,
individually, but in behalf and for the benefit of
the corporation. (SMC vs. Khan)
Where corporate directors are guilty
of breach of trust – not mere error of judgment
or abuse of discretion – and intra-corporate
remedy is futile or useless, a stockholder may
institute a suit in behalf of himself and other
stockholders and for the benefit of the
corporation, to bring about a redress of the
wrong inflicted directly upon the corporation and
indirectly upon the stockholders. (Reyes vs. Tan,
et al.)
The stockholders in a derivate suit cannot
allege or vindicate their own individual interests
or prejudice. (Gamboa vs. Victoriano, et al.)
  39
In a derivative suit, the injury complained of is
primarily to the corporation, so that the suit for
the damages claimed should be by the
corporation rather than by the stockholders. The
stockholders may not directly claim those
damages for themselves for that would result in
the appropriation by, and the distribution among
them of part of the corporate assets before the
dissolution of the corporation and the liquidation
of its debts and liabilities. (Evangelista vs.
Santos)
Rules, requirements and procedure so that a
derivative suit may proceed or prosper:
1. The party bringing the action
should be a stockholder as of the time the act or
transaction complained of took place, or whose
shares have evolved upon him since by
operation of law. This rule, however, does not
apply if such act or transaction continues and is
injurious to the stockholder or affects him
specifically in some other way. The number of
shares is immaterial.
2. He has tried to exhaust intra-
corporate remedies, i.e. he has made a demand
on the board of directors for the appropriate
relief but the latter had failed or refused to heed
his plea. Demand, however, is not required if the
company is under the complete control of the
directors who are the very ones to be sued (or
where it becomes obvious that a demand upon
them would have been futile and useless) since
the law does not require a litigant to perform
useless acts.
3. The stockholder bringing the
suit must allege in his complaint that he is suing
on a derivative cause of action on behalf of the
corporation and all other stockholders similarly
situated, otherwise, the case is dismissible.
4. The corporation should be made
a party, either as party-plaintiff or defendant, in
order to make the court‟s judgment binding upon
it.
5. Any benefit or damages
recovered shall pertain to the corporation.
EXECUTIVE COMMITTEE
An executive committee may be created when
authorized by the by-laws.

 

General rule: The executive committee may CHAPTER VII- CORPORATE

act, by majority vote of all its members, on such
specific matters within the competence of the POWERS AND AUTHORITY
board, as may be delegated to it in the by-laws
or on a majority vote of the board.

Exceptions: Classification of corporate authority:

1. Approval of any action for which 1. Those expressly granted or

shareholders' approval is also required; authorized by law inclusive of the
corporate charter or articles of
2. The filling of vacancies in the board; incorporation

3. The amendment or repeal of by-laws or 2. Those impliedly granted as are

the adoption of new by-laws; essential or reasonably necessary to the
carrying out of the express powers
4. The amendment or repeal of any
resolution of the board which by its 3. Those that are incidental to its
express terms is not so amendable or existence.
repealable; and
Powers expressly granted
5. A distribution of cash dividends to the
shareholders. 1. Power to sue and be sued (Sec. 36)

2. Power of succession (Sec. 36)

3. Power to adopt and use a corporate

seal (Sec. 36)

4. Power to amend its articles of

incorporation (Sec. 36)

5. Power to adopt, amend or repeal by-

laws (Sec. 36)

6. Power to issue or sell stocks/ to admit

members (Sec. 36)

7. Power to acquire or alienate real or

personal property (Sec. 36)

8. Power to enter into merger or

consolidation (Sec. 36)

9. Power to make reasonable donations

(Sec. 36)

10. Power to establish pension, retirement,

and other plans (Sec. 36)

11. Power to extend or shorten corporate

term (Sec. 37)

12. Power to increase or decrease capital

stock (Sec. 38)

  40
 

13. Power to incur, create or increase
bonded indebtedness (Sec. 38)
14. Power to deny pre-emptive right (Sec.
39)
15. Power to sell or dispose corporate
assets (Sec. 40)
16. Power to acquire own shares (Sec. 41)
17. Power to invest corporate funds in
another corporation or business or for
any other purpose (Sec. 42)
18. Power to declare dividends (Sec. 43)
19. Power to enter into management
contract (Sec. 44)
POWER TO SUE AND BE SUED
A juridical entity is separate and distinct
from the persons compromising it.
The residence of the corporation is the place
of its principal office as may be indicated in its
articles of incorporation and may, therefore, be
sued only at that place. (CRS vs. Antillon)
Service of summons upon a corporation must
be made upon:
1. President
2. Managing partner,
3. General manager,
4. Corporate secretary,
5. treasurer, or
6. In-house counsel (Sec 11, Rule 14)
Strict compliance with the mode of
service is necessary to confer jurisdiction of
the court over a corporation. The officer
upon whom service is made must be one
who is named in the statute; otherwise the
service is insufficient. (Delta Motor Sales
Corp. vs. Mangosing)
Under the new rules, service of summons
upon an agent of the corporation is no longer
  41
authorized. (E.B. Villarosa & Partner Co., LTD.
vs. Benito)
When you make a special appearance in
court on behalf of the corporation it does not
mean that you are the in-house counsel
because he was only employed for that specific
purpose.
This rule on Summons applies only if
corporation is sued by third party because if intra
corporate case, another law. (See appendix)
1.
2.
3. Corporation and State- if stockholder is
denied to inspect accounts, what will then apply
is summons to statutory officers or officers
indicated in by-laws or their respective
secretaries. Therefore, it can only be given to
director (statutory officer)
POWER OF SUCCESSION
Right of succession – a corporation
persists to exist despite the death, incapacity,
civil interdiction or withdrawal of the
stockholders or members thereof because it has
a personality separate and distinct from officers
or stockholders.
POWER TO ADOPT AND USE COMMON
SEAL
Statutes empowering corporations to
make and own a seal are not mandatory but
merely permissive. Because a corporate seal
performs no further or greater function than to
impart a prima facie evidence of the due
execution by the corporation of a written
document or obligation.
Q: When is putting seal mandatory?
POWER TO AMEND ARTICLES OF
INCORPORATION
General rule: Amendment of the articles of
incorporation is a matter of right (Note:
procedure differs for special amendments)

Exception: Corporations created by special law.
However, Congress may repeal or amend it
charter.
POWER TO ADOPT BY-LAWS.
A corporation, once formed is required
to adopt its by-laws, not contrary to law, morals
or public policy, within one month from receipt of
official notice of the issuance of certificate of
incorporation or registration.
POWER TO ISSUE OR SELL STOCKS
AND ADMIT MEMBERS
The power of a corporation to issue or
sell stock is an inherent right except only as it
may be regulated by law or by the articles of
incorporation. (e.g Where it sells or issues
stocks of other corporation, Securities
Regulation Code).
As to admission and termination of
members, it is a prerogative granted by law to
non-stock corporations and the manner,
requirements or procedure for such admission or
termination may be contained in its articles of
incorporation or by-laws.
POWER TO ACQUIRE/ALIENATE
PROPERTY
GR: A corporation is expressly empowered by
law to acquire or alienate real or personal
properties
XPN: 1. Section 36- it must be for the lawful
transaction of business as may be reasonably
and necessarily require.
5. Section, Article XII of Constitution-
Private corporations may not hold alienable
lands of public domain (except agricultural
lands) but only by lease for a period not
exceeding 25 years renewable for nmt 25
years, and not to exceed 1000 H
XPN: SC: A corporation may register
alienable public lands if it has been held by
it, personally or through his predecessor-in-
interest, openly, continuously and publicly
within the prescribed period of 30 years
under the Public Land Law, since it is
converted into private property by mere
lapse of such period.
  42
Real or personal properties must be acquired,
held or conveyed as the transaction of the lawful
business of the corporation may reasonably and
necessarily require. Furthermore, it shall be
subject to the limitations imposed by law and the
Constitution.
Luneta Motors Co. vs. A.D. Santos, Inc.
A corporation cannot undertake acquisition of
property which would have no purpose and
would have no necessary connection with its
legitimate business.
Govt. vs. El Hogar (?)
A corporation whose business may properly
conducted in a populous center may acquire an
appropriate lot and construct thereon an edifice
with facilities in excess of its own immediate
requirements.
Dir. of Lands vs. CA
A corporation may register alienable public
lands if it has been held by it, personally or
through its predecessor-in-interest, openly,
continuously and publicly within the prescribed
statutory period of 30 years under the Public
Land Law, as amended, since it is converted
into private property by mere lapse of
completion of said period.
( in the previous cases, printing machine is
acquired by a drugstore, court said that it is not
within the lawful business of corporation)
Q: RCBC Towers is owned by Rural Bank, it
leases a part of the building to several
foreign embassy. Can the bank lease the
building to other companies? This is an Ultra
vires act but can be ratified or that is stated as
their additional purpose.
POWER TO ENTER INTO MERGER OR
CONSOLIDATION
POWER TO MAKE REASONABLE
DONATIONS
GR: A pure gifts of funds or property by a
corporation not created for charitable purpose is
not authorized and would constitute violation of
rights of stockholders.

XPN: Unless empowered by statute. Because
profit is owned by the stockholders and not
corporation
XPN to XPN: Corporation can donate if it will
benefit the them, such as for promotional.
Limitations imposed upon corporate donations:
1. The donation must be reasonable;
2. It must be for public welfare, or for
hospital, charitable, scientific, cultural or
similar purpose; and
3. It shall not be in aid of any political party
or candidate, or for purpose of partisan
political activity.
Q: Is sports and fraternal included in no. 2?
No
In practice, they still give donations they just
indicate it as miscellaneous expense.
POWER TO ESTABLISH PENSION,
RETIREMENT AND OTHER PLANS
This is allowed because it will promote
the convenience, welfare and benefit of the
employees or officers.
Republic vs. Acoje Mining Co., Inc.
While as a rule an ultra vires act is one
committed outside the object for which a
corporation is created as defined by law of its
organization and therefore beyond the powers
conferred upon it by law, there are however
certain corporate acts that may be performed
outside of the scope of the powers expressly
conferred if they are necessary to promote the
interest or welfare of the corporation. This is
vital for the improvement of its employees.
POWER TO EXERCISE SUCH OTHER
POWERS ESSENTIAL OR NECESSARY
TO CARRY OUT ITS PURPOSES
(IMPLIED POWERS)
Powers incidental are those that attach
to the corporation from the date of its
incorporation which may likewise be inherent to
  43
corporate existence.
These powers which are impliedly
conferred are
1. Privilege of having the right of
succession
2. Capacity to sue and be sued
3. Capacity to purchase properties
4. Adopt Corporate seal
5. Authority to adopt and amned by-
laws.
As to powers “essential or necessary”
no uniform rule. Each case must depend upon
its particular facts and circumstances.
The test to be applied is whether the act
in question is in direct and immediate
furtherance of the corporation’s business, fairly
incident to the express powers and reasonably
necessary to their existence.
Classification of implied powers:
1. Acts in the usual course of business
2. Acts to protect debts owing to the corporation
3. Embarking on a different business
4. Acts in part or wholly to protect or aid
employees
5. Acts to increase business
(A manuf company sold its plant but the
proceeds of sale is use to build a more
complex facility, this is usual. But not if
the new building is sold again, this must
result to amendment of Articles.)
A corporation has authority to do what will
legitimately tend to effectuate the express
purposes and objects; that it may ordinarily do
all things that are convenient, suitable or
necessary to enable it to fully perform the
undertaking designated in its charter, and for
which it is organized.
Examples:

Teresa Electric Power Co., Inc. vs. PSC
Operation and maintenance of an
electric plant for a cement factory.
The articles provides that the
corporation may secure form government
franchises that are necessary or related to
business.
NPC vs. Vera
NPC‟s undertaking of stevedoring
services for its power plant.
The charter creating NPC provided
that they may exercise those things that may
reasonably necessary to carry out the business.
Powers vs. Marshall
International School‟s imposition of a
development fee for expansion and
maintenance.
By-laws provides that school has the
right to exercise such powers and do such
things as may be lawfully exercise or perform by
the corporation. The law authorizes the school to
add fees provided with approval of Secretary of
DepEd.
POWER TO EXTEND/SHORTEN
CORPORATE TERM
Section 37 not 16.
Requirements and procedure:
1. Approval by the majority vote of the
board of directors or trustees;
2. Ratification by the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members in case of non-stock
corporations;
3. The ratification must be at a meeting
duly called for that purpose;
4. Prior written notice of the proposal to
extend or shorten the corporate term
must be made stating the time and
place of meeting addressed to each
  44
stockholder or member at his place of
residence, either by mail or personal
service;
5. In case of extension, the same cannot
be made ealier than five (5) years prior
to the original or subsequent expiry date
unless there are justifiable reasons for
an earlier extension;
6. In case of extension, the same must
be made during the lifetime of the
corporation;
7. Any dissenting stockholder may
exercise his appraisal right;
8. Submission of the amended articles
with the SEC; and
9. Approval thereof by the SEC.
Q: A corporation registered 10years ago and
with term of 50 years, can they amend it
now? It depends. Yes, if shorten the term. No, if
it is extended unless there is justifiable reason.
POWER TO INCREASE/DECREASE
CAPITAL; INCUR, CREATE OR
INCREASE BONDED INDEBTEDNESS
Requirements and procedure:
1. Approval by the majority vote of the
board of directors or trustees;
2. Ratification by the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members in case of non-stock
corporations;
3. The ratification must be at a meeting
duly called for that purpose;
4. Prior written notice of the proposed
action must be made stating the time
and place of meeting addressed to each
stockholder or member at his place of
residence, either by mail or personal
service;
5. A certificate in duplicate must be signed
by a majority of the directors of the
corporation, countersigned by the

 

chairman and the secretary of the 2. Increasing the number of existing

stockholder‟s meeting, setting forth shares without increasing the par value
thereof; and
(1) That the requirements of this section
have been complied with; 3. Increasing the number of existing
(2) The amount of the increase or shares and at the same time increasing
diminution of the capital stock; the par value of the shares.
(3) If an increase of the capital stock,
the amount of capital stock or number of shares PV
of no-par stock thereof actually subscribed, the
names, nationalities and residences of the ACS 1M 1M/s 1:00
persons subscribing, the amount of capital stock Increase 2M 1M/s 2:00
or number of no-par stock subscribed by each, 2m/s 1:00
and the amount paid by each on his subscription
1.5m/s 1.5:00
in cash or property, or the amount of capital
stock or number of shares of no-par stock
allotted to each stock-holder if such increase is
for the purpose of making effective stock Q: May a stock corporation convert itself
dividend therefor authorized; to a non-stock corporation, vice versa?
(4) Any bonded indebtedness to be
incurred, created or increased; Stock to Non stock, yes, they can assign
(5) The actual indebtedness of the the proprietary right to another person
corporation on the day of the meeting;
(6) The amount of stock represented at Non stock to stock, No, dissolve the
the meeting; and corporation first because there are certain
(7) The vote authorizing the increase or rights that’s for stock corporation only.
diminution of the capital stock, or the
incurring, creating or increasing of any ?In increasing capital stock there is no
bonded indebtedness. limitation but must first

6. In case of increase in capital stock, 25% 1. pay liabilities

of such increased capital must be
subscribed and that at least 25% of the 2. acquisition of business
amount subscribed must be paid either
in cash or property; 3.

7. In case of decrease in capital stock, the

same must not prejudice the right of the
creditors; Existence of unissued or
unsubscribed share out of the original capital
8. Filing of the certificate of increase and stock will not prohibit the increase of capital
amended articles with the SEC; and stock.

9. Approval thereof by the SEC. Reasons for decreasing capital stock:

(Note: The SEC requires the submission or filing 1. To reduce or wipe out existing deficit
of the amended articles in any case where there where no creditors would thereby be
are changers thereto) affected;

3cways of increasing the capital stock: 2. When capital is more than what is
(decreasing also) necessary to procreate the business or
reduction of capital surplus; or
1. Increasing the par value of the existing
number of shared without increasing the 3. To write down the value of its fixed
number of shares; assets to reflect the present actual value
in case where there is a decline in the

  45
 

value of the fixed assets of the
corporation.
There must be a valid reason for
decreasing the capital structure. The
reasons above are not exclusive.
Examples of decrease in capital
Trading company who wants to
engage in grocery business has a capital of
2M but their business permit was denied
because the Mayor owns all the grocery
stores in the area. Instead, they just build a
sari-sari store. So what they will do is to
reduce capital.
A manufacturing company has a
capital of 2M, it appears that some
ingredients are harmful, so instead of selling
them they just burn it. The corporation now
has a deficit of 5M, they can just decrease
the capital so that third person will not be
affected
A taxi corporation bought a taxi
amounting to 1M each. Due to wear and tear
its resale value only amounts to 500k and
these are the only assets of corporation. It
can decrease its capital to show that they
are still a good corporation and they will not
affect third parties.
Philippine Trust Company vs. Rivera
A corporation has no power to release an
original subscriber to its capital stock from the
obligation of paying for his shares, without a
valuable consideration for such release; and as
against creditors a reduction of the capital stock
can take place only in the manner and under the
conditions prescribed by law. Moreover, strict
compliance with the statutory regulations is
necessary.
Reduction is not valid because no approval of
SEC. Even if filed in SEC it will still not be
approved because it runs counter with Trust
Fund Doctrine.
Trust Fund Doctrine- Subscriptions to the
capital of a corporation constitute a fund to
which creditors have a right to look upon for
satisfaction of their claims and that the assignee
in insolvency can maintain an action upon any
  46
unpaid stock subscription in order to realize
assets for the payment of its debts.
Madrigal & Co. vs. Zamora
A reduction of capital stock may not be used as
a subterfuge, a deception as it were, to
camouflage the fact that a corporation has been
making profits to obviate a just sharing to labor.
A corporation which has the power to borrow
or raise money, to contract for labor or services,
or otherwise contract a debt has the implied
power to issue bonds in payment or as a
security provided it violates no prohibition or
restriction in its charter or any other statutes.
Corporate bonds must be registered and
approved by the SEC before they are issued.
The procedure and requirements in S 38 is the
same as in increasing or decreasing capital
stock except that the certificate does not have to
state the matters required in subsection 2 & 3
thereof.
Bond- obligation of a state, its subdivision or
a private corporation, represented by a
certificate or an instrument for the principal and
by detachable coupons for the payment of
interests. It is one where an obligor obliges
himself to pay a certain sum of money to
another at a day named.
POWER TO DENY PRE-EMPTIVE RIGHTS
Pre-emptive right – is a right granted by law
to all existing stockholders of a stock corporation
to subscribe to all issues or disposition of shares
of any class, in proportion to their respective
stockholdings, subject only to the limitations
imposed under Sec. 39.
The basis for the grant of this right is the
preservation, unimpaired and undiluted, of the
old stockholders‟ relative and proportionate
voting strength and control, that is, the existing
ratio of their proprietary interest and voting
power in the corporation. (In order for them to
maintain their proportionate interest)
If there is increase in 10%, stockholders is
entitled to subscribe another 10%. In order that
his 10% voting right & dividends will be
maintained.

 

Absent this right, a controlling stockholder Are there instances when such right can be
may easily strengthen his hold and control of the denied without mentioning in articles? Yes,
corporate affairs. those in exceptions.

GR: All stockholders of a stock corporation Will this exceptions apply to close
shall enjoy pre-emptive right to subscribe to all corporations?
issues or disposition of shares of any class, in
proportion to their respective shareholdings, No, XPN to XPN
unless such right is denied by the articles of
incorporation or an amendment thereto. See section 96, close corporations must
provide it first on its articles of incorporation, that
Exceptions: its articles does not really deny such pre-
emptive rights.
1. Shares to be issued in compliance with
laws requiring stock offerings or ØØ Section 102, will not apply to close
minimum stock ownership by the public; corporations
or
ØØ The right of pre-emptive rights is absolute in
2. Shares to be issued in good faith with close corporations
the approval of the stockholders
representing two- thirds (2/3) of the
outstanding capital stock, in exchange
for property needed for corporate EXAMPLE:
purposes or in payment of a previously
contracted debt. ACS 1M

XPN to XPN: 1. The exceptions do not apply to SUBSCRIBED 1M- 250t

stockholders of a close corporation because of
the express provision in the Code which
provides that the pre-emptive right of a
stockholder in a close corporation shall extend
to all stock to be issued, including reissuance
of treasury shares, whether for money, property
or personal services or in any payment of a
corporate debt, unless the article provide
otherwise. (S. 102)
750t unissued/unsubscribed
Board decides to issue remaining
usubscribe portion to other person, will the
existing stockholder have pre-emptive right?
Yes, because Benito case is abandoned.
Now new or unsubscribed stocks.

2. S. 96
POWER TO SELL/DISPOSE ASSETS
The right may be lost by waiver, expressly or
impliedly by inability or failure to exercise it after Conditions for the valid exercise of this right
having been notified.
1. Resolution by the majority vote of the
The pre-emptive right covers all issues or board of directors or trustees;
disposition of share of any class. It includes new
share issued pursuant to an increase in capital
2. Authorization from the stockholders
stock, unissued shares which form part of the
representing at least 2/3 of the
original capital stock and treasury shares.
outstanding capital stock or 2/3 of the
members in case of non-stock
Q: Since it is expressly provided by law, May corporations;
this be denied?
3. The ratification must be at a meeting
Yes, Article of corporation or amendment duly called for that purpose;
thereto.
4. Prior written notice of the proposed

  47
 

action must be made stating the time and
place of meeting addressed to each
stockholder or member at his place of
residence, either by mail or personal
service;
5. The sale of the assets shall be
subject to the provisions of existing laws
on illegal combinations and monopolies;
and
6. Any dissenting stockholder shall have
the option to exercise his appraisal right.
(Note: In non-stock corporations where there are
no members with voting rights, the vote of at
least a majority of the trustees in office will be
sufficient authorization for the corporation to
enter into such transaction.)
The procedure and requirements
above will not apply if the sale or disposition
does not involve “all or substantially all” of the
assets of the corporation as to render it
incapable of continuing business or
accomplishing the purpose for which it was
incorporated. Thus, if the same is necessary
in the usual and regular business, Section 40
will not apply.
For section 40 to apply therefore,
the sale or disposition of assets must be
such as to render the corporation incapable
to carry out the purpose of its organization,
or that proceeds thereof will not be use for
the conduct of the remaining business.
Despite authorization from
stockholder, the code allows the board of
directors to abandon the ale or disposition
subject only to the rights of third parties under
the contract, w/o further action or approval of the
stockholders or members.
Sale may result to merger or
consolidation. And a s Rule, the corporation is
not liable for the debts and liabilities of the
transferor.
Q: X Company is engage in Real property
business and has one property, will approval
of stockholders necessary? No, because it is
in the regular course of business.
X company has a compound where
  48
it has a plant and sold it to third party, is
stockholders approval necessary? Yes,
because such is not in the course of business.
Selling the plant will render the business
incapable of doing business.
GR: Stockholders approval
XPN: If proceeds are used for the
furtherance of business like for more plants.
IDP vs. CA
The sale or other disposition of all or
substantially all of the corporate property or
assets must be voted for by the legitimate
board and concurred in by the bona fide
stockholders or members.
Q: Assuming that they are legitimate
members, is their action now valid?
No, because parcels of land are the
only properties of IDP, the act of selling would
render corporation incapable to carry out the
purpose of its organization.
Edward Nell vs Pacific Farms
General rule: Where a corporation sells or
otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts
and liabilities of the transferor.
Exceptions:
1. Where the purchaser expressly or
impliedly agrees to assume such debts;
2. Where the transaction amounts to a
consolidation or merger of the
corporations;
3. Where the purchasing corporation is
merely a continuation of the selling
corporation; and
4. Where the transaction is entered into
fraudulently in order to escape liability
for such debts.
POWER TO ACQUIRE OWN SHARES
A stock corporation shall have the power to
purchase or acquire its own shares for a

legitimate corporate purpose or purposes,
including but not limited to the following cases:
1. To eliminate fractional shares arising out of
stock dividends;
2.To collect or compromise an indebtedness to
the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale;
3.To pay dissenting or withdrawing stockholders
entitled to payment for their shares; and
4.To redeem redeemable shares.
General rule: the corporation must have
“unrestricted retained earnings.” The phrase is
used in the sense that the corporation cannot
use its capital stock to purchase its own shares,
that is, corporate assets below the legal or
stated capital but only from surplus profits.
Exceptions:
a. Redemption of redeemable
shares; and (s.8)
b. Stockholders right to compel a
close corporation to purchase
his shares when the corporation
has sufficient assets to cover its
debts and liabilities. (sec 105 &
sec 104)
Where a corporation acquires its own
shares, the shares are not extinguished unless it
is acquired by the corporation with the intention,
and may thereafter reissued. While in the
possession of the corporation, it is considered at
treasury share and while they remain so, they
have no voting and dividend right.
The acquisition of shares must be made in
good faith, free from fraud, actual or
constructive, and that the corporation is not
insolvent or in the process of dissolution and
that the rights of creditors and other
stockholders are in no way injuriously affected.
Q: May a corporation acquire its own share?
Yes, for legitimate purposes.
Q: What will be the legitimate purposes?
  49
Sectio 4(1-8)
Q: How can there be fractional share? Issue
amnesty out of stock dividend and pay in cash
the equivalent value.
Fractional share is no longer allowed in our
country.
Steinberg vs Velasco
Corporation cannot acquire its own share if
you have no unrestricted earnings.
Creditors of a corporation has the right to
assume that so long as there are outstanding
debts and liabilities, the board od directors will
not use the assets of the corporation to
purchase its own stock, and that it will not
declare dividends to stockholders when the
corporation is insolvent.
POWER TO INVEST FUNDS
The right refers to investment in the
form of money, stock, bonds and other liquid
assets and does not include real properties or
other fixed assets. (“may invest funds”)
Requirements and procedure:
1. Resolution by the majority vote of the
board of directors or trustees;
2. Ratification by the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members in case of non-stock
corporations;
3. The ratification must be at a meeting
duly called for that purpose;
4. Prior written notice of the proposed
investment and the time and place of
meeting shall be made, addressed to
each stockholder or member at his
place of residence, either by mail or
personal service; and
5. Any dissenting stockholder shall have
the option to exercise his appraisal right.
The approval of the stockholders or
members is not required where the investment is

 

reasonably necessary to accomplish its primary POWER TO DECLARE DIVIDENDS

purpose. “For any purpose other than the
primary purpose” that even if the business is
authorized in the secondary purpose, the
provision of section 42 must be complied with
before the corporation may pursue the same.
Dividends – are corporate profits set aside,
declared and ordered by the Board of Directors
to be paid to the stockholders. (Fruit of
investment).

Dela Rama vs Mao-sugar Central This right is not available to Non-stock

corporation because they can’t declare
Investment in Phil Fiber a dividends.
manufacturer of sugar bags is necessary in the
primary purpose of mao-sugar. Test is whether Q: Where does dividends come from?
there exist a logical connection from the primary
purpose. Dividends can only be declared out of
unrestricted retained earnings or surplus profits.
Gokongwei, Jr. vs. SEC (don’t say profits)

There is more logic in the stand that if Unrestricted retained earnings –

the investment is made in a corporation whose
business is important to the investing
corporation as would aid it in its purpose, to
require authority of the stockholders would be to
unduly curtail the power of BOD.
An unauthorized investment which is
not illegal or void ab initio or not contrary to law,
morals, public order or public policy, is merely
voidable and may become binding and
enforceable when ratified by the stockholders.
Q: Corporation’s primary purpose is
construction business while secondary
purpose is realty . Is stockholders approval
necessary ? Yes, law says that the power to
invest corporate funds requires approval of
stockholders if investment is for another
corporation or for any other purposes other that
primary.
Appraisal right of stockholders to
withdraw uncertain acts and compel corporation
to pay the FMV of the stocks is not available in
instances when stockholders may object (Sec
81 & 86)
undistributed earnings of a corporation which
have not been allocated for any managerial,
contractual or legal purpose and which are free
for distribution to the stockholders as dividends.
A corporation has no power to declare
dividends if its paid-up capital is not maintained
or is impaired. This capital represents a “trust
fund” which is kept intact for protection of
creditors.
Types of dividends:
1. Cash dividend – those that are payable in
lawful money or currency.
2. Property dividend – those that are paid in the
form of property instead of cash.
those that take form of bonds,
notes, evidences of
indebtedness or stock in other
corporations.
3. Stock dividends – refer to the corporation’s
shares of stock or certificate
evidencing it.

Q: RCBC building is being leased to third Cash or Property Stock Dividends

parties. Is stockholders ratification Dividends
necessary?
BOD will declare Approval of 2/3 of the
Yes, there is a need for 2/3 vote, or dividends outstanding capital
ratification, or by estoppel. stock

Declaration of cash or Neither would stock

property dividends dividends increase
have the effect of the proportionate

  50  
  

reducing corporate interest of The judgment of the board of directors in the

assets to the extent stockholders of matter of declaring dividends is conclusive
of dividends declared. corporation although except when they act in bad faith, or for a
it will have the effect dishonest purpose or act fraudulently,
of increasing the oppressively, unreasonably or unjustly or abuse
subscribed and paid- of discretion can be shown so as to impair the
up capital. rights of the complaining stockholders to their
just proportion of corporate profits. If the policy
It gives the of the directors is dictated by their personal
stockholders nothing interest rather than the corporate welfare.
in the way of
distribution of assets Accumulated Profits beyond 100%
but merely divides his of PU
existing shares into
smaller units. General rule: Stock corporations are prohibited
from retaining surplus profits in excess of 100%
of their paid-in capital stock.

Rules on dividends due on delinquent Exceptions:

stock:
1. When justified by definite corporate
GR: expansion projects or programs
approved by the board of directors; or
Cash dividend – first applied to the unpaid
balance on subscription costs 2. When the corporation is prohibited
and expenses. under any loan agreement with any
financial institution or creditor, whether
Stock dividend – withheld until subscription is local or foreign, from declaring dividends
fully paid. without its/his consent, and such
consent has not yet been secured; or
XPN:
3. When it can be clearly shown that
S. 72 even if subscribed stocks is not such retention is necessary under
yet paid the stockholders still have certain rights special circumstances obtaining in the
like appraisal. ( Stockholder must be declared corporation, such as when there is need
delinquent) for special reserve for probable
contingencies.
Modes of Collecting
When Dividend Rights Vest
1. If Board make a call
GR: The right of the stockholders to be paid
2. If Board said that the stock delinquent dividends vest as soon as they have been
should be paid in the specific time. lawfully and finally declared by the Board of
Directors.
Authority to Declare Dividends
Lodged with the Board. No revocation of dividend may be had
unless it has not been officially communicated to
General rule: The board of directors exercise the stockholders or is in the form of stock
exclusive authority in declaring dividends. dividends which is revocable at any time prior to
(Reason: they are managers of corporation) distribution. ( to prevent misleading investors
and the probable effect which revocation may
Exception: In declaring stock dividends, the have on the stability of stock transactions)
approval of the stockholders representing at
least 2/3 of the outstanding capital stock is XPN: In stock dividends, it can still be
required. revoked even if dividend is already announced

  51  
  

but not yet paid or issued. (Stock dividend does

not result to the distribution of corporate powers
but merely divides the existing shares of
stockholders into smaller units.

Who is the owner upon declaration of

dividends?

GR: Any dividend already declared when shares

are transferred belongs to the owner of shares
at the time of the declaration. Whoever is the
registered owner on a specified record date is
entitled to dividends.

XPN: If there is a contrary agreement.

As to Transefer…

As against his transferor, however as

transferee of stocks after the declaration but
before the specified date of payment, has
presumably the right to such dividends despite
failure to record the transfer in stock and transfer
book. XPN: Unless the contracting parties have
agreed to the contrary.

Directors can’t declare dividends if there is no

POWER TO ENTER INTO MANAGEMENT
surplus profits. (Steinberg vs. Velasco0 CONTRACTS

Stock dividends cannot be issued to a person Requirements and procedure:

who is not a stockholder. (Neilson & Co., Inc. vs.
Lepanto Consolidated Mining Co.) 1. Resolution by the board of
directors or trustees;
Directors are not liable for declaration of
dividend contrary to law, unless attended with 2. Approval by the stockholders
bad faith, gross negligence or willful and representing a majority of the
knowing assent. (Ladia) outstanding capital stock or majority
of the members in case of non-stock
Q: If BOD acted in due diligence corporations;
in the declaration of dividend, can they
pursue stockholder to bring back 3. The approval must be at a
dividend? An innocent stockholder is not meeting duly called for that purpose;
liable to return it unless corporation is
experiencing Insolvency. 4. The contract shall not be for a
period longer than 5 years for any
one term, except those which relate
to exploration, development or
utilization of natural resources which
may be entered into for such periods
as may be provided by pertinent
laws and regulations.

GR: Majority votes

  52
 

XPN: Not only majority but approval of the
stockholders of the managed corporation
owning at least 2/3 of the outstanding
capital stock or 2/3 of the members in case
of non-stock corporations are required:
1. Where a stockholder or
stockholders representing the same
interest of both the managing and
the managed corporations own or
control more than 1/3 of the total
outstanding capital stock entitled to
vote of the managing corporation;
2. Where a majority of the members
of the board of directors of the
managing corporation also constitute
a majority of the members of the
board of directors of the managed
corporation; or
3. Where the contract would
constitute the management or
operation of all or substantially all of
the business of another corporation,
whether such contracts are called
service contracts, operating
agreements or otherwise.
ULTRA-VIRES ACTS
Ultra-vires acts – are those that can not be
executed or performed by a corporation because
they are not within its express, inherent or
implied powers as defined by its charter or
articles of incorporation.
Although an Unltra vires act, jurisprudence
tends to hold as within the corporate powers,
acts which are clearly beneficial to the company
or necessary to promote the interest or welfare
of the corporation, its employees and their
families, or in the legitimate furtherance of its
business. Thus, any transaction which id
incidental to the main business of the
corporation may be undertaken.
Ultra vires act is not necessary illegal or void.
GR: It is merely voidable and may be ratified, by
equitable ground or estopped.
  53
XPN: Unless the public or third parties are
thereby prejudiced.
Consequences of ultra-vires acts:
1. On the corporation itself – the proper
forum may suspend or revoke, after
proper notice and hearing, the franchise
or certificate of registration of the
corporation for serious
misrepresentation as to what the
corporation can do or is doing to the
great damage or prejudice of the
general public.
2. On the rights of the stockholders – a
stockholder may either an individual or
derivative suit to enjoin a threatened
ultra-vires act or contract.
3. On the immediate parties –
(a) if the contract is fully executed on
both sides, the contract is effective;
(b) if the contract is executory on both
sides, neither party can maintain an action
for its non-performance; and
(c) if the contract is executory on one
side only, and has been fully performed on
the other, the party who has received the
benefits is estopped to set up that the
contract is ultra-vires.
Q: X co. manuf is a caterer. B corporation’s
President is about to retire. They contracted
X co to be the caterer for the farewell party.
After the event, B corpo alleged that contract
is ultra vires, is B corp still liable? Yes, B
corpo received benefits from the contract and
now is estopped to allege ultra vires act.
Republic vs. Acoje Mining
Acts which are clearly beneficial to the
company or necessary to promote the interest or
welfare of the corporation, its employees and
their families, or in the legitimate furtherance of
its business are within corporate powers.
Privano vs. De la Rama Steamship
Mere ultra-vires acts which are not illegal per
se may become binding and enforceable either

 

by ratification, estoppel or on equitable grounds CHAPTER VIII- BY-LAWS

unless the public or third parties are thereby
prejudiced.
By-laws – are rules and ordinances made by a
corporation for its own government; to regulate
Carlos vs. Midoro Sugar Co. the conduct and define the duties of the
stockholders or members towards the
Corporations authorized to acquire the bonds corporation and among themselves.
have the implied power to guarantee them in
order to place them upon the market under
They are rules and regulations or private laws
better, more advantageous conditions, and
enacted by the corporation to regulate, govern
thereby secure the profit derived from their sale.
and control its own actions, affairs and concerns
When a contract is not on its face necessarily
and its stockholders or member and directors
beyond the scope of the power of the
and officers with relation thereto and among
corporation by which it was made, it will, in the
themselves in their relation to it.
absence of proof to the contrary, be presumed
to be valid. Corporations are presumed to
Requirements and procedure for adoption of by-
contract within their powers. The doctrine of ultra
laws:
vires, when invoked for or against a corporation,
should not be allowed to prevail where it would
1. The by laws must not be inconsistent
defeat the ends of justice or work a legal wrong.
with the Code;
Japanese War Notes Claimants Assoc., Inc.
2. If adopted prior to incorporation:
vs. SEC
i. Approved and signed by
Actions which are beyond the powers of the
all the incorporators;
corporation as embodied in its articles of
incorporation and have absolutely no relation to
ii. Submitted together with
the avowed purpose of the corporation are ultra-
the articles of
vires.
incorporation to the
SEC;
Corporation is a non-stock and should not be
engage in a business for profit.
If adopted subsequent to incorporation:
Crisologo-Jose vs. CA
i. Adopted within one (1) month
after receipt of official notice of the
GR: Corporate officers have no power to
issuance of its certificate of incorporation
execute for mere accommodation a negotiable
by the SEC;
instrument of the corporation for their individual
debts or transactions arising from or in relation
ii Affirmative vote of the stockholders
to matters in which the corporation has no
representing at least a majority of the
legitimate concern. Since such accommodation
outstanding capital stock, or of at least a
paper cannot thus be enforced against the
majority of the members in case of non- stock
corporation, especially since it is not involved in
corporations,
any aspect of the corporate business or
operations, the signatories thereof shall be
personally liable therefor, as well as for the iii. Signed by the
consequences arising from their acts in stockholders or
connection therewith. members voting for
them
XPN: If power to execute negotiable
instrument is delegate to agents and officers of iv. Kept in the principal
corporation office of the corporation,
subject to the inspection
of the stockholders or
members during office
hours.

  54
 

v. A copy thereof, duly
certified to by a majority
of the directors or
trustees countersigned
by the secretary of the
corporation, must be
filed with the SEC which
shall be attached to the
original articles
incorporation.
3. Certification of the
appropriate government agency
concerned to the effect that such by-
laws or amendments are in accordance
with law.
4. Issuance by the Securities
and Exchange Commission of a
certification that the by-laws are not
inconsistent with this Code.
Contents of by-laws:
a. The time, place and manner of
calling and conducting regular
or special meetings of the
directors or trustees;
b. The time and manner of calling
and conducting regular or
special meetings of the
stockholders or members;
c. The required quorum in
meetings of stockholders or
members and the manner of
voting therein;
d. The form for proxies of
stockholders and members and
the manner of voting them;
e. The qualifications, duties and
compensation of directors or
trustees, officers and
employees;
f. The time for holding the annual
election of directors of trustees
and the mode or manner of
giving notice thereof;
g. The manner of election or
appointment and the term of
 
office of all officers other than
directors or trustees;
h. The penalties for violation of the
by-laws;
i. In the case of stock
corporations, the manner of
of issuing stock certificates; and
j. Such other matters as may be
necessary for the proper or
convenient transaction of its
corporate business and affairs.
(Some provisions like a-c do not need
to be included in by-laws because the Code
already provides for it)
By-laws are subordinate to the articles of
incorporation, the Corporation Code and other
statutes which form part of the corporate charter.
Q: When is By-laws approved? By-laws shall
be effective upon the issuance by the SEC of a
certification that by-laws are not inconsistent
with the Code.
By law and articles are different. Because in
by laws approval of SEC is needed while in
articles Ordinary amendment S.16 will become
valid upon approval or after 60 days SEC did not
act upon it, the time of effectivety retroacts from
day of filing.
By-laws become effective only upon the
approval of the SEC
Time of filing:
Prior to incorporation – must be
signed by all the incorporators, must be filed
together with the articles of incorporation
After incorporation – approval of at
least a majority of the outstanding capital stock
Failure to file by-laws may result to
suspension or revocation of corporate franchise
after proper notice and hearing
Two modes of amending or repealing by laws or
adopting a new one:
a. By a majority vote of the
55

 

directors or trustees and the interest of a director.

majority vote of the outstanding
capital stock or members, at a
regular or special meeting called
for that purpose; or
b. By the board of directors alone
when delegated by 2/3 of the
outstanding capital stock or
members
Delegated power to amend, repeal or adopt
by-laws may be revoked
Further the law merely states the minimum
qualification and disqualification. The by-law
may provide for additional qualifications and
disqualificationss
Elements of a valid by laws:
a. It must not be contrary to law, public
policy or morals.
b. It must not be inconsistent with the
articles of incorporate.

c. It must be general and uniform in its

LGVHA vs. CA effect or applicable to all alike or those
similarly situated.
Failure to file by-laws does not result in
automatic dissolution. There must be notice and d. It must not impair obligations and
hearing. contracts or vested rights.

PD 902-A Commissioner has authority to e. It must be reasonable.

suspend or revoke certificate or franchise for
failure to file the corporation By-laws.

(If we apply Section 144 we will reach the

same decision if we apply PD 902-A)

Fleisher vs. Botica Nolasco

By-laws are internal rules an cannot bind,

effect or prejudice third persons without
knowledge.

Shares of stock are personal property and

may be transferred by the stockholder to any
one.

The only restraint that may be imposed is the

need for the registration of sale or transfer in the
Books of the corporation.

Govt. vs. El Hogar

Incorporation of an invalid by-law provision is

not a misdemeanor. It does not justify the
dissolution of the corporation.

Gokongwei, Jr. vs. SEC

The by-laws may disqualify a stockholder

from being elected into office if he has a
substantial interest in a competitor corporation to
avoid any possible adverse effects of conflicting

  56
 

CHAPTER 9: MEETINGS
Meetings – applies to every duly convened
assembly either stockholders, members,
directors or trustees, manages, etc. for any legal
purpose, or the transaction of business of a
common interest.
Classification of Corporate meetings:
1. General
2. Special
A. STOCKHOLDER’S MEETINGS
GR: Stockholders have no power to
act for the corporation except in a corporate
meeting called and conduced according to law in
order for the to discuss the issues and vote.
XPN: Ordinary Amendment of Articles
of Incorporation where the vote or “written
assent” of the stockholders representing 2/3 of
the outstanding capital stock or 2/3 of the
members in case of non-stock.
Classification of SH meetings:
1. Regular meetings of stockholders of
members- are those held annually on a
date fixed in the by-laws, or if not so fixed,
on any date in April of every year as the
BOD or trustees may determine.
2. Special- Held at any time deemed necessary
or as provided for in by-laws.
Requirements to have a valid stockholder’ s
meeting:
1. It must be held on the date fixed in the by-
laws or in accordance with law; If there is no
date fixed, it may be held on any date on April
as may be fixed by the BOD.
XPN: Where the annual meeting
cannot be held on the appointed time for some
valid and meritorious reasons such as force
majeure or inability to obtain the require
quorum. The same may be postponed to a
reasonable future date.
Q: Why April? – It is the time when financial
  57
statement are audited.
2. Prior notices must be given
GR:
Ø Regular SHs Meeting- Written notice
shall be sent to all SHs of record at
least 2 weeks prior to the meeting.
Ø Special SHs Meeting- 1 week prior
written notice is required.
XPN: Unless the by-laws requires a different
period. The by-laws may extend or shorten
the sending out of notices.
Q: What will be the effect if no notice is
given? Failure to give notice, give the
agenda or business matters to be taken
would render resolution made VOIDABLE at
the OPTION OF STOCKHOLDER OR
MEMBER who was NOT NOTIFIED.
However, Notice may be waived, either
expressly or impliedly, by any SH and the
fact that a SH attended the meeting is
deemed an implied waiver of the notice
requirement; this is equally true where the
shareholder is represented and participated
by proxy or by proper authority.
6. Directors vs. Tan
The by-laws provided for a 5 day notice rule
which upheld its validity, nonetheless, it posted 2
days prior to the meeting, thus the court held
that the meeting and resolution passed was not
valid for want of notice.
Failure to give notice in accordance therewith
would render the resolution made thereunder
voidable at the option of the SH/members who
was not notified.
1. 3. It must be held at the proper
place/venue.
> Stock Corporation- At all times it
must be held in the city or municipality
where the principal office of the corporation
is located and, far as practicable, in the
province or municipality where the principal
office is located
> Non-Stock Corporation- meetings may

 

held anywhere in the Philippines provided Otherwise, the remedy is to file

that proper notices shall be sent indicating a petition for mandamus.
the date, time and place of the meeting.

Q: Can the By-laws provide for other Q: What if the person authorized failed or
places to hold a meeting? – In Non-stock neglected to call a meeting? Ponce case
provision only, anywhere in the Philippines would apply only “where there is no person
provided there is a By-law provision. If no authorized to call a meeting”, thus an ex-parte
By-law provision they cannot meet proceeding may e allowed as obviously there
anywhere, s. 87 governing Stock corporation is no person to summon and no person whose
is applicable also to non-stock corporation right to due process will be violated. However,
unless otherwise provided in Title 12. where there is an officer authorized to call the
meeting then the Ponce case will not apply.
Q: Is there a proper place of meeting This is so because the phrase “or when the
if office is located in Makati and meeting officer authorized to do so refuses, or fails, or
was held in PICC? Yes, neglects to call a meeting” in Section 26 of the
old law has been deliberately omitted in Sec
A corporation whose principal office is 50 of the Corporation Code.
located in Makati, Metro Manila may hold its Appropriate remedy is
SHs meeting in any place within Metro Manila Writ of Mandamus.
since the latter is considered as one city or
municipality. v. Quorum and Voting Requirements must be
met
It must be called by the proper person or Ø In order to have a valid stockholders’ or
officer. members’ meeting the Quorum
requirement must be complied
Persons who may call the meeting Ø For a binding resolution the Voting
requirement must likewise be met.
i. The person or persons authorized under the
by-laws; Otherwise any matter taken thereat will not
ii. Absent of any provision in the by-laws, the have any binding force and effect on the
president; corporation and the stockholders or members.
iii. Under Sec. 28 (removal of director), by the
secretary on order of the president or on Quorum Requirement
written demand of the stockholder
representing or holding at least a majority of GR:
the outstanding capital stock or majority of
the members entitled to vote in a non-stock >Stock corporation – quorum shall be majority of
corporation, or the stockholder or member the outstanding capital stock total subscription
making the demand if there is no secretary irrespective of the amount paid by them.
or he refuses to do so; and
iv. On order of the proper forum under Sec. 50. >Non-stock corporation – total number of
S.50 Whenever, for any cause, there is registered voting members.
no person authorized to call a meeting,
the SEC, upon petition of a SH or XPN: Corporations are authorized to prescribe
members, and on the showing of good in their by-laws the number of members or
cause, may issue an order to the outstanding stock capital stock required to be
petitioning SH or memb directing him to present or duly represented in a meeting to
call a meeting of the corporation by constitute a quorum.
giving proper notice required by this However, any provision in the by-laws
Code or by the by-law. The petitioning relative to quorum requirement, will be invalid if
SH shall preside thereat until at least a it is in conflict with the provision of the statute.
majority of the SH present have chosen (You can not stipulate less than the majority)
one of their number as presiding officer.
The basis of determining the presence of a

  58
 

quorum: A quorum once present is not broken
by the subsequent withdrawal of a part or
fraction of the stockholders.
If the voting requirement is met, any
resolution passed in the meeting, even if
improperly held or called will be valid if all the
stockholders or members are present or duly
represented.
In SHs meeting, the voting requirement may
vary depending on the nature of the transaction
to be passed upon. Should the Code require a
specific number of vote necessary for a valid
resolution, the by-laws cannot validly provide for
a lesser number.
- Adoption of by-laws –majority
- Removal of D/T, amendment of Articles,
Management contract, amendment if By-
laws- 2/3
Q: Do we include non-voting shares? it
depends, if it is one of those included in the
last par. Of Section 6
B. DIRECTORS’/ TRUSTEES’
MEETING
2 Kinds
1. Regular meetings – held monthly, unless
the by-laws provide otherwise
2. Special meetings – held at any time upon
the call of the president or person
authorized as provided in the by-laws
Q: Where is the meeting held? Meetings
may be held anywhere in or outside of the
Philippines, unless the by-laws provide
otherwise.
Q: What are the notice requirements?
Notice must be sent at least one (1) day prior
to the scheduled meeting, unless otherwise
provided by the by-laws.
Q: What if notice requirement is not
complied with?
GR: If the notice requirement is not complied
  59
with the meeting is illegal/ Voidable and will not
bind the corporation XPN: 1. When
subsequently ratified. (Lopez vs. Fontecha)
2. In a close
corporation, the act of any one director may bind
the corporation without a meeting. (S.101)
XPN to XPN
1. Notice may be waived, expressly or
impliedly. Presence at a meeting waives
want of notice or
2. when the absentee signed the checks
they are now estopped to question the
validity.
Q: May the directors vote by proxy? No,
because they are elected to manage and to be
present in the meeting. This is in line with the
fiduciary duty to the corporation where his
personal judgment must be exercised.
Q: Members of the Board A, B. C. D are
called for electing successor of those whose
term are about to expire. “A” vote by proxy,
is it allowed? Yes, because A is voting as a SH
in SH meeting not as a Director.
Q: Is the Director need to be present in the
venue of the meeting so that there will be
quorum? No, Physical presence at the meeting
is not required; teleconferencing and
videoconferencing is allowed. (RA 8792)
Q: Who shall preside the meeting?
GR: The President shall preside at all the
meeting of BOD/T
XPN: Unless otherwise determined by the by-
laws.
Q: What is the quorum requirement?
GR: Majority of the number as fixed in the
Articles. If there are 7 Directors and 2 died, still 7
will be the basis for quorum.
XPN: 1. By-laws may provide for a greater
majority
3. Election of corporate officers which
requires the vote of a majority of all

members of the BOD/T.
STOCKHOLDERS’ RIGHT TO VOTE
AND MANNER OF VOTING
7. General rule: The right to vote is an inherent
right and the stockholder may vote any
way he pleases.
This right can’t be denied or
impaired. The court will not deprive a
SH of his right to vote his share.
Exceptions: If restricted by law, Articles or
by-laws of the Corporation.
1. Non-voting shares are not entitled to
vote except in those instances provided
for in the penultimate paragraph of Sec. 6
(Only preferred and redeemable shares
may be deprived of the right to vote)
2. Treasury shares while they still remain
in the treasury. This is to prevent or deter
the incumbent directors and officers of the
corporation from perpetuating themselves
a such or prolong their stay in office by
voting on the shares of stock reacquired
by it.
3. Delinquent shares
4. Unregistered transferee of stock
5. Common shares can’t be denied of their
right to vote XPN Founder’s share.
Q: What if shares held in common
A- Vote Mar
B- Vote Binay
C- Vote Poe
How will you cast the vote?
Equally, because they are common
shares (equal rights). If there are 1M
shares divide by three. If there are
fraction shares such is no longer
allowed in Corporation Code.
General rule: Stockholders or members may
vote personally or through a representative by
way of proxy, voting trust agreement or by the
executor, administrator, receiver of other legal
representative.
Exception: In non-stock corporations, the right
to vote may be limited, broadened or denied in
the articles of incorporation or in the by-laws.
The right to vote is vested with the legal
  60
owner of the shares.
Q: Who has right to vote, pledgor or
pledgee?
In case of pledged or mortgaged shares, the
pledgor or mortgagor is entitled to vote in
absence of a written agreement (recorded in the
corporate books) to the contrary. (Sec. 55)
Q: Who is entitled to vote in behalf of
decedent?
Executors, administrators, receivers, and
other legal representatives duly appointed by the
court may attend and vote in behalf of the
stockholders or members without need of any
written proxy. (Sec. 50) (It does not matter
whether the shares stand on the books of the
corporation in the name of the decedent)
“Appointed by the court”- such that absence
of an appointment, no person can represent or
vote the shares of an incapacitated or deceased
stockholder on the ground that nobody is legally
capable to represent his estate.
An executor or administrator of a stockholder
may not be elected unless he owns at least 1
share.
What if there is no administrator, who is can
vote on the shares of the deceased? No one
can Vote.
Q: How can joint owners vote?
General Rule: In case of shares jointly owned,
the consent of all the co-owners shall be
necessary.
Exceptions:
1. Written proxy signed by all the co-
owners
2. The shares are owned in an "and/or"
capacity where any one of the joint
owners can vote the shares or appoint a
proxy thereof.
PROXY AND OTHER
REPRESENTATIVE VOTING

PROXY
Proxy – the authority given by the stockholder
or member to another to vote for him at a
stockholders‟ or members‟ meeting. It also
refers to the instrument or paper which is
evidence of the authority of the agent or the
holder thereof to vote for and in behalf of the
stockholder or member.
GR: Proxy Voting is a right granted by law to all
SH entitled to vote in stock corporation and can’t
be denied. Any by-law provision or resolution
prohibiting the use of proxies in stockholders’
meeting is void and of no effect. (Matter of right
under Doctrine of Limited Capacity)
XPN: However, it may be denied in a non-stock
corporation (sec 89)
Two types of proxies:
1. General – gives a general discretionary power
of attorney to vote for directors and all
ordinary matters that may properly come
before a meeting. It is not an authority,
however, to vote for fundamental changes in
the corporate charter or for other unusual
transactions, unless specified.
2. Limited – restricts the authority to vote on
specified matters only and may direct the
manner in which the vote will be cast.
Requirements to be a proxy:
1. In writing
2. Signed by the stockholder or member or duly
authorized representative.
3. Filed before the scheduled meeting with the
corporate secretary
4. However, publicly listed corporations whose
shares are traded in the stock exchange must
comply with the SEC Memorandum Circular
relative to proxy and meetings.
Failure to comply will result to a
fine of 5M or imprisonment of maximum 21
years, or both.
5. By-laws may reasonably regulate the form
and execution of proxies. Thus, absent of by-law
  61
provision requiring notarization of proxy, the
same will not be required.
> Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is
intended.
> No proxy shall be valid and effective for a
period longer than five (5) years subject to
extension for nmt 5 years for each renewal.
> GR: A proxy is revocable XPN:
unless coupled with an interest and revocation
need not be made by formal notice in writing.
Thus, it may be revoked orally.
Revocation may be expressed:
1. To the proxy holder
2. To the election committee
3. By a subsequent proxy to another
4. By sale of the shares
VOTING TRUST
A voting trust is one created by an
agreement between a group of stockholders of a
corporation and a trustee, or a group of identical
agreements between individual stockholders
and a common trustee, whereby it is provided
that for a term of years, or for a period
contingent upon a certain event, or until the
agreement is terminated, control over the stock
owned by such stockholders, shall be lodged in
the trustee, either with or without reservation to
the owners or persons designated by them the
power to direct how such control shall be used.
It is a device of binding stockholders to vote as a
unit and thus assuring a desirable stability and
continuity in management in situations where it
is needed.
Requirements for Voting Trust:
1. It should confer upon the trustee or trustees
the right to vote and other rights pertaining to
the shares;
2. It should be for a period not exceeding five (5)

 

years at any time unless the voting trust is

specifically required as a condition in a loan
agreement, in which case, the voting trust
may be for a period exceeding five (5) years
but shall automatically expire upon full
payment of the loan;
Voting Trust Proxy
3. It must be in writing and notarized, and shall
specify the terms and conditions thereof; The beneficial owner of Legal title remains with
the shares ceases to be the beneficial owner
4. A certified copy thereof must be filed with the a stockholder of record
corporation and with the Securities and of the corporation
Exchange Commission, otherwise, said
agreement is ineffective and unenforceable; The trustee votes as The proxy holder votes
owner of the shares merely as an agent
5. The certificate or certificates of stock covered
by the voting trust agreement shall be
canceled and new ones shall be issued in the
name of the trustee or trustees stating that The beneficial owner of The owner of the shares
they are issued pursuant to said agreement. the shares is may be elected as a
In the books of the corporation, it shall be disqualified to be a director since legal title
noted that the transfer in the name of the
director. VA can be a remains with him.
trustee or trustees is made pursuant to said
Director because legal
voting trust agreement; he has legal title
6. The trustee or trustees shall execute and
deliver to the transferors voting trust
certificates, which shall be transferable in the
The purpose is to Generally used to
same manner and with the same effect as
acquire voting control of secure voting and
certificates of stock.
the corporation quorum requirements or
merely for the purpose
7. It should not be entered into for the purpose
of representing an
of circumventing the law against monopolies
absent stockholder
and illegal combinations in restraint of trade
or used for purposes of fraud.

The Voting trustee, in reality becomes merely

Irrevocable Revocable unless
a “sham owner with a colorable and fictitious
coupled with an interest
tile” for the purpose of voting upon stocks that
he does not actually own.

Test to be a Voting Trust

The trustee can act and A proxy holder can
i. The Voting Rights of the stock are separated vote at any meeting generally act as such
from other attributes of ownership. during the duration of only at a particular
ii. The voting rights granted are intended to be the voting trust meeting
irrevocable for a definite period of time. agreement
iii. That the principal purpose of the grant of
voting rights is to acquire voting control of
the corporation.
The trustee may vote in A proxy holder must
person or by proxy vote in person

  62  
  

The duration may The duration may not

exceed 5 years exceed 5 years

Must be notarized and Need not be notarized

filed with the SEC nor filed with the SEC

Lee vs CA (Ch VI)

The beneficial owner of the shares

ceases to be a stockholder of record of the
corporation. SH has no legal title but only
beneficial owner because legal title is
transferred to trustee.

NIDC vs. Aquino

A corporation is not a party to a voting trust

agreement therefore it is not a real party interest
in a suit to enforce the same.

A voting trust transfers only voting and CHAPTER X

other rights pertaining to the shares subject of
the agreement or control over the stock. It does
STOCKS AND STOCKHOLDERS
not include the assets, operation and
management of the corporation.

Q: Can a corporation interfere with VTA? No,

3 ways in which a person may become a
Corporate entity theory. It is the SH who signs
stockholder:
such VTA.
1. By a contract of subscription with the
corporation;

2. By the purchase of treasury shares from the

corporation; and

3. By purchase or acquisition of shares from

existing stockholders (includes purchase
from the stock exchange).

SUBSCRIPTION CONTRACT

Ø Subscription – the mutual

agreement of the subscribers to take
and pay for the stocks of a
corporation.
Ø Subscription contract – any contract
for the acquisition of unissued stock in
an existing corporation or a

  63
 

corporation still to be formed, not
withstanding the fact that the parties
refer to it as a purchase or some other
contract.
Q: Is there a distinction between purchase
and subscription of unissued shares of stock
corporation?
Distinction between a purchase and
subscription of “unissued stocks” of a
corporation has been eliminated. So long as the
shares to be acquired from the corporation are
“unissued stocks of the latter, the contract will be
deemed a subscription contract. Thus,
subscriber/purchaser becomes of unissued
stocks is already entitled to all rights of a SH and
subjected to all liabilities upon execution and
affectivity of the contract.
A subscription contract is not
required to be written; an oral contract for
subscription is valid and enforceable. The
statutes of fraud do not apply to a subscription
contract because such subscription does not fall
under the statutory definition of a sale.
> Conditional subscription – one made upon a
condition precedent, does not make the
subscriber a stockholder, or render him to pay
the amount of his subscription, until the
performance or fulfillment of the condition.
> Subscription upon special terms
– an absolute subscription, making the
subscriber a stockholder, and rendering him
liable as such, as soon as the subscription is
accepted, the special term being an independent
stipulation.
Whether a subscription is conditional or by
special terms depends on the agreement or
intention of the parties. In case of doubt, a
subscription shall be considered one upon
special terms in order to protect the creditors
and other subscribers.
General rule: Conditional subscriptions are
valid.
Exceptions:
i. The charter or enabling act prohibits the
same; or
ii. The conditions are such as to render their
  64
performance beyond the powers of the
corporation or in violation of law or contrary
to public policy.
Trillana vs Quezon College
There was a condition in the subscription
which states “Babayaran kong lahat pagkatapos
na ako ay makapaghuli ng isda”
General form of subscription must be
accepted by the corporation to create a binding
contract.
A condition facultative as to the debtor
renders the whole obligation void.
Q: 10M ACS; 5M SC; 5M PU
Z acquired the unissued shares and there
was a stipulation that Z will not be a SH
unless he pay all of the shares. Then there
was a fire, is Z liable to vote for all shares?
Yes, for all legal intent.
Q: “A” subscribe for 1M and paid only 500k.
Corporation wants to enforce payment
because of failure to pay on the specified
date, hence, “A” becomes delinquent. There
will be a Public Auction and if the corporation
bought it, it will become treasury shares. If “Z”
acquire it and there was a fire will Z be liable
to pay the subscription in full? No, because it
is purchase.
PRE-INCORPORATION SUBSCRIPTIONS
Types of subscriptions as to time of
execution:
1. Pre-incorporation subscriptions –
subscriptions for shares of stock of
a corporation still to be formed
(prior); and
2. Post-incorporation subscriptions –
those made or executed after the
formation or organization of the
corporation.
Pre-incorporation gives an immediate
binding effect. It is mandatory as may be culled
form Sec 13 and 14 of the Code which
mandates that a corporation may be registered

only with 25% of its ACS has been subscribed
and at least 25% of the subscribed capital has
been paid.
General rule: A subscription for shares of stock
of a corporation still to be formed is irrevocable.
Exceptions:
1. They shall be irrevocable for a period of 6
months from date of subscription unless
a) All the subscribers consent to
the revocation; or
b) The incorporation of said
corporation fails to materialize
within 6 months or within a
longer period as may be
stipulated in the contract of
subscription.
Exception to the exceptions: Irrevocable. No
pre-incorporation subscription may be
revoked after the submission of the articles
on incorporation to the SEC.
Stocks shall not be issued for a
consideration less than the par or issued price
thereof.
Consideration for the issuance of
stock may be any or a combination of any two or
more of the ff:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible,
actually received by the corporation and
necessary or convenient for its use and
lawful purposes at a fair valuation equal
to the par or issued value of the stock
issued;
Ø Tangible Properties value
determined either by:
a. appraisal report of an independent
appraiser
b. zonal valuation as certified by the BIR
c. market value indicated in the Real
Estate Tax Declaration
Ø Intangible Properties, the valuation
shall be determined
a. Initially by the incorporators or the
BOD subject to the approval of the
SEC
b. The latter is not precluded from
 
requiring the corporation to submit
an appraisal report of an
independent appraiser
3. Labor performed or services actually
rendered to the corporation; (As long as
capable of valuation)
4. Previously incurred indebtedness by
the corporation; (Set-off or satisfaction
of a debt due from the corporation is
lawful and valid consideration for the
issuance of the stock)
5. Amounts transferred from unrestricted
retained earnings to stated capital
(declaration and distribution of stock
dividend where corporate earnings are
capitalized rather that being distributed
as ash dividend); and
6. Outstanding shares in exchange for
stocks in the event of reclassification or
conversion. (refers to stocks
surrendered to the corporation in
exchange for a new or different type of
shares. (Ex. conversion of founder‟s
shares to common shares.)
Stocks shall not be issued in
exchange of promissory notes or future services.
Their realization is uncertain.
Issue – the making of a share contract or
contract of subscription, that is, transaction by
which a person becomes the owner of shares
is and by which new share contracts are created.
The issuance of shares is not
dependent on the delivery of a certificate of
stock.
Par or issue price – indicates the amount which
the original subscribers are supposed to
contribute to the corporate capital as the basis of
the privilege of profit sharing with limited liability.
Two theories in the valuation of property
or services:
65

True value rule – the motives or intent of those
making the valuation are disregarded and the
sole and decisive factor or question is whether
or not the property or services are in fact worth
the value placed on them.
Good faith rule – the value of the property or
services is a matter about which there can be
an honest difference of opinion. Therefore, if
the parties have acted in good faith without
fraud or intentional over-valuation, the
transaction cannot be overturned even if the
later becomes evident that the property or
services were in fact worth much less than the
value fixed on them initially.
The Promissory Notes and future services are
not allowed to be used as consideration for the
issuance of shares as their realization are not
certain
National Exchange Co., Inc. vs. Dexter
The stipulation under consideration is illegal
for this stipulation obligates the subscriber to
pay nothing for the shares except as dividends
may accrue upon the stock. In the contingency
that no dividends are declared and paid, there is
no liability at all. This discrimination is unlawful.
A corporation has no power to receive a
subscription upon such terms as will operate as
a fraud upon the other subscribers as
stockholders by subjecting the particular
subscribers to lighter burden, or by giving his
greater rights and privileges, or as fraud upon
creditors of the corporation by withdrawing or
decreasing capital. Therefore, an agreement
between a corporation and a particular
subscriber, by which the subscription is not to be
payable, or is to be payable in part only, is illegal
and void.
CERTIFICATES OF STOCK AND THEIR
TRANSFER
Shares of stock- a profit sharing contract, a
series of units of interest and participation in a
corporation in consideration of a proportionate
right to participate in dividend and other
distributions.
Certificate of stock – the piece of paper or
document which evidences the ownership of
shares and a convenient instrument for the
  66
transfer of the title.
Requisites for the issuance of a certificate of
stock:
1. It must be signed by the president or vice-
president and countersigned by the
secretary or assistant secretary;
2. It must be sealed with the corporate seal; and
3. The full amount of subscription together with
interest and expenses (in case of delinquent
shares) if any is due, has been fully paid.
General rule: Holders of subscribed shares not
fully paid are entitled to all the rights of a
stockholder but are not entitled to be to the
issuance of a certificate of stock because full
payment is required in the latter. (S.72)
Exceptions:
1. The shares have been declared delinquent; or
2. The stockholder exercises his appraisal right
pursuant to Sec 83.
The issuance of a stock certificate is not a
condition sine quanon to consider a subscriber
as a stockholder.
A certificate of stock is not a negotiable
instrument but quasi-negotiable.
Negotiable because it may be transferred by
endorsement coupled with delivery.
Non-negotiable because the transferee takes
takes it without prejudice to all rights and
defenses which the true and lawful owner may
have except Estoppel.
Two modes of transferring shares of stock:
1. When the corporation has already issued
stock certificates – transfer is done only
through endorsement and delivery of the
certificate or certificates of stock indorsed
by the owner or his attorney-in-fact or
other person legally authorized to make
the transfer.
2. When the corporation has not yet issued
certificates of stock – by a duly notarized

deed.
If a certificate of stock has been
issued a mere notarized deed will not
suffice. It must be coupled with endorsement
and delivery of the stock certificate.
Transfer- absolute and unconditional transfer to
warrant registration in the books of the
corporation in order to bind the later and other
third persons.
The right to transfer shares may not
be unreasonably restricted. But it may be
“regulated” to give corporation protection against
colorable or fraudulent transfer or to enable it to
know who its SHs are.
Restrictions on the right to transfer
shares would include
1. Section 6 of Corporation Code allows
a corporation to classify its shares and
grant such “rights, privileges or
restrictions, as may be indicated in the
Articles, there must be indication of
reasonable terms, conditions or period.
2. It is not valid, except as between the
parties, until recorded in the books of
the corporation.
3. Shares of stock against which the
corporation holds any unpaid claim shall
not be transferable in the books of the
corporation, unpaid claims, refer to
claims arising from unpaid subscription
and not to any indebtedness which a SH
may owe the corporation such as
monthly dues.
4. Restrictions required to be indicated
in the articles of incorporation, bylaws
and stock certificates of a close
corporation.
5. Restrictions imposed by special law
6. Sale to aliens in violation of maximum
ownership of shares under the
Nationalization laws
7. Those covered by reasonable
agreement of the parties.
No transfer shall be valid, except as between
the parties, until the transfer is recorded in the
books of the corporation.
Until registration is accomplished, the transfer
of stock, though valid between the parties,
cannot be effective as against the corporation.
  67
The corporation looks only through its books for
the purpose of determining who its stockholders
are.
Non-registration of a transfer of stock will
not, however, affect the validity thereof at least
in so far as the contracting parties are
concerned.
Reasons (purpose) for the necessity of the
registration of transfers of stock:
1. To enable the corporation to know who
its stockholders are;
2. To enable the transferee to exercise his
rights as a stockholder;
3. To afford the corporation an opportunity
to object or refuse registration of the
transfer in cases allowed by law (as
when it has unpaid claims on the shares
transferred);
4. To avoid fictitious and fraudulent
transfers; and
5. To protect creditors who have the right
to look upon stockholders, in case of
non-payment or watered shares, for the
satisfaction of their claims.
The duty of the corporate secretary to record
a valid transfer of shares of stock is ministerial.
Thus, he may be compelled by mandamus.
General rule: A certificate of stock is not a
negotiable instrument. A bona-fide purchaser of
a certificate of stock will acquire no better title to
the shares than his transferor had and will be
subject to all rights, remedies and defenses
which the true and lawful owner may have.
Exception: When the general principles of
estoppel apply. Thus, if the legal owner thereof,
by his act or negligence, is estopped from
claiming ownership, (as when he clothes
another with apparent title or authority to
dispose of the same) a purchaser in good faith
and without notice will acquire a better title as
against the owner so estopped.
The duty of the corporate secretary to register
a valid transfer of shares is ministerial.
Therefore, mandamus will lie to compel
registration in case the corporation or the
corporate secretary refuses registration. (Rural
Bank of Salinas vs. CA) However, the
transferee has no such right when his title to
said shares has no prima facie validity or is

uncertain. (Tay vs. CA)
The right to transfer shares of stock may not
be unreasonably restricted or prohibited. Every
owner of corporate shares has the same
uncontrollable right to alienate them and is
under no obligation from selling them at his
sacrifice and for the welfare and benefit of the
corporation and other stockholders. (Padgett
vs. Bobcock & Templeton; Fleischer vs.
Botica Nolasco)
However, the right to transfer may be
“regulated” to give the corporation protection
against colorable or fraudulent transfer or to
enable it to know who its stockholders are. Also,
as a matter of policy, the SEC allows the grant
of “preferential rights” to existing stockholders
and/or the corporation, giving them the first
option to purchase the shares of a selling
stockholder within a reasonable period not
exceeding 30 days provided that the same is
contained in the articles of incorporation and in
all of the stock certificates to be issued by the
corporation. This is considered “reasonable”
since it merely suspends the right to transfer
within the period specified.
A corporation may classify its shares and
grant such “rights, privileges or restrictions”
provided that such are made in the articles of
incorporation and subject to reasonable terms,
conditions or period. (Go Soc & Sons vs. IAC)
Transfer stock to warrant registration
in the books of the corporation in order to bind
the latter and other third persons. (Monserrat
vs. Ceron)
Only the transfer or absolute conveyance of
the ownership of the title to a share need be
entered and noted upon the books of the
corporation in order that such transfer may be
valid, therefore, inasmuch as a chattel mortgage
of the aforesaid title is not a complete and
absolute alienation of the dominion and
ownership thereof, its entry and notation upon
the books of the corporation is not a necessary
requisite to its validity. (Monserrat vs. Ceron)
Chattel mortgages over shares of stock
should be registered both at the owner‟s
domicile and in the province where the
corporation has its principal office or place of
business in order to bind third persons. The
ownership of shares in a corporation is property
  68
distinct from the certificates which are merely
the evidence of such ownership. The property in
the shares are deemed to be situated in the
province in which the corporation has its
principal office or place of business. (Chua
Guan vs. Samahang Magsasaka, Inc.)
All transfers of shares should be entered in
the books of the corporation. Transfers not so
entered are invalid as to attaching or execution
creditors of the assignors as well as to the
corporation and to subsequent purchasers in
good faith, and indeed, as to all persons
interested, except the parties to such transfer.
(Uson vs. Diosomito)
A clause contained in the by-laws of a
corporation which provides that the owner of a
share of stock cannot sell it to another person
except to the defendant corporation is ultra-
vires, violative of the property rights of
shareholders, and in restraint of trade.
(Fleischer vs. Botica Nolasco Co.)
Shares of stock being regarded as property,
the owner of such shares may, as a general
rule, dispose of them as they see fit, unless the
corporation has been dissolved, or unless the
right to do so is properly restricted, or the
owner‟s privilege of disposing of his shares has
been hampered by his own action. (Padgett vs.
Babcock & Templeton)
Any restriction on a stockholder‟s right to
dispose of his shares must be construed strictly;
and any attempt to restrain a transfer of shares
is regarded as being in restraint of trade, in the
absence of a valid lien upon its shares, and
except to the extent that valid restrictive
regulations and agreements exist and are
applicable. Subject only to such restrictions, a
stockholder cannot be controlled in or restrained
from exercising his right to transfer by the
corporation or its officers or by other
stockholders, even though the sale is to a
competitor or the company, or to an insolvent
person, or even though a controlling interest is
sold to one purchaser. Therefore, restrictions
consisting in the word “non-transferable” is
illegal. (Padgett vs. Babcock & Templeton)
The suspension of the power to sell shares of
stock which has a beneficial purpose, results in
the protection of the corporation as well as of the
individual parties to the contract, and is
reasonable as to the length of time of

 

suspension is valid. (Lambert vs. Fox)
An indorsee of an undelivered certificate of
stock has no power to effectively transfer the
shares to other persons or his nominees. For an
effective transfer of shares of stock the mode
and manner of transfer prescribed by law must
be followed. (Embassy Farms, Inc. vs. CA)
Indorsement of the certificate of stock is a
mandatory requirement of law for an effective
transfer of a certificate of stock. (Razon vs. IAC)
The right of a transferee/assignee to have
stocks transferred to his name is an inherent
right flowing from his ownership of the stocks.
The corporation‟s obligation to register is
ministerial. (Rural Bank of Salinas vs. CA)
The pledge of shares of stock does not vest
ownership of such shares to the pledgee. The
pledgor remains the owner during the pendency
of the pledge and prior to foreclosure and sale.
Therefore, the pledgee has no right to demand
the registration of the pledged shares in his
name. In order that a writ of mandamus may
issue, it is essential that the person petitioning
for the same has a clear legal right to the thing
demanded and that is it the imperative duty of
the respondent to perform the act required. (Tay
vs. CA)
stockholder, cannot vote nor be voted for, and
will not be entitled to dividends, insofar as the
assigned shares are concerned. (Rural Bank of
Lipa City, Inc. vs. CA)
Delivery is not essential where it appears that
the person sought to be held as stockholders
are officers of the corporation, and have custody
of the stock books. (Tan vs. SEC)
After a valid transfer of share, the right to
have such registered commences to exist.
However, it would not follow that said right
should be exercised immediately or within a
definite period. (Won vs. Wack Wack Golf &
Country Club, Inc.)
Certificates of stock are not negotiable
instruments. Consequently, a transferee under a
forged assignment acquires no title which can
be asserted against the true owner, unless his
own negligence has been such as to create an
estoppel against him. If the owner of the
certificate has endorsed it in blank, and it is
stolen from him, no title is acquired by an
innocent purchaser for value. (De Los Santos
vs. Republic)
Note: Review Cases

Without a stock certificate, which is the FORGED AND UNAUTHORIZED

evidence of ownership of corporate stock, the TRANSFERS
assignment of corporate shares is effective only
between the parties to the transaction. (Nava
Forged and Unauthorized
vs. Peers Marketing)
unauthorized issuance of stock
transfer certificate
For a valid transfer of stocks, there must be
strict compliance with the mode of transfer
prescribed by law. What is forged or The act of the
unauthorized is the corporation in
transfer of the issuing a certificate,
1. There must be delivery of the stock
certificate from the either fraudulently
certificate;
true and lawful or by mistake.
2. The certificate must be endorsed by the
owner to another
owner or his attorney-in-fact or other
person.
persons legally authorized to make the
transfer; and
3. To be valid against third parties, the
transfer must be recorded in the books
of the corporation.

An assignment, without endorsement and General rule: In forged or unauthorized

delivery, while valid as among the parties, does transfer of stock the purchaser acquires no title
not necessarily make the transfer effective. The no matter how innocent they ma have been as
assignees cannot enjoy the status of a against the lawful owner and will have no right or

  69
 

remedy against the corporation because he took
the shares not by virtue of misrepresentation
made by the corporation but on faith of a forged
endorsement or unauthorized transfer. (non-
negotiability of stock certificates).
Exception: If after such forged or
unauthorized transfer, the corporation issues a
new certificate and such certificate passes into
the hands of subsequent bona fide purchaser,
the latter may rightfully acquire title thereto since
the corporation will be estopped to deny the
validity thereof. The subsequent purchaser in
good faith took the shares by virtue of the
genuiness of the certificates issued by the
corporation or of the representation made by the
corporation that the same is valid and subsisting
and that the person named therein is a
stockholder of the corporation. He may
therefore, compel the corporation to recognize
him as a stockholder or claim reimbursement
and damages against the latter.
ISSUANCE OF STOCK CERTIFICATES
Q: When is stock certificate issued?
Subscriptions to shares of stock are
indivisible. Thus, no certificate of stock shall be
issued to a subscriber until the full amount of his
subscription together with interest and expenses
(in case of delinquent shares), if any is due, has
been paid.
Once a subscriber has paid his
subscription in full, he becomes entitled to be
issued a stock certificate.
The duty of the corporate officers to
issue stock certificates to those entitled is a
ministerial duty enforceable by mandamus.
A stockholder whose subscription is
not fully paid may not be issued a stock
certificate for that portion already paid. (Fua Cun
vs. Summers and China Banking Corporation)
Q: How much is the consideration for the
issuance of stocks? Nlt the par value or issued
  70
price
Q: How about non par value shares? S. 62
last par
Q: What about no par value shares issued
below the required issued price?
WATERED STOCK
Watered stock – one which is issued
by the corporation as fully paid-up shares when
in fact the whole amount of the value thereof has
not been paid. “Watered or Fictitiously paid-up”
Q: What is the extent of liability of Directors
or Officers consenting and have knowledge?
Sec. 62 Directors or officers shall be solidarily
liable with the stockholder concerned to the
corporation and its creditors for the difference
between the fair value received at the time of
issuance of the stock and the par or issued
value of the same for the following acts:
1. Consenting to the issuance of watered stocks;
or
2. Having knowledge thereof, failing to forthwith
express his objection in writing and file the same
with the corporate secretary.
All creditors, whether prior or
subsequent to the issuance of watered stock
may enforce payment of such water.
Q: What if “no par value” is issued below the
par?...
Ways in which watered stocks may be
issued:
1. For a monetary consideration
less than its par or issued value;
2. For a consideration in
property, tangible or intangible, valued in
excess of its fair market value;
3. Gratuitously or under an
agreement that nothing shall be paid at
all; or
4. In the guise of stock
dividends when there are no surplus

profits of the corporation.
Evil effects of stock watering:
1. The corporation is deprived of its capital
thereby hurting its business prospects,
financial capability and responsibility;
2. Stockholders who paid their subscriptions in
full, or promised to pay the same, are injured
and prejudiced by the reduction of their
proportionate interest in the corporation; and
3. Present and future creditors are deprived of
corporate assets for the protection of their
interest.
Two theories advanced as the basis for the
liability on water stocks:
1. Trust fund doctrine – treating the capital of
the corporation, inclusive of the unpaid
portion of subscriptions to said capital, as a
“trust fund” which the creditors have a right
to look up to for the satisfaction of their
claims.
2. Fraud or misrepresentation theory – liability
is based on the false representation made
by the corporation and the stockholder
concerned to the creditors that the true par
value or issued price of the shared has
been paid or promised to be paid full.
Effects of issuance of watered stock:
1. As to the corporation – when a corporation
is guilty of ultra-vires acts which constitute
an injury to or fraud upon the public, or
which will tend to injure or defraud the
public, the State may institute a quo-
warranto proceeding to forfeit its charter for
the misuse or abuse of its franchise.
2. As between the corporation and the
subscriber – the subscription is void; the
subscriber is liable to pay the full par or
issued value thereof, to render it valid and
effective.
3. As to the consenting stockholders – they
are estopped from raising any objection
thereto.
4. As to dissenting stockholder – in
view of the dilution of their proportionate
interest in the corporation, they may compel
  71
the payment of the “water” in the stock
solidarily against the responsible and
consenting directors and officers inclusive of
the holder of the watered stock.
5. As to creditors – they may enforce
payment of the difference in the price, or the
water in the stock, solidary against the
responsible directors/officers and the
stockholders concerned.
6. As against transferees of the
watered stock – his right is the same as
that of his transferor. If however, a certificate
of stock has been issued and duly indorsed
to a bona fide purchaser, without
knowledge, actual or constructive, the latter
cannot be held liable, at least as against the
corporation, since he took the shares on
reliance of the misrepresentation made by
the corporation that the stock certificate is
valid and subsisting. This is because a
corporation is prohibited from issuing
certificates of stock until the full value of the
subscriptions have been paid and could not,
therefore, deny the validity of the stock
certificate it issued as against a purchaser in
good faith.
Subscribers for stock shall pay (in full) to the
corporation interest on all unpaid subscriptions
from the date of subscription, if so required by,
and at the rate of interest fixed in the by-laws. If
no rate of interest is fixed in the by-laws, such
rate shall be deemed to be the legal rate.
Q: Are subscribers liable to pay interest?
Yes,
What if unpaid subscription? Generally not
liable until the by-laws requires or contract of
subscription provides otherwise.
Q: Capital structure of 10M shares divided
into 5M common shares with 10 par value
and 10M no par value shares
They’ve decided that issue price is
20/share. Assuming that there is
unsubscribed shared and “A” wants to
subscribe 1M shares.
Corporation agreed that “A” to subscribe
10M shares at 8/share and 1M no par value
share with a consideration of 18/share.

 

Is this watered stock? collect the unpaid portion thereof (Trust

fund doctrine).
Yes, it is watered stocks because it is issued
less than 20/share. BOARD ACTION

What is he liability of D/O? Solidary liable Procedure for the enforcement of payment
with A for both issuances. through board action:

What about A, what is the extent of his 1. The board of directors, by a formal
liability? P.57 resolution, declares the whole or any
percentage of unpaid subscriptions to
Par value- SH is solidary liable be due and payable on a specific date.
However, if the contract of subscription
provides the date or dates when
No par value- SH is not liable for watered
payment is due, no “call” declaration of
stocks because limitation on corpo to issue no
the board is necessary;
par value share. No par value share are deemed
2. The stockholders concerned are
fully paid and non assessable.
given notice of the board resolution by
the corporation either personally or by
Q: Assume there is 10 shares valued at registered mail. Publication of the notice
of call is not required unless the by-laws
provide otherwise. Notice is not likewise
necessary if the contract of the
subscription stipulates a specific date
when any unpaid portion is due and
ENFORCEMENT OF PAYMENT OF payable;
SUBSCRIPTIONS 3. Payment shall be made in the date
specified in the call or on the date
Unpaid subscription or any percentage provided for in the contract of
thereof, together with interest if required, by subscription;
the By-laws or the contract shall be paid 4. Failure to pay on the date required in
either: (When is unpaid subscription the call or as specified in the contract of
becomes due and demandable?) subscription will render the entire
balance due and payable and making
i. On the date or dates fixed in the the stockholder liable for the interest;
contract of subscription; or 5. If within 30 days from the date stated
ii. On the date or dates that may be in the call or as may be provided in the
specified by the board of directors pursuant contract of subscription no payment is
to a “call” declaring any or all unpaid portion made, all the stock covered by the
thereof to be so payable. subscription shall become delinquent
and shall be subject to a delinquency
Two possible remedies available to the sale;
corporation to enforce payment of unpaid 6. The board, by resolution, orders the
subscription: sale of the delinquent stock stating the
amount due and the date, time and
1. By board action (delinquency place of the sale;
sale); s.67 to 69 7. The sale shall be made not less than
2. By a collection case in court. 30 days nor more than 60 days from the
Sec. 70 date the stocks became delinquent;
8. Notice of the sale, with the copy of the
6. Failure or refusal of the board resolution should be sent to every
corporation, through its board of delinquent stockholder either personally
directors to enforce or collect payment or by registered mail;
of unpaid subscription will not prevent 9. Publication of the notice of sale must
the creditors or the receiver of the be made once a week for two
corporation to institute a court action to consecutive weeks in the newspaper of

  72
 

general circulation in the province or city
where the principal officer is located;
10. Sale at public auction if no payment is
made by the delinquent stockholder in
favor of the bidder who offered to pay
the full amount of the balance in the
subscription, inclusive of interest, cost of
advertisement and expenses for the
smallest number of shares;
11. Registration or transfer of the shares
of stock in the name of the bidder and
corresponding issuance of the stock
certificate covering the shares
successfully bidded;
12. If there be any remaining shares, the
same shall be credited in favor of the
delinquent stockholder who shall be
entitled to the issuance of a certificate of
stock covering such shares;
13. If there is no bidder at the public
auction who offers to pay the total
amount due plus interest, cost and
expenses, the corporation may, subject
to the provisions of the Code, bid for the
same and the total amount due shall be
credited or paid in full in the corporate
books; and
Q: What is the meaning of “subject to the
provisions of this Code” – GR: it must have
unrestricted retained earnings
What is the recourse of the
corporation? 2 Remedies to enforce payment
i. Board Action
ii. Direct Collection Case in court by
Specific Performance
14. The shares so purchased by the
corporation shall be vested in the latter
as treasury shares.
Q: Who will win the bid?
Highest bidder – is such bidder who shall offer
to pay the full amount of the balance on the
subscription together with accrued interest, cost
of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share.
“A” Subscribed for 100 shares at P100/share
and paid only 50% and has an unpaid balance
of 5k
Bidders are B and Z paid together with accrued
  73
interest, cost of advertisement and expenses of
sale.
“B”- 70 shares for 5k
“Z”-75 shares for 5k
B will be the winner and th2 30 shares
remaining will inure to the benefit of the
delinquent stockholder.
Grounds to question the delinquency sale:
1. Irregularity or defect in the notice of
sale; or
2. Irregularity or defect in the sale itself.
Two conditions before an action to recover
delinquent stocks irregularly sold may be
allowed:
1. The party seeking to maintain such
action first pays or tenders to the party
holding the stock the sum for which the
same was sold, with interest from the
date of the sale at the legal rate; and
2. The action shall be commenced by the
filing of a complaint within six months
from the date of the sale.
COURT ACTION
A “call” is a condition precedent before the
right of action to institute a recovery suit
accrues. A demand is required before a debtor
may incur a delay in the performance of his
obligation.
Instances when a “call” is not necessary:
1. The contract of subscription provides for
a date or dates when payment is due; or
2. The corporation has become insolvent.
Velasco vs. Poizat
A subscription for shares of stock does not
require an express promise to pay the amount
subscribed, as the law implies a promise to pay
on the part of the subscriber. The subscriber is
as much bound to pay the amount of the share
subscribed by him as he would be to pay any

other debt, and the right of the company to
demand payment is no less incontestable.
De Silva vs. Aboitiz & Co.
Notwithstanding the fact that the by-laws of
the corporation provides for a method for the
collection of the unpaid portion of stock
subscriptions, the corporation may still make use
of the methods provided by the Code.
General rule: A valid and binding subscription
for stock of a corporation cannot be cancelled so
as to release the subscriber from liability
thereon.
Exception: Consent of all the stockholders is
given.
Exceptions to the exception:
1. Bona fide compromise;
2. Set-off of a debt due from the corporation; or
3. Release supported by consideration
(Set off is premature unless there is a stipulation
in contract or by-laws. It can’t be due and
demandable unless there is a call.
(Lingayen Gulf vs. Baltazar)
Apocada vs. NLRC
The NLRC has no jurisdiction to determine
intra-corporate disputes between the
stockholder and the corporation as in the matter
of unpaid subscriptions.
Unpaid subscriptions are not due and
payable until a call is made by the corporation
for payment.
Lumanlan vs. Cura
Subscription to the capital of a corporation
constitutes a fund to which the creditors have a
right to look for satisfaction of their claims and
that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in
order to realize assets for the payment of its
debt.
  74
PNB vs. Bitulok Sawmill, Inc.
The President of the Philippines is devoid of
the prerogative of suspending the operation of
any stature or any of its items. Thus the
President cannot condone the payment of stock
subscriptions in the event that the counterpart
fund to be invested by the government would not
be available.
Edward Keller & Co., Ltd. vs. Cob Group
Marketing, Inc.
A stockholder is personally liable for the
financial obligations of a corporation to the
extent of his unpaid subscription.
Garcia vs. Suarez
The subscription to capital stock of the
corporation, unless otherwise stipulated, is not
payable at the moment of the subscriptions but
on a subsequent date which may be fixed by the
corporation.
Shares of stock become delinquent when no
payment is made on the balance of all or any
portion of the subscription on the date or dates
fixed in the contract of subscription without need
of call, or on the date specified by the board of
directors pursuant to a call made by it.
Q: What will be the rights of a delinquent
SH?
General rule: Delinquent stock shall not be
entitled to:
1. Be voted for or to vote;
2. Representation at any stockholder's
meeting; or
3. Any of the rights of a stockholder.
Exception: Delinquent stocks are entitled to the
right to dividends. What will be the extent of
their dividend right? any cash dividends due
on delinquent stockholders shall first be applied
to the unpaid balance on his subscription plus
cost and expenses, while stock dividends shall
be withheld until his unpaid subscription is paid
in full.
General rule: Holders of subscribed shares not
fully paid which are not delinquent shall have all
the rights of a stockholder.

Exception: Shares of stock not fully paid are not
entitled to be issued a certificate of stock.
“A” a SH and a director. His hares are
delinquent. Can he exercise his rights as a
director? The shares still stands in his name in
the book pending the result of the bid. He is still
the owner. Even if there is winning bidder
already and entirety of subscription is not sold,
he can still be a director because the remaining
shares will still be under his name.
Q: What shall be done if certificate of share
is lost or destroyed?
Requirements and procedure for issuance of
new certificates of stock in lieu of those lost,
stolen or destroyed:
1. The registered owner of a certificate
of stock in a corporation or his legal
representative shall file with the
corporation an affidavit in triplicate
setting forth:
2. The circumstances as to how the
certificate was lost, stolen or destroyed;
3. The number of shares represented by
such certificate;
4. The serial number of the certificate;
and
5. The name of the corporation which
issued the same.
6. He shall also submit such other
information and evidence which he may
deem necessary.
7. Publication of a notice in a newspaper
of general circulation published in the
place where the corporation has its
principal office, once a week for 3
consecutive weeks at the expense of
the registered owner of such certificate
of stock.
8. If no contest has been presented
within 1 year from the date of the last
publication, the right to make such
contest shall be barred and said
corporation shall cancel in its books the
certificate of stock which has been lost,
stolen or destroyed and issue in lieu
thereof new certificate of stock.
However, the registered owner may file
a bond or other security, effective for a
period of 1 year, for such amount and in
such form and with such sureties as
may be satisfactory to the board of
directors, in which case a new certificate
  75
may be issued even before the
expiration of the one 1 year period.
9. If a contest has been presented to
said corporation or if an action is
pending in court regarding the
ownership of said certificate of stock,
the issuance of the new certificate of
stock shall be suspended until the final
decision by the court regarding the
ownership of said certificate of stock.
10. Except in case of fraud, bad faith, or
negligence on the part of the corporation
and its officers, no action may be
brought against any corporation which
shall have issued certificate of stock in
lieu of those lost, stolen or destroyed
pursuant to the procedure above-
described.
Rationale for the law is to avoid
duplication of certificates of stock and to avoid
duplication of certificates of stocks and the
avoidance of fictitious and fraudulent transfers. It
is likewise intended for the protection of the
corporation against damage from whatever
source arising from issuance of the duplicate
certificate based on the duplicate.
Thus, the BOD has the authority to
decide the amount and the kind of surety bond
that may be required for the issuance of a
certificate of stock, in lieu of the lost or
destroyed one, if the same is to be issued prior
to the expiration of the one year period provided
by Sec 73.
Q: How much is surety bond? BOD has the
authority to decide the amount and kind of
surety bond.
Q: Certificate of stock is lost and destroyed,
may the SH transfer his shares pending the
said period? No, notarized deed is not
sufficient. You can’t transfer it by notarized deed
it must be coupled by endorsement and delivery
of certificate. (Rural Bank case)
XPN: 1. Tan vs Sec- Person sought
to be is officer of corporation
2. in cases of shares of stock acquired through
stock exchange. You course it through the
Broker. Broker will the forward to subtransfer
agent an record it (Scriptless endorsement)
Q: May a corporate officer be liable for

 

unauthorized issued of new certificate of 19. In the case of a close corporation, to

stock? GR: No, XPN in cases of Fraud or withdraw therefrom, for any reason, and
negligence. to compel the purchase of his shares.

Certain obligations and liabilities of

stockholders:
RIGHTS AND LIABILITIES OF
STOCKHOLDERS i. To pay the corporation the balance of his
unpaid subscriptions;
Certain basic rights for the protection of ii. To pay interest on his unpaid subscription if
stockholders: required by the by-laws or by the contract of
subscription;
1. Participation in the management of the iii. To answer to creditors for the unpaid portion
corporate affairs by exercising their right of their subscription;
to vote and be voted upon either iv. To answer the “water” in their stocks;
personally or by proxy; v. To be liable, as general partners, for all debts,
2. To enter into a voting trust agreement; liabilities and damages of ostensible
3. To receive dividends and to compel their corporations; and
declaration if warranted; vi. In case of a close corporation, to be
personally liable for corporate torts when
7. To transfer shares of stock subject only to they actively participate in the management
reasonable restrictions inclusive of the of the corporation.
right of the transferee to compel the
registration of the transfer in the books
of the corporation;

8. To be issued a certificate of stock for fully

paid-up shares; CHAPTER XI
9. To exercise pre-emptive rights; CORPORATE BOOKS AND
10. To exercise their appraisal right;
RECORDS

11. To institute and file a derivative suit;

12. To recover shares of stock unlawfully Q: What are the books and records that
sold for delinquency; corporation must keep?

13. To inspect the books of the corporation; Records to be kept and maintained by the
corporation:
14. To be furnished the most recent
financial statements of the corporation; 1. Records of all business transactions – which
include, among others, journals, ledgers,
15. To be issued a new stock certificate in contracts, vouchers and receipts, financial
lieu of the lost or destroyed one; statements and other books of accounts, income
tax returns, and voting trust agreement which
16. To have the corporation dissolved; must be kept and carefully preserved at its
principal office.
17. To participate in the distribution of the
assets of the corporation upon 2. Minutes of all meetings of stockholders or
dissolution; members and of the directors or trustees -
setting forth in detail the time and place of
18. In the case of a close corporation, to holding the meeting, how authorized, the notice
petition the SEC to arbitrate a deadlock; given, whether the meeting was regular or
and special, if special its object, those present and
absent, and every act done or ordered done

  76
 

thereat which must likewise be kept at the
principal office of the corporation.
3. Stock and transfer book – showing the names
of the stockholders, the amount paid or unpaid
on all stock for which subscription has been
made, a statement of every alienation, sale or
transfer of stock made, the date thereof, and by
and to whom made which must be kept either in
the principal office of the corporation or in the
office of its stock transfer agent. –instead of
corporation monitoring the stock, they assign an agent to
monitor and transfer the stocks.
Q: Where should this be kept? Principal office
or in the office of stock transfer agent.
4. Financial Statements as certified- (sec. 75)
These corporate books and records, inclusive
of all business transactions and minutes of
meetings, are subject to inspection by any
director, trustee, stockholder or member of the
corporation at reasonable hours on business
days and a copy of excerpts of said records may
be demanded.
And for an effective exercise of his right, a SH
can make copies, abstracts and memoranda of
documents, books ad papers as incident thereto.
Q: Can they copy the Books and Record?
Yes, at the expense of SH.
Q: What is the basis of the Right to Inspect?
To protect the interest of the SH. Business
prudence demands that the investor keep a
watchful eye on the management and the
condition of business. Those in charge of the
company may be guilty of gross incompetence
or dishonesty for years and escape liability if the
shareholders cannot inspect the records and
obtain information.
Q: What is stock and transfer book?
Q: Is there a distinction between right of
director and Sh to inspect? Yes
Director- Absolute and unqualified
Stockholder- Reasonable business hours.
Q: Is the right personal in nature?
  77
GR: Yes
XPN: It may be exercised by SH or proper
representative or attorney-in-fact with or without
presence of SH.
General rule: The right of stockholders to
examine corporate books extends to a wholly
owned subsidiary which is completely under the
control and management of the parent company
where he is such a stockholder. (Gokongwei
vs. SEC)
Exception: But if the two entities, the subsidiary
and the parent, are legally being operated as
separate and distinct entities, there is no such
right of inspection on the part of the SH of parent
company.
The right to inspect corporate books, although
personal, may be exercised through an agent or
representative since it may be unavailing in
many instances. (W.G. Philpotts vs. Philippine
Manufacturing Co.)
Q: What does wholly owned mean? All shares
are in the name of corporation
Ayala land- Globe Can “A” inspect Globe? No,
because Ayala do not wholly/ Subsidiary Globe.
The corporation, or its responsible directors
and officers cannot unduly restrict the right of
inspection and may not arbitrarily set a few days
of the year within which the stockholder may
make the inspection. (Pardo vs. Hercules
Lumber, Co.)
Directors or Trustees of a corporation have
the absolute and unqualified right to inspect the
books and records of the corporation at all
reasonable hours. This is because a director
supervises, directs, and manages corporate
business and its necessary that he be equipped
with all the information and data with regard to
the affairs of the company.
However, there is no absolute right to secure
certified copies of the minutes of the corporation
until these minutes have been written up and
approved by the directors. (Vegaruth vs.
Isabela Sugar Co., Inc.)
It is a required condition for the inspection of
corporate books that the one requesting it must

not have been guilty of using improperly any
information secured through a prior examination
and that the person asking for such examination
must be acting in good faith and for a legitimate
purpose in making his demand. (Gonzales vs.
PNB) **
The corporation, or its responsible directors
and officers cannot unduly restrict this right of
inspection and may not arbitrarily set few days
of the year within which to inspect. Should a SH
be unjustifiably refused the right to inspect the
corporate books, he is not left without remedy.
Remedies of a stockholder who is denied
inspection of corporate books:
1. Mandamus; In such event, the corporate
secretary shall be included as a party
respondent since he is customarily charged
with the custody of all documents or records
of the corporation and against whom
personal order of the court would be made.
2. Damages either against the corporate or the
responsible officer who refused inspection;
or
3. Criminal complaint based on Sec. 144 of the
Code. If the refusal is pursuant to a
resolution or order of the board, the liability
shall be imposed upon the directors or
trustees who voted for such refusal. Any
penal sanction? Sec. 144
General rule: Any officer or agent of the
corporation who refuses to allow the inspection
of corporate books and records, or any director
or trustee who through a resolution by the board
votes for such refusal shall be liable for
damages and shall be guilty of an offense which
shall be punishable under Sec. 144.
Exception. It shall be a defense that the
person demanding inspection
1. Has improperly used any information
secured through any prior examination
of the records or minutes of such
corporation or of any other corporation;
or
2. Was not acting in good faith or for a
legitimate purpose in making his
demand.
3. His right is limited or restricted by
special law or the law of its creation.
  78
Any Corporation under this Code must
submit 2 documents
1. General Information- submitted in the SEC
within 30 days from date of annual meeting.
2. Audited Financial Statement stamped by
the BIR within 120 days from end of fiscal
year of corporation.
Right to Financial Statements
Within ten (10) days from receipt of a written
request of any stockholder or member, the
corporation shall furnish to him its most recent
financial statement, which shall include a
balance sheet as of the end of the last taxable
year and a profit or loss statement for said
taxable year, showing in reasonable detail its
assets and liabilities and the result of its
operations.
At the regular meeting of stockholders or
members, the board of directors or trustees shall
present to such stockholders or members a
financial report of the operations of the
corporation for the preceding year, which shall
include financial statements, duly signed and
certified by an independent certified public
accountant. However, if the paid-up capital of
the corporation is less than P50,000.00, the
financial statements may be certified under oath
by the treasurer or any responsible officer of the
corporation.
CHAPTER XII
MERGER AND CONSOLIDATION
Section 36, par. 8 of Corporation Code of the
Philippines expressly empowers a corporation to
merge or consolidate with another corporation.
Merger and consolidation are the two most
common types of corporate reorganizations or
combination parlance.
Corporate Reorganization- signifies the

 

various proceedings and transactions by which a c. A statement of changes, if any, in the

succession of corporations is brought about, articles of incorporation; and
involving as it does the carrying out, by proper d. Other provisions deemed necessary and
agreements and legal proceedings of business desirable.
plan or scheme for winding up the affairs of or
foreclosing a mortgages upon the property of 2. Approval of the plan by the
insolvent corporation. stockholders representing 2/3 of the
outstanding capital stock or 2/3 of the
“usually” this is sought due to financial losses, members in a non-stock corporations of
however, it can also be used if there will be an each constituent corporation at separate
expansion. corporate meetings called for the
purpose;
However, corporation cannot merge or 3. Prior notice of such meeting, with a
consolidate if it will result to Monopoly. RPC copy or summary of the plan of merger
imposes a penalty of imprisonment and or fine or consolidation shall be given to all
on any person who enters into a contract or stockholders or members at least 2
conspiracy to create monopolies and weeks prior to the scheduled meeting,
combinations in restraint of trade. either personally or by registered mail
stating the purpose thereof;
Limitations of Merger and Consolidation 4. Execution of the articles of merger or
consolidation by each constituent
1. Act. 3518 – monopoly corporation to be signed by the
2. Sec. 20 president or vice-president and certified
3. RPC Art. 186 by the corporate secretary or assistant
secretary setting forth the following:
Merger – a union effected by absorbing one or a. The plan of the merger or
more existing corporations by another which consolidation;
survives and continues the combined business; b. As to stock corporations, the
the uniting of two or more corporations by the number of shares outstanding,
transfer of property to one of them which or in the case of non-stock
continues in existence, the other or others being corporations, the number of
dissolved and merged therein. members; and
c. As to each corporation, the
Consolidation – the uniting or amalgamation of number of shares or members
two or more existing corporations to form a new voting for and against such plan,
corporation and the termination of existence of respectively.
the old ones.
5. Submission of the articles of merger
Constituent Corporation or consolidation in quadruplicate to the
SEC subject to the requirement of that if
Consolidated Corporation it involves corporations under the direct
supervision of any other government
Requirements and procedure for merger or agency or governed by special laws the
consolidation: favorable recommendation of the
government agency concerned shall first
be secured; and
1. The board of directors or trustees of
6. Issuance of the certificate of merger
each constituent corporation shall
or consolidation by the SEC at which
approve a plan of merger or
time the merger or consolidation shall
consolidation setting forth the following:
be effective. If the plan, however, is
(Sec 76)
believed to be contrary to law, the SEC
a. The names of the constituent
corporations; shall set a hearing to give the
b. The terms of the merger or corporations concerned an opportunity
consolidation and the mode of carrying to be heard upon proper notice and
thereafter, the SEC shall proceed as
the same into effect;
provided in the Code.

  79
 

Any amendment to the plan of merger
or consolidation must be approved by
majority vote of the respective boards of
directors or trustees of all the constituent
corporations and ratified by the affirmative
vote of stockholders representing at least
2/3 of the outstanding capital stock or of 2/3
of the members of each of the constituent
corporations.
Mergers and consolidations may not be
entered into for the purpose of circumventing the
law against monopolies and illegal combinations
in restraint of trade or for purposes of fraud.
***Effects of merger or consolidation:
1. There will only be a single
corporation. In case of merger, the
surviving corporation, or in case of
consolidation, the consolidated
corporation;
2. Termination of the corporate
existence of the constituent
corporations, except that of the surviving
or the consolidated corporation;
3. The surviving or the consolidated
corporation will possess all the rights,
privileges, immunities and powers and
shall be subject to all the duties and
liabilities of a corporation organized
under the Code;
4. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and franchises of
the constituent corporations; and all
property and all receivables due on
whatever account, including
subscriptions to shares and other
choses in action, and all and every other
interest of, or belonging to, or due to
each constituent corporation, shall be
deemed transferred to and vested in
such surviving or consolidated
corporation without further act or deed;
and
5. The surviving or consolidated
corporation shall be responsible and
liable for all the liabilities and obligations
of each of the constituent corporations;
and any pending claim, action or
proceeding brought by or against any of
such constituent corporations may be
prosecuted by or against the surviving
or consolidated corporation. The rights
of creditors or liens upon the property of
  80
any of such constituent corporations
shall not be impaired by such merger or
consolidation.
Merger or consolidation does not
become effective upon the mere agreement of
the constituent corporations. It shall be effective
only upon the issuance of a certificate of merger.
(Associated Bank vs. CA)
BPI case WON the ee’s of absorbed corporation
will also be absorbed by absorbing/surviving
corporation?
First, No, ee’s are not chattel, franchises or
liabilities.
…There was Motion for Reconsideration
filed.
Second, SC now said that Yes, because of
social justice and State policy according to full
protection of Labor, contracts are automatically
assumed (here there is contract) there is no
impairment of right of er to terminate ees for
lawful reason or for ee to resign subject to
contractual obligation.
CHAPTER XIII
TITLE X- APPRAISAL RIGHT
Appraisal right – the method of paying a
shareholder for the taking of his property; the
statutory means whereby a stockholder can
avoid the conversion of his property into another
property not of his own choosing. The purpose
of the right is to protect the property rights of
dissenting stockholders from actions by the
majority shareholders which alters the nature
and character of their investment. It is a right
granted to dissenting stockholders on certain
corporate or business decisions to demand
payment of the fair market value of their shares.
Q: When may appraisal right be exercised?
Instances when a stockholder may have the
right to dissent and demand payment of the fair

value of his shares:
1. In case any amendment to the articles
of incorporation has the effect of:
a. Changing or restricting the rights
of any stockholder or class of
shares;
b. Authorizing preferences in any
respect superior to those of
outstanding shares of any class;
or
c. Extending or shortening the term
of corporate existence.
(It is no available if amendment consist of
instance, of changing the corporate name
or of increasing or decreasing the number
of the members of the board of directors.)
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of
all or substantially all of the corporate
property and assets as provided in the
Code; and
3. In case of merger or consolidation.
Enumeration is not exclusive!!
Other instances provided for in the Code:
1. Investment of corporate funds in another
corporation or business or for any other
purpose;
2. In a close corporation, a stockholder has
the right to compel the corporation “for
any reason” to purchase his shares at
their fair value which shall not be less
than the par or issued value when the
corporation has sufficient assets to
cover it debts and liabilities, exclusive of
capital stock.
A. Q: Articles of incorporation is
amended changing corporate office from
QC to Manila . Can “A” exercise
Appraisal Right? No
Q: What if “A” is disabled and can no
longer attend meetings because of the
change in office. Will it restrict the rights
of an SH? If this is his only reason, he can’t
nd
exercise appraisal right sec. 51 2 par that if
it is located within metro manila
What if in Davao? He may because
wording of law is any SH
  81
Q: What if He is out voted, can he be paid
of his stocks?
B. Q: Change in purpose from
construction to real estate? Not one
of the instances in Sec. 81 but under
sec. 42 it allows SH to dissent for any
investment other than the primary
purpose.
Demands to pay for his SH, but
corporation has no funds to pay the
shares, 1 yr later corporation sold
some of his property and has a profit
of 50M, may a corporation now pay
his shares? This can be done because
he already exercised his appraisal right,
true he may withdraw his rights but must
have consent of corporation S.84.
What if 4 other SH wants to pay “A”
his appraisal right in order that only
the 4 will divide the cash dividend?
Same as above s. 84
C. Q: SH objected SCTEX extension
because it will traverse property of a
person he knows. “A” now demand
for payment of his shares but all the
capital issued for payment of other
property? He can’t be paid because he
has no unrestricted retained earnings.
In the meantime, the 30 day period has not
yet elapsed. What will happen? S. 83
What will be the right of Sh? His right before
the 30d period is suspended Voting and
dividend right is suspended.
After 30D period “A” was not paid, what
happens to his rights as SH? His rights will be
restored.
Requirements and procedure for the exercise
of the appraisal right:
i. The stockholder must have voted
against the proposed corporate action in any
of the instances allowed by law for the
exercise of the appraisal right;
ii. A written demand for payment must
be made by the dissenting stockholder
within 30 days after the date on which the
vote was taken. Failure to make the demand

within the said period shall be deemed a
waiver of the appraisal right;
iii. Surrender of the certificate of stock by
the dissenting stockholder for notation in the
corporate books and payment by the
corporation of the fair market value of said
shares as of the day prior to the date on
which the vote was taken, excluding any
appreciation or depreciation in anticipation
of such corporate action. If the stockholder
and the corporation cannot agree on the fair
market value thereof, the same shall be
determined by appraisers;
Q: How is fair value determined? The day
prior to the date on which the vote was
taken, excluding any appreciation or
depreciation in anticipation of such
corporate action.
iv. The corporation must have
unrestricted retained earnings in it books to
cover the payment of the fair value of the
shares of the dissenting stockholder;
v. Upon payment of the shares by the
corporation, the dissenting stockholder shall
transfer his shares to the corporation.
Effects of demand for payment of the fair
value of a stockholder’s shares:
> From the time of demand for payment – all
rights accruing to such shares, including
voting and dividend rights, are suspended,
except the right to receive payment.
> After either the right ceases or the purchase of
the said shares by the corporation – all rights
accruing to such shares are restored and all
dividend distributions which would have
accrued on the shares shall be paid to the
holder thereof.
If the dissenting stockholder is not paid the
value of his shares within 30 days after the
award, his voting and dividend rights shall
immediately be restored.
No demand for payment may be withdrawn
unless the corporation consents thereto.
A dissenting SH will not be paid the fair value
of his shares so s to restore his rights as such
SH, and all dividend distribution which would
have accrued on his shares shall be paid to him
in those instances provided for in Sec. 84.
Instances when the right to payment ceases:
  82
i. The stockholder withdraws his
demand for payment with the consent of the
corporation;
ii. The proposed corporate action is
abandoned or rescinded by the corporation;
iii. The proposed corporate action is
disapproved by the SEC where such
approval is necessary;
iv. The SEC determines that such
stockholder is not entitled to the appraisal
right;
v. The stockholder fails within 10 days
after demanding payment for his shares to
submit the certificates of stock representing
his shares to the corporation for notation
and the corporation, at its option, terminates
the right.
vi. The shares represented by the
certificates bearing such notation are
transferred and the certificates subsequently
cancelled.
Q: What if they do not agree on the fair
value? The appraisal, if not agreed upon by the
corporation and the dissenting Sh, shall be
determined by three disinterested persons and
the cost thereof shall be borne either by the
corporation or by the SH depending on the
circumstances provided for under the Code.
Q: Who will pay the cost and expenses?
General rule: The costs and expenses of
appraisal shall be borne by the corporation.
Exception: The fair value ascertained by the
appraisers is approximately the same as the
price which the corporation offered to pay the
stockholder.
General rule: In an action to recover the fair
value of stocks, all costs and expenses shall be
assessed against the corporation.
Exception: The refusal of the stockholder to
receive payment is unjustified.
A dissenting stockholder is required within
10 days after demanding payment for his shares
to submit the stock certificates representing his
shares to the corporation for notation. His failure
to do so shall, at the option of the corporation,
terminate his rights.
The dissenting stockholder is not prohibited
from selling, transferring or assigning his shares.

 

If such be the case, once the certificates are CHAPTER XIV

subsequently canceled, the rights of the
transferor as a dissenting stockholder shall
cease and the transferee shall have all the rights
of a regular stockholder; and all dividend
distributions which would have accrued on such
shares shall be paid to the transferee.
A director who exercises his appraisal right
remain to be a director until his shares are no
longer registered in his name.
A stockholder whose subscription is not fully
paid is still entitled to exercise his appraisal
right.
Notation, in the books of the corporation, to
the effect that certain share are dissenting is
necessary to give notice and guide the
corporation to determine the respective rights of
Sh. Dissenting SH who demands payment for
the fair value of his shares are thus required by
law, to submit his certificate in order that his
rights, accruing to said shares may be effectively
suspended.
Notation is not Mandatory! “at the option of
the corporation” Sec. 86
NON-STOCK CORPORATIONS
Q: What provisions govern non-stock
corporation? S. 87 to 95 and subject to
provisions relating to stock corporations
Non-stock corporation - one where no part of
its income is distributable as dividends to its
members, trustees, or officers, subject to the
provisions of the Code on dissolution.
Even if a corporation has capital stock divided
into shares it is considered as non-stock so long
as it does not distribute dividends to its
members and officers. (CIR vs. Club Filipino
de Cebu) Club shares represent capital whose
income is not distributed by way of dividends.
However, as may be allowed and specified in
its articles of incorporation or as incident to the
objects and purposes indicated therein, it may
engage in certain money-making ventures or
economic activities provided that any profits
derived therefrom shall be used for the
furtherance of the purpose.

Right of SH to Right of SH to Non-stock corporations may be organized or

formed for any purposes allowed or indicated in
dividends if exercise appraisal
Section 88. The enumeration is not
delinquent Sh right
exclusive…Charitable, religious, educational,
professional, cultural, fraternal, literary,
Right is not Suspends right
scientific, social, civic service, or similar
suspended under only.
purposes, like trade, industry, agricultural and
s.71
like chambers, or any combination thereof (non-
exclusive).

MEMBERSHIP AND VOTING RIGHTS

Q: May a SH who’s share is not fully paid-up
exercise his appraisal right even if it is
Stock Corporation Non-Stock
required in Sec. 86 to surrender certificate
Corporation
since a certificate is not yet issued to such
SH? S. 86 is not mandatory because how can
you make a notation if there is no certificate Cumulative voting GR: Cumulative
is a matter of right Voting is not
issued yet.
allowed

XPN: If allowed in
Articles or By-laws

Proxy voting is right GR: Entitled to vote

granted by law to all by proxy in the
SH absence of Article
or By-laws

  83  
  

XPN:Proxy Voting adopt rules prescribing the mode and manner in

may be denied which membership thereat can be obtained or
maintained. In other words, membership in non-
GR: The vote must Voting by mail or stock corporations may be acquired by
be cast at a duly other similar means complying with the provisions of its rules
constituted may also be prescribed in the by-laws. In absence of
meeting. authorized and restrictions, a non-stock corporation may act
allowed by the by- arbitrarily and exclude any persons it may see
XPN: General laws fit, and the courts have no power to interfere. It
amendment of is free to fix qualifications for membership and to
Articles where the provide for termination of membership.
written assent of
SH may be General rule: The board of trustees of a non-
sufficient. stock corporation shall have the authority to
admit members. Since it is the body that
Corporate officers Allows the Articles exercises all corporate powers.
are elected by the or by-laws to
BOD rather than by provide that officers Exception: The by-laws provide otherwise. In
SH thereof shall be certain cases, the law itself may provide certain
directly elected by limitations or even perhaps proscription on
the members transfer of membership.

Mandated to Membership RA 4726 Condominium Act requires that

conduct the meeting may be membership therein shall not be transferred
meeting within the held anywhere in separately from the condominium unit of which it
city of municipality the Philippines is appurtenant and that when a member ceases
where the principal to own a unit, he shall automatically cease to be
office is located, Note: Even if the a member.
and as far as meeting is
practicable, within improperly held or Membership shall be terminated in the
the principal office called, it shall, manner and for the causes provided in the
of the corporation. nevertheless be articles of incorporation or the by-laws.
valid if all SH or
members were General rule: Termination of membership shall
present or duly have the effect of extinguishing all rights of a
represented member in the corporation or in its property.
thereat,
8. Exception: The articles of incorporation or
The voting rights of the members in no-stock the by-laws provide otherwise.
corporations may be “limited, broadened, or be
denied” by specific provisions in the Articles or In terminating membership, strict compliance
By-laws. Thus, they may provide for a with the manner and procedure laid down in the
classification of members with voting or non- by- laws must be observed, otherwise it may
voting rights. render the expulsion ineffective and invalid.
(Carmoan vs, PED)

In absence of any provision in the articles of

General rule: Membership in a non-stock incorporation or by-laws relative to the manner
corporation and all rights arising therefrom are and causes of termination, the power is
personal and non-transferable. nonetheless inherent in the following situations:

Exception: The articles of incorporation or the 1. When an offense is committed which,

by-laws provide otherwise. although it has no immediate relation to
a members duty as such, it is so
Non-stock corporations have the right to infamous as to render him unfit for

  84
 

society of honest men, and which is
indictable at common law;
2. When the offense is a violation of his
duty as a member of the corporation;
and
3. When the offense is of a mixed nature,
being both against his duty as a
member of the corporation, and also
indictable at common law.
As to whether or not a member should be
expelled or maintained is the established right of
the corporation to determine and the courts are
without authority to strip a member of his
membership without cause.
Courts cannot strip a member of a non-stock
corporation of his membership therein without
cause. Otherwise, that would be an unwarranted
and undue interference with the well established
right of a corporation to determine its
membership. (Chinese YMCA vs. Ching)
Q: Assuming that shares is transferable for
instance Club shares. What is being
transferred is proprietary certificate of stock.
Owner transfers it to “A” may “A compel
Wack-wack to transfer the certificate under
his name? He can, provisions of stock
corporation is also applicable (Rural Bank
Case). Because it is required for them to record
any transfer otherwise, they can be compelled
by Mandamus.
If now it is transferred under his name, is
he now considered as a member of Wack-
wack? Being a shareholder and member is not
the same in Non-stock corporation because
member may be required to comply with rules of
non-stock corporation.
Golfer in Wack-wack transferred the
proprietary certificate to his driver and ask to
transfer or record in corporate book.
Corporation recorded it but they can’t compel
corporation to acknowledge him as a member,
one of the qualification is financial capacity.
Cebu Country Club case- although a
corporation can provide in by-laws on how they
can accept members, such can’t be exercised
arbitrarily.
TRUSTEES AND OFFICERS
Non-stock or special corporations may
  85
designate their governing boards by any name
through their articles of incorporation or their by-
laws.
General rule: The number of trustees in a
non-stock corporation may exceed 15.
1. Exception: The articles of incorporation or
the by-laws provide otherwise.
2. GR: A term in excess of 5 years is not
allowed as it would unduly deprive other
members to take an active part in the
corporate management.
3. XPN: If the articles or by-laws otherwise
provided.
( Valle verde case – GR: 1 year
Xpn: 1. Non-stock
2. Educational institution
3…
General rule: The term of office of the board
of trustees may be staggered. They shall
classify themselves in order that 1/3 of their
number shall expire every year and subsequent
elections of trustees comprising 1/3 shall be held
annually.
4. Exception: The articles of incorporation or
the by-laws provide otherwise.
9. Qualifications of trustees: (Qualif and
Disqualif in Stock Corporation is also
applicable)
10. 1. He is a member of the corporation;
11. 2. Majority thereof must be residents of
the Philippines; and
12. 3. Other qualifications as may be
provided for in the by-laws.
13. General rule: officers of a non-stock
corporation may be directly elected by
the members.
14. Exception: The articles of incorporation
or the by-laws provide otherwise.

Trustees elected to fill vacancies occurring
before the expiration of a particular term hold
office only for the unexpired period.
General rule: The courts will not interfere on
matters involving the internal affairs of an
unincorporated association such as elections,
the manner by which it was conducted and the
results thereof. (Lions Club International vs. CA)
15. Exceptions:
16. 1. There is fraud, oppression or bad
faith;
17. The action complained of is capricious,
arbitrary or unjustly discriminatory;
18. 3. Property and civil rights are invaded;
4. The proceedings are violative of the laws of
society, or the law of the land, as by
depriving a person of due process of
law;
5. There is lack of jurisdiction on the part
of the tribunal conducting the proceedings;
6. The organization exceeds its powers;
7. The proceedings are illegal; or
8. An incorporated association or its
members avail of the remedy of instituting an
intra- corporate dispute case.
Q: Can the held the meeting anywhere in
the Philippines? No, Qualify
General rule: Regular or special meetings of
members of a non-stock corporation shall be
held in the city or municipality where the
principal office is located, and if practicable in
the principal office of the corporation.
Exceptions:
a. The by-laws of the corporation provide
otherwise; and
b. Metro Manila is considered a city or
municipality.
Requirements for meetings held outside the
location of the principal office as provided for by
the by-laws:
1. Proper notice is sent to all members indicating
the date, time and place of the
  86
meeting; and
2. The place of meeting must be within the
Philippines.
General rule: All proceedings and business
transactions at a meeting improperly held or
called are invalid.
Exception: All of the members are present or
duly represented at the meeting.
DISTRIBUTION OF ASSETS UPON
DISSOLUTION
All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be made
therefore;
Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with such
requirements;
Assets received and held by the
corporation subject to limitations permitting their
use only for charitable, religious, benevolent,
educational or similar purposes, but not held
upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall
be transferred or conveyed to one or more
corporations, societies or organizations engaged
in activities in the Philippines substantially
similar to those of the dissolving corporation
according to a plan of distribution;
Assets other than those mentioned in
the preceding paragraphs, if any, shall be
distributed in accordance with the provisions of
the articles of incorporation or the by-laws, to the
extent that the articles of incorporation or the by-
laws, determine the distributive rights of
members, or any class or classes of members,
or provide for distribution; and
In any other case, assets may be
distributed to such persons, societies,
organizations or corporations, whether or not
organized for profit, as may be specified in a
plan of distribution.

Procedure and requirements for a plan of
distribution of assets:
1. Majority vote of the board of trustees
adopting a plan of distribution;
2. Approval of such plan by at least 2/3 of
the members having voting rights
present or represented by proxy at a
regular or special meeting for that
purpose; and
3. Prior written notice setting forth the
proposed plan of distribution or a
summary thereof and the date, time and
place of such meeting shall be given to
each member entitled to vote, within the
time and in the manner provided in the
Code for the giving of notice of meetings
to members.
Q: May there be a distribution it the members
of assets? If there is no distributive rights
granted to members such then can’t be
distributed to them, such can be transferred in
accordance with section 94… if there is
distributive right but no distributive plan that is
when Section 95 will set in.
(check book)
TITLE XV
CLOSE CORPORATIONS
(Check page 447 for comparison with Family
Corporation)
Q: What law will govern Close Corporation?
The provisions of Title XII of the Code shall
primarily govern close corporations. However, in
the absence of special law the general law
governing ordinary corporations apply to the
former.
Q: What is a Close Corporation?
Close corporation - one whose articles of
incorporation provide that:
i. All the corporation's issued stock of
all classes, exclusive of treasury shares,
shall be held of record by not more than a
specified number of persons, not exceeding
  87
20;
ii. All the issued stock of all classes shall
be subject to one or more specified
restrictions on transfer permitted by Title XV
of the Code; and
iii. The corporation shall not list in any
stock exchange or make any public offering
of any of its stock of any class.
Absent any of the three requisites, a
corporation cannot be considered a close
corporation and would thus be governed by the
general provisions on ordinary corporations.
Purpose: Close corporation is inserted in the
law to provide a type of business organization
especially designed for business belonging to a
small, closely-knit group, like the family.
A corporation does not become a close
corporation just because a husband and wife
owns 99.86% of the capital stock. (San Juan
Structural Steel vs. CA)
A corporation shall not be deemed a close
corporation when at least 2/3 of its voting stock
or voting rights is owned or controlled by another
corporation which is not a close corporation.
Culled from this is that even if another
corporation owns or controls 2/3 of the voting
stocks of a close corporation, the latter may still
be considered as such close corporations if the
corporation owning or controlling the shares is
also a close corporation.
Close Corporation - Partnership
The ultimate effect is to furnish another form
of business organization- a “de facto corporation
with a corporate shell”.
It is referred to sometimes as hybrid of both
the corporate and partnership forms an
incorporated partnership or a corporation de jure
but a de facto partnership.
This is because a close corporation may
partake the nature of a partnership in that SHs
thereof take an active role in the management of
the corporate affairs either as directors, officers,
or even perhaps as partners in management.
Q: What is the most distinct characteristic of
close corporation? In ordinary stock
corporation the SHs have hardly a voice in

 

management except to elect the directors. or more classes, each of whom may be
Identity of SHs and active participation of SH voted for and elected solely by a
which the old code failed to mention. particular class of stock; (check book for
example)
Se. 97 allows the Articles of a Close 3. For a greater quorum or voting
Corporation to do away wit a Board of Directors requirements in meetings of
vesting management of the corporate affairs to stockholders or directors;
SHs. Despite this, and unlike partnership the Although the articles or by-laws of
SHs who are active in management, still enjoy other stock corporations may provide for
greater quorum and voting requirements in
“Limited liability” to the extent of subscription.
Director’s meeting (Sec. 25), those for Sh’s
meeting, unlike in close corporation, may not
It will be noted, however, under no. 5 of be altered or increased. This provision,
Section 100 of the Code, they are made increases the veto power of minority SHs-
personally liable for corporate torts unless they Investment in another purpose. For ordinary
have obtained a reasonably adequate insurance corporation 2/3 but in non-stock corporation
liability. it can include in its by-laws that vote must be
¾.
General rule: Any corporation may be
incorporated as a close corporation. 4. The Articles of Incorporation of a
Close Corporation may provide that
Exceptions: the business of the corporation shall
be managed by the stockholders of
the corporation rather than by a
1. Mining or oil companies;
2. Stock exchanges; board of directors. So long as this
3. Banks; provision continues in effect:
4. Insurance companies; a. No meeting of stockholders need be
5. Public utilities; called to elect directors;
6. Educational institutions; and b. Unless the context clearly requires
7. Corporations declared to be vested with otherwise, the stockholders of the
public interest. corporation shall be deemed to be
directors; and
c. The stockholders of the corporation
Sec. 140 authorizes the NEDA to
shall be subject to all liabilities of
recommend to the legislature the setting of
directors.
maximum limits to family or group ownership of
stock in corporation vested with public interest,
As to their Liability-
and the determination of whether or not it should
Close Corporation Ordinary
be vested with public interest is within its corporation
domain.
Their liability will be Directors are liable
The articles of incorporation of a close more extensive in for corporate torts
corporation may provide: that they are only if they have
personally liable for been negligent or
1. For a classification of shares or rights corporate torts acted fraudulently
and the qualifications for owning or unless, again, the
holding the same and restrictions on corporation has
obtained a
their transfers as may be stated therein; reasonably adequate
A close corporation may thus liability insurance.-
classify its shares into different classes to be depends on the facts
held of record only by specified persons. For
example it may provide that it shall gave 3
classes of shares, A, B, C. Class A to be
held by incorporators, B by relatives within
rd
3 civil degree, and C by close business 5. That all officers or employees or that
associates. specified officers or employees shall be
elected or appointed by the
2. For a classification of directors into one stockholders, instead of by the board of

  88  
  

directors. certificate
In ordinary corporation, the officers are conspicuously
appointed or elected by the board. states such
number; and
In order to bind purchasers in good faith,
restrictions on the right to transfer shares 3. The issuance or
must appear in: transfer of stock
causes the stock to
1. The articles of incorporation; be held by more
2. The by-laws; and than such number
3. The certificate of stock. of persons.

Restrictions on the right to transfer

shares shall not be more onerous than
granting the existing stockholders or the 1. The stock The transferee is
corporation the option to purchase the certificate conclusively
shares of the transferring stockholder within conspicuously presumed to have
reasonable terms, conditions or period. If shows a restriction notice of this fact.
upon the expiration of said period, the on transfer of stock;
existing stockholders or the corporation fails
to exercise the option to purchase, the 2. The transfer
transferring stockholder may sell his shares violates the
to any third person. restriction.
Effects of issuance or transfer of stock in
breach of qualifying conditions:

Conditions Effects
General rule: A close corporation may refuse to
1. The stock is The transferee is
register the transfer of stock in the name of the
issued or conclusively
transferee who has or is conclusively presumed
transferred to a presumed to have
to have notice that:
person not entitled notice of his
under the articles of ineligibility to be a
1. He is not eligible to be a holder of stock
incorporation; and stockholder.
of the corporation;
2. Transfer of stock to him causes the
2. The stock
stock of the corporation to be held by
certificate
more than the number of persons
conspicuously
permitted by its articles of incorporation
shows the
to hold stock of the corporation; or
qualifications of the
3. The transfer of stock is in violation of a
persons entitled.
restriction on transfer of stock.

Exceptions:
1. The articles of The transferee is
1. The transfer of stock has been
incorporation states conclusively
consented to by all the stockholders; or
the number of presumed to have
2. The close corporation has amended its
persons, not notice of this fact.
articles of incorporation.
exceeding 20, who
are entitled to be
Options granted to the transferee/ Recourse
holders of record of
of Transferee:
its stock
1. Compel the Close corporation to
2. The stock
purchase his shares at the fair value for

  89  
  

any reason subject only to the any phase of the corporate affairs, shall
conditioned laid down in Section 105. be invalidated as between the parties on
2. Rescind the transfer; or the ground that its effect is to make
3. Recover under any applicable warranty, them partners among themselves.
express or implied.
4. A written agreement among some or all
The term "transfer" is not limited to a of the stockholders in a close
transfer for value. corporation shall not be invalidated on
the ground that it so relates to the
Agreements by and among Stockholders conduct of the business and affairs of
the corporation as to restrict or interfere
1. Agreements by and among stockholders with the discretion or powers of the
executed before the formation and board of directors: Provided, That such
organization of a close corporation, agreement shall impose on the
signed by all stockholders, shall survive stockholders who are parties thereto the
the incorporation of such corporation liabilities for managerial acts imposed by
and shall continue to be valid and this Code on directors.
binding between and among such Par 3 and 4 refers to conduct of
stockholders, if such be their intent, to corporate affairs which renders any written
agreement of the SHs to be effective and
the extent that such agreements are not
binding despite the fact that it may make
inconsistent with the articles of them partners among themselves.
incorporation, irrespective of where the Agreements may also be entered
provisions of such agreements are into by and between the Shs of a close
contained, except those required by this corporation which relates to the
Title to be embodied in said articles of management of the corporate affairs which
incorporation. would not otherwise be valid and binding in
other corporations. This is because Sh/s
Ordinary stock Close Corporation agreement in the latter cannot limit or restrict
corporation the discretion and powers of the BOD to
manage the corporate affairs.
5. To the extent that the stockholders are
Do not ordinarily In close corporations,
survive the it will survive and actively engaged in the management or
corporation in continue to be valid, if operation of the business and affairs of
ordinary stock such be the intent of a close corporation, the stockholders
corporation unless it the SHs, provided that shall be held to strict fiduciary duties to
has been ratified or agreement is not each other and among themselves. Said
adopted by the inconsistent with the stockholders shall be personally liable
corporation after articles. for corporate torts unless the
incorporation. corporation has obtained reasonably
adequate liability insurance.

General rule: Any action by the directors of a

close corporation without a meeting is invalid.
2. An agreement between two or more
stockholders, if in writing and signed by
Exceptions: When board meeting is
the parties thereto, may provide that in
unnecessary or improperly held. - Unless the by-
exercising any voting rights, the shares
laws provide otherwise, any action by the
held by them shall be voted as therein
directors of a close corporation without a
provided, or as they may agree, or as
meeting shall nevertheless be deemed valid if:
determined in accordance with a
procedure agreed upon by them. (SHs in
a. Written consent is signed by all the
a close corporation may this agree to vote
for a specific person or group or to maintain directors;
a certain Sh as their president or chairman.
b. All the stockholders have actual or
3. No provision in any written agreement implied knowledge of the action and
signed by the stockholders, relating to make no prompt objection thereto in

  90  
  

writing; a. Delete or remove any provision required

c. The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
stockholders; or
d. All the directors have express or
implied knowledge of the action in
question and none of them makes
prompt objection thereto in writing.
(If a director's meeting is held without
proper call or notice, an action taken therein
within the corporate powers is deemed ratified
by a director who failed to attend, unless he
promptly files his written objection with the
secretary of the corporation after having
knowledge thereof.)
Exception to the exceptions: The by-laws
provide otherwise.
As to Pre-emptive Right
by Title XV of the Code to be contained
in the articles of incorporation, or
b. Reduce a quorum or voting requirement
stated in said articles of incorporation,
must be approved by the affirmative
vote of at least 2/3 of the outstanding
capital stock, whether with or without
voting rights, or of such greater
proportion of shares as may be
specifically provided in the articles of
incorporation for amending, deleting or
removing any of the aforesaid
provisions, at a meeting duly called for
the purpose.
Main distinctions of ordinary stock and close
corporations are:
1. No public offer in close corporation
2. As to their pre-emptive right
3. Any SH may compel the corporation to
buy its shares provided, corporation has
capacity

Ordinary Stock Close Corporation ** Deadlock - the directors or stockholders are

Corporation so divided respecting the management of the
corporation's business and affairs that the votes
Pre-emptive right be Pre-emptive right is required for any corporate action cannot be
denied if the shares absolute because obtained, with the consequence that the
are to be issued in there is no public business and affairs of the corporation can no
compliance with laws offering in close longer be conducted to the advantage of the
requiring stock corporation.
stockholders generally.
offering or minimum
stock ownership y the Pre-emptive right is
public, in exchange broadened to include
Ex. 2/3 votes for ordinary stock; ¾ for close
for properly needed all issued without corporation as provided in Articles. 2/3 votes can
for corporate exceptions unless, of be obtained but ¾ votes not. If this is the case
purposes; or, in course, denied or there will be deadlock.
payment of previous limited by the Articles.
debts. (S.39) - Provision violated the business
judgment rule.
Q: Are treasury - Powers of the SEC involving
shares included?
intracorporate disputes is transferred to
the special commercial law.
- Provisional director appointed by the
court.
General rule: The pre-emptive right of - It may prohibit corporation to act even in
stockholders in close corporations shall extend case of death of the corporation,
to all stock to be issued, including reissuance of - It gives the SEC a very wide discretion
treasury shares, whether for money, property or in respect to management of a close
personal services, or in payment of corporate corporation in the event of deadlock. It
debts. may:
Exception: The articles of incorporation In case of a deadlock and upon written
provide otherwise. Any amendment to the petition by any stockholder, the SEC has the
articles of incorporation which seeks to: power to arbitrate the dispute and the authority

  91
 

to:
1. Cancel or alter any provision contained in
the articles of incorporation, by-laws, or any
stockholder's agreement;
2. Cancel, alter or enjoin any resolution or act of
the corporation or its board of directors,
stockholders, or officers;
3. Direct or prohibit any act of the corporation or
its board of directors, stockholders, officers, or
other persons party to the action;
4. Require the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books, or by
the other stockholders;
5. Appoint a provisional director;
6. Dissolve the corporation; or
7.Grant such other relief as the circumstances
may warrant.
In the event that SEC opt to appoint a
provisional director, the second par of Sec. 104
will apply. The provisional director may break
the deadlock by casting the deciding vote.
Provisional director:
a. A provisional director shall be an
impartial person who is neither a
stockholder nor a creditor of the
corporation or of any subsidiary or
affiliate of the corporation, and whose
further qualifications, if any, may be
determined by the SEC.
b. A provisional director is not a receiver of
the corporation and does not have the
title and powers of a custodian or
receiver.
c. A provisional director shall have all the
rights and powers of a duly elected
director of the corporation, including the
right to notice of and to vote at meetings
of directors, until such time as he shall
be removed by order of the SEC or by
all the stockholders.
His compensation shall be
determined by agreement between him and the
corporation subject to approval of the SEC,
which may fix his compensation in the absence
of agreement or in the event of disagreement
  92
between the provisional director and the
corporation.
Any stockholder of a close corporation may,
for any reason, compel the said corporation to
purchase his shares at their fair value, which
shall not be less than their par or issued value,
when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive
of capital stock. This can be done by stock
corporation only upon the exercise of his
appraisal right in those instances allowed in Sec.
81.
Dissolution…
Any stockholder of a close corporation may,
by written petition to the SEC, compel the
dissolution of such corporation whenever:
Any of acts of the directors, officers or those
in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder; or Corporate assets are being
misapplied or wasted.
Dishonesty is a ground for dissolution of a
close corporation
When there is a relief available, dissolution
would not be available in an ordinary
corporation.
Ex:
Wastage of corporate assets because
investment in business outside the purpose
clause. Corporation did not approve and they
ask for dissolution
Land transportation to Mining- SC did not ruled
in favor of dissolution because this may only be
warranted if no other remedy. First, go
personally to officer involved but in close
corporation court perhaps may have granted
dissolution because one of the grounds is any
other acts prejudicial to the business.
Close Corporation Ordinary Stock
Corporation
The number of No limitation as to
stockholders cannot number of

 

exceed 20. shareholders. particular class of

stock, cumulative
The number of Maximum number of voting may, in effect,
directors can directors is 15 be restricted.
effectively be more
than 15. The articles of Officers are elected
incorporation may by the Board of
Shares of stock are Generally no provide that all Directors.
subject to specified restriction on transfer officers shall be
restrictions. of shares. elected or appointed
by the stockholders.
Shares of stock are No prohibition.
prohibited from it may provide for Although the articles
being listed in the greater quorum and of incorporation or
stock exchange or voting requirements by-laws may provide
offered for sale to in meetings of for greater quorum
the public. stockholders and and voting
directors. requirements in
Stockholders may Management is directors‟ meetings
take an active part in lodged in the board under Sec. 25, those
corporate of directors. for stockholders‟
management by meetings cannot
vesting generally be altered.
management to
them rather than the Restrictions on Valid and binding if
a board of directors. transfer of shares indicated in the
should be indicated articles of
Those active in Directors are liable in the articles of incorporation and
management are for torts only if they incorporation, by- stock certificates.
personally liable for have acted laws and stock
corporate torts negligently or certificates.
unless the fraudulently.
corporation has Pre-emptive rights of Pre-emptive rights
obtained an stockholders is may be denied as
adequate liability broader as it provided for in Sec.
insurance. includes all issues 39.
without exception.
Directors can validly Directors must, as a
act even without a rule, act as a body at
meeting a duly constituted A stockholder may Unless he sells his
meeting. withdraw and shares, a
compel the stockholder cannot
Agreements Not valid and binding corporation to get back his
between since stockholders‟ purchase his shares investment nor
stockholders agreement cannot for any reason with compel the
regarding the limit the discretion of the limitation only corporation to buy
operations of the the Board to manage that the corporation his shares except in
business can validly corporate affairs. has sufficient assets the exercise of his
be made. to cover its liabilities appraisal right.
exclusive of capital
To the extent that Ordinarily, no such stock.
directors may be classification and no
classified into one or restrictions on The proper forum Courts cannot
more classes and to cumulative voting. may interfere in the interfere in the
be voted solely by a management of a business judgment of

  93  
  

close corporation in the duty imposed by law. Article 283 of the Labor
case of deadlocks directors/stockholder Code mandates the employer to grant
under Sec. 104, s. separation pay to employees in case of closure
even if the or cessation of operations of establishment or
directors/stockholder undertaking not due to serious business losses
s are acting in good or financial reverses. CFTI failed to comply with
faith. this law-imposed duty or obligation.
Consequently, its stockholder who was actively
Any stockholder Dissolution may be engaged in the management or operation of the
may petition the Sec had only on the business should be held personally liable.
for corporate grounds provided by (Naguiat vs. NLRC)
dissolution on the provisions of the
grounds among Code on dissolution Atty. Ladia: 2 Corporations in both cases are
others, provided for and PD 902-A, as not close corporation because there must be
in Sec. 105., amended. compliance with sec. 96 but still SC said that
they are close corporation. He said that the SC
Additional will still arrive at the same ruling without
misapplying the law if:
As to appraisal right
Dulay case- Estoppel because Vice president
sigened

Nugait cause- In labor cases, if in Bad faith are

personally liable.
Business judgment rule
is not applicable in IMPORTANT!! Notes in page 465
case of deadlocks

Transferees has no
same right to compel
the corporation record
the transfer in books to
be a Sh

In a close corporation, a corporate action

taken at a board meeting without proper call or
notice is deemed ratified by the absent director
unless the latter promptly files his written
objection with the secretary of the corporation
after having knowledge of the meeting. (Manuel
Dulay Enterprises vs. CA)

Structure steel corporation holding 98%

od outstanding stock does not make it a close
corporation because qualifying condition in Sec.
96 must be present.

Stockholders who actively engage in the

management or operation of the business and
affairs of a close corporation shall be personally
liable for corporate torts unless the corporation
has obtained reasonably adequate liability
insurance. Essentially a tort consists in the
violation of a right given or the omission of a

  94
 

CHAPTER XVI
SPECIAL CORPORATION
2 Tyeps
1. Educational Corporation
Private & Public
2. Religious Corporation
Corporation sole & Religious
societes
EDUCATIONAL CORPORATIONS
Educational corporations – those which
provide facilities for teaching or instruction.
Educational corporations are governed
primarily by special laws and secondarily by the
Code.
Public schools are those created by
government and subject to the law of its
creation.
Private school includes any private
institutions for teaching, managed by private
individual or corporations.
Educational institutions are required
to incorporate within 90 days after their
recognition as such. However, failure to comply
will not immune the educational institution from
suit as a corporation.
A favorable recommendation of the
Secretary of Education, Culture and Sports is
required before the SEC accepts or approves
the articles of incorporation or by-laws of any
educational institution.
Q: How are the BOD/T of be constituted in
educational corporations?
  95
Trustees of non-stock educational
corporations shall not be less than 5 nor more
than fifteen 15, in multiples of 5.
Q: May the governing board be less than 13?
Yes, in stock corporation, because provisions in
stock corporation must apply. In non-stock
corporation, No, it must be in multiples of 5.
Q: What is their term of office?
GR: 5 years
XPN:
Unless otherwise provided in the
articles of incorporation on the by-laws (it may
be less than 1 year), the board of trustees of
incorporated schools, colleges, or other
institutions of learning shall, as soon as
organized, so classify themselves that the term
of office of 1/5 of their number shall expire every
year. Trustees thereafter elected to fill
vacancies, occurring before the expiration of a
particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to
fill vacancies caused by expiration of term shall
hold office for 5 years. A majority of the trustees
shall constitute a quorum for the transaction of
business. The powers and authority of trustees
shall be defined in the by- laws.
For institutions organized as stock
corporations, the number and term of directors
shall be governed by the provisions on stock
corporations.
Q: May foreigners be Board of Director in an
educational corporation?
General rule: Educational institutions shall be
owned solely by citizens of the Philippines or
corporations or associations at least 60% of the
capital of which is owned by such citizens. The
control and administration of educational
institutions shall be vested in citizens of the
Philippines. (While foreigners may own a max. of
40% of capital stock of an educational institution not
one of them may sit as a BOD. Neither may they act
as a officer with the power of control and
administration. Their ownership is limited to “non
controlling interest”)
Exception: Educational institutions established
by religious groups and mission boards. ( Art.
XIV, Par. 2 Sec. 4)

General rule: No educational institution shall be
established exclusively for aliens and no group
of aliens shall comprise more than 1/3 of the
enrollment in any school.
Exception: The rule shall not apply to schools
established for foreign diplomatic personnel and
their dependents and, unless otherwise provided
by law, for other foreign temporary residents.
Ex. St. Louis University- created by religious
order by Belgian
UST- Jesuits
Grace Christian School- President is
naturalized foreigner.
RELIGIOUS CORPORATIONS
Religious corporation – one composed entirely
of spiritual persons which is created for the
furtherance of religion or perpetuating the rights
of the church or for the administration of church
or religious work or property.
Classes of religious corporations:
i. Corporations sole; and
ii. Religious societies.
Religious corporations are governed
by the appropriate chapter of the Code and the
general provisions on non-stock corporations.
Corporation Sole
Corporation sole – consists of one person only
and his successor in some particular station,
who are incorporated by law in order to give
them some legal capacities and advantages,
particularly that of perpetuity, which in their
natural persons they could not have had.
Purpose – Administration and management, as
trustee, of the affairs, properties and
temporalities of any religious denomination, sect
or church.
Who – Chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of such
religious denomination, sect or church. (not just
any person)
  96
Requirements and procedure of
incorporation:
The chief archbishop, bishop, priest, minister,
rabbi or other presiding elder of such religious
denomination, sect or church must file the
articles of incorporation with the SEC which
must contain the following:
1. That he is the chief archbishop,
bishop, priest, minister, rabbi or
presiding elder of his religious
denomination, sect or church and that
he desires to become a corporation
sole;
2. That the rules, regulations and
discipline of his religious denomination,
sect or church are not inconsistent with
his becoming a corporation sole and do
not forbid it;
3. That as such chief archbishop,
bishop, priest, minister, rabbi or
presiding elder, he is charged with the
administration of the temporalities and
the management of the affairs, estate
and properties of his religious
denomination, sect or church within his
territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy
occurring in the office of chief
archbishop, bishop, priest, minister,
rabbi of presiding elder is required to be
filled, according to the rules, regulations
or discipline of the religious
denomination, sect or church to which
he belongs; and
5. The place where the principal office of
the corporation sole is to be established
and located, which place must be within
the Philippines.
The articles of incorporation may
include any other provision not contrary to law
for the regulation of the affairs of the
corporation.
The articles of incorporation must be:
Verified by affidavit or affirmation of
the chief archbishop, bishop, priest, minister,
rabbi or presiding elder, as the case may be;
Accompanied by a copy of the commission,
certificate of election or letter of appointment of
such chief archbishop, bishop, priest, minister,
rabbi or presiding elder; and Duly certified to be
correct by any notary public.

From and after the filing of the
aforementioned documents with the SEC, such
chief archbishop, bishop, priest, minister, rabbi
or presiding elder shall become a corporation
sole.
All temporalities, estate and properties of the
religious denomination, sect or church
administered or managed by the corporation
sole shall be held in trust for the use, purpose,
behalf and sole benefit of the religious
denomination, sect or church, including
hospitals, schools, colleges, orphan asylums,
parsonages and cemeteries thereof.
A provision relative to its term of existence is
not required since a corporation sole is
supposed to exist in perpetuity. It may however
be dissolved in accordance with Sec. 115
Q: When does it become a judicial
personality?
General rule: A corporation acquires juridical
personality only upon the issuance of a
certificate of incorporation by the SEC.
Exception: A corporation sole becomes
endowed with corporate personality after filing of
the verified articles of incorporation together with
other required documents.
Q: Can a corporation sole acquire, own, sell
and alienate properties?
A corporation sole may purchase and hold
real estate and personal property for its church,
charitable, benevolent or educational purposes,
and may receive bequests or gifts for such
purposes.
General rule: A court order is required before a
corporation sole may sell or mortgage real
property held by it. Before such an order is
granted, a verified petition must be made by the
chief archbishop, bishop, priest, minister, rabbi
or presiding elder acting as corporation sole and
it must be shown that notice of the application
has been given as directed by the court and that
it is to the interest of the corporation that the
petition be granted. However, such application
may be opposed by any member of the religious
denomination, sect or church represented by the
corporation sole.
  97
Exception: Court intervention is not necessary
when the rules, regulations and discipline of the
religious denomination, sect or church, religious
society or order concerned represented by such
corporation sole regulate the method of
acquiring, holding, selling and mortgaging real
estate and personal property.
T or F- Does the sole corporation has the
same rights with ordinary corporation with
regards to acquisition and alienation?
FALSE, in alienation and selling court order is
required unless otherwise provided in the
Articles.
Q: Can the Sole corporation register
property? Yes
Will it vest ownership to the head? No, the
head merely acts as trustee of guardian.
Registration of real property in the name of
the corporation sole does not vest ownership
unto the head thereof.
The constitutional requirement that 60% of
the capital of a corporation must be owned by
Filipino citizens before it may register land in its
own name does not apply to a corporation sole.
A corporation sole has no nationality and the
framers of the constitution did not have in mind
the corporation sole when it provided for such
requirement. (Roman Catholic Apostolic Adm.
of Davao, Inc. vs. LRC)
Whether or not a corporation sole, or any
private corporation for that matter, can acquire
alienable land of the public domain depends
upon the character of the land at the time of the
institution of the registration proceeding. If it still
forms part of the public domain, no. If it is
private, yes. (Republic vs. INC)
Under the Public Land Act, alienable public
land may be subject to registration by a
possessor if he, personally or through his
predecessor-in-interest, had openly,
continuously, exclusively and notoriously
possessed the same for 30 years. The law
creates the legal fiction whereby the land, upon
completion of the requisite period ipso jure and
without the need of judicial or other sanction,
ceases to be public land and becomes private
property. (Director of Lands vs. CA)
Q: Who fill up the vacancy?

 

In case of vacancy in the office of the “head” or for the management of its affairs, properties
of the corporation, the person authorized by the and estate
rules, regulations or discipline of the
denomination shall exercise all the powers and Who – any religious society or religious order, or
authority of the corporation sole during such any diocese, synod, or district organization of
vacancy and until such vacancy has been filled- any religious denomination, sect or church.
up. It is required that the successor filling-u the
vacancy must file with the SEC a copy of his Requirements and procedure for incorporation:
commission, certificate of election, or letter of
appointment, duly certified by a notary public. 1. Filing of the articles of incorporation
with the SEC;
The successors in office shall become the 2. The articles of incorporation must set
corporation sole and shall be permitted to forth the following:
transact business as such only upon the filing a. That the religious society or
with the SEC of a copy of their commission, religious order, or diocese,
certificate of election, or letters of appointment, synod, or district organization is
duly certified by a notary public. a religious organization of a
religious denomination, sect or
Q: May a Corporation Sole be dissolved? church;
Yes, by submission of a verified declaration of b. That at least 2/3 of its
dissolution. membership have given their
written consent or have voted to
Q: May it be dissolved involuntary incorporate, at a duly convened
(judicially)? GR: No, because of separation of meeting of the body;
Church and State 3. That the incorporation of the
religious society or religious order, or
XPN: By Police Power, in the event that diocese, synod, or district organization
corporation did not use it according to purpose. desiring to incorporate is not forbidden
For illegal or immoral acts. by competent authority or by the
constitution, rules, regulations or
Requirements for the voluntary dissolution of discipline of the religious denomination,
corporations sole: 1. Filing with the SEC of a sect, or church of which it forms a part;
verified declaration of dissolution which must set 4. That the religious society or
forth the following: religious order, or diocese, synod, or
district organization desires to
a. The name of the corporation; incorporate for the administration of its
b. The reason for dissolution and affairs, properties and estate;
winding up; 5. The place where the principal
c. The authorization for the dissolution office of the corporation is to be
of the corporation by the particular established and located, which place
religious denomination, sect or church; must be within the Philippines; and
and 6. The names, nationalities, and
d. The names and addresses of the residences of the trustees elected by the
persons who are to supervise the religious society or religious order, or
winding up of the affairs of the the diocese, synod, or district
corporation. organization to serve for the first year or
e. Approval of the SEC. such other period as may be prescribed
by the laws of the religious society or
Religious Societies religious order, or of the diocese, synod,
or district organization, the board of
Religious society – a body of person trustees to be not less than 5 nor more
associated together for the purpose of than 15.
maintaining religious worship.

Purpose – the administration of its temporalities

The articles of incorporation

  98
 

must be verified by the affidavit of the
presiding elder, secretary, or clerk or other
member of such religious society or religious
order, or diocese, synod, or district
organization of the religious denomination,
sect or church.
Q: When does they acquire juridical
personality? Issuance of the SEC of the
certificate of incorporation.
The articles of incorporation of a religious
society need not indicate a term since it is
supposed to exist in perpetuity.
Religious society is not mandated by law to
register as a corporation but it may do so to
acquire juridical personality and for the purpose
of administration of its temporalities and
properties and even to acquire properties of its
own. Thus, it has been held that an
unincorporated religious association cannot
acquire private agricultural land in the
Philippines.
Q: May it be dissolved thru judicial act? Yes
May the rules governing dissolution be
applied in religious societies? Yes
CHAPTER XVII
DISSOLUTION
Dissolution – the extinguishment of the
corporate franchise and the termination of
corporate existence.
General rule: When a corporation is dissolved,
it ceases to be a juridical entity and can no
longer pursue the business for which it is
incorporated.
Exception: The corporation will continue as a
body corporate for another period of 3 years
from the time it is dissolved for the purpose of
winding up its affairs and the liquidation of its
assets.
  99
Three modes of dissolution:
1. By expiration of the corporate term;
2. By voluntary surrender of its primary franchise
(voluntary dissolution); or
3. By the revocation of its corporate franchise
(involuntary dissolution).
EXPIRATION OF CORPORATE TERM
General rule: A corporation registered under
the Corporation Code is required to indicate its
term of existence in the articles of incorporation.
Exceptions:
1. Corporations sole; and
2. Religious societies.
A corporation ceases to exist and is
automatically dissolved (ipso facto) upon the
expiration of the term indicated in its articles of
incorporation without the need of formal
proceeding. There is no need to for the
institution of a proceeding for quo warranto to
determine the time and date of the dissolution of
a corporation because the period of corporate
existence is provided in the articles of
incorporation. (PNB vs. CFI)
SURRENDER OF FRANCHISE (VOLUNTARY
DISSOLUTION)
Three modes of voluntary dissolution:
i. Voluntary dissolution where no creditors are
affected;
ii. Voluntary dissolution where creditors are
affected; and
iii. Shortening of corporate term.
Voluntary dissolution where no creditors are
affected;
Formal and procedural requirements for
voluntary dissolution where no creditors are
affected:
a. Majority vote of the board of directors
or trustees;
b. Sending of notice to each stockholder
or member either by registered mail or

personal delivery at least 30 days prior
to the meeting (scheduled by the board
for the purpose of submitting the board
action to dissolve the corporation for
approval of the stockholders or
members);
c. Publication of the notice of time, place
and subject of the meeting for 3
consecutive weeks in a newspaper
published in the place where the
principal office of said corporation is
located or in a newspaper of general
circulation in the Philippines;
d. Resolution adopted by the affirmative
vote of the stockholders owning at least
2/3 of the outstanding capital stock or
2/3 of the members at the meeting duly
called for the purpose;
e. A copy of the resolution authorizing
the dissolution must be certified by a
majority of the board of directors or
trustees and countersigned by the
corporate secretary; and
f. Issuance of a certificate of dissolution
by the SEC.
The requirements and formalities provided by
law for the dissolution of corporations are
mandatory such that failure to comply therewith
will have no effect on the legal existence of the
corporation. A corporation being a creation of
law may only terminate its existence in the
manner prescribed by law.
A mere resolution by the stockholders or the
board of directors of a corporation to dissolve
the same does not affect the dissolution of a
corporation. (Daguhoy Enterprises vs. Ponce)
Voluntary dissolution where creditors are
affected
Formal and procedural requirements for
voluntary dissolution where creditors are
affected:
a. Affirmative vote of the stockholder
representing at least 2/3 of the
outstanding capital stock or at least 2/3
of the members at a meeting duly called
for that purpose;
b. Petition for the dissolution shall be
filled with the SEC signed by the
majority of its board of directors or
trustees or other officers having the
management of its affairs, verified by
  100
the president or secretary or one of its
directors or trustees, setting forth all
claims and demands against it;
c. Issuance of an order by the SEC
reciting the purpose of the petition and
fixing the date on or before which
objections thereto may be filed by any
person, which date shall not be less
than 30 days nor more than 60 days
after entry of the order;
d. Before such date, a copy of the order
must be published once a week for 3
consecutive weeks in a newspaper of
general circulation published in the city
or municipality where the principal office
is situated or in a newspaper of general
circulation in the Philippines;
e. Posting of the same order for 3
consecutive weeks in 3 public places in
such city or municipality;
f. Upon 5 days notice, given after the
date on which the right to file objects
has expired, the SEC shall hear the
petition and try any issue made by the
objections filed; and
g. Judgment dissolving the corporation
and directing disposition of its assets as
justice requires and the appointment of
a receiver (if necessary in the court‟s
discretion) to collect such assets and
pay the debts of the corporation.
While the foregoing is a mandatory
requirements, the appointment of a receiver is
only permissive. SC: The law is intended to let
the stockholders have control of the assets of
the corporation upon dissolution and winding up
of its affairs.
Dissolution by shortening the corporate term
A Corporation may exist for a period of
50 years but there is no law which prevents the
shareholders thereof to shorten that period and
effect a dissolution of the corporation.
19. Procedure to shorten the corporate
term:
20. a. Approval by a majority vote of the
board or directors or trustees.
21. b. Written notice of the proposed action
and the time and place of meeting shall

be served to each stockholder or
member either by mail or by personal
service.
22. c. Ratification by the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members in case of non-stock
corporations.
23. d. Submission of the amended articles
of incorporation to the SEC.
24. e. Approval of the SEC.
In case of a corporation sole, an authorization
for the dissolution by the particular religious
denomination, sect or church is necessary.
A vote must cast at a duly constituted
meeting. Written assent is insufficient.
It is only upon the approval of the SEC that
the corporation is deemed dissolved. Likewise,
section 16 provides that amendment of articles
is deemed approved if not acted upon by SEC
within 6 months does not apply in shortening of
corporate term.
INVOLUNTARY DISSOLUTION
Requirements for involuntary dissolution
by the SEC:
1. Filing of a verified complaint; and
2. Proper notice and hearing on the
grounds provided by laws, rules and
regulations.
Notwithstanding the fact that RA 8799
transferred the jurisdiction of the SEC under
Sec. 5 of PD 902-A to the Special Commercial
Courts, the same law granted the SEC
concurrent jurisdiction over revocation
proceedings. Sec. 5 (m) of RA 8799 provides
that the SEC shall have the power to suspend or
revoke, after proper notice and hearing, the
franchise or certificate of registration of
corporations, partnerships or associations, upon
any ground provided by law.
Grounds for involuntary dissolution under
  101
Sec. 6, PD 902-A:
1. Fraud in procuring the certificate of
registration;
2. Serious misrepresentation as to
what the corporation can do or is doing to
the great prejudice of or damage to the
general public;
3. Refusal to comply or defiance of
any lawful order of the Commission
restraining commission of acts which would
amount to a grave violation of its franchise;
4. Continuous inoperation for a period
of at least 5 years;
5. Failure to file by-laws within the
required period; and
6. Failure to file required reports in
appropriate forms as determined by the
Commission within the prescribed period.
Other grounds provided for the in Corporation
Code:
1. Violation of any provision of the
Code (Sec. 144);
2. In case of deadlock in a close
corporation (Sec. 105);
3. In a close corporation, any acts of
directors, officers or those in control of the
corporation which is illegal or fraudulent or
dishonest or oppressive or unfairly
prejudicial to the corporation or any
stockholder or whenever corporate assets
are being misapplied or wasted (Sec. 105).
Other grounds can be found in special laws,
e.g. the Securities Regulation Code and the
General Banking Act.
Involuntary dissolution is a harsh
remedy akin to a capital punishment. Thus,
Courts proceed with extreme caution in the
proceeding which have for their object the
forfeiture of corporate franchises, and a
forfeiture will not be allowed, except under
express limitation, or for a plain abuse of power
by which the corporation fails to fulfill the design
and purpose of its organization. But when such

abuses and violations constitute or threaten a
substantial injury to the public or such as to
amount to a violation of the fundamental
conditions of the contract (charter) by which the
franchise were granted and thus defeat the
purpose of the grant, then dissolution will be
granted. (Government vs. Philippine Sugar
Estates Co.)
Likewise, it has been held that relief of
dissolution will be awarded only where no other
adequate remedy is available and it will not be
allowed where the rights of the SHs can be, or
are, protected in some other way.
The court has a discretion with respect to the
infliction of capital punishment upon
corporations and there are certain
misdemeanors and misusers of franchises which
should not be recognized as requiring their
dissolution. (Government vs. El Hogar)
That the corporation is guilty of willful and
repeated violation of the law and that its
continuance inflicts substantial injury to the
public warrants its dissolution. (Republic vs.
Security Credit)
Q: What if the corporation in this case is a
close corporation, will the court decide
otherwise? Sec. 105 provides for the grounds
for dissolution of close corporation. It may even
be by mere dishonesty.
Relief by dissolution will be awarded only
where no other adequate remedy is available,
and is not available where the rights of the
stockholders can be, or are, protected in some
other way. The several acts of misuse and
misapplication of the funds and/or assets of the
corporation were committed more particularly by
the corporation‟s president, for the commission
of which they may be held personally liable.
(Republic vs. Bisaya Land Transportation
Co., Inc.)
Under the present state of law, any
stockholder or member of a corporation can
institute a dissolution proceeding against his
own corporation before the proper forum.
The Special Commercial Courts, shall hear
and decide cases involving intra-corporate
dispute or partnership relations between and
among stockholders, members or associates;
between any or all of them and the corporation,
  102
partnership or association of which they are
stockholders, members or associates,
respectively; and between such corporation,
partnership or association and the State insofar
as it concerns their individual franchise or right
to exist as such entity. (PD 902-A)
The SEC has concurrent jurisdiction to
suspend, revoke, after proper notice and
hearing, the franchise or certificate of
registration of corporations, partnership or
associations upon any of the grounds provided
by law. (Sec. 5(m) RA 8799)
The existence of a de jure corporation may
be determined in a private suit for its dissolution
between stockholders, without intervention of
the State. (Hall vs. Piccio)
In a close corporation, a petition for the
dissolution of the corporation may be instituted
by any shareholder on the ground of mere
dishonesty.
EFFECTS OF DISSOLUTION
No right or remedy in favor of or against any
corporation, its stockholders, members,
directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall
be removed or impaired by the subsequent
dissolution of said corporation.
GR: Dissolution terminates not only a
corporations primary franchise but also prevents
it from further exercising other or secondary
franchises which have been conferred to it.
XPN: Debts due to or by the corporation are
not extinguished. Rights and liabilities of the
corporation is not extinguished by its
dissolution.
Dissolution terminates the corporations
power to enter into contracts or to continue the
business as a going concern. (Hall vs. Piccio)
General rule: In a lease to a corporation, the
rights and obligations thereunder are not
extinguished by the corporations dissolution
since leases affect property rights and survives
the death of parties. The stockholders succeed
to the rights and liabilities of the dissolved
corporation in an unexpired leasehold state

which may be enforced by or against the
receiver or liquidating trustee.
Exception: The lease, by its terms, terminates
when the corporation ceases to exist.
Contracts for personal services are deemed
terminated by the dissolution of the corporation.
There is an implied condition that the contract
shall terminate in such event. (Gelano vs. CA)
A dissolved corporation has no juridical
personality; it ceases to exist as a corporation
and cannot apply for a new certificate or a
secondary franchise. (Buenaflor vs. Camarines
Sur Industry Corp.)
The 3-year period allowed by the law is only
for the purpose of liquidation or winding up of
corporate affairs. No act can be done for the
purpose of continuing the business for which it
was established. Neither can it enforce a
contract executed prior to its dissolution. (Cebu
Port Labor Union vs. State Marine Co.)
The termination of the life of a juridical entity
does not, by itself, imply the diminution or
extinction of rights demandable against such
juridical entity. Debts due to or against the
corporation will not be extinguished. Otherwise,
it will amount to an impairment of contracts or a
denial of due process. (Gonzales vs. Sugar
Regulatory Administration)
**LIQUIDATION AND WINDING UP
- The most important steps in connection with
dissolution.
Liquidation and winding up – the collection of
all corporate assets, the payments of all its
debts and settlement of its obligations and the
ultimate distribution of the corporate assets, if
any of it remains, to all stockholders in
accordance with their proportionate
stockholdings in the corporation or in
accordance with their respective contracts of
subscription (e.g. preferred stocks).
A dissolved corporation continues as a body
corporate for a period of 3 years from the time of
dissolution for the purpose of prosecuting and
defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and
convey its property and to distribute its assets,
  103
but not for the purpose of continuing the
business for which it was established.
At any time during said three (3) years, the
corporation is authorized and empowered to
convey all of its property to trustees for the
benefit of stockholders, members, creditors, and
other persons in interest. From and after any
such conveyance by the corporation of its
property in trust for the benefit of its
stockholders, members, creditors and others in
interest, all interest which the corporation had in
the property terminates, the legal interest vests
in the trustees, and the beneficial interest in the
stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs,
any asset distributable to any creditor or
stockholder or member who is unknown or
cannot be found shall be escheated to the city or
municipality where such assets are located.
General rule: No corporation shall distribute any
of its assets or property except upon lawful
dissolution and after payment of all its debts and
liabilities.
25. Exceptions:
1. By decrease of capital stock; or
2. As otherwise allowed the Code.
26. ***Three methods of
liquidation:
1. By the corporation itself though
the Board of Directors
Usual method or procedure of
liquidating a corporation and although there
is no law authorizing it, neither is there
anything that prohibits the BOD from
undertaking the same.
The power of the board to manage
the corporate affairs is broad enough to
cover situation where the corporate affairs
are to be liquidated.
If this method is resorted t, the board
will only have a period of 3 years to finish its
task of liquidation. Claims for or against the
corporation not filed within the period will
become unenforceable as there exist no
corporate entity against which they can be
enforced.
Actions pending for or against the

corporation when the 3 year period expires,
are abated since after the period, the
corporation ceases for all intents and
purposes and is no longer capable of suing
or being sued.
2. By a Trustee appointed by the
corporation.
The 3 year period limitation will not
apply provided the designation of the trustee is
made within that period. Should the corporation
finds it difficult to finish its liquidation, it may, at
any time during the 3 year period, convey all its
assets and receivables to a trustee to prosecute
and defend suits by or against the corporation
begun before the expiration of said period.
In effect, the corporation, as
represented by trustee. Can sue and be sued
even beyond the 3 year period fixed by law.
“Trustee” –counsel to whom the case
is entrusted.
3. By appointment of a receiver.
A receiver may be appointed by the
proper forum or motu proprio upon the
dissolution of the corporation. The appointment
of receiver is permissive and the law tends to
recognize that in cases of voluntary dissolution
there is no occasion for the appointment of a
receiver except under special circumstances
and upon proper showing.
If a receiver is appointed, the three
year period fixed by law within which to
complete the task of liquidation will not likewise
apply because the dissolved corporation is
substituted by the receiver who may sue or be
sued even after that period.
Thus, when a corporation is dissolved
and the liquidation of the assets is placed in the
hands of receiver or assignee, the period of 3
years prescribed by law of the corparation even
after the expiration of three years.
Mere appointment of a receiver without
anything more does not imply the dissolution of
a corporation.
Pending actions by or against a corporation
are abated upon expiration of the period allowed
by law for the liquidation of its affairs; but
  104
trustees to whom the corporate assets have
been conveyed may sue or be sued as such in
all matters connected with the liquidation. The
effect of conveyance is to make the trustees the
legal owners of the property conveyed, subject
to the beneficial interest therein of creditors and
stockholders. (National Abaca Other Fibers
Co. vs. Pore)
If the corporation carries out the liquidation of
its assets through its own officers and continues
and defends the actions brought by or against it,
its existence shall terminate at the end of three
years from the time of dissolution; but if a
receiver or assignee is appointed, as has been
done in the present case, with or without a
transfer of its properties within three years, the
legal interest passes to the assignee, the
beneficial interest remaining in the members,
stockholders, creditors and other interested
persons; and said assignee may bring an action,
prosecute that which has already been
commenced for the benefit of the corporation, or
defend the latter against any other action
already instituted or which may be instituted
even outside of the period of three years fixed
for the offices of the corporation. (Sumera vs.
Valencia)
(Board of Liquidators vs. Kalaw)
The counsel who prosecuted and defended
the interest of the corporation and who appeared
in behalf of the corporation may be considered a
trustee of the corporation at least with respect to
the matter in litigation only. The word “trustee”
must be understood in its general concept.
(Gelano vs. CA)
A claim established against the corporation
may be prosecuted against the liquidator of such
corporation even after the three years from its
dissolution. (Republic vs. Marsman
Development Company)
Upon dissolution of the corporation its assets
are held for the benefit of its stockholder after
payment of its debts and will be so distributed to
the said stockholder in accordance with their
proportionate interest in the corporation or their
contracts of subscription.
Holders of preferred shares may be granted
certain rights or privileges upon dissolution.
General rule: The board of directors of a

dissolved corporation is not permitted to
undertake any activity outside of the usual
liquidation of the corporation.
Exception: The stockholders of a dissolved
corporation may convey their respective
shareholdings toward the creation of a new
corporation to continue the business of the old.
Winding up is the sole activity of a dissolved
corporation that does not intend to incorporate a
new. (Chung Ka Bio vs. IAC)
If the three year period of liquidation has
elapsed and no effort to finally settle or close the
corporate affairs was undertaken, those having
pecuniary interest in the corporate assets,
including not only the stockholders but likewise
the creditors, acting for and its behalf, may make
proper representations with the SEC for working
out a final settlement of the corporate concern.
(Clemente vs. CA)
*** Note: The above decision is an aberrant
ruling. Once the three year period for liquidation
and winding up has elapsed without any trustee
or receiver being appointed, the assets of the
corporation will be escheated in favor of the
Government thus barring the claims of
stockholders and creditors. (Review book!!!)
CHAPTER XVIII
FOREIGN CORPORATIONS
Foreign Domestic
Corporation Corporation
Any corporation A corporation
which owes its created by the laws
existence to the of the state or
laws of another country.
state, government
or country
Foreign corporation – one formed, organized
or existing under any laws other than those of
the Philippines (and whose laws allow Filipino
citizens and corporations to do business in its
  105
own country or state).
The phrase “whose laws allow Filipino citizens
and corporations to do business in its own
country or state” is a mere condition precedent
to the grand of a license of a foreign corporation
to do business in the Philippines.
General rule: The “incorporation test” is
applied in determining whether a corporation is
domestic or foreign. If it is incorporated in
another state, it is a foreign corporation, while if
it is registered under Philippine laws, it is
deemed a Filipino or domestic corporation
irrespective of the nationality of its stockholders.
( a corporation registered under Foreign Investment
Act or Trade Liberalization law with 100% equity is
considered a Domestic foreign corporation)
Exception: In times of war, the “control test”
would apply in determining the corporate
nationality, i.e., the citizenship of the controlling
stockholders determines the nationality of the
corporation.
General rule: A corporation can have no legal
existence outside the boundaries of the
sovereign by which it is created.
Exception: By virtue of state comity, a
corporation created by laws of one state is
usually allowed to transact business in other
states and to sue in the courts of the forum,
subject to restrictions and certain requirements
imposed therein.
Q: What are the requisites in order that FC
can do business in Phil.?
Sec. 123 Requisites for a foreign corporation to
transact business in the Philippines:
1. A license or permit to do so in
accordance with laws of the country;
and
2. A certificate of authority from the
appropriate government agency.
BSP- banking institutions
Office of the Insurance Commission-
insurance companies
A certificate from Board on Investment is no
longer required it is necessary only for
purpose of availing of the incentives allowed
under Omnibus Investment Code.
Q: What will be the implication if FC does

business in Philippines without license?
They can’t sue, liable officers will be held with
penal sanctions under sec.144
It is not the lack of license required but doing
business without required license that will bar
FC from bringing sit in Phil. Courts. XPN ?
Q: How to apply for a license?
Procedure for application of a license:
1. Submission to the SEC of its articles
of incorporation and by-laws, certified in
accordance with law, and their
translation to an official language of the
Philippines, if necessary.
2. The application shall be under oath
and, unless already stated in its articles
of incorporation, shall specifically set
forth the following:
a. The date and term of
incorporation;
b. The principal office of the
corporation in the country or
state of incorporation;
c. The resident agent;
d. The place in the Philippines
where the corporation
intends to operate;
e. The purpose or purposes of the
corporation;
f. The directors and officers of the
corporation;
g. Its authorized capital stock;
h. Its outstanding capital stock;
i. The amount actually paid in;
and
j. Such additional information as
may be necessary or
appropriate in order to
enable the SEC to determine
whether such corporation is
entitled to a license to
transact business in the
Philippines, and to determine
and assess the fees payable.
3. Attached to the application for license
shall be a duly executed certificate
under oath by the authorized official or
officials of the jurisdiction of its
incorporation, attesting to the fact that
the laws of the country or state of the
applicant allow Filipino citizens and
corporations to do business therein, and
that the applicant is an existing
  106
corporation in good standing. If such
certificate is in a foreign language, a
translation thereof in English under oath
of the translator shall be attached
thereto.
4. The application for a license to
transact business in the Philippines shall
likewise be accompanied by a statement
under oath of the president or any other
person authorized by the corporation,
showing to the satisfaction of the
Securities and Exchange Commission
and other governmental agency in the
proper cases that the applicant is
solvent and in sound financial condition,
and setting forth the assets and
liabilities of the corporation as of the
date not exceeding one (1) year
immediately prior to the filing of the
application.
5. Foreign banking, financial and
insurance corporations shall, in addition
to the above requirements, comply with
the provisions of existing laws
applicable to them. In the case of all
other foreign corporations, no
application for license to transact
business in the Philippines shall be
accepted by the Securities and
Exchange Commission without previous
authority from the appropriate
government agency, whenever required
by law.
Foreign corporations already issued a license
to transact business in the Philippines prior to
the effectivity of the Code continue to have such
authority under the terms and conditions of its
license, subject to the provisions of the Code
and other special laws.
Upon compliance with the provisions of Sec.
125, other special laws and the rules and
regulations implementing them, the SEC shall
thereafter issue the license.
Upon issuance of the license, such foreign
corporation may commence to transact business
in the Philippines and continue to do so for as
long as it retains its authority to act as a
corporation under the laws of the country or
state of its incorporation, unless such license is
sooner surrendered, revoked, suspended or
annulled in accordance with this Code or other

special laws.
Within 60 days after the issuance of the
license, a foreign corporation, except those
engaged in foreign banking or insurance, shall
deposit with the SEC, for the benefit of creditors,
securities consisting of bonds or other evidence
of indebtedness of the Philippine government or
its political subdivisions or instrumentalities, or of
government owned or controlled corporations
and entities, shares of stock in “registered
enterprises,” shares of stock in domestic
insurance companies and banks, or any
combination thereof, with an actual market value
of P100,000.00. Additional securities may be
required by the SEC if the actual market value of
the securities on deposit has decreased by at
least 10%.
The objective of the law requiring the
license is not to prevent the foreign corporation
from performing isolated or single acts, but to
prevent it from acquiring a domicile for the
purpose of pursuing its business without taking
steps to render it amendable to suit in the local
courts. (Marshall-Wells Co. vs. H. W. Elser &
Co.)
MODES OF ENTRY OF FOREIGN
CORPORATIONS
FC may step into Philippines territory
and do certain acts, engage in activities or
transact business in various mode. Among them
are:
1. Branch office – on which carries out
business activities of the foreign
corporation itself and derives income
from the Philippines. As such, the
juridical entity involved is one and the
same.
2. Representative or liaison office- One
which deals directly with the clients of
the parent company but does not derive
income from the host country and is fully
subsidized by its head office. It
undertakes activities such as but not
limited to information dissemination and
promotion of company’s products.
3. Local subsidiary- A FC may form or
organize a separate corporation under
the Foreign Investment Act by making at
least a majority of the investment
  107
therein. The corporation thus formed
becomes as the local subsidiary of the
investing FC which becomes legally
independent unit governed by the laws
of Phil. It is called “Domestication” in the
sense that FC is granted the right to
obtain a character or organize itself into
a domestic corporation under the
general laws of the other state.
4. Regional or area headquarters- It is
an office whose purpose is to act as an
administrative branch of a multinational
company engaged in international trade
which principally serves as a
supervision, communications and
coordinating center for its subsidiaries,
branches or affiliates in Asia-Pacific
Region and other foreign markets and
which does not earn or derive income in
the Philippines. It cannot in any manner,
participate in the management of any
subsidiary or branch office in the
Philippines nor shall it market goods and
services in behalf of its mother
company, branches or affiliates.
5. Regional operating headquarters- It is
a FC entity which is allowed to derive
income in the Philippines by performing
qualifying services exclusively to its
affiliates, subsidiaries or branches in the
Philippines, in the foreign markets. They
are granted certain tax incentives such
as exemption from all kinds of local
taxes fees or charges imposed by local
government units except real property
tax, land improvements, tax and duty-
free importation of training materials and
importation of motor vehicles.
6. Regional warehouse- One whose
activities are limited to serving as supply
depot of Regional or Area headquarters
or regional operating headquarters in
the Philippines, after securing a license
therefor in PEZA or concerned ecozone.
It shall only be used for the storage,
deposit and safekeeping but shall not
directly engage in trade or disposition of
goods in the Philippines except those for
delivery to an authorized distributor in
the country.
7. Joint venture- Is a one-time grouping
of two or more persons, natural or

juridical, for carrying out a specified
undertaking. No license to do business
is required on the part of the FC
entering into such kind of business
venture since mere investment does not
constitute doing business as per IRR
unless, the FC actively participates in
the management.
RESIDENT AGENT
The appointment of a resident agent is a
condition precedent to the issuance of a license
to transact business in the Philippines by a
foreign corporation.
The following may be appointed as a resident
agent:
a. An individual residing in the
Philippines, of good moral character and
of sound financial standing; or
b. A domestic corporation lawfully
transacting business in the Philippines
(includes partnerships such as law firms
and accounting firms).
Q: Is it required that FC will have resident
agents? Yes, in order that summons may be
served.
The necessity of the appointment of a
resident agent is only for the purpose of
receiving summons and other legal processes in
any legal action or proceeding against the
foreign corporation.
Modes of service of summons upon a foreign
corporation:
a. Service upon the resident agent – service
upon the resident agent is mandatory if the
foreign corporation is license to do business in
the Philippines;
b. Service upon the SEC – if the licensed foreign
corporation has ceased to transact business in
the Philippines or has no resident agent in the
Philippines; or
c. Service upon any of its officers or agents
within the Philippines.
The latter 2 modes may become
effective only if the foreign corporation failed or
  108
neglected to designate such a person or an
agent.
It was held that “where such FC
actually doing business here has not applied for
a license to do and has not designated and
agent to receive summons, then service of
summons on it will be made pursuant to the
ROC…If such FC has a license to do business,
then summons to it will be served on the agent
designated by it for purpose, or otherwise in
accordance with the Corporation law.
DOING BUSINESS WITHOUT A LICENSE
General rule: No foreign corporation
transacting business in the Philippines without a
license, or its successors or assigns, shall be
permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative
agency of the Philippines
Exception: Such corporation may be sued or
proceeded against before Philippine courts or
administrative tribunals on any valid cause of
action recognized under Philippine laws.
A foreign corporation cannot transact
business in the Philippines without the requisite
license. If it does so, the responsible officers
may be subjected to the penal provisions of Sec.
144.
General rules regarding whether or not a
foreign corporation may sue or be sued in
the Philippines:
A. As to whether or not it can sue.
1. A foreign corporation transacting or doing
business in the Philippines with a license
can sue before Philippine Courts.
2. Subject to certain exceptions, a foreign
corporation doing business in the country
without a license can not sue in Philippine
Courts.
3. If it is not transacting business in the
Philippines, even without a license, it can
sue before the Philippine Courts.
B. As to whether it can be sued or not.
1. A foreign corporation transacting business
in the Philippines with the requisite
license can be sued in the Philippines.
2. A foreign corporation transacting business

in the Philippines without a license can
be sued in Philippine courts.
3. If it is doing business in the Philippines, it
cannot be sued in Philippine courts for
lack of jurisdiction.
It is not the lack of required license but doing
business without a license which bars a foreign
corporation from access to our courts.
(Universal Shipping vs. IAC)
**** General rule: A foreign corporation must
have the requisite license to sue before the
Philippine courts.
Exceptions:
a. The act or transaction involved is an
“isolated transaction;”
b. The foreign corporation is not seeking
to enforce any legal or contractual
rights arising from, or growing out of
any business which it has transacted in
the Philippines;
c. The purpose of the suit is to protect
its trademark, tradename, corporate
name, reputation or goodwill;
d. The suit is based on a violation of the
Revised Penal Code;
e. The foreign corporation is merely
defending a suit filed against it;
f. The party is estopped to challenge
the personality of the corporation by
entering into a contract with it.
f. § Exception to an
exception: Where a single act or
transaction however, is not merely
incidental or casual but indicates the
foreign corporation‟s intention to do
other business in the Philippines, said
single act or transaction constitutes
„doing‟ or „engaging in‟ or „transacting‟
business in the Philippines.
The true test regarding “doing” or “engaging
in” or “transacting” business is whether the
foreign corporation is continuing the body or
substance of the business or enterprise for
which it was organized or whether it has
  109
substantially retired from it and turned it over to
another. The term implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of
acts or works or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, the purpose and
object of its organization. (Mentholatum Co.,
Inc. vs. Mangaliman) examples page 537
The object of the statute was to subject the
foreign corporation doing business in the
Philippines to the jurisdiction of its courts. The
object of the statute was not to prevent the
foreign corporation from performing single acts,
but to prevent is from acquiring domicile for the
purpose of business without taking the steps
necessary to render it amenable to suit in the
local courts. The law simply means that no
foreign corporation shall be permitted “to
transact business in the Philippine Islands”
unless it shall have the license required by law,
and until it complies with the law, shall not be
permitted to maintain any suit in the local courts.
(Marshall-Wells Co. vs. Henry W. Elser & Co.)
A foreign corporation not engaged in
business in the Philippines may not be denied
the right to file an action in Philippine courts for
isolated transactions. (Bulakhidas vs. Navarro)
If A foreign corporation not engaged in
business in the Philippines has the right to sue
on an isolated transaction, more so may it sue
based on a mistake. (Swedish East Asia Co.,
Ltd. vs. Manila Port Service)
There was only one agreement between
petitioners and the respondent. The three
seemingly different transactions were entered
into by the parties only in an effort to fulfill the
basic agreement and in no way indicate an
intent on the part of the respondent to engage in
a continuity of transactions with petitioners
which will categorize it as a foreign corporation
doing business in the Philippines. The
respondent, being a foreign corporation not
doing business in the Philippines, does not need
to obtain a license to do business in order to
have the capacity to sue. (Atnam
Consolidated, Inc. vs. CA)
Under the rules of the BOI, the phrase “doing
business‟ has been exemplified with
illustrations, among them being as follows:

a. Soliciting orders, purchase (sales) or service
contracts. Concrete and specific
solicitations by a foreign firm, not acting
independently of the foreign firm
amounting to negotiation or fixing of the
terms and conditions of sales or service
contract, regardless of whether the
contracts are actually reduced to writing,
shall constitute doing business even in
the enterprise has no office or fixed place
of business in the Philippines.
b. Appointing a representative or distributor
who is domiciled in the Philippines unless
said representative or distributor has an
independent status, i.e., it transacts
business in its name and for its own
account, and not in the name or for the
account of the pricipal.
c. Opening offices, whether called „liaison‟
offices, agencies or branches, unless
provided otherwise.
d.Any other act or acts that imply a continuity
of commercial dealings or arrangements,
and contemplate to that extent the
performance of acts or works, or the
exercise of some of the functions
normally incident to, or in the progressive
prosecution of, commercial gain or of the
purpose and objective of the business
organization. (Facilities Management
Corp. vs. De La Rosa)
A single act may bring the corporation within
the purview of the statute where it is an act of
the ordinary business of the corporation. In such
a case, the single act of transaction is not
merely incidental or casual, but is of such
character as distinctly to indicate a purpose on
the part of the operations for the conduct of a
part of the corporation‟s ordinary business. (Far
East Int‟l Import vs. Nankai)
ITEC‟s arrangement with its various
business contacts in the country indicate its
purpose to bring about the situation among its
customers and the general public that they are
dealing directly with ITEC and that ITEC is
actively engage in business in the country. In
determining whether a corporation does
business in the Philippines or not, aside from
their activities within the forum, reference may
be made to the contractual agreements entered
into by it with other entities in the country.
  110
(Communication Materials and Design, Inc.
vs. CA)
A foreign corporation doing business in the
Philippines may sue in Philippine courts
although no authorized to do business here
against a Philippine citizen or entity who had
contracted with and benefited by said
corporation. To put it another way, a party is
estopped to challenge the personality of a
corporation after having acknowledged the same
by entering into a contract with it. An the
doctrine of estoppel to deny corporate existence
applies to a foreign as well as to domestic
corporations. One who has dealt with a
corporation of foreign origin as a corporate entity
is estopped to deny its corporate existence and
capacity. The principle will be applied to prevent
a person contracting with a foreign corporation
from later taking advantage of its noncompliance
with the statutes chiefly in cases where such
person has received the benefits of the contract.
(Communication Materials and Design, Inc.
vs. CA)
The right of a corporation to use its corporate
and trade name is a property right, a right in
rem, which it may assert and protect against all
the world, in any of the courts of the world –
even in jurisdictions where it does not transact
business – just the same as it may protect its
tangible property, real or personal, against
trespass, or conversion. Since it is the trade and
not the make that is to be protected, a trademark
acknowledges no territorial boundaries or
municipalities or states or nations, but extends
to every market where the traders goods have
become known and identified by the use of the
mark. (Western Equipment and Supply Co.
vs. Reyes)
A foreign corporation which has never
done business in the Philippine Islands and
which is unlicensed and unregistered to do
business here, but is widely and favorably
known in the Islands through the use therein of
its products bearing its corporate and trade
name has a legal right to maintain an action in
the Islands. Parenthetically the Trademark Law
allows a foreign corporation or juristic person to
bring an action in Philippine courts for
infringement of a mark or trade-name, for unfair
competition, or false designation of origin and
false description, whether or not it has been
licensed to do business in the Philippines.
(General Garments Corporation vs. Director

of Patents)
Article 8 of the Paris Convention to which the
Philippines became a party provides that a trade
name shall be protected in all the countries of
the Union without the obligation of filing or
registration, whether or not it forms part of the
trademark. (Puma vs. IAC)
A foreign corporation not doing business not
doing business in the Philippines needs no
license to sue before Philippine courts for
infringement of trademark and unfair
competition. (Le Chemise Lacoste vs.
Fernandez)
In a suit involving the violation of the Revised
Penal Code the complainant foreign
corporation‟s capacity to sue is not significant.
(Le Chemise Lacoste vs. Fernandez)
CAPACITY TO SUE
General rule: A foreign corporation must
affirmatively plead its capacity to sue in order
that it may proceed and effectively institute a
case in Philippine courts.
Exceptions:
a. The action involves a complaint for violation
of the Revised Penal Code.
b. The foreign corporation is not suing or
maintaining a suit but is merely
defending itself from one filed against it.
The qualifying circumstance of whether or not
a foreign corporation has engaged in business
in the Philippines is an essential part of the
element of a foreign corporations capacity to
sue and must be affirmatively pleaded.
(Atlantic Mutual Insurance Co. vs. Cebu
Stevedoring Co., Inc.)
If the dismissal of the case, based on failure
of the foreign corporation to aver its capacity to
sue, would not, however, bar the institution of
the same action, dismissal should not be
allowed, especially so if it would be an idle,
circuitous ceremony considering the absence of
any meritorious substantial defense of the
  111
defense of the defendant. Technical rules should
not be accorded undue importance to frustrate
and defeat a plainly valid claim. (Olympia
Business Machines Co. vs. Razon, Inc.)
Since petitioner is not maintaining any suit
but is merely defending one against itself (it did
not file any complaint but only a corollary
defensive petition to prohibit the lower court from
further proceeding with a suit that it had no
jurisdiction to entertain), its failure to aver its
legal capacity to institute the present petition is
not fatal. (Time, Inc. vs. Reyes)
LAWS GOVERNING FOREIGN
CORPORATIONS
General rule: Any foreign corporation lawfully
doing business in the Philippines shall be bound
by all laws, rules and regulations applicable to
domestic corporations of the same class. They
are placed in a similar situation as any other
domestic corporation.
Exceptions:
a. Laws which provide for the creation,
formation, organization or dissolution of
corporations; or
b. Laws which fix the relations,
liabilities, responsibilities, or duties of
stockholders, members or officers of a
corporation to each other or to the corporation.
In effect, Intra-corporate or internal matters not
affecting creditors or the public in general are
governed not by Philippine laws but the law
under which the foreign corporation was formed
or organized.
Special laws may provide or grant certain
restrictions, limitations, privileges or incentives
to a foreign corporation not otherwise applicable
or granted to domestic corporations (e.g. import
duties and tax incentives under the Omnibus
Investments Code).
A foreign corporation authorized to transact
business in the Philippines which amends its
articles of incorporation or by-laws must file a
copy of such amended articles of incorporation
or by-laws with the SEC or the appropriate

 

government agency within 60 days from the penalties, if any, lawfully due to the
effectivity of such amendment. Philippine Government or any of its
agencies or political subdivisions
Instances when a foreign corporation authorized have been paid;
to transact business in the Philippines must
obtain an amended license: d. Publication of the petition for
withdrawal once a week for 3
a. The foreign corporation changes its corporate consecutive weeks in a newspaper
name; or of general circulation in the
Philippines; and
b. The foreign corporation desires to pursue
other or additional purposes in the e. Issuance of the certificate of
Philippines. withdrawal by the SEC.

Requirements in a merger or consolidation of Grounds for the revocation or suspension of

a foreign corporation licensed in the Philippines: license:

Ø With a domestic corporation: Such a.
must be permitted under Philippines
laws and by the law of its incorporation;
and The requirements on merger or b.
consolidation provided by the Code
must be followed. If it merges or
consolidates in the place of its c.
incorporation, necessarily the laws of
that state shall be made to apply. It shall
file with the SEC and the appropriate
government agency concerned, a duly
authenticated copy of the Articles of d.
merger and consolidation.
Ø With a foreign corporation: Such must
be permitted by the law of its
incorporation; A duly authenticated
articles of merger or consolidation
must be filed with the SEC or the
appropriate government agency within e.
60 days from the effectivity of the
merger or consolidation; and If the
absorbed corporation is the foreign
corporation doing business in the
Philippines, a petition for withdrawal of f.
its license must also be filed.
Requirements and procedure for the withdrawal
of foreign corporations:
Failure to file its annual report or pay
any fees as required by the Code;
Failure to appoint and maintain a
resident agent in the Philippines;
Failure, after change of its resident
agent or of his address, to submit to
the SEC a statement of such
change;
Failure to submit to the SEC an
authenticated copy of any
amendment to its articles of
incorporation or by-laws or of any
articles of merger or consolidation
within the time prescribed by the
Code;
Misrepresentation of any material
matter in any application, report,
affidavit or other document
submitted;
Failure to pay any and all taxes,
imposts, assessments or penalties,
if any, lawfully due to the Philippine
Government or any of its agencies
or political subdivisions;

a. Filing of a petition for withdrawal of g. Transacting business in the

license; Philippines outside of the purpose or
purposes for which such corporation
b. All claims which have accrued in the is authorized under its license;
Philippines have been paid,
compromised or settled; h. Transacting business in the
Philippines as agent of or acting for
c. All taxes, imposts, assessments and and in behalf of any foreign

  112
 

corporation or entity not duly
licensed to do business in the
Philippines; or
i. Any other ground as would render it
unfit to transact business in the
Philippines.
Last ground is all encompassing, giving the
SEC a wide discretion in revoking or suspending
the license of a FC. Depending on the
seriousness of the acts objectionable done by
FC, the SEC can either mete out the penalty of
suspension or revocation.
Revocation is not generally granted if it
does not cause a substantial injury to the public
and there are other legal remedies available.
Other grounds for revocation of license
under special laws:
1. General Banking Act – imminent danger of
insolvency;
2. Insurance Code – unsound condition, failure
to comply with the provisions of law or
regulation obligatory upon it, a condition
or method of business hazardous to the
public or its policy holders, impairment
of its security deposit, or deficiency in
the margin of solvency.
3. Omnibus Investments Code – willful
violation of the provisions of existing
laws and implementing guidelines or
violation of the terms and conditions of
its license.
In case the revocation is warranted the SEC
shall:
a. Issue a certificate of revocation;
b. Furnish a copy thereof to the appropriate
government agency; and
c. Mail a notice of such revocation accompanied
by a copy of the certificate of revocation
to the corporation at its registered office
in the Philippines.
SEC does not have the sole authority to
suspend or revoke the license of a FC doing
business in Phil since other government
  113
agencies like the CB and the Insurance
Commission may also issue an order effectively
suspending or revoking the license of a FC.
CHAPTER XIX
MISCELLANEOUS PROVISIONS
Outstanding capital stock – the total shares
of stock issued under binding subscription
agreements to subscribers or stockholders,
whether or not fully or partially paid, except
treasury shares.
Non-stock or special corporations may,
through their articles of incorporation or their by-
laws, designate their governing boards by any
name other than as board of trustees.
The NEDA shall, from time to time, make a
determination of whether the corporate vehicle
has been used by any corporation or by
business or industry to frustrate the provisions
thereof or of applicable laws, and shall submit to
Congress, whenever deemed necessary, a
report of its findings, including recommendations
for their prevention or correction.
Maximum limits may be set by Congress for
stockholdings in corporations declared by it to
be vested with a public interest pursuant to the
provisions of this section, belonging to
individuals or groups of individuals related to
each other by consanguinity or affinity or by
close business interests, or whenever it is
necessary to achieve national objectives,
prevent illegal monopolies or combinations in
restraint or trade, or to implement national
economic policies declared in laws, rules and
regulations designed to promote the general
welfare and foster economic development. In
recommending to Congress corporations,
business or industries to be declared vested with
a public interest and in formulating proposals for
limitations on stock ownership, the NEDA shall
consider the type and nature of the industry, the
size of the enterprise, the economies of scale,
the geographic location, the extent of Filipino
ownership, the labor intensity of the activity, the

export potential, as well as other factors which
are germane to the realization and promotion of
business and industry.
Every corporation, domestic or foreign,
lawfully doing business in the Philippines shall
submit to the SEC an annual report of its
operations, together with a financial statement of
its assets and liabilities, certified by any
independent certified public accountant in
appropriate cases, covering the preceding fiscal
year and such other requirements as the SEC
may require. Such report shall be submitted
within such period as may be prescribed by the
SEC.
All interrogatories propounded by the SEC
and the answers thereto, as well as the results
of any examination made by the Commission or
by any other official authorized by law to make
an examination of the operations, books and
records of any corporation, shall be kept strictly
confidential, except insofar as the law may
require the same to be made public or where
such interrogatories, answers or results are
necessary to be presented as evidence before
any court.
The SEC shall have the power and authority
to implement the provisions of this Code, and to
promulgate rules and regulations reasonably
necessary to enable it to perform its duties
hereunder, particularly in the prevention of fraud
and abuses on the part of the controlling
stockholders, members, directors, trustees or
officers.
Violations of any of the provisions of this
Code or its amendments not otherwise
specifically penalized therein shall be punished
by a fine of not less than one thousand
(P1,000.00) pesos but not more than ten
thousand (P10,000.00) pesos or by
imprisonment for not less days but not more
than five (5) years, or both, in the discretion of
the court. If the violation is committed by a
corporation, the same may, after notice and
hearing, be dissolved in appropriate proceedings
before the Securities and Exchange
Commission: Provided, That such dissolution
shall not preclude the institution of appropriate
action against the director, trustee or officer of
the corporation responsible for said violation:
Provided, further, That nothing in this section
shall be construed to repeal the other causes for
dissolution of a corporation provided in this
  114
Code.
No right or remedy in favor of or against any
corporation, its stockholders, members,
directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall
be removed or impaired either by the
subsequent dissolution of said corporation or by
any subsequent amendment or repeal of this
Code or of any part thereof.
All corporations lawfully existing and doing
business in the Philippines on the date of the
effectivity of this Code and heretofore
authorized, licensed or registered by the
Securities and Exchange Commission, shall be
deemed to have been authorized, licensed or
registered under the provisions of this Code,
subject to the terms and conditions of its license,
and shall be governed by the provisions hereof:
Provided, That if any such corporation is
affected by the new requirements of this Code,
said corporation shall, unless otherwise herein
provided, be given a period of not more than two
(2) years from the effectivity of this Code within
which to comply with the same than thirty (30)
PD 902-A, AS AMENDED
The SECs quasi-judicial functions
under Sec. 5 of PD 902-A, as amended were
transferred to the Special Commercial Courts by
RA 8799. This would include intracorporate
controversies; devices; or schemes amounting
to fraud and misrepresentation detrimental to the
public and/or stockholders; controversies in the
election or appointment of directors, trustees,
officers or managers, and petitions for
suspension of payments.
Old Law New Law
Fraudulent and
manipulative devices
relative to securities
are clearly spelled
out and defined
Administrative and
Penal sanctions are
more stringent
- Adminis -Administrative
trative sanctions sanction- penalty of

 

suspension or 10k but nmt 1M plus hear and decide cases involving devices or
revocation of 2k for each day of schemes employed by or any acts of the board
certificate of continuing violation. of directors, business associates, its officers or
registration or partners, amounting to fraud and
permit to sell -Penal Fine of min misrepresentation which may be detrimental to
securities, fine of 50k but nmt 5M the interest of the public and/or of the
nlt 200 nmt 50k while retaining the 7 stockholder, partners, members of associations
plus 500 for to 21 years or organizations registered with the SEC.
each day of imprisonment.
continuing Exception: The complaint is based on the
violation , or violation of the Revised Penal Code (Ex.
disqualification Syndicated Estafa)
from being an
officer, director Even if the action is for recovery of
or principal SH sums of money paid or given to the corporation
of a n issuer through devices and schemes amounting to
corporation. fraud or misrepresentation detrimental to the
investing public, the same must be filed, heard
- Penal Sanction and tried by the Special Commercial Courts.
Fine nlt 5k or
imprisonment of nlt Examples of acts amount to fraud or
7 years nor more misrepresentation within the original and
than 21 years, or exclusive jurisdiction of the Special Commercial
both. Courts:

a. Fraud committed by a corporation in failing

to pay individual money market
General rule: The Special placements. (Orosa, Jr. vs. CA) I
Commercial Courts shall have exclusively and b. Corporations act of duping persons into
originally jurisdiction over cases falling under investing money when such
Sec. 5 of PD 902-A. corporations authority to issue
commercial papers has already
Exception: The SEC shall retain expired. There is no averment in the
jurisdiction over cases involving suspension of complaint of any fraud or
payments and corporate rehabilitation filed on or misrepresentation. The cause of action,
before June 30, 2000. therefore, were nothing more than
money claims. (Mangalad vs. Premier
§ Distribution of Special Corporation)
Commercial Courts: c. Corporate officer‟s act of diverting
corporate funds and assets for his
i. Two in Makati City; personal use. Fraud committed is
detrimental to the corporation and
ii. Two in Quezon City; members (Alleje vs. CA)
d. Pyramiding schemes.
iii. One in each in other cities in
Metro Manila; and The allegation of fraud must be stated with
particularity to place the case with the
iv. One per region. jurisdiction of the Special Commercial Courts.
It must state ultimate facts and not Conclusion
DEVICES OR SCHEMES AMOUNTING TO of laws. That averments in the complaints
FRAUD AND MISREPRESENTATION (Sec. 5 determines the nature of the action and
[a]) consequently, the jurisdiction of the courts.

General rule: The Special Commercial Courts INTRA-CORPORATE CONTROVERSIES (Sec.

shall have original and exclusive jurisdiction to 5 [b])

  115
 

Intra-corporate controversies include those of
corporations, partnerships and associations.
Elements of intra-corporate controversies:
An intra-corporate relationship:
i. Between and among the
stockholders, members, associates of a
corporation, partnership or association;
ii. Between them and the corporation,
partnership or association; or
iii. Between the corporation, partnership
or association and the State.
The controversy must arise out of
said relationship.
The dispute among the parties must be
intrinsically connected with the regulation of the
corporation. If the nature of the controversy
involves matters that are purely civil in character
necessarily the case does not involve an intra-
corporate controversy. (Speed Distributing
Corp. vs. CA)
` The fact that shares of stock were issued to be
used as part payment for lease rentals does not
convert it into a intra-corporate controversy.
(DMRC Enterprises vs. Este del Sol Mountain
Reserve, Inc.)
` Recovery of the control and management of a
corporation in the guise of a complaint for
rescission of a memorandum of agreement
which vested such control and management is
an intra-corporate controversy. (DPB vs. Ilustre,
Jr.)
If all of the requirements for a valid transfer
have been complied the dispute is intra-
corporate and is within the jurisdiction of the
Special Commercial Court. (Abejo vs. de la
Cruz; Rural Bank of Salinas, Inc. vs. CA)
`If the petitioner does not have a “prima facie”
title to the share sought to be recorded in his
name the dispute is not intra-corporate and the
ordinary or regular court can assume jurisdiction
over the case. (Rivera vs. Florendo; Tay vs.
CA)
A dispute regarding the automatic rescission
clause of a Memorandum of Agreement
regarding the sale of shares of a group of
  116
stockholders to another group of stockholders is
intra-corporate. (Saavedra vs. SEC)
Where the conflict involves the enforcement
of rights and obligations under the Corporation
Code or the inter and intra-corporate affairs of
the corporation, jurisdiction would fall with the
Special Commercial Courts. But if it requires a
mere determination of the contractual rights of
the parties under an ordinary agreement, the
ordinary/regular courts can acquire jurisdiction
thereto.
The factor which decides whether the action
is within the jurisdiction of the Special
Commercial Courts is that the controversy arose
out of an intra-corporate relation between and
among the parties. (SEC vs. CA)
The filing of the civil/intra-corporate case
before the SEC does not preclude the
simultaneous and concomitant filing of a criminal
action before the regular courts; such that, a
fraudulent act may give rise to liability for
violation of the rules and regulations of the SEC
cognizable by the SEC itself, as well as criminal
liability for violation of the Revised Penal Code
cognizable by the regular courts, both charges
to be filed and proceeded independently, and
may be simultaneously, with the other. (Fabia
vs. CA)
CONTROVERSIES IN THE APPOINTMENT,
ELECTION AND REMOVAL OF DIRECTORS
AND OFFICERS (Sec. 5 [c])
The Special Commercial Courts have original
and exclusive jurisdiction to hear and decide
cases involving controversies in the election or
appointment of directors, trustees, officers or
managers of corporations, partnerships or
associations.
General rule: A corporate officers election,
appointment or termination by the board of
directors is always a corporate act, and the fact
that the officer asks for back wages, other
benefits as well as damages does not alter the
picture. The original and exclusive jurisdiction
rests with the Special Commercial Courts. (In
this case a close examination reveals that they
are actually part of the pre-requisite od his
elective position, hence, ultimately linked with
his relations with the corporation.)
Exception: The main cause of action is for the

recovery of unpaid wages and separation pay.
(Midland Construction Co., Inc. vs. Movilla)
The main aspect to be considered is whether
the corporate officer asserts his rights as such
officer or questions his removal or ouster. If so,
the case would fall within the ambit of the
jurisdiction of the Special Commercial Courts
and not the NLRC.
Examples
1. Tan was a SH, director and VP of
PSBA. The Board declared all corporate
positions vacant and they elected new
officers. Tan was not re-elected and he
filed an illegal dismissal case. SC: The
controversy is intracorporate it revolves
around the election of directors, officers
or managers of PSABA, the relation
between and among its Shs, and
between them and the corporation.
2. Determination of the rights from alleged
illegal convening of the meeting of the
Board and subsequent ouster from
corporate office as a result of the voting
for the reorganization of management
are obviously intracorporate
controversies subject to the jurisdiction
of the SEC.
3. PAL case, dismissal of VP although not
a SH is considered as intracorporate
controversy. A corporate officer’s
dismissal is always a corporate act
and/or an intracorporate controversy
and that nature is not altered by the
reason or wisdom which the BOD may
have in taking such action.
RECEIVERSHIP AND SUSPENSION (Sec. 5
[d] and 6[c, d])
Petitions for suspension of payments of
corporations, partnerships or associations, and
appointment of receivership, management
committee, board or body are lodged within the
jurisdiction of the Special Commercial Courts.
A corporation, partnership or association,
whether or not insolvent, can file a petition for
suspension of payments provided it is placed
under a rehabilitation receiver or management
committee or rehabilitation receiver.
27. Three types of suspension of payments:
  117
28. 1. Simple suspension of payments –
mere deferment of payment of debts
and it refers to a petition which is filed
by a corporation which possesses
sufficient assets to cover its liabilities but
foresees the possibility of meeting them
when they respectively fall due owing to
temporary liquidity problems.
29. 2. Suspension of payments with the
appointment of a receiver with or without
a rehabilitation plan. The rehabilitation
plan is a plan under which the
corporation will reschedule the payment
of its debts and liabilities. Either the
petitioner corporation will propose the
plan or ask for the appointment of a
receiver who will study and make the
plan.
30. 3. Suspension of payments where the
corporation has no sufficient assets to
cover its debts and liabilities with or
without the appointment of a
management committee with or without
a rehabilitation plan.
EFFECTS OF SUSPENSION OF PAYMENTS
The proper court may issue an order
suspending payments of claims due from a
distress corporation.
Upon the appointment of a management
committee, rehabilitation receiver, board or body
all actions for claims against the corporation,
partnership or association under management or
receivership pending before any court, tribunal,
board or body shall be suspended accordingly.
The reason for suspension of payments for
claims against a distressed corporation is to
enable the management committee to effectively
exercise its powers free from judicial or
extrajudicial interference that might unduly
hinder or prevent the „rescue‟ of the debtor
company. (PAL vs. Sps. Sadic and Kurangking)
The suspension of all actions for claims
against a corporation embraces all phases of the
suit, be it before the trial court or any tribunal or
before this Court. No other action may be taken,
including the rendition of judgment during the
state of suspension. It must be stressed that
what are automatically stayed or suspended are
the proceedings of a suit and not just the

 

payment of claims during the execution stage entertain petitions for suspension of payments
after the case had become final and executory. filed by parties other than corporations,
Once the process of rehabilitation, however, is partnerships or associations. (Union Bank vs.
completed, this Court will proceed to complete CA)
the proceedings on the suspended actions.
Furthermore, the actions that are suspended Equality is Equity – during suspension the
cover all claims against the corporation whether assets are held in trust for the equal benefit of all
for damages founded on a breach of contract of creditors to preclude one from obtaining an
carriage, labor cases, collection suits or any advantage or preference over another by the
other claims of a pecuniary nature. No exception expediency of an attachment, execution or
in favor of labor claims is mentioned in the law. otherwise. The creditors should stand on equal
(PAL vs. Zamora) footing. Not anyone of them should be given any
preference by paying one of them ahead of the
Claims – refers to debts or demands of others. (Alemars Sibal and Son, Inc. vs.
pecuniary nature; the assertion of right to have Elibenas)
money paid.
The issue of whether or not preferred
Suspended proceedings include extra judicial creditors of distressed corporations stand on
foreclosures. You cannot even consolidate. All equal footing with all other creditors gains
proceedings at whatever stage are suspended. relevance and materiality only upon the
appointment of a management committee,
Even if the suspension order is issued after a rehabilitation receiver, board or body.
creditor‟s action in court has already become Suspension of claims against the corporation
final but pending execution, the execution of the under rehabilitation is counted or figured up only
decision is likewise suspended. (Filinvest vs. upon the appointment of a management
Ejercito) committee or a rehabilitation receiver. (RCBC
vs. IAC)
Note the words “against the corporation.”
******
If a corporation secures a loan, and one of its
key officers uses his private properties to 1. All claims against corporations,
guarantee the loan, corporation files for partnerships or associations that are
suspension, the bank want to foreclose on the pending before any court, tribunal or
prop, may the bank foreclose? Yes. It is not an board, without distinction as to whether
action for ac claim against the corporation. or not a creditor is secured or
Union bank case. unsecured, shall be suspended
effective upon the appointment of a
Properties of an individual stockholder, management committee, rehabilitation
director or officer, as surety of corporate receiver, board or body in accordance
liabilities, are not, and will not be covered by the with the provisions of PD 902-A.
suspension of payments order issued by the
court pursuant to PD 902-A. 2. Secured creditors retain their preference
over unsecured creditors, but
Same with regard to criminal proceedings, enforcement of such preferences is
personal to corporate officer concerned. equally suspended upon the
appointment of a management
Despite the appointment of a receiver for a committee, rehabilitation receiver,
corporation under PD 902-A, an action against a board or body. In the event that the
corporation seeking the nullification of corporate assets of the corporation, partnership or
documents cannot be suspended by reason association are finally liquidated,
thereof, since the civil action does not present a however, secured or preferred credits
monetary claim against the corporation. (Finasia under the applicable provisions of the
Investment and Finance Corporation vs. CA) Civil Code will definitely have
preference over unsecured ones.
The SEC does not have jurisdiction to
If the rehabilitation of the corporation

  118
 

is not feasible, the court muto propio or the
management committee may petition the lifting
and the preferences will be there again.
APPOINTMENT OF MANAGEMENT
COMMITTEE, BOARD OR BODY (Sec. 6 [d])
Special Commercial Courts may create or
appoint a management committee, board or
body upon petition or muto propio to undertake
the management of corporations, partnerships
or association not supervised or regulated by
other government agencies in appropriate cases
where there is imminent danger of dissipation,
loss or wastage or destruction of assets or other
properties or paralyzation of business operations
of such corporation or entities which may be
prejudicial to the interest of minority
stockholders, parties-litigant or the general
public.
It may also create or appoint a management
committee, board or body to undertake the
management of corporations, partnerships or
other associations supervised or regulated by
other government agencies such as banks and
insurance companies, upon the request of the
government agency concerned.
Requisites before a management committee,
board or body may be appointed or created:
1. Dissipation, loss, wastage or destruction
of assets or other properties; and
2. Paralyzation of its business operations
which may be prejudicial to the interest
of the minority stockholders, parties-
litigants or the general public. (Sy Chim
vs. Sy Siy Ho & Sons, Inc.)
Danger – a general term, including peril,
jeopardy, hazard and risk; refers to exposure or
liability to injury.
Imminent – something which is threatening to
happen at once, something close at hand,
something to happen upon the instant, close
although not yet happening, and on the verge of
happening.
In the absence of a strong showing of an
imminent danger of dissipation, loss, wastage or
destruction of assets or other properties of a
  119
corporation and paralysis of its business
operations, the mere apprehension of future
misconduct based upon prior mismanagement
will not authorize the appointment of a
management committee/receiver. (Sy Chim vs.
Sy Siy Ho & Sons, Inc.)
Mere disagreement among stockholder as to
the fairness of the corporation would not in itself
suffice as a ground for the appointment of a
management committee. However, where the
dissention among the stockholders is such that
the corporation cannot successfully carry on its
corporate functions, the appointment of a
management committee becomes imperative.
(Jacinto vs. First Women‟s Credit
Corporation)
A management committee shall have the
power to take custody of and control all assets
and properties owned and possessed by the
entity under management. It shall take the place
of the management and board of directors of the
entity under management, assume their rights
and responsibilities, and preserve the entity‟s
assets and properties in its possession.
The rehabilitation receiver shall not take over
the management and control of the debtor but
shall closely oversee and monitor the operations
of the debtor during the pendency of the
proceedings. He shall be primarily tasked to
study the best way to rehabilitate the debtor and
to ensure that the value of the debtor‟s property
is reasonably maintained pending the
determination of whether or not the debtor
should be rehabilitated, as well as implement the
rehabilitation plan after its approval.
Venue of actions in intra-corporate
controversies – Special Commercial Court
which has jurisdiction over the principal office of
the corporation, partnership or association.
Nature of proceedings is in rem. Jurisdiction
acquired upon publication of the proceeding.
Creditors have the personality (at least 25% of
the total outstanding liablitities) may file, ex.
Bayantel.
Their compensation is subject to agreement
of the parties.
Actuations of the board, body, committee
subject to....

 

Service of pleadings . Sec. 6 rule 1. may be determine technical and intricate matters of fact.
by fax or email. When authorized by the court.
§ A criminal charge for violation of the
Service of summons. Sec. 5 rule 2. made SRC is a specialized dispute. Hence, it
upon any of the statutory or corporate officers or must first be referred to an
their respective secretaries. vs. Eb Villarosa administrative agency of special
case. (Rule of Court) competence, i.e., the SEC... The SRC is
a special law. Its enforcement is
31. SECURITIES particularly vested in the SEC. Hence,
all complaints for any violation of the
REGULATION CODE (SRC) Code and its implementing rules and
R.A 8799 regulations should be filed with the SEC.
Where the complaint is criminal in
nature, the SEC shall indorse the
32. - Passed and Enacted by the House of complaint to the DOJ for preliminary
Representatives and the Senate on July investigation and prosecution as
17 and 28, 2000. provided in Section 53.1. (Baviera vs.
Paglinawan)
33. - Approved by the President on July 19,
2000. Securities

34. - Effectivity date on August 8, 2000. 20. § Securities – are

shares, participation or interests in a
corporation or in a commercial
35. - It replaced the Revised Securities Act enterprise or profit-making venture and
(Batas Pambansa Blg. 178) evidenced by a certificate, contract,
instrument, whether written or electronic
36. - AIM – Establish a free securities in character. It includes:
market that regulates itself, encourage
widest participation of ownership in Shares of stock, bonds, debentures, notes,
enterprises, enhance the evidences of indebtedness,
democratization of wealth, promote the asset-backed securities;
development of the capital market,
protect investors and minimize Investment contracts, certificates of interest or
fraudulent and other market participation in a profit sharing
manipulations which creates distortions agreement, certificates of
in the free market. deposit for a future subscription;

The law adopts the view that the State should Fractional undivided interests in oil, gas or other
not interfere in the business judgment of mineral rights;
investors.
Derivatives like option and warrants;
The SEC is tasked merely to ensure the Full
disclosure rule – as long as there is full andfair Certificates of assignments, certificates of
disclosure relative to the issuance of securities participation, trust certificates,
the investing public should determine for voting trust certificates or similar
themselves whether or not to invest. There is a instruments;
departure to the “Merit Regulation”
Proprietary or non proprietary membership
Doctrine of primary jurisdiction – courts will certificates incorporations; and
not determine a controversy involving a question
within the jurisdiction of the administrative Other instruments as may in the future be
tribunal, where the question demands the determined by the Commission.
exercise of sound administrative discretion
requiring the specialized knowledge and 21. § The definition of
expertise of said administrative tribunal to

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securities is extra-ordinarily broad. It is a
catch all phrase meant to include all
novel devices which are of the same
nature. Investment contracts and golf
club shares are included in the definition
of securities.
General rule: Securities cannot be sold or
offered for sale or distribution to more than 19
persons without a Registration Statement duly
filed and approved by the SEC. Once the
securities are sold or offered to more than 19
persons, it becomes a public offering requiring
prior registration with the SEC. Violation thereof
renders the person administratively, civilly and
criminally liable.
Exception: Registration and Licensing is note
required if the securities involved are covered by
Sec. 9 (exempt securities) and Sec. 10 (exempt
transactions).
Persons engaging in the business of buying
or selling securities in the Philippines as a
broker or dealer, or acting as a salesman for
such entities must be registered and authorized
as such by the SEC.
Broker- is a person engaged in the buying and
selling of securities for the account of others
Dealer- Is a person who buys and sells
securities for his own account in the ordinary
course of business.
Salesman- Is a natural person employed as
such or as an agent, by a dealer, issuer or
broker to buy and dell securities.
Any violation of the laws may result to
imposition of administrative sanction (Sec. 54)
and penal sanctions (Sec. 73). This is without
prejudice to civil liabilities provided for under
section 56.
Investment contract – a contract or scheme
whereby a person invests his money in a
common venture premised on a reasonable
expectation of profits to be derived from the
entrepreneurial or managerial efforts of others.
Issuance of certificates of participation in a
multi-level marketing scheme, solely on the
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management of others without goods or services
is an investment contract and thus a security.
“Pyrammiding scheme” (Justee vs. SEC)
Pyramiding schemes partakes of a nature of
an investing contract which cannot be sold to
more than 19 persons without prior approval of
the SEC.
When an investor is relatively uninformed
and turns over his money to others, essentially
depending upon their representations and their
honesty and skill in managing it, the transaction
generally is considered as an investment
contract. The touchstone is the presence of an
investment in a common venture premised on a
reasonable expectation of profits to be derived
from the entrepreneurial or managerial efforts of
others. (People vs. Petralba)
Exempt Securities (Sec. 9):
i. Any security issued or guaranteed by
the Government of the Philippines, or by any
political subdivision or agency thereof, or by
any person controlled or supervised by, and
acting as an instrumentality of said
Government.
ii. Any security issued or guaranteed by
the government of any country with which
the Philippines maintains diplomatic
relations, or by any state, province or
political subdivision thereof on the basis of
reciprocity: Provided, That the Commission
may require compliance with the form and
content of disclosures the Commission may
prescribe.
iii. Certificates issued by a receiver or by
a trustee in bankruptcy duly approved by the
proper adjudicatory body.
iv. Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, HLURB, or BIR.
v. Any security issued by a bank except its own
shares of stock.
Exempt Transactions (Sec. 10):
1. Any judicial sale, or sale by an executor,
administrator, guardian or receiver or
trustee in insolvency or bankruptcy.

2. By or for the account of a pledge holder,
or mortgagee or any other similar lien
holder selling or offering for sale or
delivery in the ordinary course of
business and not for the purpose of
avoiding the provisions the SRC, to
liquidate a bona fide debt, a security
pledged in good faith as security for
such debt.
3. An isolated transaction in which any
security is sold, offered for sale,
subscription or delivery by the owner
thereof, or by his representative for the
owner’s account, such sale or offer for
sale, subscription or delivery not being
made in the course of repeated and
successive transactions of a like
character by such owner, or on his
account by such representative and
such owner or representative not being
the underwriter of such security.
4. The distribution by a corporation,
actively engaged in the business
authorized by its articles of
incorporation, of securities to its
stockholders or other security holders as
a stock dividend or other distribution out
of surplus.
5. The sale of capital stock of a corporation
to its own stockholders exclusively,
where no commission or other
remuneration is paid or given directly or
indirectly in connection with the sale of
such capital stock.
6. The issuance of bonds or notes secured
by mortgage upon real estate or tangible
personal property, where the entire
mortgage together with all the bonds or
notes secured thereby are sold to a
single purchaser at a single sale.
7. The issue and delivery of any security in
exchange for any other security of the
same issuer pursuant to a right of
conversion entitling the holder of the
security surrendered in exchange to
make such conversion: Provided, That
the security so surrendered has been
registered under the SRC or was, when
sold, exempt from the provisions of the
SRC, and that the security issued and
  122
delivered in exchange, if sold at the
conversion price, would at the time of
such conversion fall within the class of
securities entitled to registration under
the SRC. Upon such conversion the par
value of the security surrendered in
such exchange shall be deemed the
price at which the securities issued and
delivered in such exchange are sold.
8. Broker‟s transactions, executed upon
customer‟s orders, on any registered
Exchange or other trading market.
9. Subscriptions for shares of the capital
stock of a corporation prior to the
incorporation thereof or in pursuance of
an increase in its authorized capital
stock under the Corporation Code, when
no expense is incurred, or no
commission, compensation or
remuneration is paid or given in
connection with the sale or disposition of
such securities, and only when the
purpose for soliciting, giving or taking of
such subscriptions is to comply with the
requirements of such law as to the
percentage of the capital stock of a
corporation which should be subscribed
before it can be registered and duly
incorporated, or its authorized capital
increased.
10. The exchange of securities by the issuer
with its existing security holders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly for soliciting such
exchange.
11. The sale of securities by an issuer to
fewer than 20 persons in the Philippines
during any twelve-month period.
12. The sale of securities to any number of
the following qualified buyers:
a. Bank
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan
maintained by the Government of
the Philippines or any political
subdivision thereof or managed by a

 

bank or other persons authorized by 6. No proxy shall be valid and

the Bangko Sentral to engage in effective for a period longer than 5 years
trust functions; at one time.
e. Investment company; or
f. Such other person as the No broker or dealer shall give any proxy,
Commission may by rule determine consent or authorization, in respect of any
as qualified buyers, on the basis of security carried for the account of a customer, to
such factors as financial a person other than the customer, without the
sophistication, net worth, express written authorization of such customer.
knowledge, and experience in
financial and business matters, or A broker or dealer who holds or acquires the
amount of assets under proxy for at least 10% or such percentage as the
management. Commission may prescribe of the outstanding
share of the issuer, shall submit a report
TENDER identifying the beneficial owner within 10 days
after such acquisition, for its own account or
Tender Offers – a publicly announced intention customer, to the issuer of the security, to the
by the purchaser to acquire a certain block of Exchange where the security is traded and to
equities of a company through open market the Commission.
purchases or private negotiations.
INDEPENDENT DIRECTOR
A tender offer is required of any person or
group of persons acting in concert who intend to Any corporation with a class of equity
acquire: securities listed for trading on an Exchange or
with assets in excess of P50M and having 200
1. At least 15% of any class of any equity or more holders, at least of 200 of which are
security of a listed corporation or of any holding at least 100 shares of a class of its
class of any equity security of a equity securities or which has sold a class of
corporation with assets of at least P50M equity securities to the public pursuant to an
and having 200 or more stockholders with effective registration statement shall have at
at least 100 shares each; or least 2 independent directors or such
2. At least 30% of such equity over a independent directors shall constitute at least
period of 12 months. 20% of the members of such board, whichever
is the lesser.
PROXIES
Independent director – a person other than
Proxies must be issued and proxy solicitation an officer or employee of the corporation, its
must be made in accordance with rules and parent or subsidiaries, or any other individual
regulations to be issued by the Commission. having a relationship with the corporation, which
would interfere with the exercise of independent
5. Requisites for proxies: judgment in carrying out the responsibilities of a
director.
In writing;
The SEC may exempt corporations from the
Signed by the stockholder or his duly required independent directors as it did in the
authorized representative; and rehabilitation of Victorias Milling Co. Inc..

Filed before the scheduled meeting Insider Trading

with the corporate secretary.
Insider:
General rule: A proxy shall be valid only for the
meeting for which it is intended. a. The issuer;
b. A director or officer (or person
Exception: It is otherwise provided in the performing similar functions) of,
proxy. or a person controlling the

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issuer;
c. A person whose relationship or
former relationship to the issuer
gives or gave him access to
material information about the
issuer or the security that is not
generally available to the public;
d. A government employee, or
director, or officer of an
exchange, clearing agency
and/or self-regulatory
organization who has access to
material information about an
issuer or a security that is not
generally available to the public;
or
e. A person who learns such
information by a communication
from any of the foregoing
insiders.
General rule: An insider may not sell or buy a
security of the issuer while in possession of
material information with respect to the issuer or
the security that is not generally available to the
public.
Exceptions:
f. The insider proves that the
information was not gained from
such relationship; or
g. The insider disclosed the information
to a party reasonably believed
by the insider to possess the
information.
Material non-public information – has not been
generally disclosed to the public and:
1. would likely affect the market price of
the security after being disseminated to
the public and the lapse of a reasonable
time for the market to absorb the
information; or
2. would be considered by a reasonable
person important under the circumstances
in determining his course of action
whether to buy, sell or hold a security.
An insider may not communicate material
non-public information to any person who will
likely buy or sell a security of the issuer while in
possession of such information.
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Trading by persons who have material non-
public information about a tender offer is
prohibited.
Registration of Brokers, Dealers, Salesmen
and Associated Persons
Persons engaging in the business of buying
or selling securities in the Philippines as a
broker or dealer, or acting as a salesman for
such entities must be registered and authorized
as such by the SEC.
A stockbrokerage firm can have no other
business than that.
Purchase of shares should be coursed
through a broker. However a private transaction
can be made.
Fraudulent Transactions and Other Market
Manipulations
Fraudulent and manipulative devices:
1. Wash sale – any transaction in a
security which involves no change in the
beneficial ownership thereof.
2. Matched order – an order or orders for
the purchase or sale of security with the
knowledge that a simultaneous order or
orders of substantially the same size,
time and price for the sale or purchase
of such security has, or will be entered
by or for the same or different parties.
3. Marking the close – place of purchase
or sale order, at or near the close of the
trading period.
4. Painting the tape – the activity is made
during normal trading hours. It involves
buying activity among nominee
accounts at increasingly higher or lower
prices or causing fictitious reports to
appear on the “ticker tape.”
5. Squeezing the float – the part or portion
of the issue/security which is
outstanding but intentionally held by
dealers or other persons with a view of

reselling them later for profit.
6. Hype and dump – the act employed by a
person or group of persons of
purchasing the outstanding capital stock
of a dormant public shell company for a
nominal amount and merge it with their
privately held company. They would
then gain control of the majority of the
stocks of the merged entity. The shares
of the Shell Company are often reverse-
split four to one or more to reduce the
number of shares. Stock certificates are
often re-issued in the name of the
merged entity to relatives and
associates who act as nominees of the
person or group of persons employing
the device. They would then look for a
broker- dealer who would be willing to
make a market relative to the stocks of
the newly merged company; then hire a
promoter who would “hype” the virtues
of the company, its products and stocks.
The broker-dealer then generates
volume and advance bid price. When
the market reaches a high price, they
would “dump” their shareholdings and
bail out.
7. Boiler room operations – involves an
intensive selling campaign through
numerous salesmen by telephone or
through direct mail offerings for
securities of either a certain type or from
a specific issuer. Investors are induced
to purchase through hard-sell
techniques based on unfounded
predictions and mailing of misleading
market letters.
8. Circulating or dissemination information
that the price of any security listed in the
Exchange will or is like to rise or fall
(illegal)
9. Making false or misleading statements
with respect to any material fact, which
he knew or had reasonable ground to
believe was so false or misleading for
the purpose of inducing the purchase or
sale of any security (illegal).
10. Pegging or fixing or stabilizing the price
of security effected either alone or with
others through any series of
transactions for the purchase or sale
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thereof (illegal)
11. Short sale – sale of securities which the
vendor does not own (illegal unless
done in accordance with the rules and
regulations of the SEC) (T3 rule).
12. Insider trading – the act of an insider of
buying or selling securities of the issuer
while in possession of material
information with respect thereto that is
not generally available to the public
(illegal unless exempted).
Wash sale and matched order is illegal when
used as a means to create a false or misleading
appearance of active trading in the security
concerned.
Marking the close, painting the tape,
squeezing the float, hype and dump, and boiler
room operations are illegal when they are
effected to:
a. Raise the price or induce the
purchase of a security or of a
controlling, controlled or
commonly controlled company by
others;
b. Depress their price to induce the
sale of a security, whether of the
same or of a different class, of the
same issuer or of a controlling,
controlled company, or common
controlled company of others; and
c. Creates active trading to induce
such purchase or sale through
said devices or schemes.
Other fraudulent transactions:
1. Employing any device, scheme, or
artifice to defraud;
2. Obtaining money or property by means
of any untrue statement of a material
fact of any omission to state a material
fact necessary in order to make the
statements made, in the light of the
circumstances under which they were
made, not misleading; or
3. Engaging in any act, transaction,
practice or course of business which
operates or would operate as a fraud or
deceit upon any person.
Fraud – akin to bad faith which implies a

 

conscious and intentional design to do a

wrongful act for a dishonest purpose or moral
obliquity.

Settlement Offer

At any time, during an investigation or

proceeding under this Code, parties being
investigated and/or charged may propose in
writing an offer of settlement with the
Commission.

Upon receipt of such offer of settlement, the

Commission may consider the offer based on
timing, the nature of the investigation or
proceeding, and the public interest.

The Commission may only agree to a  

settlement offer based on its findings that such
settlement is in the public interest. Any
agreement to settle shall have no legal effect
until publicly disclosed. Such decision may be
made without a determination of guilt on the part
of the person making the offer.

Limitation of Actions

SEC. 62. Limitation of Actions. - 62.1. No

action shall be maintained to enforce any liability
created under Section 56 or 57 of this Code
unless brought within two (2) years after the
discovery of the untrue statement or the
omission, or, if the action is to enforce a liability
created under Subsection 57.1(a), unless
brought within two (2) years after the violation
upon which it is based. In no event shall any
such action be brought to enforce a liability
created under Section 56 or Subsection 57.1 (a)
more than five (5) years after the security was
bona fide offered to the public, or under
Subsection 57.1 (b) more than five (5) years
after the sale.

62.2. No action shall be maintained to

enforce any liability created under any other
provision of this Code unless brought within two
(2) years after the discovery of the facts
constituting the cause of action and within five
(5) years after such cause of action accrued.
Fasle registration statement - liable civily - sec.
56 Ceiling as to amount of damages - triple of
the amount involved limitation of actions - not
later than 5 years after the cause of action
accrues

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