Chapter I INTRODUCTION Role of Corporation in Modern Business. The importance of the corporation in the industrial and eco- nomic development of a country can hardly be questioned. The corporate form of business organization permits the combination of funds from various sources to raise the big capital needed for large business and industrial enterprises, which one or two persons may ‘find difficult to finance. The combination of resources which the cor- porate form of business allows coupled with the advantage which the investor therein gains by the legal theory limiting his liability to the amount of his investment, have made the corporation the most popular form of organization for big business. This has contributed greatly to the growth of industry carrying with it the benefits of a wider employment of manpower and a fuller development of techni- cal and managerial skill. Definition and Attributes of a Corporation. ‘The Corporation Code! defines a corporation thus: SEC. 2. Corporation Defined.—A corporation is an arti- ficial being created by operation of law, having the right of succession and the powers, attributes, and properties ex- pressly authorized by law or incident to its existence. Under this definition, a corporation has four attributes: First, it is an artificial being, i.e., a juridical person capable of having rights as well as obligations, with a personality separate and 1 Batas Blg. 68 which took effect on May 1, 1980.=o jo — CORPORATION CODE "|. ’ e : distinct from its lembers or stockholders. This attribute gives rise to aGundamental principle in corporation ldw? stockholders are not personally,liable for corporate obligations and cannot be held liable to third persons who have claims against the corporation beyond their agreed contribution to the corporate capital: Neither may the corporation be liable for the personal obligations of its stockholders» (Second, it is created by operation of law, Mere consent of the parties to form a corporation is not sufficient. Before it can acquire a juridical personality, the State must give jts consent either in the rm of a special law or a general enabling act. In common law jurisdictions, corporations were originally created by special grants or charters of the State’ This method of creation gave rise to the criticism that charters were granted only to favorites of those in power. The special charters gradually gave way to general enabling laws under which any group of a specified number of persons could form a corporation by merely following the statutory provisions for incorporation. This is perhaps the explanation for the provision in the Philippine Constitution prohibiting the formation, organization and regulation of private corporations except by general law, unless they are owned or controlled by the government? ‘The general law under which a private corporation may be formed or organized is the Corporation Code, the requirements of which must be complied with by those wishing to incorporate. Only upon such compliance will the corporation come into being and acquire a juridical personality, thus giving rise to its right to exist and act as a legal entity. This right is what is referred to as the corporation's primary franchise. A government corporation is nor- mally created by special law, referred to often as its charter. (Third, a corporation has the right of succession whereby its con- tinued existence during the term stated in its articles of incorpora- tion cannot be affected by any change in the members or stockhold- ers, whether this change be the consequence of death, insolvency or any other incapacity. Nor is it affected by the transfer of shares by a stockholder to a third person. (it) Lastly, the corporation has the powers, attributes and proper- ties expressly authorized by law or incident ta its existence. Under 2 Constitution of the Philippines (1987), Art. XII, Sec. 16.INTRODUCTION 3 the trayditional concept, a corporation, being merely a creature of the law, can exercise only such powers as the law may choose to grant it, either expressly or impliedly, as contrasted with the pow- ers of a natural person, who can do anything he wishes as long as he violates no law nor rights of others. ESws Governing Philippine Corporations. The law presently applicable to Philippine corporations is the Corporation Code of the Philippines which became effective on May 1, During the Spanish regime, Philippine corporations were gov- erned by the provisions of the Code of Commerce, which was based_ on the Spanish_Code-of 1885, and promulgated in 1888. However, they were not referred to as “corporations” but as “sociedades anonimas”, which though not identical with our present-day corpo- ration, had features strikingly similar to the latter, including lim- ited liability of members and centralized management of its affairs. With the advent of American sovereignty, the Philippine Commis- sion passed the Corporation Law’ which took effect on April 1, 1906._ Aimed at replacing the sociedad anonima with the American con- cept of corporate entity, it however gave the sociedad anonimas the choice to continue as such or to reorganize under the Corporation Law.‘ Whoever chose to remain a sociedad anonima would continue to be governed by the Code of Commerce in matters relating to its organization and method of transacting business as well as to the rights of members among themselves.® However, with respect to its lations to the public and public officials, it would be governed by the new Corporation Law.® Although many sociedades opted to reorganize as corporations, some expressed their choice to remain sociedades, while others merely failed or neglected to reorganize. A sociedad which failed to express its choice and did not reorganize as held by the Supreme Court to have elected to continue business * Act 1459. 4 See Act 1459, Sec. 75. * Id., Sec. 191. * Ibid.4 CORPORATION CODE as a sociedad anonima.’ Although no period was fixed by the Corpo- ration Law within which a sociedad could make its election, the Court held that such election should have been made within a reasonable period from the effectivity of the law, and that a period of forty years was certainly beyond such reasonable time, specially since one of the avowed purposes of the Corporation Law was to phase out sociedad anonimas as early as possible.* However, an attempt to extend a sociedad’s term so as to allow it to exist for a total period of more than fifty years could not be allowed in view of the Corporation Law’s original restriction that a corporation's term could not go beyond fifty years.° Although the Code of Commerce contained no similar restriction on sociedades, the Supreme Court was of the opinion that since a sociedad’s term affects its relations with the public, which can deal with it as such only during its legal existence, the Corporation Law’s restriction applied to it.’° During the seventy four years of its applicability, the Corpora- tion Law of 1906 underwent several amendments made necessary by the inevitable changes in conditions, specially in the business and industrial world, rendering some of its provisions obsolete or in- adequate. It was generally felt however that these sporadic and piece-meal attempts failed to meet the demands of modern-day business needs. As early as 1955, the Code Commission submitted to Congress a proposed Corporation Code to supersede the Corpora- tion Law. Unfortunately, this proposal was not seriously considered by Congress. In 1970, the University of the Philippines Law Center under- took as one of its major projects, the task of preparing a draft of a proposed Corporation Code. Three years later, after the draft had been the subject of public hearings to which representatives of both the private and public sector were invited to give their comments and suggestions, a revised draft was finally submitted to the Presi- 1 Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956). * Ibid. ® This restriction was later amended to allow a corporation to extend its corporate existence through an amendment of its articles of incorpora- tion, as long as each extension did not exceed 50 years. See Sec. 18, Act 1459. 19 Benguet Consolidated Mining co. v. Pineda, supra,INTRODUCTION 5 dent of the Philippines for his approval. The draft was sent to the Securities and Exchange Commission for further study. In the meantime, the Batasang Pambansa" came into being and with the many changes that the draft had undergone at the SEC and the Batasan’s Committee on Revision of Laws; thé Corporation Code of the Philippines was finally passed by the BP, and approved by the President on May 1, 1981 If only because it has filled many of the gaps in the law, the Corporation Code is an improvement on the Corporation Law of 1906. It has incorporated many common law principles and con- cepts. In view of this, in case of conflicting views on the interpreta- tion of its provisions, the decisions of American courts would at least be as persuasive as they have been in the past.!? Although the Corporation Code applies to all private corpora- tions in general, there are special laws which govern special kinds of corporations, like the Insurance Code, the General Banking Act and the Investment Company Act, to mention a few. Furthermore, most government-owned or controlled corporations have their spe- cial charters. In the cases of all these special and government- owned corporations, the Corporation Code would have suppletory effect, in so far as the provisions thereof may be applicable, and are not inconsistent with such special laws." Choice of Business Organization Besides the corporation, there are other forms of business pos- sible under the law, ie, individual proprietorship, partnership (general or limited), joint venture and the business trust. Although the form in which a business is conducted will not necessarily be determina- tive of its ultimate success or failure, it may influence to a consider- able extent the facility and efficiency of its operations as well as the actual profits which would accrue to its owners. It is therefore important for the lawyer whose advice and counsel is sought, to consider carefully which form is best suited to the particular cir- “ This was the legislative body under the 1973 Constitution. It was replaced by Congress under the 1987 Constitution. 1 See Harden v. Benguet Consolidated Mining Co. 58 Phil. 141, (1933). 4 See Corp. Code, Sec. 4.CORPORATION CODE ametances of the business and its owners. Factors will vary and what may be “best” for one business situation may not be suitable or another. Sometimes the advantages of one particular form are so favor- ible to the proposed business that the choice of that form is inevi- able, Although the size of the business is not the determinative ‘actor, it seems obvious that & ‘sari-sari store would be best run as an individual proprietorship. On the other hand, large industrial firms, specially those which are intended to be financed not merely by a few persons, should normally be incorporated. In rare in- stances, the law gives no freedom of choice. Abank, for example, has to organize as & stock corporation.'* Between these extreme situ- ations are the medium-sized business enterprises which are owned and operated by jimited number of people. It is perhaps in this area where informed judgment on the choice of the most suitable business form would be most needed. ‘A basic factor to be considered would be the legal requirements, effects and consequences which accompany or follow the choice of one form over another. It thus becomes pertinent at this point to discuss briefly the legal nature of the different business forms, 80 that the advantages and disadvantages of each may be more clearly seen. 2 Individual proprietorship. _ Ars its name suggests, the individual proprietorship is the ordi- nary form for the one-man business, where the owner is at the same time the worker. This of course does not preclude his employment of others as his business needs may require. But he makes his deci- sions alone and thus can act without delay ot other formalities. Although he has to obtain the proper municipal licenses and per- mits before he can open his business, he is otherwise free from the many regulations and requirements ‘which corporations, and even partnerships, must follow not only in their organization put also in the operations of their business. The individual owner's earnings _— M™ RA. 337, a8 amended (General Banking act), Sec. 7 See also RA 4720 (Rural Bank Act), See. 4.INTRODUCTION 7 are subjected to income tax only once, unlike corporate and partner- ship profits which are subject to the corporate income tax as well as to the individual income tax of each partner or stockholder." On the other hand, the individual proprietorship has some built-in disadvantages. Most significant of these is the owner's unlimited personal liabilit} I] the debts and obligations ‘business. He cannot limit his risk to hisinvestment-in-the business. Cepital will be limited by his resources. Expansion would present sily get credit or oe into st least a eee ee ee in his immediate 2. The partnership. The Civil Code defines a partnership thus: Article 1767. By the contract of partnership two or mere persons bind themselves to contribute money, or industry toa common fund, with the intention of dividing the profits among themeclves. x x x. Although partnerships and corporations are similar in that unlike the individual proprietorship, both forms require the in- volvement of more than one person, and both have juridical person- alities separate from the people composing them, they have many significant differences which should be carefully considered in de- termining which business form to adopt. Their most important difference lies in the nature of the liability of the persons composing the organization. While partners are per- sonally liable for the debts of the partnership which its assets cannot satisfy, stockholders of a corporation cannot be made to personally answer to corporate creditors beyond the amount which they fave opted or have promised to contribute to the corpo- rate capital/"* This difference, although an apparent advantage of 48 See, National Internal Revenue Code, Sec. 24. 1 See People ex. Rel. National Express Co. v. Coleman et al, 133 N.Y. 279, 31 NE 96, 1892, See Art. 1816 Civil Code on the liability of partners.8 CORPORATION CODE the corporate form, should however be considered with the reality that in most smal] corporations, credit cannot be obtained without the personal guaranty of the principal stockholders, and many business hazards may be covered by insurance. From the point of view of the creation of the juridical person, it is much simpler to form a partnership. In the first place, while under the Corporation Codevthere must be at ieast five incorpora- tors,"” two persons are sufficient to form a partnership. More impor- tantly, mere agreement of the parties gives rise to the juridical personality of the partnership, whether or not it is registered with the Securities and Exchange Commission (SEC)."* In the creation of the corporation, although the agreement of the parties is indispen- sable, it is not sufficient to give rise to its juridical personality. The incorporators must follow substantially all the requirements of the Corporation Code, and it is only upon the issuance of the certificate of incorporation by the SEC that it acquires such juridical personal- ity. Thus, forming a partnership would usually entail less ex- penses than incorporating. And even after its organization, a part- nership has ordinarily greater freedom from governmental control than the corporation. ‘The-imanagement factor is also of much significance. In most cases, all the owners of a partnership business actively participate in the management. Consequently the law considers every partner as an agent of the partnership, with the capacity to bind it by any usual contract in the ordinary course of business.” In the corpora- tion, management is centralized in the board of directors which has the exclusive power to act for and bind the corporation.” The stockholder has as a rule no voice in the management of the busi- ness except to elect its directors. On the other hand, while it is usually easier to allocate functions in a corporation, the partnership agreement, because of its private nature, makes for more flexibility as far as internal arrangements are concerned. ” See Corp. Code, Sec. 10. ™ See Civil Code, Art, 1768. 1° See Corp Code, Sec. 19. % See Civil Code, Art. 1818. 21 See Corp. Code, Sec. 23.INTRODUCTION 9 ~~ A partnership is usually formed by persons who know and trust each other well. It is therefore avgersonal relationship based on mutual trust and confidence. Because of this characteristic, often referred to as@electus personae, any change of membership or in the members will usually affect its existence. Thus, the death or insolvency of a partner wil) result in its dissolution.” Should a partner transfer his interest in the partnership to a third person, the latter cannot take his place as a partner without the consent of the other partners.” Furthermore, even where there is an agreed term in the partnership, any partner may demand its dissolution at any time,™ even without sufficient cause, subject only to his liability for damages for breach of contract. The existence of the partner- ship is therefore precarious because of the facility with which it can be dissolved. The advantage to the partner however is that it is usually possible for him to get back his investment if he is dissatis- fied with the way the business is making out or when he loses confidence in his partner. The corporation, on the other hand, has More stability. It enjoys the right of succession® and its legal existence is not affected by the death, insolvency or other incapacity of its members or stockholders, Unlike a partner, a stockholder may as a general rule freely transfer his shares in the corporation, giving his transferee the status of a stockholder, even without the consent of his co-stockholders. Furthermore, except in the case of expiration of its term, a corporation cannot be voluntarily dissolved except by the two-thirds vote of the stocks.” And even this is not sufficient. Since it is the State which gave it life by the issuance of its certifi- cate of incorporation, its dissolution can legally take place only by some State act, whether judicial or administrative.* Thus, the SEC's intervention is in one way or another necessary.” ® See Civil Code, Art. 1830, par. (5) and (6). ® See Civil Code, Art. 1804, % Id., Art. 1830 (2), Id., Art. 1837, ™ Corp. Code, Sec. 2. 77 Id, Secs. 118 and 119. ™ See Daguhoy Enterprises v, Ponce. 96 Phil. 15 (1954). ™ If there are no creditors, the SEC issues a certificate of dissolution (See See. 118, Corp. Code); otherwise, a petition for dissolution must he filed before the SEC, (See Sec. 119, Corp. Code).10 CORPORATION CODE A corporation has only such powers as are expressly granted to it and such as are necessary to the exercise of the powers so granted” or for the accomplishment of its purpose.®" A partnership is not so circumscribed in its capacity to act. As long as the parties have agreed to it, the partnership can perform any act as long as it does not violate any law or right of others. Capital considerations are just as important. A corporation is ideally suited as a medium for bringing together in a common project the separate funds of many investors. If additional capital will be needed later, a small business may not be able to raise it except from outside sources. Obtaining credit may not be possible without the personal guaranty of the owners. Formerly, one of the advantages of the partnership form was the fact that it was not subject to income tax as such, the liability for the same being imposed on the individual partners, in proportion to their individual share in the partnership income. However, under present law, both the partnership and the corporation are subject to income tax as such, apart from the income tax which each partner or stockholder will have to pay for any dividends or share he may receive from the earnings of the business. 3. The close corporation. Most of the disadvantages of the partnership form can be obvi- ated by the formation of a “close corporation”, a form introduced by the Corporation Code. Where business associates belong to a small, closely-knit group, like a family, they usually prefer to keep the organization exclusive and would not welcome strangers. Since it is through their efforts and managerial skill that they expect the business to grow and Prosper, it is quite understandable why they would not trust outsid- ers to come in and interfere with their management thereof, and much less share whatever fortune, big, or small, that the business may bring. Wishing to avail themselves of the advantage of limiting ® Corp. Code, See 45. 4 Id., See. 36 (11). ™ See Secs. 24, 26 and 49 of the former NIRC. ® Section 26 of the NIRC.as INTRODUCTION 1 their liability for business reverses to the amount of their invest- ment therein, they form a corporation. However, since the identity and personality of each stockholder are important to his associates, although they may consider their organization as a corporation in their dealings with third persons, among themselves, they act and feel as partners. The Corporation Code has recognized the fact that close corpo- rations have special needs different from those of widely-held corpo- rations, and treats them under a separate Title,” relaxing in their favor some of the general rules and requirements applicable to all business corporations. The first provision of Title XII reads as follows: SEC. 98. Definition anid applicability of Title—A close corporation, within the meaning of this Code, is one whose ar- ticles of incorporation provide that: (1) All of the corpora- tion’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restric- tions on transfer permitted by this Title; and (3) The corpora- tion shall net list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corpora- tion when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corpora- tion, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. The above codal definition however fails to mention what is perhaps the most characteristic feature of a close corporation—the ™ See Title XII, Corp. Code. [-9- 04 aye12 CORPORATION CODE Adentity of stock ownership and active management, ie., all or most of the stockholders are active in the corporate business either as directors, officers or other key men in management. This is in fact its main distinction from other corporations where the owners (stockholders) have hardly any voice in management except to elect their directors. ‘The ultimate effect of the special provisions on close corpora- tions is to furnish another special form of business organization—a de facto partnership with a corporate shell. The Code allows the articles of incorporation of a close corporation to do away with a board of directors, vesting management in the stockholders them- selves, But a significant difference between the close corporation and other corporations under the Code is that the stockholders of a close corporation who are active invnanagement are made person- ally liable for corporate torts, unless it has obtained reasonably ade- quate insurance. However, they still enjoy limited liability in so far as other corporate obligations are concerned: This will in effect, compel close corporations to obtain insurance in order to indemnify those injured by the corporation’s actions. Where the proposed business is affected with a public interest, the formation of a close corporation composed only of members of the same family or closely knit group may not be possible. In banks for example, not more than twenty percent of the voting stocks may be owned by relatives within the third degree of consaguinity or af- finity.* The Code has laid down a similar policy by authorizing the National Economic and Development Authority (NEDA) to recom- mend to Congress the setting of maximum limits to family or group ownership of stocks in corporations vested with public interest.” 4, The limited partnership. A limited partnership is in between a corporation and a partner- ship. It makes possible the sharing of profits by an investor, whose liabiity is limited to his investment. Like in the case of the corpora- tion, there are certain formalities which must be complied with in % See Corp. Code, Sec. 100 (6). * R.A. 337 (General Banking Act), Sec. 12D. * Corp. Code, See. 140.INTRODUCTION 13 order to achieve this end.® Like the stockholder, the limited partner cannot take part in the management of the business and must leave it exclusively in the hands of general partners, under pain of losing the privilege of limited liability.°* However, unlike the corporation, a limited partnership must have at least one member, a general partner, who is willing to answer personally for the debts of the partnership should the latter’s assets prove insufficient to pay them.” It is however subject to income tax as an entity just as a general partnership and a corporation." 5. The joint venture. ‘The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been generally understood to mean an organization formed for some temporary purpose.“ It is in fact hardly distinguishable from the partnership, since their ele- ments are similar—community of interest in the business, sharing of profits and losses, and a mutu] right of control.” The main distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary na- ture." This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal and a particular partnership may have for its object a specific undertaking.“® It would seem therefore that under Philip- % See Civil Code, Art. 1844. %® See Civil Code, Art. 1888. “Id, Art. 1843. *1 See NIRC, Sec. 24. 2 Gates v. Megargel 266 Fed. 811 (1920). 4 Blackner v. McDermott, 176 F. 2d 498, (1949); Carboneau v. Peter- son, 95 P, 2d 1043 (1939); Buckley v. Chadwick, 45 Cal. 2d 183, 288 P. 2d 12, 289 P. 2d 242 (1955). f “ Tufts v. Mann, 166 Cal. App. 170, 2 P. 2d 500 (1931); Harmon v. Martin, 395 Ill. 595, 71 N.E. 2d 74 (1947); Gates v. Megargel, 266 Fed. 811 (1920). 48 See Civil Code, Art. 1783.14 CORPORATION CODE pine law, a joint venture is a form of partnership and should thus be governed by the law of partnerships. The Supreme Court has how- ever recognized a distinction between these two business forms, and has held that although a corporation cannot enter into a partner- ship contract, it may however engage in a joint venture with oth- ers.® Apparently, the Court had in mind a relationship akin to the common law concept of joint venture. In today’s business world, the combination of resources between two groups, e.g. a foreign investor, corporate or otherwise, and a Philippine group, is referred to as a joint venture. In most cases, it takes the form of a domestic corporation in which one group (Philip- pine) would own, say, 60% of the stocks, with the other group (foreign) taking the remaining 40%. From the legal standpoint, it is more than a mere joint venture. It is a corporation, with a separate juridical personality and subject to the provisions of the Corporation Code and related laws. 6. The business trust. The vesting of title to the assets of a business enterprise in trustees, who act as representatives thereof, for the benefit of others, called the beneficiaries or cestui que trust, gives rise to a business trust. Since there is no law in this jurisdiction which expressly recognizes the existence of the business trust as an asso- ciation or organization, it cannot have the juridical personality which the partnership and the corporation possess. The Civil Code however provides that the principles of the general law on trusts are applicable in this jurisdiction, in so far as they are not in conflict with other laws.’ Since business trusts are of common law origin, the common law principles prevailing in the United States relating to business trusts may therefore be applied to any business trust created in the Philippines. The business trust affords some of the advantages of a corpora- tion, such as centralized management in the hands of the trustees, and easy transferability of beneficiaries’ interest. The deed of trust “8 Tuazon v. Bolanos, 95 Phil. 906 (1954). *” See Civil Code, Art. 1442.INTRODUCTION 15 is similar to the “ticles of incorporation in that it sets up the or- ganization and specifies its purposes, the powers of the trustees as well as the rights of the beneficiaries. If the trustees are given complete control of the business without any right of the beneficiar- ies to interefere therein, the prevailing view exempts such benefici- aries from personal liability for debts incurred by the trustees on behalf of the business trust. Under such a set-up, practically the only rights of the beneficiaries would be to receive dividends and their distributive share of the assets upon the termination of the trust. Where, however, the deed of trust gives the beneficiaries indirect control by allowing them to elect trustees and fill vacancies, or to amend or dissolve the trust, they are subject to personal liability as partners carrying on a business."® In this matter there- fore, it differs from a corporation. Government Regulation of Corporations. 1. By the legislature. Government regulation of corporations can be justified not only by the police power of the state,* but also by the fact that they owe their existence to it. The power to regulate corporations in their activities and operations is exercised through the legislative and executive branches of government. The legislature has the power to amend or repeal the Corporation Code or any part hereof, provided that accrued rights are respected.” 2. By the SEC. Administrative supervision over corporations is vested by law in the Securities and Exchange Commission, a quasi-judicial body charged with the enforcement of all laws affecting corporations. It “ See Brown v. Bodell, 263 N.Y. 177, 188 N.E. 641; Levy v. Nellis, 284 T11. App. 228, 1 N.E. 2d 251. “© Motor Transit Co. v. Railroad Commission, 189 Cal. 573, 209 Pac. 586; Northern Ry Co. v. State of Washington, 300 U.S. 154; 81 L.Ed. 573, 57 Sup. Ct., 397. See also Article XII, Section 6 of the Constitution. 8 See Corp. Code, Sec. 145.16 CORPORATION CODE was first organized in 1936 with the enactment of Commonwealth Act. 83, known as the Securities Act, but was later reorganized in 1976 by virtue of Presidential Decree 902-A, which granted it even more extensive powers than what it already had. Section 3 of said Decree provicies as follows: ” See. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or license or permit issued by the government, to operate in the Philippines; and in the exercise of its authority, it shall have the power to enlist the aid and support of and to depu- tize any and all enforcement agencies of the government, civil or military as well as any private institution, corporation, firm, association or person. (As amended by PD 1758). Among the more significant of its powers are the following: (1) To approve or reject articles of incorporation" (2) To approve by-laws of corporations and amendments thereto; (3) To approve registration of securities, like shares and bonds, before they can be publicly sold; (4) To approve amendments to articles of incorporation; (5) To approve increase or reduction of capital stock;® (6) To conduct investigations as it may consider necessary in the enforcement of the Corporation Code and other related laws,* and in this connection, to inspect the books of any corporation within its jurisdiction,” to issue subpoenas and subpoenas duces tecum as well as to order the search and seizure of documents and records of any person or entity under investigation; © Id. See. 17; See also Sec. 6 (k), PD 902-A as amended by PD 1653. " Corp. Code, Secs. 46 and 48. * See Batas Pambansa Blg. 178 (Revised Securities Act), Sec. 4. Corp. Code, See. 20. 5 Id., Sec. 38. 5 Rev. Sec. Act, Sec. 31, R.A. 1140, Sec. 1 (d); C.A. 287, Sec: 1. 5 PD, 902-A, Sec. 6 (k) as amended; see also SEC v, Pimentel, 90 Phil. 701 (1952). ® P.D 902-A, as amended, Sec. 6 (h).INTRODUCTION WW (7) To punish for contempt, direct or indirect; (8) To require corporations to submit financial and other re- ports as it may deem necessary in the public interest or for the proper discharge of its duties; (9) To issue rulings and opinions as to the proper interpreta- tion and application of laws entrusted to it for administration;* (10) To impose fines and/or penalties for violation of the laws implemented by it, as well as its rules and regulations, its orders, decisions and/or rulings. (11) To act on complaints of any violation of law, rule or regu- lation required to be enforced by it or for non-compliance of any term or condition of any certificate, license or permit issued by it;* (12) To suspend ot revoke, after proper notice and hearing, the certificate of registration of any corporation on certain specified grounds; (13) To promulgate rules and regulations as may be necessary for the proper execution of all the laws administered by it; (14) Togrant licenses to foreign corporations to enable them to transact business in the Philippines;* (15) To issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it has jurisdiction; (16) To issue writs of attachment in cases in which it has juris- diction, in order to preserve the rights of parties;* (17) To appoint one or more receivers of the property, real and personal, which is the subject of the action pending before it in accordance with the Rules of Court, and in such other cases when- ever necessary to preserve rights of parties litigants and/or protect the interest of the investing public and creditors;® and % Id., Sec. 6 (e). © R.A. 5050, Sec. 1(C). 1 Id., Sec. 1 (B). @ P.D. 902-A as amended, Sec. 6 (i). ® RA. 1143, Sec. 1 (e). P.D 902-A, Sec. 6 (i) ® RA. 1143 Sec. 1(f); Rev. Sec. Act, Sec. 33; Corp. Code, Sec. 143. ® Corp. Code, Secs, 125 and 126. © P.D. 902-A as amended, Sec. 6 (a). ® Id., Sec. 6 (b). ® Id., Sec. 6 (c).18 CORPORATION CODE (18) To create and appoint a management committee, board, or body upon petition or motu propio to undertake the management of corporations not supervised or regulated by other government agencies in appropriate cases when there is imminent danger of dis- sipation or loss of assets or other properties or paralization of business operations of such corporations which may be prejudicial to minority stockholders, parties-litigants or the general public.” More significantly, the SEC has original and exclusive jurisdic- tion to hear and decide cases enumerated in Sectiori 5 of P.D. 902-A, as follows: SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or part- ners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stock- holders, partners, members of associations or organizations registered with the Commission. b) Controversies arising cut of intra-corporate or part- nership relations, between and among stockholders, mem- bers of uscociates; between any or all of them and the corpora- tion, partnership or association of which they are stockhold- ers, 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; ¢) Controversies in the election or appointments of di- rectors, trustees, officers or managers of such corporations, partnership or associations. 4) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the man- agement of a Rehabilitation Receiver or Management Com- 7 Id., See. 6 (d).INTRODUCTION 19 mitte created pyrsuant to this Decree. (as added by P.D. 1758) In the exercise of the foregoing authority and jurisdiction, hear- ings are conducted by the SEC or by a Commissioner, or by such other bodies, boards, committees or any officer created or desig- nated by it for the purpose. Any decision of such Commissioner, bodies, boards, committees or officer may be appealed to the SEC sitting en banc within thirty days after receipt by the appellant of notice of such decision.” Any aggrieved party may appeal the order, decision or ruling of the SEC en banc to the Court of Appeals by petition for review in accordance with the pertinent provisions of the Rules of Court.” In this connection, the Supreme Court has held that a Court of First Instance (now Regional Trial Court) has no jurisdiction to review the orders of the SEC and that such power rests solely with the Supreme Court.” (Presently, with the Court of Appeals first, then, if proper, to the Supreme Court). Under Section 5 of P.D. 902-A quoted above,the regular courts are deprived of any jurisdiction over all cases affecting controver- sies within the corporation. Whether or not a court has jurisdiction over the subject matter of the action is determined from the allega- tions of the complaint. Thus, where it is evident in the complaint and prayer that the plaintiffs are asking the defendant corporation for an accounting and distribution to them of the certificate of the shares which they inherited from their father, it is clearly an intra- corporate conflict within the exclusive jurisdiction of the SEC.” And, although the case was instituted in the guise of a complaint for rescission, where the complaint seeks to set aside the election of the directors and officers of the corporation, it obviously involves an intracorporate dispute and is outside the jurisdiction of the Re- gional Trial Court.”* Other cases which have been held to be within 1 Id., Sec. 6, last paragraph. ” [bic ® Philippine Pacific Fishing Co. v. Luna, L-59070, March 15, 1982; 112 SCRA 603. ™ Malayan Integrated Industries Corp. v. Mendoza et al, 1-75238, Sept. 30, 1987, 154 SCRA 548. % Development Bank of the Phillippines v. Illustre et al, L-57905, Aug. 1, 1985, 138 SCRA 11.20 CORPORATION CODE the exclusive jurisdiction of the SEC include a petition by a group of stockholders to enjoin another group from exercising their voting Tights,” and the complaint of a stockholder seeking to compel the corporation to issue a replacement for his lost certificate of stock.” In the same manner, an action by some stockholders questioning the validity of the defendant stockholders’ acquisition of their shares, should be brought before the SEC and not the Regional Trial Court."® Likewise, the case of a corporate officer who claims that his replacement by another stockholder is illegal, is in effect a dispute regarding the validity of the election, and is thus a matter for the SEC, not the National Labor Relations Board, to decide.” On the other hand, where the case involves the rights and obli- gations of parties outside the corporation, then the regular courts and not the SEC would have the sole power to hear and decide the same. Thus, an action by a third party to compel the corporation to issue its shares in payment of a valid debt as per a contract between. them, does not involve intra-corporate matters and is not within the jurisdiction of the SEC but of the ordinary courts.” Likewise, where @ person purchased shares from a stockholder, his action to compel the corporation to register the shares in his name in the corporate books should be brought not before the SEC but before the regular courts. Since he is not yet a stockholder of said corporation, the matter cannot be considered as intra-corporate®! In the same man- ner, an action brought by a condominium corporation against the purchaser of a condominium unit for the unpaid balance of the purchase price was held by the Supreme Court as outside the SEC jurisdiction because, under their contract, such purchaser did not become the owner of said unit until its full payment. The Court % Aytona v. Calalang et al, L-77274-5, June 20, 1988, 162 SCRA 336. ™ See Philex Mining Corp. v. Reyes, L-57707, Nov. 19, 1982, 118 SCRA 602. %8 Saavedra v. SEC, L-80879, March 21, 1988, 159 SCRA 57. ® Philippine School of Business Administration v. Leafo, L-58468, February 24, 1984, 127 SCRA 778; Dy v. NLRC, L-68544, Oct. 27, 1986, 145 SCRA 212. © DMRC Enterprises v. Este del Sol Mountain Reserve Inc., L-57936, Sept. 28, 1984, 132 SCRA 295. "1 Rivera v. Florendo, L-57586, Oct. 8, 1986, 144 SCRA 652.INTRODUCTION 21 interpreted the contract to mean that the purchaser becomes a stockholder only when title to the unit vests in him, The action was therefore not one against a stockholder but against an outsider, and thus not within the jurisdiction of the SEC. CASES: “UNION GLASS & CONTAINER CORPORATION vs. SECURITIES AND EXCHANGE COMMISSION L-64013, November 28, 1983, 126 SCRA 32 ESCOLIN, J.: ‘This petition for certiorari and prohibition seeks to annul and set aside the-Order of the Securities and Exchange Commission, dated September 25, 1981, upholding its jurisdiction in SEC Case No. 2035, entitled “Caro- lina Hofilefia, Complainant, versus Development Bank of the Philippines, et al., Respondents.” : Private respondent Carolina Hofilefia, complainant in SEC Case No. 2035, is a stockholder of Pioneer Giass Manufacturing Corporation, Pio- neer Glass for short, a domestic corporation engaged in the operation of silica mines and the manufacture of glass and glassware. Since 1967, Pioneer Glass had obtained various loan accomodations from the Develop ment Bank of Philippines [DBP], and also from other local and foreign sources which DBP guaranteed. ‘As security for said loan accomodations, Pioneer Glass mortgaged and/ or assigned its assets, real and personal, to the DBP, in addition to the mortgages executed by some of its corporate officers over their personal assets, The proceeds of said financial exposure of the DBP were used in the construction of a glass plant in Rosario, Cavite, and the operation of seven silica mining claims owned by the corporation. Tt appears that through the conversion into equity of the accumulated unpaid interests on the various loans amounting to P5.4 million as of January 1975, and subsequently increased by another P2.2 million in 1976, the DBP was able to gain control of the outstanding shares of common stocks of Pioneer Glass, and to get two, later three, regular seats in the corporation’s board of directors. #2 Sunset View Condominium Corp. v. Campos, L-52361, April 27, 1981, 104 SCRA 303.22 CORPORATION CODE Sometime in March, 1978, when Pioneer Glass suffered serious liquid- ity problems such that it could no longer meet its financial obligations with DBP it entered into a dacion en pago agreement with the latter, whereby all its assets mortgaged to DBP were ceded to the latter in full sutisfaction of the corporation’s obligations in the total amount of P59,000,000.00. Part of the assets transferred to the DBP was the glass plant in Rosario, Cavite, which DBP leased and subsequently sold to herein petitioner Union Glass and Container Corporation, hereinafter referred to as Union Glass, On April, 1981, Carolina Hofilefia filed a complaint before the respon- dents Securities and Exchange Commission against the DBP, Union Glass and Pioneer Glass, docketed as SEC Case No. 2035. Of the five causes of action pleaded therein, only the first cause of action concerned petitioner Union Glass as transferee and possessor of the glass plant. Said first cause of action was based on the alleged illegality of the aforesaid dacion en Pago resulting from: [1] the supposed unilater: id unsupported undervalu- ation of the assets of Pioneer Glass covered by the agreement; [2] the ‘self- dealing indulged in by DBP, having acted both as. stockholder/director and secured creditor of Pioneer Glass; and [3] the wrongful inclusion by DBP jn its statement of account of P26M as due from Pioneer Glass when the same had already been converted into equity, Thus, with respect to said first cause of action, respondent Hofilefia prayed that the SEC issue an order. “1. Holding that the so-called dacion en pago conveying all the assets of Pioneer Glass and the Hofilefia personal properties to Union Glass be declared nul] and void on the ground that the said conveyance was tainted with. “A. Self-dealing on the part of DBP which was acting both as a controlling stockholder/director and as secured creditor of. the Pioneer Glass, all to its advantage and to that of Union Glass, and to the gross prejudice of the Pioneer Glass; “B. That the dacion en pago is void because there was gross undervaluation of the assets included in the so-callied dacion en pago by more than 100% to the prejudice of Pioneer Glass and to the undue advantage of DBP and Union Glass; “C. That the DBP unduly favored Union Glass over an- other buyer, San Miguel Corporation, notwithstanding the clearly advantageous terms offered by the latter to the prejudice of Pioneer Glass, its other creditors and so-called ‘minority stock- holders.”INTRODUCTION 23 “2, Holding that the assets of the Pioneer Glass taken over by DBP and part of which was delivered to Union Glass particularly the glass plant to be returned accordingly. “3. That the DBP be ordered to accept and recognize the ap- praisal conducted by the Asian Appraisal Inc. in 1975 and again in 1978 of the asset of Pioneer Glass.” In her common prayer, Hofileiia asked that BDP be sentenced to pay Pioneer Glass actual, consequential, moral and exemplary damages, for its alleged illegal acts and gross bad faith; and for BDP and Union Glass to pay her a reasonable amount as attorney's fees. On April 21, 1981, Pioneer Glass filed its answer. On May 8, 1981, petitioners moved for dismissal of the case on the'ground that the SEC had no jurisdiction over the subject matter or nature of the suit. Respondent Hofilefia filed her opposition to said motion, to which herein petitioners filed a rejoinder. On July 23, 1981, SEC Hearing Officer Eugenio E. Reyes, to whom the case was assigned, granted the motion to dismiss for lack of jurisdiction. However, on September 25, 1981, upon motion for reconsideration filed by respondent Hofilefia, Hearing Officer Reyes reversed his original order by upholding the SEC’s jurisdiction over the subject matter and over the persons of petitioners. Unable to secure a reconsideration of the Order as well as to have the same reviewed by the Commission En Banc, petitioners filed the instant petition for certiorari and prohibition to set aside the order of September 25, 1981, and to prevent respondent SEC from taking cogni- zance of SEC Case No. 2035. ‘The issue raised in the petition may be propounded thus: Is it the regular court or the SEC that has jurisdiction over the case? In upholding the SEC's jurisdiction over the case Hearing Officer Reyes rationalized his conclusion thus: “As correctly pointed out by the complaint, the present action is in the form of 4 derivative suit instituted by a stockholder for the benefit of the corporation, respondent Pioneer Glass and Manufac- turing Corporation, principally against another stockholder, respon- dent Development Bank of the Philippines, for alleged illegal acts and gross bad faith which resulted in the dacion en pago arrange- ment now being questioned by complainant. These alleged illegal acts and gross bad faith came about precisely by virtue of respondent De- velopment Bank of the Philippine’s status as a stockholder of co- respondent Pioneer Glass Manufacturing Corporation although its status as such stockholder, was gained as a result of its being a creditor of the latter. The derivative nature of this instant action can24 CORPORATION CODE algo be gleaned from the common prayer of complainant which seeks for an order’ directing respondent Development Bank of the Phillippi- - nes to pay vo-respondent Pioneer Glass Manufacturing Corporation damages for the alleged illegal acts and gross bad faith as above- mentioned. “As far as respondent Union Glass and Container Corporation is concerned, its inclusion as a party-respondent by virtue of its being an indispensable party to the present action, it being in possession of the assets subject of the dacion en pago and therefore, situated in such a way that it will be affected by any judgment thereon.” In the ordinary course of things, petitioner Union Glass, as transferee and possessor of the glass plant covered by the dacion en pago agreement, should be joined as party-defendant under the general rule which requires the joinder of every party who has an interest in or lien on the property subject matter of the dispute. Such joinder of parties avoids multiplicity of suits as well as ensures the convenient, speedy and orderly administration of justice. But since petitioner Union Glags has no intra-corporate relation with either the complainant or the DBP, its joinder as party-defendant in SEC Case No. 2035 brings the cause of action asserted against it, outside the jurisdiction of the respondent SEC. ‘The jurisdiction of the SEC is delineated by Section 6 of PD No. 902-A as follows: ‘This grant of jurisdiction must be viewed in the light of the nature and function of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter “absolute jurisdiction, supervision and control over all corpora- tions, partnerships or associations, who are grantees of primary franchise and/or license or permit issued by the government to operate in the Philippines x x x.” The principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development. It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law explicitly specified and delimited its jurisdiction to matters intrinsically connected with the regulation of corporations, part- nerships and associations and those dealing with the internal affairs of such corporations, partnerships or associations. Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: [a] between the corporation, partnership or association and the public; [b] between the corporation, partnership or association and its stockholders, partners, members, or officers; [¢] between the corporation, partnership orINTRODUCTION 25 association and the state in so far as its franchise, permit or license to operate is concerned; and (d} among the stockholders, partners or associ- ates themselves. ‘The fact that the controversy at bar involves the rights of petitioner Union Glase who has no intra-corporate relation either with complainant or the DBP, places the suit beyond the jurisdiction of the respondent SEC. ‘The case should be tried and decided by the court of general jurisdiction, the Regional Trial Court. This view ie in accord with the rudimentary principle that administrative agencies, like the SEC, are tribunals of limited jurisdiction and, as such, could wield only such powers as are specifically granted to them by their enabling statutes. As We held in Sunset View Condominium Corp, vs. Campos, Jr.: “Inasmuch as the private respondents are not shareholders of the petitioner condominium corporation, the instant cases for collec- tion cannot be a ‘controversy arising out of intra-corporate or part- nership relations between and among stockholders, members or associates; between any or all of them and the corporation, partner- ship or asociation of which they are stockholders, members or associ- ates, respectively,’ which controversies are under the original and ex- clusive jurisdiction of the Securities & Exchange Commission, pursu- ant to Section 5 [b] of P.D. No. 902-A. x x x” As heretofore pointed out, petitioner Union Glass is involved only in the first cause of action of Hofilefia’s complaint in SEC Case No. 2035. While the Rules of Court, which applies suppletorily to proceedings before the SEC, allows the joinder of causes of action in one complaint, such procedure however is subject to the rules regarding jurisdiction, venue and joinder of parties. Since petitioner has no intra-corporate relationship with the complainant, it cannot be joined as party-defendant in said case as to do so would violate the rule on jurisdiction. Hofilefia’s complaint against petitioner for cancellation of the sale of the glass plant should therefore be brought separately before the regular court. But such action, if instituted, shall be suspended to await the final outcome of SEC Case No. 2035, for the issue of the validity of the dacion en pago posed in the last mentioned case is a prejudicial question, the resolution of which is logical antecedent of the issue involved in the action against petitioner Union Glass. Thus, Hofilefa’s complaint against the latter can only prosper if final judgment is rendered in SEC Case No. 2035, annulling the dacion en pago executed in favor of the DBP. WHEREFORE, the instant petition is hereby granted, and the ques- tioned Orders of respondent SEC, dated September 25, 1981, March 25, 1982 and May 28, 1982, are hereby set aside. Respondent Commission is26 CORPORATION CODE ordered to drop petitioner Union Glass from SEC Case No. 2035, without prejudice to the filing of a separate suit before the regular court of justice. No pronouncement as to costs. SO ORDERED. TEEHANKEE, J., concurring: Iconcur in the Court’s judgment penned by Mr. Justice Escolin setting aside the questioned orders of respondent SEC and ordering that peti- tioner Union Glass be dropped from SEC Case No. 2035 for lack of SEC jurisdiction over it as a third party purchaser of the glass plant acquired by the DBP by dacion en pago from Pioneer Glass, without prejudice to Hofilefia filing a separate suit in the regular courts of justice against Union Glass for recovery and cancellation of the said sale of the glass plant in favor of Union Glass. I concur also with the statement in the Court’s opinion that the final outcome of SEC Case No. 2035 with regard to the validity of the dacion en pago is a prejudicial case. If Hofilefia’s complaint against said dacion en pago fails in the SEC, then it clearly has no cause of action against Union Glass for cancellation of DBP’s sale of the plant to Union Glass. The purpose of this brief concurrence is with reference to the state- ment in the Court’s opinion that “Thus, Hofilefia’s complaint against the latter can only prosper if final judgraent is rendered in SEC Case No. 2035, annulling the dacion en pago executed in favor of the DBP,” to erase any impression that a favorable judgment secured by Hofilefia in SEC Case No. 2035 against the DBP and Pioneer Glass would necessarily mean that its action against Union Glass in the regular courts of justice for recovery and cancellation of the DBP sale of the glass plant to Union Glass would necessarily prosper. It must be borne in mind that as already indicated the SEC has no jurisdiction over Union Glass as an outsider. The suit in the regular courts of justice that Hofilefia might bring against Union Glass is of course subject to all defenses as to the validity of the sale of the glass plant in its favor as a buyer in good faith and should it successfully substantiate such defenses, then Hofilefias action against it for cancella- tion of the sale might fail as a consequence. AQUINO, J., Dissenting: I dissent with due deference to Justice Escolin’s opinion. What are belatedly assailed in this certiorari and prohibition case filed on May 17, 1983 are the order of September 25, 1981 of Eugenio E. Reyes, a SEC hearing officer, and the orders of March 25 and May 28, 1982 of Antonio R. Manabat, another SEC hearing officer.INTRODUCTION 27 Although a jurisdictional issue is raised and jurisdiction over the subject matter may be raised at any stage of the case. nevertheless, the petitioners are guilty of laches and nonexhaustion of the remedy of appeal with the Securities and Exchange Commission en banc. ‘The petitioners resorted to the special civil actions of certiorari and prohibition because they assail the orders of mere SEC hearing officers. ‘This is not a review of the order, decision or ruling of the SEC sitting en banc which, according to section 6 of Presidential Decree No. 902-A (1976), may be made by this Court “in accordance with the pertinent provisions of the Rules of Court.” Rule 43 of the Rules of Court used to allow review by this Court of the SEC order, ruling or decision. Repubic Act 5434 (1968) substituted the Court of Appeals for this Court in line with the policy of lightening our heavy jurisdictional burden. But this Court seems to have been restored as the reviewing authority by Presidential Decree No. 902-A. However, section 9 of the Judiciary Reorganization Law returned to the Intermediate Appellate Court the exclusive jurisdiction to review the ruling, order or decision of the SEC as a quasi-judicial agency. The same section 9 granted to the Appellate Court jurisdiction in certiorari and prohibition cases over the SEC although not exclusive. In this case, the SEC seems to have adopted the orders of the two hearing officers as its own orders as shown by the stand taken by the Solicitor General in defending the SEC. If that were so, that is, ifthe orders of the hearing officers should be treated as the orders of the SEC itself en banc, this Court woud have no jurisdiction over this case. It should be the Appellate Court that shoud exercise the power of review. Carolina Hofilefia has been a stockholder since 1958 of the Pioneer Glass Manufacturing Corporation. Her personal assets valued at P6,804,810 were apparently or supposedly mortgaged to the DBP to secure the obliga- tions of Pioneer Glass (p. 32, Rollo). Pioneer Glass became indebted to the Development Bank of the Philip- pines in the total sum of P59,000,000. Part of the loan was used by Pioneer Glass to establish its glass plant in Rosario, Cavite. The unpaid interest on the loan amounting to around seven million pesos became the DBP’s equity in Pioneer Glass. The DBP became a substantial stockholder of Pioneer Glass. Three members of the Pioneer Glass board of directors were from the DBP. ‘The glass plant commenced operations in 1977. At that time, Pioneer Glass was heavily indebted to the DBP. Instead of foreclosing its mortgage, DBP maneuvered to have the mortgaged assets of Pioneer Glass, including the glass plant, transferred to the DBP by way of dacion en pago. This transaction was alleged to be an “auto contract” or a case of the DBP contracting with itself since the DBP had a dominant position in Pioneer28 CORPORATION CODE Glass. Hofilefia alleged that although the debt to the DBP of Pioneer Glass amounted to P59,000,000, the glass plant in 1977 had a “sound value” of P77,329,000 and a “reproduction cost” of P90,403,000. She further alleged that San Miguel Corporation was willing to buy the glass plant for P40,000,000 cash, whereas it was actually sold to Union Glass & Container Corporation for the same amount under a 25-year term of payment (pp. 32-34, Rollo). On March 31, 1981; Carmen Hofilefia filed with the SEC a complaint against the DBP, Union Glass, Pioneer Glass and Refael Sison as chairman of the DBP and Pioneer Glass boards of directors. Union Glass filed a motion to dismiss on the ground that jurisdiction over the case is lodged in the Court of First Instance. Hofilefia opposed the motion. Hearing Officer Reyes in his order of July 23, 1981 dismissed the complaint on the ground that the case is beyond the jurisdiction of the SEC. Hofilefia filed a motion for reconsideration which was opposed by Union Glass. Hearing Officer Reyes in his order of September 25, 1981 reconsidered his dismissal order and ruled that Union Glass is an indis- pensable party because it is the transferee of the controverted assets given by way of dacion en pago to the DBP. He ruled that the SEC has jurisdiction over the case. Union Glass filed a motion for reconsideration. Hearing Officer Anto- nio R. Manabat denied the motion on the ground “that the present action is an intra-corporate dispute involving stockholders of the same corporation (p. 26, Rollo). Union Glass filed a second motion for reconsideration with the prayer that the SEC should decide the motion en banc. The hearing officer ruled that the remedy of Union Glass was to file a timely appeal. Hence, its second motion for reconsideration was denied by the hearing officer. (This ruling is a technicality which hinders substantial justice.) ie It is clear that Union Glass has no cause of action for certiorari and prohibition, Its recourse was to appeal to the SEC en banc the denial of its first motion for reconsideration. There is no question that the SEC has jurisdiction over the intra- corporate dispute between Hofilefia and the DBP, both stockholders of Pioneer Glass, over the dacion en pago. Now, does the SEC lose jurisdiction because of the joinder of Union Glass which has privity with the DBP since it was the transferee of the assets involved in the dacion en pago? Certainly, the joinder of Union Glass does not divest the SEC of jurisdiction over the case. The joinder of Union Glass is necessary because the DBP, its transferor, is being sued regarding the dacion en pago. The defenses of Union Glass are tied up with the defenses of the DBP in the intra-corporate dispute. Hofilefia’s cause of action should not be split.INTRODUCTION 29 It would not be judicious and expedient to require Hofilefa to sue the DBP and Union Glass in the Regional Trial Court. The SEC is more competent than the said court to decide the intra-corporate dispute. ‘The SEC, as the agency enforcing Presidential Decree No. 902-A, is in the best position to know the extent of its jurisdiction. Its determination that it has jurisdiction in this case has persuasive weight. Petition granted. v ABEJO vs. DE LA CRUZ ‘L-63558, 68450-51, May 21, 1987, 149 SCRA 654 TEEHANKEE, Cw., ‘These two cases, jointly heard, are jointly herein decided. They involve the question of who, between the Regional Trial Court and the Securities and Exchange Commission (SEC), has original and exclusive jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell Philippines, Inc. (Pocket Bell), a “tone and voice paging corpo- ration,” namely, the spouses Jose Abejo and Aurora Abejo (hereinafter referred to as the Abejos) and the purchaser, Telectronic Systema, Inc. (hereinafter referred to as Telectronics) of their 133,000 minority share- holdings (for P5 million) and of 63,000 shares registered in the name of Virginia Braga and covered by five stock certificates endorsed in blank by her (for P1, 674,450.00), and the spouses Agapito Braga and Virginia Braga (hereinafter referred to as the Bragas), erstwhile majority stockholders. With the said purchases, Telectronics would become the majority stock- holder, holding 56% of the outstanding stock and voting power of the corporation Pocket Bell. With the said purchases in 1982, Telectronics requested the corporate secretary of the corporation, Norberto Braga, to register and transfer to its name, and those of its nominees the total 196,000 Pocket Bell shares in the corporation’s transfer book, cancel the surrendered certificates of stock and issue the corresponding new certificates of stock in its name and those of its nominees. Norberto Braga, the corporate secretary and son of the Bragas refused to register the aforesaid transfer of shares in the corporate books, assert- ing that the Bragas claim preemptive rights over the 133,000 Abejo shares and that Virginia Braga never transferred her 63,000 shares to Telectron- ies but had lost the five stock certificates representing those shares. This triggered off the series of intertwined actions between the pro- tagonists, all centered on the question of jurisdiction over the dispute, which were to culminate in the filing of the two cases at bar.30 CORPORATION CODE ‘The Bragas assert that the regular civil court has original and exclu- sive jurisdiction as against the Securities and Exchange Commission, while the Abejos claim the contrary. A summary of the actions resorted to by the parties follows: A. ABEJOS ACTIONS IN SEC 1. The Abejos and Telectronies and the latter’s nominees, as new majority shareholders, Ruled SEC Cases Nos. 02379 and 02395 against the Bragas on December 17, 1982 and February 14, 1983, respectively. 2. In SEC Case No. 02379, they prayed for mandamus from the SEC ordering Norberto Braga, as corporate secretary of Pocket Bell to register in their names the transfer and sale of the aforesaid 196,000 Pocket Bell shares (of the Abejos and Virginia Braga, cancel the surrendered certifi- cates as duly endorsed and to issue new certificates in their names. 3. In SEC Case No. 02395, they prayed for injunction and a tempo- rary restraining order that the SEC enjoin the Bragas from disbursing or disposing funds and assets of Pocket Bell and from performing such other acts pertaining to the functions of corporate officers. 4. Pocket Bell’s corporate secretary, Norberto Braga, filed a Motion to Dismiss the mandamus case (SEC Case No. 02379) contending that the SEC has no jurisdiction over the nature of the action since it does not involve an intracorporate controversy between stockholders, the principal petitioners therein, electronics, not being a stockholder of record of Pocket Bell. 5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay denied the motion. On January 14, 1983, the corporate secretary filed a Motion for Reconsideration. On March 21, 1983, SEC Hearing Officer Joaquin Garaygay issued an order granting Braga’s motion for reconsid- eration and dismissed SEC Case No. 02379. 6. On February 11, 1983, the Bragas filed their Motion to Dismiss the injunetion case, SEC Case No. 02395. On April 8, 1985, the SEC Director, Eugenio Reyes, acting upon the Abejos’ ex-parte motion, created a three. man committee composed of Atty. Emmanuel Sison as Chairman and Attys. Alfredo Oca and Joaquin Garaygay as members, to hear and decide the two SEC cases (Nos. 02379 and 02395). 7. On April 13, 1983, the SEC three-man committee issued an order reconsidering the aforesaid order of March 21, 1983 of the SEC Hearing Officer Garaygay (dismissing the mandamus petition SEC Case No 02379) and directing corp.rate Secretary Norberto Braga to file his answer to the petitioner therein.INTRODUCTION 31 B. BRAGAS’ ACTION IN SEC 8 On December 12, 1983, the Bragas filed a petition for certiorari, prohibition and mandamus with the SEC en banc. SEC Case No. EB #049, seeking the dismissal of SEC Cases Nos. 02379 and 02398 for lack of Jurisdiction of the Commission and the setting aside of the various orders issued by the SEC three-man-committee in the course of the proceedings in the two SEC cases. 9, On May 15, 1984, the SEC en banc issued an order dismissing the Bragas’ petition in SEC Case No. EB #049 for lack of merit and at the same time ordering the SEC Hearing Committee to continue with the hearings of the Abejos and Telectronics SEC Cases Nos. 02379 and 02395, ruling that the “issue is not the ownership of shares but rather the non-performance by the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the corporation of which he is secretary.” 10. On May 15, 1984 the Bragas filed a motion for reconsideration but the SEC en banc denied the same on August 9, 1984. C. BRAGAS’ ACTION IN CFI (NOW RTC) 11. On November 25, 1982, following the corporate secretary's re- fusal to register the transfer of the shares in question, the Bragas filed a complaint against the Abejos and Telectronics in the Court of First In- stance of Pasig, Branch 21 (now the Regional Trial Court, Branch 160) docketed as Civil Case No. 48746 for: (a) rescission and annulment of the sale of the shares of stock in Pocket Bell made by the Abejos in favor of Telectronies on the ground that it violated the Bragas’ alleged pre-emptive Tight over the Abejos’ shareholdings and an alleged perfected contract with the Abejos to sell the same shares in their (Bragas) favor, (1st cavse of action); plus damages for bad faith; and (b) declaration of nullity of any transfer, assignment or endorsement of Virginia Bragas’ stock certificates of 63,000 shares in Pocket Bell to electronics for want of consent and consideration, alleging that said stock certificates, which were intended as security for a loan application and were thus endorsed by her in blank, had been lost (2nd cause of action). 12. On January 4, 1983, the Abejos filed a Motion to Dismiss the complaint on the ground that it is the SEC that is vested under PD 902-A with original and exclusive jurisdiction to hear and decide cases involving, among others, controversies “between and among stockholders” and that. the Bragas’ suit is such a controversy as the issues involved therein are the stockholders’ alleged pre-emptive rights, the validity of the transfer and endorsement of certificates of stock, the election of corporate officers and the management and control of the corportion’s operations. The dismissal32 CORPORATION CODE motion was granted by Presiding Judge G. Pineda on January 14, 1983. 13. On January 24, 1983, the Bragas filed a motion for reconsiders- tion. The Abejos opposed. Meanwhile, respondent Judge Refael de la Cruz was appointed presiding judge of the court (rename Regional Trial Court) in place of Judge G. Pineda. 14. On February 14, 1983, respondent Judge de la Cruz issued an order rescinding the January 14, 1983 order and reviving the temporary re- straining order previously issued on December 23, 1982 restraining Telec- tronics’ agents or representatives from enforcing resolution constituting themselves as the new set of officers of Pocket Bell and from assuming control of the corporation and discharging their functions. 15. On March 2, 1983, the Abejos filed a motion for reconsideration, which motion was duly opposed by the Bragas. On March 11, 1983, reapondent Judge denied the motion for reconsideration. D. ABEJOS’ PETITION AT BAR 16. On March 26, 1983, the Abejos, alleging that the acts of respon- dent Judge in refusing to dismiss the complaint despite clear lack of jurisdiction over the action and in refusing to reconsider his erroneous position were performed without jurisdiction and with grave abuse of discretion, filed their herein Petition for Certiorari and Prohibition with Preliminary Injunction. They prayed that the challenged orders of reapon- dent Judge dated February 14, 1983 and March 11, 1983 be set aside for lack of jurisdiction and that he be ordered to permanently desiat from further proceedings in Civil Case No. 48746, Respondent judge desisted from further proceedings in the case, dispensing with the need of issuing any restraining order. E. BRAGAS’ PETITION AT BAR 17. On Avgust 29, 1984, the Bragas, alleging in turn that the SEC has no jurisdiction over SEC Cases Nos. 02379 and 02395 and that it acted arbitrarily, whimsicslly and capricjously in dismissing their petition (in SEC Case No. EB #049) for dismissal of the said case, filed their herein Petition for Certiorari and Prohibition with Preliminary Injunction or TRO. The petitioner secks the reversal and/or setting aside of the SEC Order dated May 15, 1984 dismissing their petition in said SEC Case No. EB #049 and sustaining its jurisdiction over SEC Cases Nos. 02379 and 02395, filed by the Abejos. On September 24, 1984, this Court issued a temporary restraining order to maintain the status quo and restrained the SEC anWor any of its officers or hearing committees from further proceed- ing with the hearings in SEC Cases Nos. 02379 and 02395 and fromTP, LAW Ling Any INTRODUCTION 33 enforcing any and all ordere and/or resolutions issued in connection with the said cases. The cases, having been given due course, were jointly heard by the Court on March 27, 1985 and the parties thereafter filed on April 16, 1985 their respective memoranda in amplification of oral argument on the points of law that were crystallized during the hearing. The Court rules thet the SEC has original and exclusive jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell, namely, the Abejos and Telectronies, the purchasers of the 56% majority stock (supra, at page 2) on the one hand, and the Bragas, eratwhile majority stockholders, on the other, and thet the SEC, through its en bane Resolution of May 15, 1984 correctly ruled in Aismissing the Bragas’ petition questioning its jurisdiction, that “the issue je not the ownership of shares but rather the non-performance by the Corporate Secretary of the ministerial duty ‘of recording transfers of shares of stock of the Corporation of which he is secretary.” 1. The SEC ruling upholding its primary and exelusive jurisdiction over the dispute is correctly premised on, and fully supported by, the applicable provisions of P.D. No. 902-A which reorganized the SEC with anditional powers “in line with the governments policy of encouraging eeveatmente, both domestic and foreign, and more active public particips: tion in the affairs of private corporations and enterprises through which tion ile activities may be pursued for the promotion of economic develop- ment; and, to promote a wider and more meaningf\ equitable distribution of wealth,” and accordingly provided that: “SEC, 3. The Commission shall have absolute jurisdiction, su: pervision and control over all corporations, partnership oF associa- Pena, who are the grantees of primary franchise and/or a license or permit issued by the government to operate in the Philippines; x x x USEC. &. In addition to the regulatory and adjudicative func- tions of the Securities and Exchange Commission over corporations, partnership and other forms'of associations registered with it as ex- pressly granted under existing laws and decrees, it shall have origi- ere ard exclusive jurisdiction to hear and decide cases involving. 8) Devices or schemes employed by or any acts, of the board of directors, business associations, its officers or part pers, amounting to fraud and misrepresentation which may be vere montal 10 the interest of the public and/or of the stock- holder, partners, members of associations or organizations reg istered with the Commission.34 CORPORATION CODE b) Controversies arising out. of intra-corporate or partner- ship relations, between and among stockholders, members, or associates; between any and/or all of them and the corporation, Partnership or association of which they are stockholders, members or associates, respectively; and between such corpo. ration, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; ©) Controversies in the election or appointments of direc- tors trustees, officers or managers of such corporations, partner- ships or associations.” Section 6 further grants the SEC “in order to effectively exercise such Jurisdiction,” the power, inter alia, “to issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it has Jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply.” 2. Basically and indubitably, the dispute at bar, as held by the SEC, is an intracorporate dispute that has arisen between and among the principal stockholders of the corporation Pocket Bell due to the refusal of the corporate secretary, backed up by his parents as erstwhile majority shareholders, to perform his “ministerial duty” to record the transfers of the corporation’s controlling (56%) shares of atock, covered by duly en- dorsed certificates of stock, in favor of Telectronies as the purchaser thereof. Mandamus in the SEC to compel the corporate secretary to register the transfers and issue new certificates in favor of Telectronica and its nominees ~as properly resorted to under Rule XXI, Section 1 of the SEC's New Rules of Procedure, which provides for the filing of such petitions with the SEC. Section 3 of said Rules further authorizes the SEC to “issue orders expediting the proceedings x x x and also [tol grant a preliminary injunction for the preservation of the rights of the parties pending such proceedings.” ‘The claims of the Bragas, which they assert in their complaint in the Regional Trial Court, praying for rescission and annulment of the sale made by the Abejos in favor of Telectronics on the ground that they had an alleged perfected pre-emptive right over the Abejos’ shares as well as for annulment of sale to Telectronics of Virginia Braga’s shares covered by street certificates duly endorsed by her in blank, may in no way deprive the SEC of its primary and exclusive jurisdiction to grant or not the writ of mandamus ordering the registration of the shares so transferred. The Bragns’ contention that the question of ordering the recording of the transfers ultimately hinges on the question of ownership or right thereto over the shares notwithstanding, the jurisdiction over the dispute is clearlyINTRODUCTION 35 vested in the SEC. 3. The very complaint of the Bragas for annulment of the sales and transfers as filed by them in the regular court questions the validity of the transfer and endorsement of the certificates of stock, claiming alleged pre- emptive rights in the case of the Abejos’ shares and alleged loss of the certificates and lack of consent and consideration in the case of Virginia Braga’s shares. Such dispute clearly involves controversies “between and among stockholders,” as to the Abejos’ right to sell and dispose of their shares to Telectronics, the validity of the latter’s acquisition of Virginia Brage’s shares, who between the Bragas and the Abejos’ transferee should be recognized as the controlling shareholders of the corporation, with the ight to elect the corporate officers and the management and control of its operations. Such a dispute and case clearly fall within the original and exclusive jurisdiction of the SEC to decide, under jon Bof PD. 902 A, above-quoted. The restraining order issued by the Regional ‘Trial Court restraining Telectronics agents and representatives from enforcing their resolution constituting themselves as the new set of officers of Pocket Bell and from assuming control of the corporation and discharging their func- tions patently encroached upon the SEC’s exclusive jurisdiction over such specialized corporate controversies calling for its special competence. As stressed by the Solicitor General on behalf of the SEC, the Court has held that “Nowhere does the law [PD 902-A] empower any Court of First Instance {now Regional Trial Court) to interfere with the orders of the Commission,” and consequently “any ruling by the trial court on the issue of ownership of the shares of stock is not binding on the Commission” for want of jurisdiction. 4. The dispute therefore clearly falls within the general classification of cases within the SEC’s original and exclusive jurisdiction to hear and decide, under the aforequoted governing section 5 of the law. Insofar as the Bragas and their corporate secretary's refusal on behalf of the corporation Pocket Bell to record the transfer of the 56% majority shares to Telectron- ics may be deemed a device or scheme amounting to fraud and misrepre- sentation employed by them to keep themselves in control of the corpora- tion to the detriment of Telectronies (as buyer and substantial investor in the corporate stock) and the Abejos (as substantial stockholders-sellers), the case falls under paragraph (a). The dispute is likewise an intra- corporate controversy between and among the majority and minority stock- holders as to the transfer and disposition of the controlling shares of the corporation, falling under paragraph (b). As stressed by the Court in DMRC Enterprises v. Este del Sol Mountain Reserve, Inc., Considering the announced policy of PD 902-A, the expanded Jurisdiction of the respondent Securities and Exchange Commission under said decree extends exclu- sively to matters arising from contracts involving investments in private36 CORPORATION CODE corporations, partnerships and associations.” The dispute also concerns the fundamental issue of whether the Bragas or Telectronies have the right to elect the corporate directors and officers and manage its business and operations, which falls under paragraph (c). 5. Most of the cases that have come to this Court involve those under paragraph (b), i.e. whether the controversy is an intra-corporate one, arising “between and among stockholders” or “between any or all of them and the corporation.” The parties have focused their arguments on this question. The Bragas' contention in his field must likewise fail. In Philex Mining Corp. v. Reyes, the Court spelled out that “an intra-corporate controversy is one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of controversies between etockhold- ers and corporations. The issue of whether or not a corporation is bound to replace a stockholder’s lost certificate of stock is a matter purely between @ stockholder and the corporation. It is a typical intra-corporate dispute. The question of damages raised is merely incidental to that main issue.” The Court rejected the stockholders’ theory of excluding his complaint (for replacement of a lost stock (dividend] certificate which he claimed to have never received) from the classification of intra-corporate controversies as one that “does not square with the intent of the law, which is to segregate from the general jurisdiction of regular Courts controversies involving corporations and their stockholders and to bring them to the SEC for exclusive resolution, in much the same way that labor disputes are now brought to the Ministry of Labor and Employment (MOLE) and the Na- tional Labor Relations Commission (NLRC), and not to the Courts.” (a)_ The Bragas contend that Telectronics, as buyer transferee of the 56% majority shares is not a registered stockholder, because they, through their son the corporate secretary, appear to have refused to perform “the ministerial duty of recording transfers of shares of stock of the corporation of which he is the secretary,” and that the dispute is therefore, not an intracorporate one. This conten- tion begs the question which must properly be resolved by the SEC, but which they would prevent by their own act, through their son, of blocking the due recording of the transfer and cannot be sanctioned. It can be seen from their very complaint in the regular courts that they with their two sons constituting the plaintiffs are all stockhold- ers while the defendants are the Abejos who are also stockholders whose sale of the shares to Telectronics they would annul. (b) There can be no question that the dispute between the Abejos and the Bragas as to the sale and transfer of the former’s shares to Telectronics for P5 million is an intracorporate one underINTRODUCTION 37 section 5 (b), prescinding from the applicability of section 5 (a) and (©), (supra, par. 4) It is the SEC which must resolve the Bragas’ claim in their own complaint in the court case filed by them of an alleged pre-emptive right to buy the Abejos’ shares by virtue of “on-going negotiations,” which they may submit as their defenses to the man- damus petition to register the sale of the shares to Telectronics. But asserting such pre-emptive rights and asking that the same be en- forced is a far ery from the Bragas’ claim that “the case relates to questions of ownership” over the shares in question. (Not to mention, as pointed out by the Abejos, that the corporation is not a close corporation, and no restriction over the free transferability of the shares appears in the Articles of Incorporation, as well as in the by- laws and the certificates of stock themselves, as required by law for the enforcement of such restriction. See Go Soc & Sons, etc. v. LAC, G.R. No, 72342, Resolution of February 19, 1987.) (c)_ The dispute between the Bragas and Telectronics as to the sale and transfer for P1,674,450.00 of Virginia Braga’s 63.000 shares covered by Street certificates duly endorsed in blank by her is within the special competence and jurisdiction of the SEC, dealing as it does with the free transferability of corporate shares, particularly street certificates,” as guaranteed by the Corporation Code and its pro- claimed policy of encouraging foreign and domestic investments in Philippine private corporations and more active public participation therein for the promotion of economic development. Here again, Virginia Braga’s claim of loss of her street certificates or theft thereof (denounced by Telectronics as “perjurious”) must be pleaded by her as a defense against Telectronics’ petition for mandamus and recog- nition now as the controlling stockholder of the corporation in the light of the joint affidavit of General Cerefino S. Carreon of the National Telecommunications Commission and private respondent Jose Luis Santiago of Telectronics narrating the facts and circum- stances of how the former sold and delivered to Telectronics on behalf of his compadres, the Brages, Virginia Braga’s street certificates for 63,000 shares equivalent to 18% of the corporation's outstanding stock and received the cash price thereof. But as to the sale and transfer of the Abejos’ shares, the Bragas cannot oust the SEC of its original and exclusive jurisdiction to hear and decide the case, by blocking through the corporate secretary, their son, the due recording of the transfer and sale of the shares in question and claiming that Telectronics is not a stockholder of the corporation—which is the very issue that the SEC is called upon to resolve. As the SEC maintains, “There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commis-38 CORPORATION CODE sion may take cognizance of a suit seeking to enforce his rights as such stockholder.” This is because the SEC by express mandate has “absolute jurisdiction, supervision and control over all corporations” and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser's right to secure the correspond. ing certificate in his name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in securing the certificates of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the SEC, rather than through the usual tedious regular court procedure. Furthermore, as stated in the SEC order of April 13, 1983, notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to registration: “Whether the refusal of the (corporation) to effect the. same is valid or not is still subject to the outcome of the hearing on the merits of the case.” 6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and boards the power to resolve specialized disputes in the field of labor (as in corporations, public trans- portation and public utilities) ruled that Congress in requiring the Indus: trial Court's intervention in the resolution of labor-management controver- sies likely to cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in the law. The Court held that under the “sense-making and expeditious doctrine of primary jurisdic- tion. . .the courts cannot or will not determine a controversy involving a question which is within the jurisdiction of an administrative tribunal, where the question demands the exercise of sound administrative discre- tion requiring the special knowledge, experience, and services of the admin- istrative tribunal to determine technical and intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of the regula- tory statute administered.” In this era of clogged court dockets, the need for specialized adminis- trative boards or commissions with the special knowledge, experience and capability to hear and determine promptly disputes on technical matter’ or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh indispensable, Thus, in 1984, the Court noted that “between the power lodged in an administrative body and a court, the unmistakable trend has been to refer it to the former. Increas- ingly, this Court has been committed to the view that unless the law speaks clearly and unequivocably, the choice should fall on [an administra- tive agency.]” The Court in the earlier case of Ebon vs. De Guzman, noted that the lawmaking authority, in restoring to the labor arbiters and theINTRODUCTION 39 NLRC their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D. amendment splitting their jurisdiction with the regular courts, “evidently,. . . had second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award damages in labor cases because that setup would mean duplicity of suits, splitting the cause of action and possible conflicting findings and conclusions by two tribunals on one and the same claim.” 1, Thus, the Corporation Code (B.P. No. 178) enacted on May 1, 1980 specifically vests the SEC with the Rule-making power in the discharge of its task of implementing the provisions of the Code and particularly charges it with the duty of preventing fraud and abuses on the part of controlling stockholders, directors and officers, as follows: “SEC. 143. Rule-making power of the Securities and Exchange ‘Commission. —The Securities and Exchange Commission 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 preven- tion of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers.” (Italics supplied) ‘The dispute between the contending parties for control of the corpora- tion manifestly falls within the primary and exclusive jurisdiction of the SEC in whom the law has reserved such jurisdiction as an administrative agency of special competence to deal promptly and expeditiously there- with. xxx It only remains now to deal with the Order dated April 15, 1983 (Annex H, Petition) of the SEC’s three-member Hearing Committee granting ‘Telectronics’ motion for creation of a receivership or management commit- tee with the ample powers therein enumerated for the preservation pen- dente lite of the corporation’s assets and in discharge of its “power and duty to preserve the rights of the parties, the stockholders, the public availing of the corporation’s services and the rights of creditors.” as well as “for reasons of equity and justice. . . (and) to prevent possible paralization of corporate business.” The said Order has not been implemented notwith- ‘standing its having been upheld per the SEC en banc’s Order of May 15, 1984 (Annex “V”, Petition) dismissing for lack of merit the petition for certiorari, prohibition and mandamus with prayer for restraining order or injunction filed by the Bragas seeking the disbandment of the Hearing Committee and the setting aside of its Orders, and its Resolution of August 9, 1984, denying reconsideration (Annex “K”, Petition), due to the Bragas’ filing of the petition at bar.40 CORPORATION CODE Prescinding from the great concern of damage and prejudice expressed by Telectronics due to the Bragas having remained in control of the corpo- ration and having allegedly committed acts of gross mismanagement and misapplication of funds, the Court finds that under the facts and circum- stances of record, it is but fair and just that the SEC’s order creating a receivership committee be implemented forthwith, in accordance with its terms, as follows: x x x ACCORDINGLY, judgment is hereby rendered: (a) Granting the petition in G.R. No. 63558, annulling the chal- lenged Orders of respondent Judge dated February 14, 1983 and March 11, 1983 (Annexes “L” and “P” of the Abejos’ petition) and prohibiting respondent Judge from further proceeding in Civil Case No. 48746 filed in his Court other than to dismiss the same for lack or jurisdiction over the subjet-matter; (>) Dismissing the petition in G.R. Nos. 68450-51 and lifting the temporary restraining order issued on September 24, 1984, effective immediately upon promulgation hereof: () Directing the SEC through its Hearing Committee to pro- ceed immediately with hearing and resolving the pending mandamus petition for recording in the corporate books the transfer to Telec- tronics and its nominees of the majority (56%) shares of atock of the corporation Pocket Bell pertaining to the Abejos and Virginia Braga and all related issues, taking into consideration, without need of resubmittal to it, the pleadings, annexes and exhibits filed by the contending parties in the cases at bar; and (d) Likewise directing the SEC through its Hearing Committee to proceed immediately with the implementation of its receivership or management committee Order of April 15, 1983 in SEC Case No. 2379 and for the purpose, the contending parties are ordered to submit to said Hearing Committee the name of their designated representatives in the receivership/management committee within three (3) days from receipt of this decision, on pain of forfeiture of such right in case of failure to comply herewith, as provided in the said Order, and ordering the Bragas to perform only caretaker acts in the corporation pending the organization of such receivership/man- agement committee and assumption of its functions. This decision shall be immediately executory upon its promulgation. SO ORDERED.INTRODUCTION 41 Effect of Corporation Code on Existing Corporations. Section 148 of the Code provides: SEC. 148, Applicability to existing corporations.—All cor- porations lawfully existing and doing business in the Philip- pines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Ex- change Commission, shall be deemed to have been author- ized, 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 where any such corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein pro- vided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same. The above provision must be understood to be subject to the accrued or vested rights of the existing corporation, its stockholders as well as third parties, as expressly provided in section 76 of the Corporation Law as follows: SEC. 76. This Act or any part thereof may be amended or repealed at any time by the legislative authority, and any or all corporations created by virtue of this Act may be dis- solved by legislative enactment. No right or remedy in favor of or accrued against any corporation, its stockholders or officers, shall be removed or impaired either by the subse- quent dissolution of said corporation or by any subsequent amendment or repeal of this Act or of any part or portion thereof. Therefore, under the two provisions above, although a corpora- tion organized under the Corporation Law is now governed by the provisions of the Corporation Code, any rights accrued or liabilities incurred prior to the effectivity of the latter in favor of or against such corporation, its stockholders or members must be respected. However, any additional requirements imposed by the Code must be complied with within two years from its effectivity. For example, if an existing corporation has so far issued stocks in an amount less42 CORPORATION CODE than 25% of its total authorized capital stock, it has to comply with the 25% minimum requirement of the Code within said period of two years. On the other hand, suppose the articles of incorporation of an existing corporation are silent as to interest on unpaid sub- scriptions, it may continue to collect the legal rate of interest on such unpaid portions inspite of the fact that under section 66 of the Code, no interest is due unless the articles expressly impose the same. The right granted by section 37 of the Corporation Law to such interest accrued at the time of the contract of subscription and may not be impaired by its repeal.Chapter II CLASSIFICATION OF PRIVATE CORPORATIONS Stock and Non-Stock Corporations. ‘The Corporation Code classifies private corporations mainly into stock and non-stock. SEC. 3. Classes of corporations.—Corporations formed or organized under this Code may be stock or non-stock cor- porations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other private corporations are non-stock corporations. SEC. 87. Definition.—For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees or offi- cers, subject to the provisions of this Code on dissolution; Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever neces- sary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporations, when perti- nent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. SEC. 88. Purposes.—Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agri- cultural and like chambers, or any combination thereof, sub- ject to the special provisions of this Title governing particular classes of non-stock corporations. Under the above definition, two elements must be present to | make a stock corporation: it must ‘Have capital stock divided into shares, and it must be authorized to distribute to its shareholders dividends out of its surplus profits. Implicit from the latter is the 4344 CORPORATION CODE main purpose of such corporation: to make profits for its sharehold- ers. On the other hand, a non-stock corporation exists for purposes other than profit, like civic, religious and charitable organizations.’ It does not follow however that a non-stock corporation can make no profits. Many such corporations do obtain profits as an incident to their operations, but unlike in stock corporations, such profits are not distributed among its members but are used for the furtherance of its purposes. The articles of incorporation or by-laws of a non- stock corporation may however provide for the distribution of its assets among its members upon its dissolution, except as to those which have been received by it subject to restrictions as to their use or return,” and subject to the provisions of the Code. Until such dissolution, the members cannot reap for themselves any incidental income or profit made by the non-stock corporation. Persons who compose a non-stock corporation are referred to as members, while those in a stock corportion are stockholders. CASE: COLLECTOR OF INTERNAL REVENUE vs. CLUB FILIPINO INC, DE CEBU G.R. No. L-12719 (May 31, 1962); 5 SCRA 321 PAREDES, J.: This is a petition to review the decision of the Court of Appeals, reversing the decision of the Collector of Internal Revenue, assessing against and demanding from the “Club Filipino, Inc. de Cebu”, the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper of bar and restaurant. As found by the Court of Tax Appeals, the “Club Filipino , Inc. de Cebu,” (Club, for short), is a civic corporation organized under the law of the Phillippines, with an original authorized capital stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to “pro- porcionar, operar, y mantener un campo de golf, tenis, gimnesio (gymnasi- ums), juego de holos (bowling alleys), mesas de billar y pool, y toda clase de juego no prohibidos pro leyes generales y ordenanzas generales; y desarol- * Corporations organized for charitable purposes are sometimes called eleemosynary corporations. 2 See Corp. Code See. 94, Code.CLASSIFICATION OF PRIVATE CORPORATIONS. 45 lar y cultivar deportes de toda el se y denominacion cualquiera para el Teereo y entrenamiento saludable de sus miembros y accienistas” (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision relative to dividends and their distribution, although it is convenanted that upon its dissolution, the Club’s remaining assets, after paying debts, shall be donated to a chari- table Philippine Institution in Cebu (Art. 27, Estatutes del Club, Exh. A-a) ‘The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a bar-restourant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of the club and its golf course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951, as aresult of a capital surplus, arising from the revaluation ofits real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockhold- ers. In 1952, a BIR agent discovered that the Club had never paid percent- age tax on the gross receipt of its bar and restaurant, although it secured B- 4, B-9(a) and B-7 licenses. In a letter dated December 22, 1952, the Collector of Internal Revenue assessed against and demanded from the Club, the following sums:— ‘The dominant issues involved in this case are two-fold: 1. Whether the respondent Club is liable for the payment of the sum of P12,068.84, as fixed and percentage taxes and surcharge prescribed in section 182, 183 and 191 of the Tax Code, under which the assessment was made in connection with the operation of its bar and restaurant, during the periods mentioned above; and 2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty. Section 182, of the Tax Code states, “Unless otherwise provided every person engaging in a business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or fraction thereof in which such person shall engage in said business.” Section 183 provides in general that “the percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted during each quarter; etc,” And section 191, same Tax Code, provides “Percentage tax x x x keepers of restaurants, refreshments Parlors and other eating places shall pay a tax three per centum, and keepers of bars and cafes where wines or liquors are served, five per centum of their gross receipts x x x”, It has been held that the liability for6 CORPORATION CODE fixed and percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant-For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and restauranteur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualifi- cation, should be construed in its plain and ordinary meaning; restricted to activities for profit or livelihood. (Citations omitted.) Having found as a fact that the Club was organized to develop and cultivate sports of all class and denomination, for thehealthful recreation and entertainment of its stockholders and members; that«pon its dissolu- tion, its remaining assets, after paying debts, shal) be donated to a chari- table Philippine Institution in Cebu; that itis operated mainly with funds derived from membership fees and dues; that the Club’s bar and restau- rant catered only to its members and their guests; that there was in fact-no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurants used to defray its overall overhead expenses and to improve its golf-course (cost plus-expenses- basis), it stands to reason that the club is not engaged in the business of an operation of its bar and restaurant x x x It is conceded that the Club derived profit from the opeation of its bar and restaurant, but such fact does not necessarily. convert it into a profit- making enterprise. The bar and restaurant are-necessary adjuncts of the Club to foster its purpose and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members, ‘That a club makes some profit, does not make it a profit-making club. As has been remarked a club should always strive whenever possible, to have a surplus (Jesus Sacred Heart College v. C.J. Rev., G.R. No. 1-6807, May 24, 1954; C.J. Rev. v. Sineo Educational Corp., G.R. No. L-9276, Oct 23, 1956). It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock corporation. This is unmeritorious. The fact that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant, What is determi- native of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate from or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a barkeeper and restauranteur.CLASSIFICATION OF PRIVATE CORPORATIONS AT Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allot- ments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the ease at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corpo- ration, within the contemplation of the corporation law. xX xX Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any penalty, much less a compromise penalty. NOTE: Would the holding oj the Court in the above case apply to @ corporation which, besides having capital stock, is organized primarily for making profits but whose articles do not expressly authorize it to distribute divi- dends? May not such authority to distribute dividends be implied from the profit-making nature of the corporation? This case was decided years before the Corporation Code was approved. Unlike the Corporation Law, Section 43 of the Code expressly empowers the board of directors of a stock corporation to declare dividends out of unre- stricted retained earnings. Generally, a business corporation should organize as a stock corporation. In fact, some kinds of corporations, like banks, cannot organize except in the form of stock corporations.’ Under the Corporation Law, there were no provisions specially applicable to non-stock corporations. This lack of special treatment sometimes gave rise to some problems, raising doubts as to the practicability and wisdom of-applying the same rules and principles to both business and non-business corporations. With the enact- ment of the Corporation Code, a non-stock corporation is now le- gally recognized as a special kind of corporation with needs differ- ? General Banking Act, (R.A. 337) as amended, Sec. 7.48 CORPORATION CODE ent from those of stock corporations.‘ However, in matters not covered by the special provisions, those governing stock corpora- tions would still be applicable to non-stock corporations.® ‘The Code also contains special provisions on educational corpo- rations, which may either be stock or non-stock.* Title XIII of the Code covers religious corporations, which may be either corpora- tions sole or corporations aggregate, but always non-stock.’ Close corporations, which are always stock corporations, are given special treatment and are covered by Title XII.* For the protection of the buying public, the SEC has issued guidelines with respect to the sale of proprietary membership or shares in resorts and country clubs, aimed to ensure that such entities are legitimate and financially sound.® Corporation Sole. A corporation sole is an incorporated office held by only one person. The idea of such a corporation grew out of the convenience it affords to religious sects in the administration of church properties and funds. Under the Corporation Code, only a religious corporation can be a corporation sole. All other corporations must be corpora- tions aggregate, i.e., they must be formed by at least five persons. SEC. 110. Corporation sole.—For the purpose of admini- stering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archibishop, bishop, priest, minister, rabbi or other presiding elder of such. religious denomination, sect or church. Parent and Subsidiary Corporations; Holding Companies; Affiliate Corporations. 4 See Corp. Code, Title XI. 5 Id, See. 87. * Corp. Code, Secs. 106 to 108 (Title XIII). 7 Id., Secs. 96 to 105. * Id., Secs. 109 to 116. ® See Sec. Guideline issued on March 11, 1977.CLASSIFICATION OF PRIVATE CORPORATIONS 49 A subsidiary corporation is one in which control, usually in the form of ownership of majority of its shares, is in another corpora- tion, called the parent corporation.'® The parent corporation’s con- trol is in its power to elect the subsidiary’s directors thus controlling its management policies, Where the sole function of the parent company is to hold the shares of other corporations which it con- trols, it is often referred to as a holding company. It has no other business aside from holding the shares of its subsidiaries. But where a corporation holds shares in other corporations not for the purpose of controlling them but merely to invest therein, the former is more properly referred to as an investment company. ‘Affiliates are those corporations which are subject to common control and operated as part of a system." Sometimes they are called “sister corporations. 10 International Order of Twelve Knights and Daughter of Tabor v. Fridia, 91 S.W. 24 404 (1936). 11 See Ballantine on Corporations, 1946 ed., 308, Callaghanaud Co., Chicago.Chapter III FORMATION AND ORGANIZATION OF CORPORATION “Who May Form Corporation, SEC. 10. Number and qualifications of incorporators.—Auy number of natural persons not less than five (6) but not more than fifteen (15), all of legal age and a majority fo whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators ofa stock corporatiom must own or be a subsoriber to at least ‘one (1) share of the capital stock of the corporation. Incorporators are those stockholders or members Mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof,’ as distinguished from corporators, who include all stockholders or members, whether incorporators or joining the corporation after its incorporation.? Every incorporator of a stock corporation must now be a stock- holder, a requirement not imposed by the old law. 1. Must be natural persons. Under the above-quoted provision, only natural persons can be incorporators, thus excluding corporations and partnerships. This is an adoption of a well-settled principle in common law, which has been followed by our Supreme Court.! However, the law does not preclude such corporations and Partnerships from becoming stock- holders or members as long as they are not incorporators. A corpora- tion may thus become a stockholder in another corporation by subscribing to or purchasing the latter’s stocks. > Corp. Code, See. 5. 2 Ibid. ® See Danny Hotel Co. v. Scram, 6 Wash. 194, 136, Am. St. Rep., 130, * See Gout. v. E Hogar Filipino, 50 Phil. 399 at p. 461, (1927). 50FORMATION AND ORGANIZATION OF CORPORATION 51 By special provision of law, cooperatives and corporations pri- marily organized to hold equities in rural banks may be incorpora- tors thereof.> 2, At least five incorporators. At least five incorporators must sign the articles of incorpora- tion. This requirement which was present even under the old law, does not necessarily prevent the existence of the so-called “one-man corporation”, Where the business is actually owned by only one individual, it is still possible for him to incorporate by giving nomi- nal ownership of only one share of stock to each of four other Persons. This situation is not necessarily illegal and it is still pos- sible under certain limitations, to maintain and recognize the per- sonality of the corporation as distinct and separate from that of its members or stockholders.® 3. Residence requirement; citizenship requirement only in cer- tain areas. 1 While the Code requires that a majority of the incorporators be residents of the Philippines, there is no general requirement of Philippine citizenship. However, by virtue of the Constitution and various special laws, there are some areas of business and industry wherein ownership is reserved, wholly or partially, in favor of Filipino citizens among others. These include public utilities,” retail trade® banks,’ investment houses,'° savings and loan associations,"! schools’? and such other areas of investment as congress may by law provide,> * R.A. 720 as amended by P.D. 122 (Rural Banks Act), See. 4. “See Chapter LV, infra, 7 See Constitution of the Phil., Art. XII, Sec. 11. * See R.A. 1180. * See R.A. 337 (General Banking Act), Sec. 12; R.A. 720 (Rural Banks Act); R.A. 4093 (Private Development Banks Act). » B.D. 129, Sec. 5. RA. 3779. 4 Const. of the Phil., Art. XIV, Sec. 4(2). 3 Id., Art. XII, See. 10.52 CORPORATION CODE Even in the areas where there are no legal restrictions as to alien ownership, where more than forty percent of the outstandi: ing capital of a proposed corporation is to be owned or controlled by aliens, a written authorization must first be ‘sought from the Board of Investments (BOI) before it can register with the SEC.“ This “requirement is for the purpose of enabling the BOI to determine whether such corporation wherein aliens own a substantial number of shares would contribute to the sound and balanced development of the national economy.1® And in order to insure that the minimum limitation on Filipino ownership is maintained, the SEC requires that a timely notice be given by the corporation concerned to the SEC and the stock ex- changes, stating the exact number of shares which may be sold without impairing such limitation.'* 4. Restrictions on stock ownership of closely-knit groups, Recent experience in Philippine business has shown that in some sensitive areas, the ownership by a closely-knit group of a substantial portion of the stocks can prove detrimental to the public interest. This has been specially true in banking institutions. Thus, under present law, no bank may be licensed to operate if the stockholdings of any one person, or persons related to each other within the third degree of consanguinity or affinity exceed twenty percent of the bank’s voting stock.” The following provision of the Corporation Code lays down a similar policy: SEC. 140. Stock Ownership in certain corporations.— Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Au. thority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corpora- tion or by business or industry to frustrate the provisions ™ Omnibus Investments Code of 1987 (Executive Order No. 26), Art. 47. 18 Ibid. *® See SEC Circular issued on March 31, 1967, *” See R.A. 337 as amended by P.D. 71, See. 12-D,FORMATION AND ORGANIZATION OF CORPORATION 53 thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its find- ings, including recommendations for their prevention or cor- rection. Maximum limits may be set by Congress (the Batasang Pambansa) 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 combina- tions in restrain or trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic develop- ment. In recommending to Congress (the Batasang Pambansa) corporations, businesses or industries to be declared vested with a public interest and in formulating proposals for limita- tions on stock ownership, the National Economic and Devel- opment Authority 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 rationalization and promotion of business and industry. In connection with the above limitations, it is pertinent to note that there is a provision in the Code allowing close corporations to provide in their articles of incorporation for qualifications for own- ing or holding stocks therein. Presumably therefore, stock owner- ship in close corporations may be limited by the articles of incorpo- ration in favor of members of the same family or group. Section 97 in part provides: SEC. 97. Articles of incorporation.—The articles of in- corporation of a close corporation may provide: 1. Fora classification of shares or rights and the qualifi- cations for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provi- sions of the following section; rrr54 CORPORATION CODE This provision however must be subject to'the’ public policy laid down in section 140 just quoted. Steps in Formation of Corporation, 1. Promotional stage. There have been various definitions of the term “promoter”. He has been described as one who “brings together persons who become interested in the enterprise, aids in procuring ‘subscriptions and sets in motion the machinery which leads to the formation of the corporation itself.”"* He formulates the necessary initial business and financial plans and, if necessary, buys the rights and Property which the business may need, with the understanding that the corporation when formed, shall take over the same,!? The Revised Securities Act gives the following definition: SEC. 2. Definitions—For the purposes of xxx x. (r)_ “Promoter” includes (1) any person who, acting alone or in conjunction with one or more other persons, directly or indirectly, takes initiative in founding and organizing the business or enterprise of an issuer; or (2) any.person who, in connection with the founding and organizing of the business of an issuer, directly or indirectly, receives in consideration of services or property or both services or property ten (10%) per centum or more of any class of securities of the issuer or ten (10%) per centum or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely as consideration of property shall not be deemed a promoter within the meaning of this paragraph Sfsuch person does not otherwise take part in founding and organizing the enterprise. 1® See Armstrong v. Sun Printing & Publishing Assn. 122 N.Y.S. 531, (1910) citing Cook on Corporations, 6th ed., See. 651. 1 The rights and liabilities of the corporation on promoters’ contracts as well as the promoter’s liability on the same are discussed in Chapter V, infra.FORMATION AND ORGANIZATION OF CORPORATION 55 The Code requires that before incorporation at least 25% of the authorized capital stock of the proposed corporation should be sub- scribed and atleast 25%. of. this subscription should be paid in. The promoters must therefore secure these before the corporation can be registered. In many cases, the promoters are also incorporators. If they can-supply the minimum capital requirement, then no addi- tional subscription need be solicited at this stage. However, as is sometimes-the:case, if the initial capital requirements of the busi- ness cannot be met by them, then such business must be “promoted” so that other people can be convinced into investing in the proposed corporation’s shares of stock. Under the Securities Act, shares of stock cannot be sold publicly unless they are first registered with the SEC.” In order to protect the public from unscrupulous promot- ers, said Act, before allowing such registration, requires disclosure of all pertinent information regarding the purposes, character and nature of the business, the financial position of the proposed corpo- ration, the financial responsibility of its directors and officers, and the nature and other circumstances of the shares to be issued.” These matters must appear in a registration statement which must be filed with the SEC and published in two newspapers of general circulation once a week for two consecutive weeks.” If after the completion of such publication, the SEC finds that the registration statement and all papers and documents attached thereto are com- plete and all requirements of law for the protection of investors have been complied with, it shall issue an order making the registration effective and grant the corporation a permit to offer the securities named in the certificate for sale.” The SEC must however advise the public that the issuance of such permit does not mean a finding that the registration statement is true and accurate on its face or that it has given approval of the security involved.™ Moreover, every permit and any other state- ment which makes reference to such permit must clearly state that ‘its issuance is only permissive and does not constitute a recommen- ® See. Rev. Securities Act, Sec. 4. ™ Id., Sec. 8. 2 Ibid. ® [bid. ™ Ibid.56 CORPORATION CODE dation or endorsement of the securities permitted to be offered for sale. ‘The law exempts from registration pre-incorporation subscrip- - tions up to the minimum amount required before a corporation may be registered, provided no commission is paid in connection with their disposition.* Therefore, before subscriptions to the stock of a proposed corporation may be solicited, either such stocks must first. be registered or a certificate of exemption from registration should be obtained. 2. Drafting articles of incorporation. Once the financial plans are finalized, the incorporators should draft, the articles of incorporation, if this has not yet been done. These articles are significant in that they constitute, with the Cor- poration Code, the charter of the corporation. It is the contract between it and its stockholders as well as the agreement among the stockholders. Sections 14 and 15 of the Code provide for the contents of the articles of incorporation as well as the form which they should follow. SEC. 14. Contents of articles of incorporation.—All cor porations organized under this Code shall file with the Secu- rities and Exchange Commission articles of incorporation in. any of the official languages, duly signed and acknowledged by all of the incorporators, containing substantially the fol- lowing matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose of purposes for which the corpo- ration is being incorporated. Where a corporation hus more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict ita nature as such; % Ibid. ™ Id., Sec. 6.FORMATION AND ORGANIZATION OF CORPORATION 87 3. The place where the principal office of the corpora- tion is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incor porators; 6. The number of directors or trustees, which shall not be less than five (6) nor more than fifteen (15); 7. The names, nationalities and residences of the per. sons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its author. ized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the shares are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9, Ifitbeanon-stock corporation, the amount of its eapi- tal, the names, nationalities and residences of the contribu- tors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and con- venient, ‘The Securities and Exchange Commission shall not ac- cept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the corpora- tion has been subscribed, and at least twenty-five (25%) per- cent of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said sub- scription, such paid-up capital being not less than five thou- sand (P5,000.00) pesos. SEC. 15. Form of articlee of incorporation.—Unless oth- erwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form:58 CORPORATION CODE ARTICLES OF INCORPORATION OF —— a (Name of Corporation) KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corpora- tion under the laws of the Republie of the Philippines; AND WE HEREBY CERTIFY: FIRST: That the name of said corporation shall be INC. or CORPORATION”; SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes); THIRD: That the principal office of the corporation is located in the City/Municipality of______, Province of. Philippines; FOURTH: That the term for which the said corporation is to exist is _____ years from and after the date of issuance of the certificate of incorporation; FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows: NAME NATIONALITY RESIDENCE | | | SIXTH: That the number of directors or trustees of the corporation shall be ; and the names, nationalities and residences of the first directors or trustees of the corporation are as follows:FORMATION AND ORGANIZATION OF CORPORATION 59 NAME NATIONALITY RESIDENCE SEVENTH: That the authorized capital stock of the corpo- ration is (p ) Pesos in lawful money of the Philippines, divided into shares with the par value (P____) Pesos per share. in case all the shares are without par value): That the capital stock of the corporation shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of shares of which shares are of the par value of _____ (P_____) pesos each, and of which shares are without par value. EIGHTH: That at least twenty-five (25%) percent of the au- thorized capital stock above stated has been subscribed as follows: No. of shares Amount Name of Subscriber Nationality Subscribed Subscribed NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows: Name of Subscriber Amount Subscribed _—Total Paid-In60 CORPORATION CODE (Modify Nos. § and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the - articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respec. tive amount given by each,) has been elected by the sub- scribere as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been author. ized to receive for and in the name for the benefit of the corporation, all subscriptions (or fees) or contributions or donations paid or given by the subscribers or members. ELEVENTH: (Corporations which will engage in any busi- ness or activity reserved for Filipino citizens shall provide the following): “No transfer of stock or interest which will reduce the ownership of Filipino citizens to lees than the required per. centage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all the stock certificates issued by the corporation.” IN WITNESS WHEREOF, we have hereunto signed these Articles of ¥ncorporation, this dayof_____,19__,in the City/Municipality eee Province of Republic of the Philippines, (Names and signatures of the incorporators) SIGNED IN THE PRESENCE OF: Enea (Notarial Acknowledgment)FORMATION AND ORGANIZATION OF CORPORATION 61 'TREASURER’S AFFIDAVIT REPUBLLIC OF THE PHILIPPINES d CITY/MUNICIPALITY OF ___) SS. PROVINCE OF L, being duly sworn, depose and say: That I have been elected by the subscribers of the corpo- ration as Treasurer thereof, to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscriptions has been paid, and re- ceived by me, in cash or property, in the amount of not less than P§,000.00, in accordance with the Corporation Code. (Signature of Treasurer) SUBSCRIBED AND SWORN to before me, a Notary Pub- lic, for and in the City/Munic: lity of, _, Province of » This day of , 19___; by with Res. Cert. No.. issued at catenins gay NOTARY PUBLIC My commission expires on PAO IeEEHSLES Dee. No. A Page No.____ + Book No. 3 Series of 19__62 CORPORATION CODE (1) Corporate name. The name of a corporation is essential to its existence since itis ~ through it that the corporation ean sue and be sued and perform all legal acts.” It is the only means of identifying it not only from its -members or stockholders, but also from other entities and corpora- tions. The Code therefore does not allow it to adopt a name identical or deceptively or confusingly similar to that of. ‘any existing corpora- tion or to any other name already protected by law or which is patently deceptive, confusing or contrary to existing laws.” Thus, where “Universal Textile Mills Inc.” was the name of an existing corporation engaged in the manufacture of textile, a corporation organized later for the manufacture of fabrics and wearing apparel could not be allowed to use the name “Universal Mills Corpora- tion.”* Although the names were not identical, the Supreme Court held that they were indisputably so similar that confusion would arise in the mind of the publie, specially since they were engaged in a similar business.” In view of this, it would be practical for the incorporators, even before adopting a name in their articles of incorporation, to first inform the SEC of the name they have chosen so that they may know ahead of time whether it is legally permis- sible for them to use it. In any case, the SEC requires incorporators to submit a written undertaking to change the corporate name in case there is another person, firm or entity with a prior right to the use of the said name or one similar to it. The SEC also reserves the right to require a corporation to change its name in case there will later on appear a person or company with a prior right to the use of said name. On the other hand, if the name is legally permissible the incor- porators may be allowed by the SEC to “reserve” it for a reasonable syed Line Transportation Co, v. Rural Transit Co., 60 Phil. 549, (1934), % Corp. Code, See. 18. * See Universal Mills Corporation v. Universal Textile Mills Inc., L- 28351, July 28, 1977; 78 SCRA 62. 3 Ibid. * Guideline issued on Sept. 7, 1977.FORMATION AND ORGANIZATION OF CORPORATION 63 period. To distinguish it from partnerships and other business organizations, the law requires the corporation to append the word “Corporation” or “Inc.” to its chosen name. A corporation: should transact business only in its corporate name. It may amend: such name provided it is done in accordance with the procedure laid down by the Code for amendments of articles of incorporation, and the the SEC approves such change. If the change is approved, the SEC should issue an amended certifi- cate of incorporation under the corporation’s new name. CASE: PHILIPPINE FIRST INSURANCE COMPANY, INC. us. MARIA CARMEN HARTIGAN, ET AL. L-26370, July 31, 1970, 74 SCRA 252 BARREDO, J.: Appeal from the decision dated 6 October 1962 of the Court of First Instance of ManiJa—dismissing the action in its Civil Case No. 4825—brought by the herein plaintiff-appellant Philippine First Insurance Co., Inc. to the Court of Appeals which could, upon finding that the said appeal raises purely questions of law, declared itself without jurisdiction to entertain the same and, in its resolution dated 15 July 1966, certified the records thereof to this Court for proper determination. The antecedent facts are set forth in the pertinent portions of the reso- lution of the Court of Appeals referred to as follows: “According to the complaint, plaintiff was originally organized as an insurance corporation under the name of “The Yek Tong Lin Fire and Marine Insurance Co., Ltd.’. The articles of incorporation origi- nally presented before the Securities and Exchange Commissioner and acknowledged before Notary Public Mr. E.D. Ignacio on June 1, 1953 state that the name of the corporation was ‘The Yek Tong Lin Fire and Marine Insurance Co., Ltd.’. On May 26, 1961 the articles of incorporation were amended pursuant to a certificate of the Board of Directors dated March 8, 1961 changing the name of the corporation to “Philippine First Insurance Co., Ine’. % See Corp. Code, See. 16. % Id., Sec. 18.64 CORPORATION CODE “The complaint alleges that the plaintiff Philippine First Insur- ance Co., Inc., doing business under the name of the The Yek Tong Lin Fire and Marine Insurance Co,, Li signed as co-maker together - , «with defendant Maria Carmen Hartigan, CGH, a promissory note for * ~ P5,000.00 in favor of the China ‘Banking Corporation payable within 30 days after the date of the promissory note with usual banking “interest; that the plaintiff agreed to act as such co-maker of the Promissory note upon the application of the defendant Maria Carmen Hartigan, CGH, who together with Antonio F, Chua and Chang Ka Fu, signed an indemnity agreement in favor of the plaintiff, under. taking jointly and severally to pay the plaintiff damages, losses or expenses of whatever kind or nature, including attorney's fees and legal costs, which the plaintiff may sustain as a result of the execu- tion by the plaintiff as co-maker of Maria Carmen Hartigan, CGH, of the promissory note above-referred to; that as a result of the execu- tion of the promissory note by the plaintiff and Maria Carment Har. tigan, CGH, the China Banking Corporation delivered to the defen. dant Maria Carmen Hartigan, CGH, the sum of P5,000.00 which said defendant failed to pay in full, such that on August 31, 1961 the same was renewed and as of November 23, 1961 plus P119.90 by way of attorney’s fees and costs. “Although O. Engkee was made as party defendant in the cap- tion of the complaint, his name is not mentioned in the body of said complaint. However, his name appears in the Annex A attached to the complaint which is the counter indemnity agreement supposed to. have been signed according to the complaint by Maria Carmen Hartigan, CGH, Antonio F. Chua and Chang Ka Fu. “In their answer the defendants deny the allegation that the plaintiff formerly conducted business under the name and style of “The Yek Tong Lin Fire and Marine Insurance Co,, Ltd’, They admit the execution of the indemnity agreement but they claim that they signed said agreement in favor of the Yek Tong Lin Fire and Marine Insurance Co., Ltd.’ and not in favor of the plaintiff. They likewise admit that they failed to pay the promissory note when it fell due but they allege that since their obligation with the China Banking Corpo- ration based on the promisory note still subsists, the surety wha co- signed the promissory note is not entitled to collect the value thereof from the defendants otherwise they will be liable for double amount of their obligation, there being no allegation that the surety has paid the obligation to the creditor.FORMATION AND ORGANIZATION OF CORPORATION 65 “By way of special defense, defendants claim that there is no privity of contract between the plaintiff and the defendants and consequently, the plaintiff has no cause of action against them, considering that the complaint does not allege that the plaintiff and the *Yek Tong Lin Fire and Marine Insurance Co., Ltd.’ are one and the same or that the plaintiff has acquired the rights of the latter. ‘The parties after the admission of Exhibit A which is the amended articles of incorporation and Exhibit 1 which is a demand letter dated August 16, 1962 signed by the manager of the loans and discount department of the China Banking Corporation showing that the promissory note up to said date in the sum of P4,500.00 was still unpaid, submitted the case for decision based on the pleadings.” Under the date of 6 October 1962, the Court of First Instance of Manila rendered the decision appealed. It dismissed the action with costs against, the plaintiff Philippine First Insurance Co,, Ine. x x x In due time, the Philippine First Insurance Company, Inc. moved for reconsideration of the decision aforesaid, but said motion was denied.

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