AUSL/CORPORATION LAW REVIEWER/AJP-SFO
ARELLANO UNIVERSITY SCHOOL OF LAW
BUSINESS ORGANIZATION II
CORPORATION LAW REVIEWER
ATTY. RUBEN LADIA
By: PARRENO, ANTONY J.
OLIVA, STEPHANIE FAYE
DEFINITION OF A CORPORATION
Section 2. Corporation defined. – A
corporation is an artificial being created by
operation of law, having the right of succession
and the powers, attributes and properties
expressly authorized by law or incident to its
existence.
ATTRIBUTES
1. CORPORATION AS AN ARTIFICIAL
BEING
Q: IS A CORPORATION ENTITLED TO THE
AWARD OF MORAL DAMAGES?
No. It is not entitled to moral damages. Moral
damages may be awarded in recompense for
physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation,
wounded feelings, moral shock, and similar
injury. (Tamayo vs. University of Negros,
1962)
A corporation being an artificial person existing
only in contemplation of the law has No
Feelings. It has No Emotions and No Senses. It
cannot thus experience mental anguish and
physical suffering.
INSTANCES WHEN MORAL DAMAGES MAY
BE AWARDED:
A corporation may have a good reputation
which is besmirched may also be a ground for
the award of moral damages. (Mambulao
Lumber vs. PNB, 1968)
Article 2219 enumerates the instances when
moral damages may be awarded. Said provision
authorizes the recovery of moral damages in
cases of libel, slander and any other form of
defamation.
This provision of the Civil Code does not qualify
whether the plaintiff is a natural or a juridical
person. Thus, a juridical person can validly
complain for libel and any other form of
defamation and claim for moral damages.
(Filipinas Broadcasting vs. Ago Medical
Center, 2005, Art. 2219, (7), NCC)
When the corporation has a reputation that is
debased resulting in its humiliation in the
business realm, moral damages may be
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awarded. (MERALCO vs. Team Electronics
Corporation, 2007)
2. CORPORATION HAS THE POWERS AS
MAY EXPRESSLY BE CONFERRED BY
LAW.
DOCTRINE OF LIMITED CAPACITY in the
corporate form of business. Unlike a natural
person, it can only do such acts and things as
the law allows it to do.
Thus, the definition that it has the powers,
attributes and properties expressly authorized
by law or incident to its existence.
DIFFERENT TYPES OF CORPORATIONS
Section 3. Classes of corporations. –
Corporations formed or organized under this
Code may be stock or non-stock corporations.
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 corporations are non-stock corporations.
(3a)
Section 4. Corporations created by special
laws or charters. – Corporations created by
special laws or charters shall be governed
primarily by the provisions of the special law or
charter creating them or applicable to them,
supplemented by the provisions of this Code,
insofar as they are applicable. (n)
Stock Corporations - one with capital stock
divided into shares and are authorized to
distribute allotment of its surplus profits by
way of dividends.
REQUISITES IN ORDER THAT A
CORPORATION MAY CONSIDERED AS A
STOCK
1. A capital stock divided into shares;
2. The authority to distribute allotment of
its surplus profits by way of dividends
All others are Non-Stock.
CORPORATIONS WITH CAPITAL STOCK BUT
THEY ARE NOT STOCK CORPORATIONS.
Club shares - they have capital stock divided
into shares but they are Non-Stock in the sense
that they do not distribute allotment of their
surplus profits by way of dividends.
Example: Manila Golf Club
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Q. WHAT WOULD BE THE IMPORTANCE OF
KNOWING THE TYPE OF CORPORATIONS
INVOLVED?
It is important in order to determine what law
or provision of the law may apply to them. In
case of Stock and Non-Stock Corporations:
Section 87(2). The provisions governing stock
corporation, when pertinent, shall be
applicable to non-stock corporations, except as
may be covered by specific provisions of this
Title.
The abovementioned provision provides that:
“The provisions governing Stock corporations
when pertinent shall be applicable to Non-
Stock corporations except as may be provided
by Title 11.”
Therefore, Title 11 is the provision governing
Non-Stock Corporations
Venue of Meetings of Stockholders
Section 51. Place and time of meetings of
stockholders of members. – Stockholder’s or
member’s meetings, whether regular or special,
shall be held in the city or municipality where
the principal office of the corporation is located,
and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall,
for purposes of this section, be considered a
city or municipality.
Notice of meetings shall be in writing, and the
time and place thereof stated therein.
All proceedings had and any business
transacted at any meeting of the stockholders
or members, if within the powers or authority
of the corporation, shall be valid even if the
meeting be improperly held or called, provided
all the stockholders or members of the
corporation are present or duly represented at
the meeting.
Stockholders Meetings can only be held within
the territorial boundaries of the city or
municipality where the corporation has its
principal office and as far as practicable, at the
principal office of the corporation.
Section 93. Place of meetings. – The by-laws
may provide that the members of a non-stock
corporation may hold their regular or special
meetings at any place even outside the place
where the principal office of the corporation is
located: Provided, That proper notice is sent to
all members indicating the date, time and place
of the meeting: and Provided, further, That the
place of meeting shall be within the Philippines.
A Non-Stock Corporation can validly provide
in their by-laws that members’ meetings may
be held anywhere in the Philippines.
AUSL/CORPORATION
This cannot be done in case of a Stock
Corporation due to the Doctrine of Limited
Capacity
Note however that if there is no by-law
provision authorizing the holding of the
members’ meetings in Non-Stock Corporation
then of course the meeting can also be held
only within the territorial boundaries of the city
or municipality where it has its principal office.
Section 87, the provisions governing Stock
Corporations will apply; So if there is no such
by-law provision, then the same rule with
respect to a stock corporation will also apply to
non-stock.
Section 51. Place and time of meetings of
stockholders of members. – Stockholder’s or
member’s meetings, whether regular or special,
shall be held in the city or municipality where
the principal office of the corporation is located,
and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall,
for purposes of this section, be considered a
city or municipality.
Notice of meetings shall be in writing, and the
time and place thereof stated therein.
All proceedings had and any business
transacted at any meeting of the stockholders
or members, if within the powers or authority
of the corporation, shall be valid even if the
meeting be improperly held or called, provided
all the stockholders or members of the
corporation are present or duly represented at
the meeting.
Metro Manila is considered as one single City
or Municipality.
So whether they be non-stock or stock
corporation, if the principal office is located
anywhere in Metro Manila, they can hold their
meetings also anywhere within Metro Manila.
Section 24. Election of directors or trustees. –
At all elections of directors or trustees, there
must be present, either in person or by
representative authorized to act by written
proxy, the owners of a majority of the
outstanding capital stock, or if there be no
capital stock, a majority of the members
entitled to vote. The election must be by ballot
if requested by any voting stockholder or
member. In stock corporations, every
stockholder entitled to vote shall have the right
to vote in person or by proxy the number of
shares of stock standing, at the time fixed in
the by-laws, in his own name on the stock
books of the corporation, or where the by-laws
are silent, at the time of the election; and said
stockholder may vote such number of shares
for as many persons as there are directors to be
elected or he may cumulate said shares and
give one candidate as many votes as the
number of directors to be elected multiplied by
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the number of his shares shall equal, or he
may distribute them on the same principle
among as many candidates as he shall see fit:
Provided, That the total number of votes cast
by him shall not exceed the number of shares
owned by him as shown in the books of the
corporation multiplied by the whole number of
directors to be elected: Provided, however, That
no delinquent stock shall be voted. Unless
otherwise provided in the articles of
incorporation or in the by-laws, members of
corporations which have no capital stock may
cast as many votes as there are trustees to be
elected but may not cast more than one vote for
one candidate. Candidates receiving the
highest number of votes shall be declared
elected. Any meeting of the stockholders or
members called for an election may adjourn
from day to day or from time to time but not
sine die or indefinitely if, for any reason, no
election is held, or if there are not present or
represented by proxy, at the meeting, the
owners of a majority of the outstanding capital
stock, or if there be no capital stock, a majority
of the members entitled to vote. (31a)
Section 24 speaks of Cummulative Voting.
Cummulative Voting is a matter of Right in
Stock Corporations and cannot be denied by
the provisions of the Articles of Incorporation or
By-Laws.
Whereas, in Non-Stock Corporations unless
provided for in the Articles of Incorporation or
by-laws, members are entitled to cast only one
vote per candidate.
GR: in Non-stock corporations, cummulative
voting is not allowed.
XPN:
(1) Sec. 24 also states, “Unless otherwise
provided for in the Articles of
Incorporation”.
(2) Under the provisions of Title 11, the
Articles of Incorporation or by-laws of a
non-stock corporation under Sec. 89,
may broaden, limit or deny voting
rights of the members. Meaning, it can
validly allow also cummulative voting.
CORPORATIONS CREATED BY SPECIAL LAW
Section 4. Corporations created by special
laws or charters. – Corporations created by
special laws or charters shall be governed
primarily by the provisions of the special law or
charter creating them or applicable to them,
supplemented by the provisions of this Code,
insofar as they are applicable. (n)
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Q. WHAT LAW GOVERNS THEM?
They are governed by the Special Law creating
them; supplemented by the provisions of the
Corporation Code when pertinent.
Thus, where there is a provision in the special
law creating them, the special law will govern
even if it may run counter to the provisions of
the Corporation Code.
In Gonzales vs. PNB, a stockholder sought to
inspect the financial books and records of the
Philippine National Bank.
The Supreme Court held that a particular
stockholder cannot inspect the financial books
and records because the PNB was created by
special law. The special law creating PNB
provides that, “the financial books and records
of the PNB may be inspected only by the
Monetary Board of the Central Bank and the
result of the inspection can only be revealed to
the President of the Republic of the Philippines,
the Secretary of Finance and of the members of
the Board of PNB itself.’”
LAWS GOVERNING EMPLOYER-EMPLOYEE
RELATIONSHIP:
(1) National Labor Code
(2) Civil Service Law
Q. WHAT LAW GOVERNS EMPLOYER-
EMPLOYEE RELATIONSHIP IN GOCC’s OR
THOSE WITH THEIR OWN CHARTER?
The test in determining whether a Government-
Owned or Controlled Corporation is subject to
the Civil Service Law is the manner of its
creation (PNOC-EDC vs NLRC).
If it is created by special law or it has its own
charter, then the Civil Service Law will apply.
When it is incorporated under the General
Corporation Law, it is the Labor Laws.
PNOC was created by special law, so therefore,
generally it is governed by the Civil Service
Law. But PNOC-EDC, which is a subsidiary of
PNOC, was created by merely following the
requirements and procedures laid down by the
Corporation Code.
There was an issue regarding employer-
employee relationship in PNOC-EDC, not the
PNOC itself. Therefore, since it was created by
the Corporation Code pursuant to the
Corporation Code, the employer-employee
relationship issue will be governed by the Labor
Laws.
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COMMENCEMENT OF CORPORATE
EXISTENCE
Section 19. Commencement of corporate
existence. – A private corporation formed or
organized under this Code commences to have
corporate existence and juridical personality
and is deemed incorporated from the date the
Securities and Exchange Commission issues a
certificate of incorporation under its official
seal; and thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance
with law. (n)
GR: Corporation commences to exist upon the
issuance of the Certificate of Incorporation or
Registration by the SEC.
XPN:
(1) Corporation sole commences to exist
and will be vested with a juridical
personality upon the filing of the
verified Articles of Incorporation with
the SEC.
(2) Those created by special law. They are
not issued approval or certificates of
incorporation by the SEC but they are
created by law. It will commence to
exist upon the effectivity of the law
creating them.
CONTENTS AND FORMAT OF THE
ARTICLES OF INCORPORATION
Section 14. Contents of the articles of
incorporation. – All corporations organized
under this code shall file with the Securities
and Exchange Commission articles of
incorporation in any of the official languages
duly signed and acknowledged by all of the
incorporators, containing substantially the
following matters, except as otherwise
prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which
the corporation is being incorporated. Where a
corporation has 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 its
nature as such;
3. The place where the principal office of the
corporation is to be located, which must be
within the Philippines;
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4. The term for which the corporation is to
exist;
5. The names, nationalities and residences of
the incorporators;
6. The number of directors or trustees, which
shall not be less than five (5) nor more than
fifteen (15);
7. The names, nationalities and residences of
persons 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
authorized capital stock in lawful money of the
Philippines, the number of shares into which it
is divided, and in case the share 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. If it be a non-stock corporation, the amount
of its capital, the names, nationalities and
residences of the contributors 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 convenient.
The Securities and Exchange Commission shall
not accept 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 corporation has been subscribed, and at
least twenty-five (25%) 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 subscription, such paid-up capital
being not less than five thousand (P5,000.00)
pesos.
Section 15. Forms of Articles of Incorporation.
– Unless otherwise prescribed by special law,
articles of incorporation of all domestic
corporations shall comply substantially with
the following form:
ARTICLES OF INCORPORATION OF
(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) corporation under
the laws of the Republic of the Philippines;
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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 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:
NAME NATIONALITY RESIDENCE
____________ _____________ _____________
SEVENTH: That the authorized capital stock of
the corporation is ________ (P_____) PESOS in
lawful money of the Philippines, divided into
_______ shares with the par value of _______
(P_____) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is
_______ 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%) per
cent of the authorized capital stock above
stated has been subscribed as follows:
Name of Subscriber
Nationality
No. of Shares Subscribed
Amount 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
____________ _____________ _____________
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(Modify Nos. 8 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 respective
amount given by each.)
TENTH: That _______ has been elected by the
subscribers 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
authorized to receive for and in the name and
for the benefit of the corporation, all
subscription (or fees) or contributions or
donations paid or given by the subscribers or
members.
ELEVENTH: (Corporations which will engage in
any business or activity reserved for Filipino
citizens shall provide the following):
"No transfer of stock or interest which shall
reduce the ownership of Filipino citizens to less
than the required percentage 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 stock
certificates issued by the corporation."
IN WITNESS WHEREOF, we have hereunto
signed these Articles of Incorporation, this
___day of __, 19 ______ in the City/Municipality
of ___________, Province of _______, Republic of
the Philippines.
__________ _________
(Names and signatures of the incorporators)
SIGNED IN THE PRESENCE OF:
___________ __________
(Notarial Acknowledgment)
TREASURER’S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES)
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I, _________, being duly sworn, depose and say:
That I have been elected by the subscribers of
the corporation 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 subscription has been paid, and received
by me, in cash or property, in the amount of
not less than P5,000.00, in accordance with
the Corporation Code.
____________________
(Signature of Treasurer)
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SUBSCRIBED AND SWORN to before me, a
Notary Public, for and in the City/Municipality
of____Province of _______, this _______ day of
___________, 19 _____; by ________ with Res.
Cert. No. ___________ issued at _________on
______, 19 ____
NOTARY PUBLIC
My commission expires on _________, 19 _____
Doc. No. _________;
Page No. _________;
Book No. ________;
Series of 19____ (7a)
Prefatory Paragraph - where the incorporators
will say that it is being created in accordance
with the Philippine Laws
ARTICLE 1. CORPORATE NAME
Section 18. Corporate name. – No corporate
name may be allowed by the Securities and
Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to
that of any existing corporation or to any other
name already protected by law or is patently
deceptive, confusing or contrary to existing
laws. When a change in the corporate name is
approved, the Commission shall issue an
amended certificate of incorporation under the
amended name. (n)
No corporate name shall be allowed by the SEC
if the proposed name is:
(1) Identical, Deceptively or Confusingly
similar to any existing corporation or any
other name already protected by law; or
(2) Patently deceptive, confusing, or contrary
to law.
The name of the corporation designates the
corporation in the same manner that the name
of an individual designates the person.
This is so because the corporate name is the
“Principal Means” of distinguishing it not only
from the stockholders or members composing it
but also from other firms or entities.
Under Sec. 14 and 15, the corporate name
must include the word “Corporation” or
“Incorporated” either in its full or abbreviated
form, to distinguish it from any other type of
business entity.
Only corporations can append the word
“Corporation” or ”Incorporated” in its chosen
name. It cannot be done in a partnership or
sole proprietorship.
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GR: A corporation, once formed with its chosen
name cannot use any other name.
XPN:
(1) Unless it has been amended in accordance
with the law.
(2) As this would result in Confusion and may
open the door for Fraud and Evasion as
well as Difficulties in administration and
supervision.
In Philips Export v. CA (1992), two requisites
must concur:
1. That the complainant corporation acquired
a Prior Right over the use of the corporate
name; and
2. The proposed name is either:
a. Identical, Deceptively or Confusingly
Similar to any other existing
corporation or anyone already
protected by law; or
b. Patently Deceptive, Confusing or
Contrary to Law.
Probability of Confusion
Proof of Actual Confusion need not be shown. It
suffices that the confusion is probably or likely
to occur.
In Lyceum of the Phil. V. CA, the Court held
that the policy underlying the prohibition
against the registration of corporate name
which is identical, deceptively or confusingly
similar to that of any other corporation or is
patently deceptive or plainly confusing or
contrary to law is:
The avoidance of confusion or fraud.
In this case, confusion has been effectively
precluded by including the geographical
location of the particular institutions of
learning.
Example: How could one be confused from
Lyceum of Baguio from Lyceum of Apari? They
are far away situated from one another.
DOCTRINE OF SECONDARY MEANING
A word or phrase originally incapable of
exclusive appropriation because they are
generic words with reference to an article in the
market because of geographically, otherwise
descriptive, might nevertheless have been used
so long or so exclusively by one good user or
service provider that is with reference to the
article or service that in that trade or in that
branch of the purchasing public, the word or
phrase has become to mean that the article or
service is his own.
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ARTICLE 2. PURPOSE CLAUSE.
The purpose or purposes for which the
corporation is formed are as follows:
The importance of the purpose clause is that it
practically defines the scope of the corporate
enterprise.
This is corollary to the Doctrine of Limited
Capacity in the corporate form because it
confers as well as it limits the actual authority
of the corporation.
Section 45. Ultra vires acts of corporations. –
No corporation under this Code shall possess
or exercise any corporate powers except those
conferred by this Code or by its articles of
incorporation and except such as are necessary
or incidental to the exercise of the powers so
conferred. (n)
Section 45 provides that it can only do such
acts and things as are expressly granted by
law, the articles of incorporation and those that
are necessary or incidental thereto.
If it acts or transacts business beyond such
powers and authority, the act performed. It will
be considered as Ultra Vires.
Allowing a collateral attack on the part of the
contracting parties to question the validity of
the questioned act or transaction and escape
liability therefrom.
ARTICLE 3. PRINCIPAL OFFICE
“That the principal office of a corporation shall
be located at Q.C, Metro Manila, Philippines”
This statement establishes the residence of the
corporation which may serve important for the
purpose of determining among others:
(1) Venue of Actions for or against the
corporation.
If an action is not based from a written
contract, the corporation can only be sued in
the city or municipality where it has its
principal office.
Of course, if it has a contract, then the contract
may stipulate venue of actions that may arise
out of any question involving the same.
(2) Venue of Meetings of stockholders
and/or members.
In a Stock Corporation, meetings can only be
held within the territorial boundaries of the city
or municipality where it has its principal office.
And as far as practicable at the principal office
of the corporation.
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Also true in a Non-Stock Corporation, unless
the Articles of Incorporation or By-Laws provide
otherwise.
The articles and by-laws of a NON-STOCK
corporation can validly provide that members’
meetings can be held ANYWHERE in the
Philippines.
(3) Service of Summons
Service of summons to a corporation may be
served only also within the city or municipality
where it has its principal office.
(4) Registration of Chattel Mortgage
Under the Mortgage Law, if the shares of stocks
of a corporation are mortgaged, it must be
registered in the Registry of Deeds of the city or
municipality where it has its Principal Office.
And if the owner of the shares resides in
another city or municipality, it must also be
registered in the city or municipality where he
resides.
If these requirements of the Mortgage Law are
not complied with, then the mortgage will not
be valid as against third parties.
ARTICLE 4. CORPORATE TERM
Section 11. Corporate term. – A corporation
shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless
sooner dissolved or unless said period is
extended. The corporate term as originally
stated in the articles of incorporation may be
extended for periods not exceeding fifty (50)
years in any single instance by an amendment
of the articles of incorporation, in accordance
with this Code; Provided, That no extension can
be made earlier than five (5) years prior to the
original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier
extension as may be determined by the
Securities and Exchange Commission. (6)
“The term for which the corporation shall exist
shall be __no. of years from and after the date
of its registration.”
GR: A Corporation can exist for a period not
exceeding fifty (50) years from the date of its
incorporation.
XPN:
(1) Sooner Dissolved; or
(2) The period is extended by way of
amendment of the articles of incorporation.
It may be extended for periods not
exceeding fifty (50) years, for any single
instance by amendment of the articles of
incorporation.
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GR: No Extension of the corporate term can be
made earlier than five (5) years, prior to the
expiration of the original term stated in the
articles of incorporation.
XPN: There are Justifiable Reasons for an
earlier extension, as may be determined by the
SEC.
ARTICLE 5. INCORPORATORS
Section 5. Corporators and incorporators,
stockholders and members. – Corporators are
those who compose a corporation, whether as
stockholders or as members. Incorporators are
those stockholders or members mentioned in
the articles of incorporation as originally
forming and composing the corporation and
who are signatories thereof.
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a
non-stock corporation are called members. (4a)
“The names, nationalities and residences of the
incorporators”
Stockholders or Members originally forming the
Corporation and who are signatories of the
articles of incorporation are the Incorporators
Section 10. Number and qualifications of
incorporators. – Any number of natural persons
not less than five (5) but not more than fifteen
(15), all of legal age and a majority of whom are
residents of the Philippines, may form a private
corporation for any lawful purpose or purposes.
Each of the incorporators of s stock corporation
must own or be a subscriber to at least one (1)
share of the capital stock of the corporation.
(6a)
Qualifications and Disqualifications as to who
may be Incorporators:
(1) Any number of “NATURAL” persons, not
less than 5 but not more than 15;
(2) All of legal age; and
(3) The majority of whom are residents of the
Philippines
GR: A Corporation cannot generally be an
Incorporator
Because the law says “natural” persons. A
corporation is not a natural person.
XPN:
R.A 720, as amended by PD 122
Said law allows cooperatives and corporations,
primarily organized to hold equities in Rural
Banks.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Q. CAN MINORS BE INCORPORATORS, EVEN
IF REPRESENTED BY THE GUARDIAN OR
THEIR PARENTS?
No. Because the law is categorical, and requires
them to be All of Legal Ages.
Sec. 10 does not require any Citizenship, thus
no Citizenship requirement
GR: A corporation organized under Philippine
Laws may have Incorporators consisting solely
of Foreigners.
XPN:
(1) If it is covered by our Nationalization Laws.
Example: Under the Trade Liberalization Law of
the Philippines
Corporations engaged in the retail trade may
consist of stockholders solely of Foreigners if
the paid-in capital is at least U.S $2.5Million or
its peso equivalent.
Q: IN THIS CASE, ALL THE
INCORPORATORS OR STOCKHOLDERS ARE
FOREIGNERS. IS THIS ALLOWED?
Yes. Because the law only says “majority of
whom are residents of the Philippines”.
ARTICLE 6. DIRECTORS AND TRUSTEES
Section 23. The board of directors or trustees.
– Unless otherwise provided in this Code, the
corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such
corporations controlled and held by the board
of directors or trustees to be elected from
among the holders of stocks, or where there is
no stock, from among the members of the
corporation, who shall hold office for one (1)
year until their successors are elected and
qualified. (28a)
Every director must own at least one (1) share
of the capital stock of the corporation of which
he is a director, which share shall stand in his
name on the books of the corporation. Any
director who ceases to be the owner of at least
one (1) share of the capital stock of the
corporation of which he is a director shall
thereby cease to be a director. Trustees of non-
stock corporations must be members thereof. A
majority of the directors or trustees of all
corporations organized under this Code must
be residents of the Philippines.
“The names, nationalities and residences of the
Directors or Trustees who are to serve as such
until their successors have been elected and
qualified in accordance with law.”
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(1) Not less than 5 but not more than 15
members of the governing board
(2) Must own at least one (1) share of the
Capital Stock whose share shall stand in
his name in the books of the corporation
(3) Majority of them must be residents of the
Philippines.
There may also be other Qualifications or
Disqualifications that may be provided in the
by-laws in accordance with Sec. 47(5).
Section 47. Contents of by-laws. – Subject to
the provisions of the Constitution, this Code,
other special laws, and the articles of
incorporation, a private corporation may
provide in its by-laws for:
5. The qualifications, duties and compensation
of directors or trustees, officers and employees;
Again, there is no Citizenship Requirement,
Only Residency requirement.
Thus, a corporation created under the laws of
the Philippines may have members of the
governing board consisting solely of Foreigners
Unless barred by our nationalization laws.
Example: Sec. 4, Art. 14, 1987 Constitution
Subject to certain exceptions, the Management
of Educational Institutions shall be vested
solely to citizens of the Philippines.
Educational institutions may have
Stockholders consisting of Foreigners. They can
co-own or hold a maximum of (40%) of the
capital stock of an educational corporation.
Q. BEING STOCKHOLDERS, CAN THEY
QUALIFY TO BE DIRECTORS?
GR: No. There is a constitutional prohibition.
Because a director is a Manager of the
corporation. And since the management is
vested solely to citizens of the Philippines, even
if they may have shares of stock, these
foreigners cannot qualify to be and to act as
directors.
XPN: Those created by Mission Boards,
Charitable Institutions and Religious Orders.
Example: St. Louis University, created by a
religious sect based in Beligium. The president
and the chairman of the board is a Belgian
priest.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Q: SHOULD THE STOCKHOLDER BE THE
BENEFICIAL OR EQUITABLE OWNER OF
THE SHARE IN ORDER THAT HE MAY
QUALIFY TO BE A DIRECTOR? EXAMPLE,
THE PERSON HOLDS THE SHARE IN TRUST
FOR A CERTAIN MINOR, IS HE QUALIFIED
TO BE A DIRECTOR?
Yes. It suffices that he is possessed with Legal
Title to the shares (Lee vs. CA)
What is material is the Legal Title to and not
Beneficial Ownership of the stock, as appearing
in the books of the corporation.
As long as he holds at least one (1) share, as
appearing in the books of the corporation, no
matter how he is holding the same, whether in
trust or otherwise, he becomes qualified to be a
Director.
DISQUALIFICATION OF DIRECTORS
Section 27. Disqualification of directors,
trustees or officers. – No person convicted by
final judgment of an offense punishable by
imprisonment for a period exceeding six (6)
years, or a violation of this Code committed
within five (5) years prior to the date of his
election or appointment, shall qualify as a
director, trustee or officer of any corporation.
(n)
One cannot be and serve as a director if:
(1) He has been convicted by Final Judgment,
not merely a charge, of an offense
punishable by imprisonment for a period
exceeding (6) years or a violation of the
Corporation Code, committed within (5)
years prior to the date of his election
(2) As provided for in Section. 23, if he ceases
to own at least one (1) share of the capital
stock.
(3) Others as may be provided for in the By-
Laws
As provided for in Section. 47, the by-laws
may provide for additional qualifications
and disqualifications for membership in the
board.
In the case of Gokungwei vs. SEC, Gokungwei
has business interests directly in competition
with the San Miguel Corporation.
San Miguel amended the by-laws to provide for
a Disqualification for membership of the board:
Disqualifying a stockholder from being
elected as a member of the board, if he
happens to own a controlling interest in
another business or enterprise directly
in competition with San Miguel.
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The Supreme Court upheld the validity of the
By-Laws, inserting said disqualification as
being reasonable, as it prevents the uniting of
incompatible interests in one single enterprise.
OTHER ALLIED LAWS TO CONSIDER FOR
PURPOSES OF DISQUALIFICATION:
(1) Central Bank Banking Laws
A person charged with an offense involving
Financial Fraud cannot be a director in a
financial institution. This is an exception from
the law requiring conviction by final judgment,
under Section 27.
(2) Financial Company Act of the Philippines
You have to submit NBI and Police Clearance of
Directors applying in a financing company.
How can he be a director therefore if he is
charged with an offense?
ARTICLE 7. CAPITAL STOCK
If it is a Stock Corporation, it is
(1) The Authorized Capital Stock.
(2) The number of shares within which it is
divided
(3) The par value of its shares
(4) There may be no par value shares
(5) The amount subscribed,
(6) The names, residences and nationalities of
the subscribers and their respective
subscriptions
(7) The paid-in or paid-up capital
If it is a Non-Stock Corporation, it is sufficient
to indicate:
(1) The operating capital
(2) The names, nationalities and residences of
those who contributed to the capital
ARTICLE 8. SUBSCRIBED CAPITAL STOCK
ARTICLE 9. SUBSCRIBERS
ARTICLE 10. TREASURER
ARTICLE 11. NO TRANSFER CLAUSE
Section 13. Amount of capital stock to be
subscribed and paid for the purposes of
incorporation. – At least twenty-five percent
(25%) of the authorized capital stock as stated
in the articles of incorporation must be
subscribed at the time of incorporation, and at
least twenty-five (25%) per cent of the total
subscription must be paid upon subscription,
the balance to be payable on a date or dates
fixed in the contract of subscription without
need of call, or in the absence of a fixed date or
dates, upon call for payment by the board of
directors: Provided, however, That in no case
shall the paid-up capital be less than five
Thousand (P5,000.00) pesos. (n)
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
(1) At least 25% of the authorized capital stock
must be Subscribed
(2) At least 25% of the Total Subscription must
be paid
Meaning, the law does not require that each of
the subscribers must pay at least 25% of their
respective subscription.
Thus, anyone or some of these stockholders or
subscribers may pay the minimum paid-up
capital of 25% of the Total Subscription, while
the others may not have paid a single centavo
out of their subscriptions.
In no case however, that the paid-up capital be
less than P5,000.00
But again we have to note that while the law
prescribes P5,000.00 as the minimum paid-up
capital, there are certain business activities
where the law or rules and regulations would
require higher Paid-Up Capital than that
provided for by the Corporation Code.
Example:
(1) Financing Company Act of the Philippines
P10M minimum paid-up capital, if the principal
office is located in Metro Manila.
P5M in other cities or municipalities
(2) Banking
There is a minimum paid-up capital prescribed
by the Central Bank
(3) POEA
Those hiring for employees abroad or
recruitment agencies, P3M
NB: Check the particular agency concerned as
they might have prescribed a minimum paid-up
capital.
Q. WHAT IS CAPITAL?
In the case of Gamboa v. Teves, 2011, this
case involves the PLDT Co. and the issue of
whether or not PLDT has violated our
nationalization laws that is, the maximum
number of ownership of shares of foreigners in
the telecommunications industry.
The Philippine Constitution reserves these
types of corporations to Philippine nationals or
partnerships or corporations of which 60% of
the capital stock is owned by Filipino citizens.
In this case, the 60-40 requirement was
breached. Foreigners were holding more than
40% of PLDT’s capital stock.
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The Supreme Court held that the term Capital
in Sec. 11, Art. 12, 1987 Constitution refers
only to shares of stocks Entitled to Vote in the
Election of Directors.
Considering that common shares with voting
rights translates to control as opposed to
preferred shares which are non-voting, the
term Capital under the Constitution refers only
to Common Shares.
However, if the preferred shares have the Right
to Vote in the election of directors then the
term Capital shall include the preferred shares.
Because the right to participate in the control
and management of the corporation is
exercised through the right to hold in the
election of directors.
In short, the term Capital in the Constitution
refers only to shares of stocks that can vote in
the Election of Directors.
In that case, Justice Velasco dissented, saying
that the Corporation Code defines Outstanding
Stocks as the total shares of stock issued.
It does NOT distinguish whether they are
common or preferred shares. It includes all
types of shares.
Section 137. Outstanding capital stock
defined. – The term "outstanding capital stock",
as used in this Code, means the total shares of
stock issued under binding subscription
agreements to subscribers or stockholders,
whether or not fully or partially paid, except
treasury shares. (n)
Likewise, the SEC defined Capital as to include
both voting and non-voting shares in the
determination of the Nationality of a
corporation.
It was defined by the SEC that Capital denotes
the Sum Total of the shares subscribed and
paid-in or promised to be paid by the
stockholders irrespective of the nomenclature
issued by the corporation. Hence, non-voting
preferred shares are considered in the
computation of the 60-40 requirement under
the Constitution.
A Motion for Reconsideration was filed because
of this dissenting opinion, however the Motion
for Reconsideration was denied.
In Heirs of Gamboa vs. Teves, 2012, it was
explained that the Constitutional provision
reserving to Philippine nationals the operation
of Public Utilities, like the PLDT, or to
corporations with at least 60% of the capital
stock, outstanding, refers only to shares with
Voting Rights.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
In effect, the Supreme Court reiterated its
earlier ruling. Three (3) Special Laws were
cited:
(1) Omnibus Investments Code of 1981
(2) Omnibus Investments Code of 1987
(3) Foreign Investments Act
All these three special laws carried the
definition of Philippine Nationals as stated
under the Constitution.
A Philippine National is:
(1) A citizen of the Philippines; or
(2) A domestic partnership or corporation
organized under the laws of the Philippines
with at least 60% of the capital stock,
outstanding and entitled to vote is held by
the citizens of the Philippines.
The Supreme Court then held that only shares
with voting rights should be the basis of
determining whether or not the constitutional
provision has been breached.
Section 6. Classification of shares. – The
shares of stock of stock corporations may be
divided into classes or series of shares, or both,
any of which classes or series of shares may
have such rights, privileges or restrictions as
may be stated in the articles of incorporation:
Provided, That no share may be deprived of
voting rights except those classified and issued
as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided,
further, That there shall always be a class or
series of shares which have complete voting
rights. Any or all of the shares or series of
shares may have a par value or have no par
value as may be provided for in the articles of
incorporation: Provided, however, That banks,
trust companies, insurance companies, public
utilities, and building and loan associations
shall not be permitted to issue no-par value
shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the
distribution of the assets of the corporation in
case of liquidation and in the distribution of
dividends, or such other preferences as may be
stated in the articles of incorporation which are
not violative of the provisions of this Code:
Provided, That preferred shares of stock may be
issued only with a stated par value. The board
of directors, where authorized in the articles of
incorporation, may fix the terms and conditions
of preferred shares of stock or any series
thereof: Provided, That such terms and
conditions shall be effective upon the filing of a
certificate thereof with the Securities and
Exchange Commission.
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Shares of capital stock issued without par
value shall be deemed fully paid and non-
assessable and the holder of such shares shall
not be liable to the corporation or to its
creditors in respect thereto: Provided; That
shares without par value may not be issued for
a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That
the entire consideration received by the
corporation for its no-par value shares shall be
treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its
shares for the purpose of insuring compliance
with constitutional or legal requirements.
Except as otherwise provided in the articles of
incorporation and stated in the certificate of
stock, each share shall be equal in all respects
to every other share.
Where the articles of incorporation provide for
non-voting shares in the cases allowed by this
Code, the holders of such shares shall
nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of
the corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation
with another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to
approve a particular corporate act as provided
in this Code shall be deemed to refer only to
stocks with voting rights. (5a)
Section 6 empowers a Stock Corporation to
provide for a Classification of Shares which
may grant the holder thereof certain rights and
privileges not otherwise accorded to holders of
any other types of shares.
DOCTRINE OF EQUALITY OF SHARES
Said rights and privileges of course must be
clearly provided for in the articles of
incorporation or the certificate of stock.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Otherwise, all shares of stocks, irrespective of
their classification, shall have the same rights
and privileges.
Q. WHY SHOULD A CORPORATION
CLASSIFY ITS SHARES?
(1) To Specify and Define the rights and
privileges of the stockholders.
Example:
Voting and Non-Voting shares
Non-Voting shares cannot vote for the directors
and officers
NB: Only Preferred and Redeemable shares
may be denied the right to vote.
(2) For Regulation and Control of the issuance
of shares of stocks or sales of corporate
securities for the protection of the
purchasers or stockholders.
Example:
Close Corporations
It is required that all of its shares for any class
shall be subjected to one or more specified
restrictions allowed by the Code.
Section 96. Definition and applicability of
Title. - A close corporation, within the meaning
of this Code, is one whose articles of
incorporation provide that: (1) All the
corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding twenty (20); (2) all the
issued stock of all classes shall be subject to
one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make
any public offering of any of its stock of any
class. Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or
controlled by another corporation which is not
a close corporation within the meaning of this
Code.
Any corporation may be incorporated as a close
corporation, except mining or oil companies,
stock exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with public
interest in accordance with the provisions of
this Code.
The provisions of this Title shall primarily
govern close corporations: Provided, That the
provisions of other Titles of this Code shall
apply suppletorily except insofar as this Title
otherwise provides.
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As provided for in Section 96, the shares of
stocks of a Close Corporation can be held of
record only by not more than twenty specified
persons.
So if you are not one of those 20 specified
persons, you cannot be a stockholder in that
particular close corporation because Close
Corporations are normally organized by closely-
knit groups like the family, for instance. They
would normally want to keep the business
between and among themselves and they would
not welcome strangers to come in and interfere
in their management thereof.
(3) As a Management Control Device
Example:
In Voting and Non-Voting shares
Only Voting Shares are entitled to vote in the
election of directors who will manage the
corporate affairs.
Founder’s Shares
May be granted Specified Rights, including the
Exclusive Right To Vote in the election of
corporate directors and officers for a period not
exceeding five years upon the effectivity of the
Articles of Incorporation.
So for five years, the holders of these Founder’s
Shares will have the exclusive right to vote and
be voted upon as members of the Board and
even as corporate officers.
(4) For purposes of Compliance with Statutory
Requirements, particularly with respect to
Nationalized or Partly nationalized
industries.
Example:
Utilization of the Philippine Natural Resources
Minimum Ownership of Filipino is (60%). So
Foreigners can own (40%).
For purposes of compliance with that
requirement of the law, if there are 100M
shares, the corporation can classify it to the
effect that there shall be 60M Common A
Shares to be owned or held of record by Filipino
citizens and 40M Common B shares which may
be owned or held by any other citizen, other
than Filipino Citizens.
You cannot therefore transfer the 60M shares
reserved solely for Filipinos to a foreigner
because of the No Transfer Clause in the
Articles of Incorporation
“No transfer of shares of stocks which will
result to a violation of our nationalization laws
shall be recorded in the books of the
corporation.”
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
(5) To Better Ensure return of investments
Example:
Preferred and Redeemable Shares
Preferred Shares may be granted the right to
receive dividends first before any other types of
shares may receive their shares of the
dividends.
Redeemable Shares may be Optional or
Obligatory. It may require the corporation to
redeem that type of shares in the specified
Return of Investment or Interest.
There is therefore insurance that you will have
a better return of investment.
COMMON SHARES
The most common type of share is the Common
Share. It usually carries with it Right to Vote
and frequently the Exclusive Right To Vote.
It must be observed, however, if there are more
than one type of shares, each share,
irrespective of classification, shall be equal in
all respects. Unless the Articles of
Incorporation or the Contract of Subscription
provides otherwise.
Example:
Preferred Shares may be issued. Are these
shares Non-Voting? Not Necessarily. It wasn’t
stated that they are Non-Voting preferred type
of share.
Non-Voting Shares are not included in
determining compliance with the voting
requirement to pass a valid corporate act.
However, they are not absolutely denied the
right to vote. Under the last paragraph of Sec.
6:
“Except as otherwise provided in the
immediately preceding paragraph, the vote
necessary to approve a particular corporate act
as provided for in the Code shall be deemed to
refer only to stocks with voting rights.”
Q FOR INSTANCE, FOR THE APPROVAL OF
MANAGEMENT CONTRACT, THERE ARE
NON-VOTING SHARES. IN THE 100M
SHARES, 20% ARE PREFERRED NON-
VOTING SHARES. WILL YOU INCLUDE
THESE 20M SHARES IN ARRIVING AT THE
VOTING REQUIREMENT IMPOSED BY THE
CODE TO HAVE A VALID MANAGEMENT
CONTRACT?
No. They are not one of those listed under the
immediately preceding paragraph of the last
paragraph of Sec. 6.
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But if they fall under those enumerated in the
Penultimate Paragraph of Section 6, then, you
include Non-Voting Shares.
That enumeration provides the instances when
non-voting shares are nonetheless entitled to
vote.
If that is the case, you include the non-voting
shares in arriving at the voting requirement
imposed by the Code.
Management contract is not one of them, so
Non-Voting Shares need NOT be included or
counted.
INSTANCES WHEN NON-VOTING SHARES
ARE ENTITLED TO VOTE:
1. Amendment of the Articles Of Incorporation
2. Adoption or Amendment of the By-Laws
3. Increase or Decrease of Bonded
Indebtedness
4. Increase or Decrease in Capital Stock
5. Sale or Disposition of All or Substantially
All Of The Corporate Assets and/or
Properties
6. Mergers and Consolidations
7. Investment Of Funds in Another
Corporation
8. Dissolution Of The Corporation
If it falls under any of this enumeration, Non-
Voting Shares must also be counted in arriving
at the voting requirement imposed by the Code
to pass a valid corporate act or transaction.
Under Section 6, Preferred and “Redeemable”
Shares may be denied the right to vote. Unless
otherwise provided for in this Code.
In Gamboa v. Teves, the Supreme Court held
that Common Shares cannot be deprived of the
right to vote in any corporate meetings.
Any provision in the Articles of Incorporation
restricting the right of common shareholders to
vote is invalid. You cannot deny Common
Shares the right to vote.
Q. MAY COMMON SHAREHOLDERS BE
VALIDLY DENIED THE RIGHT TO VOTE,
EFFECTIVELY THAT IS?
Yes, they can be effectively denied the right to
vote by the issuance of Founder’s Shares.
NB: “Unless otherwise provided for in the Code”
Founders’ Shares may be granted the right to
vote in the election of directors and officers, for
a maximum period of five years.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
TREASURY SHARES
Treasury Shares are shares of stock which:
(1) Has been issued as Fully Paid
(2) Subsequently Reacquired by the issuing
corporation either by Purchase,
Redemption, Donation or any Other Lawful
Mode of Acquisition.
They have no voting rights while they remain in
the treasury, because Treasury Shares are not
Outstanding Stocks.
Section 137. Outstanding capital stock defined.
– The term "outstanding capital stock", as used
in this Code, means the total shares of stock
issued under binding subscription agreements
to subscribers or stockholders, whether or not
fully or partially paid, except treasury shares.
(n)
When the law speaks of Voting and Dividend
Rights, it speaks only of Outstanding Stocks.
So, the Treasury Shares have no right to vote
and to receive dividends, while they remain in
the treasury of the corporation.
Treasury shares may be subsequently re-
issued by the corporation. It becomes the
Property Right of the corporation and they can
thus sell or dispose of them again.
When Re-Issued, they would REGAIN BACK—
their status as Outstanding Stocks. They are
Treasury Shares only while they are in the
treasury of the corporation.
NO PAR VALUE SHARES
Section 6 provides for the limitations in the
issuance of no par value shares:
1. Once they are issued they are deemed Fully
Paid and Non-Assessable
2. The consideration for its issuance should
not be less than P5.00/share
3. The entire consideration constitutes
Capital, which is not available for dividend
declaration
Because dividends may be declared only
out of the Unrestricted Earnings or Surplus
Profits of the corporation
4. They cannot also be at the same time
issued as Preferred Shares
5. They cannot be issued by banks, trust
companies, public utilities and building and
loans associations
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RESTRICTIONS AND TRANSFERS OF
SHARES OF STOCKS
The Code does not require corporations
registered under this provision to provide a
statement of restrictions and transfers of
shares.
However, there is also likewise nothing in the
law which should prohibit the corporation from
providing reasonable restrictions, such as,
Options and the Right of First Refusal in the
articles of incorporation.
If that be the case, it must be provided for in
the Articles of Incorporation and in all of the
Stock Certificates to be issued by the
Corporation in order to be validly binding
against 3rd persons. This is only directory. They
may or may not provide restrictions or
transfers of shares.
Q. WILL THIS APPLY TO CLOSE
CORPORATIONS?
No. It is not only permissive, but mandatory.
Section 96 provides that a Close Corporation
must provide, among others, in the Articles of
Incorporation that all of its shares of stocks of
any class, shall be subjected to one or more
specified restrictions and transfers of shares
allowed by the Code.
NO TRANSFER CLAUSE
Guarantees full compliance with our
nationalization laws.
It bars the corporation from registering
transfers of shares of stock if it is violative of
the Nationality Requirements imposed by the
Code.
TREASURER IN TRUST, EXECUTION
CLAUSE AND ACKNOWLEDGMENT
Section 22. Effects on non-use of corporate
charter and continuous inoperation of a
corporation. – If a corporation does not formally
organize and commence the transaction of its
business or the construction of its works within
two (2) years from the date of its incorporation,
its corporate powers cease and the corporation
shall be deemed dissolved. However, if a
corporation has commenced the transaction of
its business but subsequently becomes
continuously inoperative for a period of at least
five (5) years, the same shall be a ground for
the suspension or revocation of its corporate
franchise or certificate of incorporation. (19a)
This provision shall not apply if the failure to
organize, commence the transaction of its
businesses or the construction of its works, or
to continuously operate is due to causes
beyond the control of the corporation as may
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be determined by the Securities and Exchange
Commission.
After it is incorporated, Section 22 requires:
(1) Every corporation registered under this
general provision that it must organize and
commence the transaction of its business
within two (2) years, from the date of its
incorporation
Its FAILURE to do so would result to the
Automatic Dissolution of the corporation
(2) If it commence the transaction of its
business but subsequently becomes
inoperative continuously for at least five (5)
years:
It will be a ground for the suspension or
revocation of the corporate franchise. Thus,
proper notice and hearing must be had.
(3) If its failure to Organize or Commence the
transaction of its business or to
continuously operate is due to causes
beyond the control of the corporation, as
may be determined by the SEC, Automatic
Dissolution, or suspension or revocation
will not ensue.
DE FACTO CORPORATION and
CORPORATION BY ESTOPPEL
Section 20. De facto corporations. – The due
incorporation of any corporation claiming in
good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall
not be inquired into collaterally in any private
suit to which such corporation may be a party.
Such inquiry may be made by the Solicitor
General in a quo warranto proceeding. (n)
Section 20 is the governing law regarding De
Facto Corporations.
This provision does not define what De Facto
Corporations are but it merely states that:
The due incorporation of any corporation
claiming in good faith to be a corporation under
the Code and its right to exercise corporation
powers shall not be inquired collaterally in any
private suit to which such corporation may be
a party.
Said inquiry may be made by the Solicitor
General in a Quo Warranto Proceeding
A De Facto Corporation however, is one that is
so defectively formed or created, so as not to be
considered as a De Jure Corporation, one that
is formed or organized in strict compliance with
the requirements of the law, it nevertheless
exist for all practical intents and purposes as a
corporate body by virtue of its bona fide
attempt to incorporate under existing statutory
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authority coupled with the exercise of corporate
powers in good faith.
While it may not be a De Jure Corporation by
virtue of an irregularity in its organization,
constitution or even from some ommission to
comply with the requirements under which it
may have been formed or organized as a De
Jure Corporation, it nevertheless exist as a
corporate body, separate and distinct from its
stockholders/members composing it.
REQUISITES FOR ITS EXISTENCE AS A DE
FACTO CORPORATION:
1. There must be a Law or an apparently Valid
Statute, under which it may have been
created as a De Jure Corporation;
2. An attempt in Good Faith to form a
corporation, according to the requirements
of the law, which should go far enough as
to amount to a Colorable Compliance with
the law;
3. User of Corporate Powers;
4. Good Faith in claiming to be and doing
business as a corporation.
All these requirements must be present. They
must go hand in hand. Otherwise, it cannot
exist as a corporation at all.
In the case of Municipality of Malabagan vs.
Benito, an Executive Order contrary to the
provisions of the Municipal Code then, was
issued by the President of the Philippines
creating the Municipality of Malabagan.
The said municipality cannot be considered as
a De Facto Corporation. Its existence may
therefore be attacked by any person in interest
not only the Solicitor General.
In this case, it was ruled that, citing the Pelaez
Doctrine under the Constitution because again,
the Corporation Code must be read in relation
to other allied laws, An unconstitutional act is
not a law. It confers no rights. It imposes no
duties. It affords no protection. It creates no
office.
It is, in legal contemplation, inoperative, as
though it had never been passed.
Therefore, in this particular case, one essential
requisite for its existence as a De Facto
Corporation does not exist, there is no law or
an apparently valid statute, under which it may
have been formed or organized as a De Jure
Corporation.
Since an unconstitutional act is not a law,
therefore this essential requisite is not present.
It is not a corporation at all and its existence
may be questioned by any person in interest.
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In Hall v. Piccio, between and among the
stockholders of a De Facto Corporation, it
cannot exist as such De Facto Corporation, if
the certificate of registration or incorporation
has not yet been issued.
Because between and among themselves, the
supposed stockholders, they are aware of the
fact of its non-registration
Therefore, they cannot claim in good faith to be
and act as a corporation. This is the 4th
requisite, Good Faith in claiming to be and
doing business as a corporation
Absence of one of the requisites then it is not a
corporation at all. Hence, any person in
interest can therefore question its existence.
Q. ARE THE RIGHTS, LIABILITIES, DUTIES
AND OBLIGATIONS OF THE
STOCKHOLDERS, DIRECTORS, OFFICERS
OR MEMBERS OF A “DE FACTO”
CORPORATION—THE SAME AS THOSE OF
THE “DE JURE” CORPORATION?
Yes. They have the same rights, liabilities,
duties and obligations. They are subject to the
same laws, rules and regulations that apply to
a De Jure Corporation.
The only importance of the distinction between
a De Facto Corporation and a De Jure
Corporation is for the purpose of determining
the applicability of Section 20, on whether or
not their existence as such may be attacked by
another person.
Existence of a De Jure Corporation cannot be
attacked even by the State
Existence of a De Facto Corporation can be
attacked only by the state in a Quo Warranto
proceeding. No other party can question the
existence of a De Facto Corporation.
CORPORATION BY ESTOPPEL
Section 21. Corporation by estoppel. – All
persons who assume to act as a corporation
knowing it to be without authority to do so
shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a
result thereof: Provided, however, That when
any such ostensible corporation is sued on any
transaction entered by it as a corporation or on
any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate
personality.
On who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation. (n)
Section 21 does not define what a Corporation
by Estoppel is. It merely provides for the
consequences of those persons who assume to
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be and act as a corporation, knowing it to be
without authority to do so.
They are liable as General Partners for all the
Debts, Liabilities and/or Damages incurred or
arising therefrom. Provided, when such
ostensible corporation is sued on any
transaction entered by it or on any tort
committed by it as such, it shall not be allowed
to use as a defense its lack of corporate
capacity.
Definition of a Corporation by estoppel
(1) Neither a De Jure/De Facto corporation
(2) By virtue of serious defects in its
organization as a corporate body, but
nevertheless exist as a corporate entity.
(3) Only to those who cannot deny its
corporate existence, either by virtue of their
Agreement, Admission or Conduct. It may
apply for or against the corporation, or for
or against the 3rd party transacting with it.
GR: A person who has contracted or otherwise
dealt with an association in such a way as to
recognize and in effect, admits its existence as
a corporation, cannot deny its juridical
personality in an action arising therefrom.
Thus, if such be the case, if a person transacts
business with a supposed corporation that
does not exist he cannot allege lack of
personality on the part of the supposed
corporation to sue and that it has not been
registered. (Asia Banking v. Standard
Products)
XPN: This doctrine will not hold true, however,
where:
(1) Fraud takes part in the transaction.
The plaintiff’s charge states that she was
unaware of the fact that the association has no
juridical personality.
The defendant gave no confirmation or denial
and the circumstances attendant to the
execution of the contract led to the inescapable
conclusion that the plaintiff was really made to
believe that there was such a corporation duly
organized in accordance with law.
She cannot thus be estopped from denying that
there is a corporation to speak of and prevent
her from making the association personally
liable, as provided for under Section 21
(Salvatiera v. Carlitos)
(2) When he is trying to Escape Liability on a
contract from which he has benefited on
the irrelevant ground of defective
incorporation.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
However, in this case, the petitioner was not
trying to escape liability from the contract, but
was rather the one claiming under it.
That being the case, he is not estopped or
barred from claiming liability against the
associates or the persons who assume to be
and act as a corporation. (International
Express Travel and Tours case)
(3) Where there is no 3rd person involved
The corporation by estoppel is founded on
principles of equity and it is designed to
prevent injustice and unfairness.
It applies when persons assume to form a
corporation, exercises corporate functions and
enter into contracts with 3rd persons.
Where there is no 3rd person involved, then the
conflict arises only between and among those
assuming to form the corporation—who
therefore know that it has not been registered.
Hence, there is no Corporation by Estoppel.
(Lozano v. Delos Santos)
Section 21 speaks of the liability of the
associates or the persons assuming to act as a
corporation.
The associates can be held liable as General
Partners.
Q. WHO SHOULD BEAR THE LOSS? ALL OF
THE ASSOCIATES OR ONLY THE ACTIVE
ONES?
Only those who Actively Participated in
holding out the association as a corporate body
should be held liable by virtue of the express
provision in Section 21.
This would be more in conformity with the
rules governing agency under the Civil Code
which would hold out:
“An agent personally liable to the party with
whom he contracts in cases he exceeds the
limit of his authority without giving the other
party sufficient notice of his powers.
Thus, the Passive Shareholders or supposed
stockholders or associates should be limited in
their liability only to their agreed contribution.
LIMITED SHAREHOLDERS’ LIABILITY in the
corporate form of business.
The stockholder’s liability is limited to the
amount he subscribed. This is one of the
advantages of the corporate form of business.
XPN: Corporation by Estoppel
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Q. WILL THIS LIMITED SHAREHOLDERS’
LIABILITY APPLY TO PERSONS ASSUMING
TO ACT AS A CORPORATION KNOWING IT
TO BE WITHOUT AUTHORITY TO DO SO?
No. Under the Civil Code, the “general
partners” can be held liable even beyond their
agreed contribution.
This is the gist of Sec. 21. They are liable as
General Partners. They can be held liable even
beyond their agreed contribution or their
particular subscription.
There is no such thing as shareholders’ limited
liability in a Corporation by Estoppel.
CORPORATE ENTITY THEORY
The corporation is possessed with a personality
separate and distinct from the stockholders or
persons composing it.
It is not affected by the personal rights,
obligations or transactions of the latter.
In the same vein, the stockholders, members or
individual directors or officers are not also
affected by the rights and obligations incurred
or accrued for the corporation.
Note that this is a General Rule, because we
have the Doctrine of Piercing the Veil of
Corporate Fiction
PIERCING THE VEIL OF CORPORATE
FICTION
When the notion of the legal corporate entity is
used:
(1) To defeat public convenience;
(2) Justify wrong;
(3) Protect fraud; or
(4) Defend crime
The law will regard the corporation as a mere
association of persons or in the case of two (2)
corporations, they will MERGE them into one.
The other being regarded merely as an Alter
Ego, Business conduit, Adjunct Extension or
Instrumentality of the other.
NB: For the separate personality of the
corporation to be disregarded:
The wrongdoing must be Clearly and
Convincingly established.
Fraud must be proven by Clear and Convincing
evidence amounting to more than
Preponderance. It cannot be justified by
speculation and can never be presumed.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
The mere fact that the corporation happens to
own all of the shares of stocks of another
corporation, these are the wholly owned
subsidiaries, will not justify piercing the veil of
corporate fiction. (Del Rosario v. NLRC)
This rule, same as above, the mere fact that the
corporation happens to own all/substantially
all of the shares of stocks of another
corporation does not justify piercing the veil of
corporate fiction and treating them as one.
True, it is PNB who owns all the shares of stock
of PNB-IFL. Therefore, it may have control over
the business practices and policies of the PNB-
IFL.
But did it use that control to commit a
fraud/wrongdoing? No. it did not.
Was it the proximate cause of the injury? No. it
is not. (PNB vs. Ritrato Group)
In Borromeo v. CA, the same ruling was
reiterated. This rule finds its justification to the
Instrumentality Rule, earlier enunciated in the
case of Concept Builders vs. NLRC
When one corporation is organized and
controlled and its affairs are conducted so that
it is a mere instrumentality or adjunct of the
other the fiction of the Corporate Entity of the
instrumentality may be disregarded.
INSTRUMENTALITY RULE
(1) There must be Absolute Control
Not mere majority or even complete stock
ownership, but Domination, not only of
finances but also of the policy and business
practices in respect to the transaction attack so
that the corporate entity has, at that time, no
separate mind, will/existence of its own
(2) Control must have been used by to commit
Fraud or Wrong to perpetuate a violation of the
plaintiff’s legal right.
(3) The aforesaid Control must be Proximately
cause the Injury or Unjust Loss complained of.
Absence of any one (1) of these elements would
prevent piercing the veil of corporate fiction.
(PNB vs. Ritrato Group, Yamamoto vs. Shino
Leather Industries)
AMENDMENT OF THE ARTICLES OF
INCORPORATION
Section 16. Amendment of Articles of
Incorporation. – Unless otherwise prescribed by
this Code or by special law, and for legitimate
purposes, any provision or matter stated in the
articles of incorporation may be amended by a
majority vote of the board of directors or
trustees and the vote or written assent of the
stockholders representing at least two-thirds
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(2/3) of the outstanding capital stock, without
prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions
of this Code, or the vote or written assent of at
least two-thirds (2/3) of the members if it be a
non-stock corporation.
The original and amended articles together
shall contain all provisions required by law to
be set out in the articles of incorporation. Such
articles, as amended shall be indicated by
underscoring the change or changes made, and
a copy thereof duly certified under oath by the
corporate secretary and a majority of the
directors or trustees stating the fact that said
amendment or amendments have been duly
approved by the required vote of the
stockholders or members, shall be submitted to
the Securities and Exchange Commission.
The amendments shall take effect upon their
approval by the Securities and Exchange
Commission or from the date of filing with the
said Commission if not acted upon within six
(6) months from the date of filing for a cause
not attributable to the corporation.
Unless otherwise prescribed by Special Law or
this Code, and for legitimate purposes, any
provision or matter stated in the Articles of
Incorporation may be amended by
(1) The Majority Vote of the Board of Directors
or Trustees; and
(2) The Vote or Written Assent of the
Stockholders, representing at least 2/3 of
the Outstanding Capital Stock
The amendment will take effect:
(1) Upon the Approval of the SEC; or
(2) From the date of its filing with the said
Commission, if Not Acted Upon within six
months from the date of filing, for a cause
not attributable to the corporation.
Q. THE AMENDMENT WAS FILED 8 MONTHS
BACK AND THE SEC HAS NOT ACTED UPON
IT. IS THE AMENDMENT ALREADY VALID?
Yes. It was valid not 6 months thereafter, but
on the date it was Filed. It retroacts to the filing
date.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Q. THE PURPOSE CLAUSE WAS CHANGED
FROM REALTY TO CONSTRUCTION. IT WAS
FILED 8 MONTHS AGO AND SEC HAS NOT
ACTED UPON IT. THE CORPORATION
STARTED DOING BUSINESS AS A
CONSTRUCTION COMPANY IN
ACCORDANCE WITH THE AMENDMENT 5
MONTHS BACK. DID THE CORPORATION
CARRY ITS POWERS AND FUNCTIONS IN
ACCORDANCE WITH ITS ARTICLES?
Yes. Because it was already valid on the date it
was filed, 8 months ago.
The voting requirement and the effectivity of
amendment will apply only however, to
Ordinary or Regular Amendments of the
Articles of Incorporation
It will not apply in cases of Special
Amendments.
(1) Extension or Shortening of the Corporate
Term (Section 37 in relation to Section
120)
(2) Increase or Decrease in Capital Stock
(Section 38)
In both cases, the 2/3 votes must be cast at
the meeting during the meeting called for that
purpose. The written assent of the Stockholder
is not sufficient.
In Section 38, any decrease in the capital stock
will never become valid and effective, until and
unless the SEC gives its stamp of approval.
Because the SEC will determine whether the
decrease in capital stock will not prejudice the
rights of 3rd parties.
BOARD OF DIRECTORS
Section 23. The board of directors or trustees.
– Unless otherwise provided in this Code, the
corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such
corporations controlled and held by the board
of directors or trustees to be elected from
among the holders of stocks, or where there is
no stock, from among the members of the
corporation, who shall hold office for one (1)
year until their successors are elected and
qualified. (28a)
Every director must own at least one (1) share
of the capital stock of the corporation of which
he is a director, which share shall stand in his
name on the books of the corporation. Any
director who ceases to be the owner of at least
one (1) share of the capital stock of the
corporation of which he is a director shall
thereby cease to be a director. Trustees of non-
stock corporations must be members thereof. A
majority of the directors or trustees of all
corporations organized under this Code must
be residents of the Philippines.
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Unless otherwise provided for in the Code, All
Corporate Powers, All Business are conducted,
and All Properties are controlled by the board
of directors
They are the Corporate Managers and are thus
the ones who can act for and in behalf of the
corporation.
GR: They must sit and act as a body at a
validly held and constituted or conducted
meeting to have a valid Corporate Act or
Transaction
Individual directors cannot bind the
Corporation by their Individual Acts, except the
following:
1. There is a Valid Delegation Of Authority;
2. When Expressly Conferred;
3. Where the officer or agent is clothed with
Actual or Apparent Authority;
4. When Expressly or Impliedly ratified; or
5. And even perhaps by Estoppel
Q. THE BOARD OF DIRECTORS OR BOARD
OF TRUSTEES IN CASE OF A NON-STOCK
CORPORATION HAS TO SIT AND ACT AS A
BODY AT A DULY CONSTITUTED MEETING.
WHAT IS THE QUORUM REQUIREMENT FOR
A VALID DIRECTORS’ MEETING? WHAT IS
THE VOTE REQUIRED?
(1) Quorum requirement:
Majority of the members of the Board as fixed
in the Articles of Incorporation
(2) Vote requirement:
In every decision of at least a majority of the
directors or trustees are present at a meeting at
which there is a quorum, may pass a valid
corporate act.
Q. IF THERE ARE 9 MEMBERS OF THE
BOARD AS FIXED IN THE ARTICLES OF
INCORPORATION, MAY THE VOTE OF 3
MEMBERS PASS A VALID CORPORATE ACT
OR TRANSACTION?
Yes. The Quorum requirement is 5, majority of
their number as fixed in the Articles of
Incorporation
The vote of the majority present at which there
is a quorum will pass a valid corporate act.
Majority of 5 is 3
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Q. ARE THERE ANY EXCEPTIONS TO THIS
RULE OF QUORUM OR VOTING
REQUIREMENT?
(1) In the cases of Election of Corporate
Officers. Vote of the majority of their entire
number is required;
(2) Unless the Articles of Incorporation or By-
Laws require a higher Quorum or Voting
requirement. The Articles and By-Laws
may provide for a higher Quorum or Voting
requirement in directors’ meetings.
Q. WE SAY THAT THEY MUST SIT AND ACT
AS A BODY TO HAVE A VALID CORPORATE
ACT OR TRANSACTION. ARE THE
DIRECTORS THEREFORE REQUIRED TO BE
PHYSICALLY PRESENT TO HAVE A VALID
MEETING?
No. The E-Commerce Law allows them to meet
via Teleconference or Video Conference.
This is not yet available to stockholders. It is
only to Directors or Trustees meeting.
Directors or Officers are not liable for their acts
for and in behalf of their corporation as long as:
(1) They act in Good Faith; and
(2) Within the Scope of their Powers And
Authority
Pursuant to the Doctrine of Corporate Entity
Theory, Contracts or Obligations incurred by
them, in their official capacity, is not theirs,
but that of the Corporation which they
represent.
GR: BUSINESS JUDGMENT RULE
Questions of Policy and Management are left
solely to the honest decisions of the Board of
Directors.
The courts are without authority to substitute
its judgment as against the said Board of
Directors.
As long as they act in Good Faith, their
actuations are not subject to judicial review.
(Montelibano vs. Bacolod)
XPN: Corporate Directors or Officers and/or
agents may nonetheless be held liable
Personally or Solidarily even if they are acting
for and in behalf of the Corporation:
1. When he assents to Patently Unlawful act
or Bad Faith or Gross Negligence in
directing the corporate affairs or for conflict
of interest resulting in damages to the
corporation, its stockholders/other persons
as provided for in Section 31.
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Section 31. Liability of directors, trustees or Q. IF A CORPORATE OFFICER, THE

officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by the
corporation, its stockholders or members and
other persons.
TREASURER AND THE PRESIDENT, PAYS A
CORPORATE OBLIGATION IN FAVOR OF
THE CREDITOR, AND THE CHECK THAT
WAS USED TO PAY ITS OBLIGATION
BOUNCED, MAY THE CORPORATE OFFICER
WHO SIGNED THE CHECK ADVANCE THE
CORPORATE ENTITY THEORY TO FREE
HIMSELF FROM ANY LIABILITY?
No. Because he is made to be Personally Liable
by a Special Law. (Bouncing Checks Law)

When a director, trustee or officer attempts to
acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of
any matter which has been reposed in him in
confidence, as to which equity imposes a
disability upon him to deal in his own behalf,
he shall be liable as a trustee for the
corporation and must account for the profits
which otherwise would have accrued to the
corporation. (n)
2. If he consents to the issuance of Watered
Stocks, or Craving due knowledge thereof
does not forthwith file his written objections
with the corporate secretary, as provided
for in Section 65.
Section 65. Liability of directors for watered
stocks. – Any director or officer of a corporation
consenting to the issuance of stocks for a
consideration less than its par or issued value
or for a consideration in any form other than
cash, valued in excess of its fair value, or who,
having knowledge thereof, does not forthwith
express his objection in writing and file the
same with the corporate secretary, shall be
solidarily, liable with the stockholder concerned
to the corporation and its creditors for the
difference between the fair value received at the
time of issuance of the stock and the par or
issued value of the same. (n)
3. When he agrees to hold himself personally
or solidarily liable with the corporation.
4. He is made by Specific Provision of the Law
to Personally Answer for his corporate acts.
Example:
In the case of the Bouncing Checks Law
Sec. 1 of the Bouncing Checks Law provides
that if a check is drawn by a corporation, the
person or persons who signed the check shall
be Personally Liable.
The liability of the corporate directors may also
be based on the fact that they owe a 3-Fold
Duty to the corporation and the stockholders
as a body.
DUTY OF LOYALTY
FORBIDDEN PROFITS RULE
Section 31. Liability of directors, trustees or
officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by the
corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to
acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of
any matter which has been reposed in him in
confidence, as to which equity imposes a
disability upon him to deal in his own behalf,
he shall be liable as a trustee for the
corporation and must account for the profits
which otherwise would have accrued to the
corporation. (n)
Section 34. Disloyalty of a director. – Where a
director, by virtue of his office, acquires for
himself a business opportunity which should
belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he
must account to the latter for all such profits
by refunding the same, unless his act has been
ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall
be applicable, notwithstanding the fact that the
director risked his own funds in the venture
Directors are considered in Equity as bearing a
Fidiuciary Relation to the corporation and the
stockholders as a whole.

Section 31 provides that Directors are liable

Jointly and Severally for Damages if they
acquire any personal or pecuniary interest in
conflict with their duty of loyalty, as such
director.
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Section 34 provides that, where a director, by
virtue of his office acquires for himself a
business opportunity which should belong to
the corporation, thereby, obtaining profits to
the prejudice of such corporation, he must
account to the latter the corporation, all profits,
by refunding the same. Notwithstanding the
fact, that he may have risked his own funds in
the specific venture.
Unless, his act has been ratified by a vote of at
least 2/3 of the Outstanding Capital Stock.
This is the Forbidden Profits Rule. Forbidden
in a sense that Directors are Fidiuciary
Representatives of the corporation and the
stockholders as a body. Such that, they are
not allowed to obtain any Personal Profit,
Commission, Bonus or Gain for their Official
Actions.
This may also refer to:
(1) Those arising out of transactions of
directors with 3rd persons which may
involve what is called as Misappropriation
of Corporate Opportunities;
(2) Disloyal Diverting Of Business. This is
otherwise known as the Corporate
Opportunity Doctrine.
CORPORATE OPPORTUNITY DOCTRINE
Places a director of a corporation in the
position of a Fidiuciary, and prohibits him from
seizing a business opportunity and of
developing it at the expense of the facilities of
the corporation.
He cannot appropriate to himself a business
opportunity, which in fairness, should belong
to the corporation.
NB: Section 34 will apply, notwithstanding the
fact that the director risked his own funds in
the venture.
SELF-DEALING AND INTERLOCKING
DIRECTORS
A Self-Dealing Director is one who enters into a
contract, or transacts business with his own
corporation.
Section 32. Dealings of directors, trustees or
officers with the corporation. – A contract of the
corporation with one or more of its directors or
trustees or officers is voidable, at the option of
such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee
in the board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
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2. That the vote of such director or trustee was
not necessary for the approval of the contract;
3. That the contract is fair and reasonable
under the circumstances; and
4. That in case of an officer, the contract has
been previously authorized by the board of
directors.
Where any of the first two conditions set forth
in the preceding paragraph is absent, in the
case of a contract with a director or trustee,
such contract may be ratified by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of at
least two-thirds (2/3) of the members in a
meeting called for the purpose: Provided, That
full disclosure of the adverse interest of the
directors or trustees involved is made at such
meeting: Provided, however, That the contract
is fair and reasonable under the
circumstances. (n)
An Interlocking Director is a director of a
corporation wherein he transacts business with
another corporation, and he also sits in that
corporation also as a director.
Section 33. Contracts between corporations
with interlocking directors. – Except in cases of
fraud, and provided the contract is fair and
reasonable under the circumstances, a
contract between two or more corporations
having interlocking directors shall not be
invalidated on that ground alone: Provided,
That if the interest of the interlocking director
in one corporation is substantial and his
interest in the other corporation or
corporations is merely nominal, he shall be
subject to the provisions of the preceding
section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty (20%) percent
of the outstanding capital stock shall be
considered substantial for purposes of
interlocking directors. (n)
GR: Contracts of Self-dealing Directors are
generally Voidable, at the option of the
corporation.
XPN: They are valid per se if all the requisites
or conditions set out in Section 32 are present:
1. That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary to
constitute a quorum for such meeting;
2. That the vote of such director or trustee
was not necessary for the approval of the
contract;
3. The contract is Fair and Reasonable under
the circumstances;
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There is no legal yardstick as to when a
contract is fair and reasonable.
It is always a Question of Fact whether it is
beneficial to both.
4. That in case of an officer, the contract has
been previously authorized by the board of
directors.
If any of the first 2 conditions will be absent,
the contract is voidable and thus, subject to
ratification by at least 2/3 of the Outstanding
Capital Stock at a meeting held for that
purpose.
Provided that, full disclosure of the adverse
interest of the director involved is made and the
contract is Fair and Reasonable.
GR: The contract of an Interlocking Director is
generally valid.
XPN: Except in cases of Fraud and when the
Contract is not Fair and Reasonable.
A contract between two more corporations
having Interlocking directors shall not be
invalidated on that ground alone.
XPN to the XPN:
If the interest of the interlocking director in one
corporation is Substantial and his interest in
the other corporation is merely Nominal, then
the provisions of the preceding Section,
provisions governing Self-Dealing Directors, will
apply. Meaning, the contract will be Voidable
also.
NB: Stockholding in Excess of 20% is
Substantial for purposes of determining
whether the contract of the Interlocking
director is Voidable or Generally Valid
application.
Q. MR. X IS A STOCKHOLDER IN A
CORPORATION AND HOLDS 25% OF ITS
OUTSTANDING CAPITAL STOCKS. HE IS
ALSO A STOCKHOLDER IN B CORPORATION
AND ALSO OWNS 22% OF ITS
OUTSTANDING CAPITAL STOCKS. A AND B
CORPORATIONS ENTERED INTO A directors to be elected.
CONTRACT. IS THE CONTRACT GENERALLY
VALID OR GENERALLY VOIDABLE? WILL
SECTION 32 APPLY OR SECTION 33?
Section 33 will apply, because his interest in
both Corporations are Substantial, more than
20% in both corporations.
Section 33 says if it is Substantial in one and
nominal in the other it will be voidable. It will
be subjected to Section 32.
If they are both Substantial or both Nominal, it
is Section 33 that will be applicable. The
contract is Generally Valid.
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ELECTION OF THE MEMBERS OF THE
BOARD
The members of the Board, whether they be
Stock or Non-Stock are to be elected by:
(1) The stockholders and/or
(2) Members entitled to vote.
The non-voting shares have no voting rights in
the election of the Corporate Directors.
Quorum requirement: Majority of the
Outstanding Capital Stock or Members entitled
to vote
Non-voting shares are said to be not included
in determining the quorum requirement and
voting requirement imposed by law as per last
paragraph of Section 6.
Q. WHAT IS THE VOTING REQUIREMENT IN
ORDER THAT A DIRECTOR MAY BE
CONSIDERED AS ELECTED?
None, the only requirement is the candidates
receiving the Highest number of votes.
Q. QUORUM REQUIREMENT?
Majority of the Outstanding Capital Stock
Q. X HAS ONLY 1 SHARE. THERE ARE 5
CANDIDATES AND X IS THE 5TH, HE HAS
ONLY 1 SHARE. IS HE ELECTED?
Yes. He is the 5th candidate receiving the
highest number of votes. The candidate
receiving the highest number of votes gets
elected. Not majority of the outstanding capital
stock but rather, the number of votes cast in
his name.
Stockholders may avail of their Cummulative
Voting, right to cumulate their vote, in a Stock
corporation.
CUMULATIVE VOTING
Multiplying the number of shares held by the
particular stock holder by the number of
No. of Shares Held
x No. of Directors to be elected
Total Number of Votes
Example: You are holding 100 shares; 5
directors are to be elected; How many votes can
you cast? 100 x 5 = 500 votes
These 500 votes may be:
(1) Cast to a single person only, or
(2) Distributed to as many candidates as you
may deem fit and proper.
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This was included in the Corporation Code for GR: One year until their successors have been
purposes of getting the minority the right of duly elected and qualified, in accordance with
representation in a Stock Corporation. law.

Q. MINORITY HAS 20% STOCKHOLDINGS. XPN:

THE OTHER 80% OF SHARES ARE HELD BY
ONE SINGLE FAMILY 5 SIBLINGS, 1. In a Non-Stock Corporation, they can serve
MAJORITY CONTROL THE 80%; THERE ARE for three years under Title 11
ALSO 5 MINORITY, NOT RELATED TO THE
MAJORITY AND NOT RELATED TO ONE 2. In Educational Corporations they can serve
ANOTHER? for a term of five years

If the 20% shares of the minority are pulled If there is no election, and their term of office
multiplied by the number of the directors to be already expired, naturally, by virtue of this
elected, they are guaranteed one seat in the provision, they shall serve for a term of one
board. This is why you have cumulative voting. year until their successors are duly elected and
qualified, then they can continue acting as
100 shares is the OCS; Minorities are holding directors in a hold-over capacity.
20 shares and there are 5 directors to be
elected. 20 x 5 = 100 votes DISTINCTION BETWEEN TERM AND
TENURE (Valle Verde Country Club vs.
If these 100 votes are cast in favor of one of the Africa)
minority, the minority is guaranteed one seat
Term Tenure
No matter what the Majority Stockholders do, Fixed by law Represents the term
they cannot outvote the minority. They can during which the
only elect (4) members of the Board. The 20% incumbent actually
and the 80%, equivalent to 400 votes holds Office.

Cumulative voting is a matter of right granted The time during which May be of longer or
to stockholders in a stock corporation. By the officer may claim to shorter duration
virtue of the Doctrine Of Limited Capacity, it hold office as a matter
cannot be denied in a stock corporation. A of right and fixes the
corporation can only do such acts and things interval after which the
as the allow it. several incumbents
shall succeed one
GR: In a Non-stock Corporation cumulative another
voting is generally not allowed, as provided for Not affected by the
in section 89. hold-over. The term is
fixed by law and it does
XPN: Provisions of Title 11 are clear and not change simply
specific: because the office may
have become vacant.
“The Articles of Incorporation or By-laws of a
non-stock corporation may Broaden, Limit or Where an incumbent holds his office beyond
Deny voting rights of the members.” the end of his term due to the fact that a
successor has not been elected or has failed to
So, the Articles of Incorporation or By-Laws qualify, Tenure may be of longer or shorter
may also allow Cumulative voting. But if there duration. Term is fixed by law.
is none, they are not entitled to Cumulative
voting. Example:

DIRECTOR’S TERM OF OFFICE (1) June 8 of last year he was elected. On

Section 23 (1). The board of directors or
trustees. – Unless otherwise provided in this
Code, the corporate powers of all corporations
formed under this Code shall be exercised, all
business conducted and all property of such
corporations controlled and held by the board
of directors or trustees to be elected from
among the holders of stocks, or where there is
no stock, from among the members of the
corporation, who shall hold office for one (1)
year until their successors are elected and
qualified. (28a)
December he resigned, the tenure was
shortened.
(2) June 8 of last year he was elected. No
election was held. In effect, there is a hold-
over. The tenure is extended.
But the Term is fixed by law, one year, that’s
the period or time where one may claim office
as a Matter of Right.

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 AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Directors and other Officers may be Removed
or Ousted from office.
Section 28. Removal of directors or trustees. –
Any director or trustee of a corporation may be
removed from office by a vote of the
stockholders holding or representing at least
two-thirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Provided,
That such removal shall take place either at a
regular meeting of the corporation or at a
special meeting called for the purpose, and in
either case, after previous notice to
stockholders or members of the corporation of
the intention to propose such removal at the
meeting. A special meeting of the stockholders
or members of a corporation for the purpose of
removal of directors or trustees, or any of them,
must be called by the secretary on order of the
president or on the written demand of the
stockholders representing or holding at least a
majority of the outstanding capital stock, or, if
it be a non-stock corporation, on the written
demand of a majority of the members entitled
to vote. Should the secretary fail or refuse to
call the special meeting upon such demand or
fail or refuse to give the notice, or if there is no
secretary, the call for the meeting may be
addressed directly to the stockholders or
members by any stockholder or member of the
corporation signing the demand. Notice of the
time and place of such meeting, as well as of
the intention to propose such removal, must be
given by publication or by written notice
prescribed in this Code. Removal may be with
or without cause: Provided, That removal
without cause may not be used to deprive
minority stockholders or members of the right
of representation to which they may be entitled
under Section 24 of this Code. (n)
With or Without Cause by at least 2/3 of the
Outstanding Capital Stock or 2/3 of the
members, in case it is a Non-Stock Corporation
The law, however, is categorical that Removal
Without Cause shall not deprive the minority of
their rightful representation to which they may
be entitled.
Q. MINORITY WERE ABLE TO VOTE ONE
DIRECTOR IN A 5-MAN BOARD BY
CUMULATING THEIR VOTES. SO THEY NOW
HAVE A REPRESENTATION IN THE BOARD.
MAJORITY HAS 80% STOCKHOLDINGS. CAN
THEY REMOVE OR OUST THAT ELECTED
DIRECTOR REPRESENTING THE
MINORITY?
Supposedly, Yes. Because they own 80%. 2/3
is only 66.67%, but it cannot be done, because
the minority is entitled to representation.
Section 29. Vacancies in the office of director
or trustee. – Any vacancy occurring in the
board of directors or trustees other than by
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removal by the stockholders or members or by
expiration of term, may be filled by the vote of
at least a majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting
called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only or
the unexpired term of his predecessor in office.
Any directorship or trusteeship to be filled by
reason of an increase in the number of
directors or trustees shall be filled only by an
election at a regular or at a special meeting of
stockholders or members duly called for the
purpose, or in the same meeting authorizing
the increase of directors or trustees if so stated
in the notice of the meeting. (n)
Only the Stockholders or Members can remove
directors or trustees elected by them. They
cannot be removed or ousted by their fellow
Directors. It must be at a Stockholders’
Meeting. (Raniel v. Fuchiko)
Q. SO IF THERE IS A VACANT SEAT BY
VIRTUE OF A REMOVAL OR OUSTER OF A
DIRECTOR, MAY THE VACANCY CREATED
BY VIRTUE OF THE REMOVAL OR OUSTER
BE FILLED UP BY THE BOARD OF
DIRECTORS THEMSELVES IF THEY STILL
CONSTITUTE A QUORUM?
No, only the stockholders can fill up the
vacancy created by virtue of removal or ouster.
Section 29 provides that any vacancy occurring
in the Board of Directors or Trustees, other
than by removal or expiration of term, may be
filled up by the vote of the majority of the
remaining directors, which is still constituting
a quorum.
So if it is caused by removal or expiration of the
term of office, then only the stockholder can fill
up the vacancy.
Q. MAY THE REMAINING MEMBERS OF THE
BOARD OF DIRECTORS, IF STILL
CONSTITUTING A QUORUM, FILL UP A
VACANCY CREATED BY THE REMOVAL OF
A HOLD-OVER DIRECTOR?
EXAMPLE: JUNE 8 OF LAST YEAR HE WAS
ELECTED. JUNE 8 OF THIS YEAR, NO
ELECTION WAS MADE. THERE WAS THEN A
HOLD-OVER. DECEMBER OF 2013, HOLD-
OVER DIRECTOR RESIGNED. MAY THE
REMAINING MEMBERS OF THE BOARD OF
DIRECTORS FILL UP THE VACANCY
CREATED BY THE RESIGNATION OF THE
HOLD-OVER DIRECTOR?
No. Because his term of office has already
expired. Term, as said, is fixed by law. As a
general rule, One year until their successors
are duly elected and qualified in accordance
with law.
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The hold-over period, that time from the lapse
of 1 year from the director’s election to the
office until his successor’s election and
qualification is not of the director’s original
term. nor is it a new term.
The hold-over period, however, constitutes part
of his tenure. Corollary, where the incumbent
member of the Board of Director continues to
serve in a hold-over capacity, it implies that the
office has a fixed term, which already expired.
Therefore, since the term of office has already
expired only the stockholders can fill up the
vacancy. (Valle Verde v. Africa)
Section 29 provides “The remaining members of
the Board, if still constituting a quorum, except
by removal/expiration of a term may fill up a
vacancy created in the Board of Directors.”
So much so that if the hold-over director
resigns, only the stockholders can fill up the
vacancy.
Q. MAY THE STOCKHOLDERS FILL UP
VACANCY CREATED BY REMOVAL AT THE
SAME MEETING WHERE THE REMOVAL
TOOK PLACE WITHOUT ANY NOTICE?
Yes. Section 29 provides that it may filled up at
the same meeting without further notice.
Q. MAY A DIRECTOR ACTING IN A HOLD-
OVER CAPACITY BE REMOVED FROM
OFFICE AT ANY TIME AND WITHOUT
CAUSE?
Yes. One occupying an office in a hold-over
capacity could be removed at any time without
cause upon the election and appointment of his
successor. (Barrayoga v. Adventist
University)
Section 30. Compensation of directors. – In the
absence of any provision in the by-laws fixing
their compensation, the directors shall not
receive any compensation, as such directors,
except for reasonable per diems: Provided,
however, That any such compensation other
than per diems may be granted to directors by
the vote of the stockholders representing at
least a majority of the outstanding capital stock
at a regular or special stockholders’ meeting. In
no case shall the total yearly compensation of
directors, as such directors, exceed ten (10%)
percent of the net income before income tax of
the corporation during the preceding year. (n)
GR: Directors are not entitled to Compensation
XPN:
(1) Reasonable per diem
(2) If there is a by-law provision allowing or
granting the same
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(3) If there is a grant by the Stockholders
owning or representing at least a Majority of
the Outstanding Capital Stock
(4) When they render Unusual or Extra-
Ordinary Service or Services.
Section 30 also provides a ceiling of the
compensation of the directors, if of course
granted to the effect that it shall not exceed
10% of the net income before tax of the
corporation during the preceding year.
Section 30 uses As Such Directors, so as to
generally deny them compensation.
In Western Institute of Technology vs. Salas,
the words As Such Directors in Section. 30,
delimits the scope of the prohibition to
compensation given to directors for services
performed purely in their capacity as directors
or trustees.
The Supreme Court held that an unambiguous
interpretation is that, they may be given
compensation, even by a mere grant of the
board of directors, by a mere board resolution
through of course, a valid resolution, even
without any grant or authority from the by-
laws or from the stockholders, when they
render services in a capacity other than as
such directors.
Thus, if they are acting in a capacity other than
such director and the board of directors passed
a resolution granting themselves compensation
in their capacities as President, Secretary,
Treasurer and Chairman of the Board of
Directors and one of the stockholders
questioned the validity of the grant because it
requires stockholders’ approval or a grant of a
by-law provision, the Court ruled that they are
entitled to compensation because they are not
acting in their regular or ordinary capacity as
such directors.
Likewise, the ceiling of 10% of the net income
of the corporation for the preceding year will
not also apply if the compensation granted
them is other than in their ordinary or regular
capacities as directors.
So even if the 10% ceiling is breached, if it is
given to them in their capacity also as
President, Secretary, Treasurer or Chairman of
the Board, Section 30 will not thereby be
violated.
CORPORATE POWERS AND AUTHORITY
A corporation is an artificial being existing only
in contemplation of the law and can thus, only
do such acts and things as the law allows it to
do, as provided for in the Doctrine of Limited
Capacity in the Corporate Form.
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These corporate powers and authority includes:
(1) Those that are Expressly Granted by law in
Section 36 to 45.
Section 36: Corporate Powers and Capacity
Section 37: Power to extend or shorten
corporate term
Section 38: Power to increase or decrease
capital stock; incur, create or increase
bonded indebtedness
Section 39: Power to deny pre-emptive right
Section 40: Sale or other disposition of
assets
Section 41: Power to acquire own shares.
Section 42: Power to invest corporate funds
in another corporation or business or for
any other purpose
Section 43: Power to declare dividends
Section 44: Power to enter into
management contract.
Section 45: Ultra vires acts of corporations.
(2) Those that are CONFERRED—by the
articles of incorporation;
Once the SEC issues a certificate of
registration, the government, through that
instrumentality of the SEC already conferred
upon that juridical entity the corporate power
to carry out the purpose or purposes indicated
in the articles of incorporation, those that are
Necessary or Incidental to its existence.
If they exercise such powers and functions
beyond any of them, the act performed is what
is called Ultra Vires Act, allowing the
contracting parties or any of them to
Collaterally Attack the validity thereof for being
beyond corporate powers.
Ultra Vires Contracts are therefore those that
cannot be performed or exercised by the
corporation because it is beyond the Express,
Inherent or Implied Powers or Authority.
Section 36. Corporate powers and capacity. –
Every corporation incorporated under this Code
has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the
period of time stated in the articles of
incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
4. To amend its articles of incorporation in
accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell
stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in
accordance with the provisions of this Code;
and to admit members to the corporation if it
be a non-stock corporation;
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds of
other corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require, subject to
the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with
other corporations as provided in this Code;
9. To make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid
of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be
essential or necessary to carry out its purpose
or purposes as stated in the articles of
incorporation. (13a)
POWER TO SUE AND/OR BE SUED
Q. UPON WHOM SERVICE OF SUMMONS IS
TO BE MADE?
GR: Section 11, Rule 14, Rules of Court
(1) President;
(2) Managing Partner;
(3) The General Manager;
(4) The Corporate Secretary;
(5) The Treasurer; or
(6) The In-House Counsel.
It may only be served unto them because a
strict compliance with the mode of service is
necessary to confer jurisdiction over the person
of the Corporation. The officer upon whom
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service is to be made must be one who is
named in the statute.
The words ‘Any of the Directors’ in the old rule
and ‘Agent’ was deliberately omitted in the New
Rules of Court. So much so that the liberalized
service of summons no longer applies (EB
Villarosa and Partners v. Benito)
Justice Regalado: “The then Sec. 13 of Rule
14 allowed service upon a defendant
corporation to be made to the President,
Manager, Secretary, Agent, Cashier, Any of the
Directors or Agents, the aforesaid terms were
obviously ambiguous and susceptible of broad
and oftentimes illogical interpretations.
Especially the word ‘Agent of the corporation.”
In the Filoil Case, litigation lawyer made a
special appearance precisely to question the
validity of the service of summons made upon a
person not named in the statute whose very
appearance was ceased upon by the Court to
say that he is considered as an ‘Agent’ of the
corporation.
The absurd decision in this case necessitated
amending the particular section in the Rules of
court permitting for instance, service of
summons only to the In-House counsel.
He is not yet the in-house counsel. He is there
only specially appearing to question the validity
of the service of summons.
XPN: Section 5, Rule 2, Interim Rules
governing Corporate Controversies
This rule, however, will not hold true if it is an
Intra-Corporate controversy, a controversy
arising between and among the stockholders,
directors, officers or between any or all of them
and the corporation.
Under the Interim Rules governing corporate
controversies, particularly Sec. 5, Rule 2
thereof:
If the defendant is a Domestic Corporation:
Service shall be deemed adequate if made upon
any of the Statutory Officers, as fixed in the By-
Laws or their respective Secretaries).
A director is, of course, a statutory officer of a
corporation. We know that they are corporate
managers.
So if it is Intra-Corporate, and it is served upon
any of the directors or even any officer as
provided for in the by-laws, if there is such a
thing as assistant finance manager in the by-
laws and it is served unto him, it is valid. It
goes further by including their respective
secretaries”.
The ruling in EB Villarosa and Partners vs.
Benito will apply only if the corporation is sued
by a 3rd party.
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Noteworthy, the Corporation may be sued only
in the City or Municipality where it has its
Principal Office, because the principal office
establishes the residence of the Corporation, if
it is NOT based on a written contract.
If it is based on a written contract, the parties
may stipulate as to venue of actions.
(Clavecilla Radio Systems v. Antillon)
POWER TO ISSUE SHARES OF STOCKS OR
TO ADMIT MEMBERS
The power to issue shares is lodged in the
Board of Directors. No stockholders’ meeting is
required to consider it because additional
issuance of shares of stock does not need the
approval of the stockholders.
What is only required is a valid board
resolution allowing the issuance of additional
shares. (Ruby Industrial Corporation v. Lim)
This is consistent with the rule that
Stockholders may have all the profits but shall
turn over the day-to-day management of the
corporate affairs to the governing Board of
Directors who, under the Corporation Code,
provides that, All Corporate Powers, All
Business are conducted and All Properties are
controlled by the said Board, unless, of course,
the law requires Stockholders’ Intervention.
Example:
(1) Investment of Corporate Fund in another
business or purpose other than the Primary
purpose.
It has to be approved by at least 2/3 of the
Outstanding Capital Stock or the Stockholders
owning or representing at least 2/3 of the
Outstanding Capital Stock
(2) To enter into mergers or consolidations.
The law likewise requires the intervention of
stockholders owning or representing at least
2/3 of the Outstanding Capital Stock.
RIGHT TO ACQUIRE OR ALIENATE
PROPERTIES.
TWO LIMITATIONS:
1. As the Lawful Transaction of its business
may reasonably require.
In the case of Luneta Motors vs. AD Santos,
Luneta Motors acquired a Certificate of Public
Convenience for operation of taxi services. It
was the winner of an auction sale for that
particular Certificate of Public Convenience.
The losing bidder went to court questioning the
validity of the acquisition of the said certificate
of public convenience.
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The Supreme Court held that Luneta Motors
cannot acquire the certificate of public
convenience.
It took note of the Articles of Incorporation and
ruled that, while it is true that Luneta Motors
may engage in the transportation business by
water, it is not authorized to engage in land
transportation business.
Since it is not as the lawful transaction of its
business reasonably require, the Court ruled
that it cannot acquire the certificate of public
convenience.
In the case of Tambunbi v. Jarencio, one of
the reasons why the Court pierced the veil of
the corporate fiction of the corporation there
involved is that, it is claiming that it owns the
American drug company engaged in the
distribution of drugs. It is claiming that it owns
a printing machine belonging to a sister
company which is engaged in printing.
The court stressed, how can you have a
printing machine? What do you need a printing
machine for when you’re engaged in the
distribution of drugs? It is not as the lawful
transaction of its business reasonably require.
2. Limitations imposed by law or the
Constitution.
Corporations, juridical entities can, like any
other natural persons, acquire lands and
register the same in their own names.
But there is a Constitutional provision that
says, it cannot register lands of the public
domain. It may hold such land of the public
domain only by way of lease under the
constitution for a particular number of area
and number of years.
However, there is an exception. In the case of
Director of Lands vs. Court of Appeals, the
effect that land of the public domain may be
converted into private property by the mere
lapse of (30) years, if it is held by a possessor
or his predecessor-in-interest continuously in
concept of an owner, openly, for the statutory
period of (30) years, if that be the case, it is
converted into private property and thus, it
may be registered by a juridical entity.
POWER TO EXTEND OR SHORTEN the
CORPORATE TERM
Section 37. Power to extend or shorten
corporate term. – A private corporation may
extend or shorten its term as stated in the
articles of incorporation when approved by a
majority vote of the board of directors or
trustees and ratified at a meeting by the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at
least two-thirds (2/3) of the members in case of
non-stock corporations. Written notice of the
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proposed action and of the time and place of
the meeting shall be addressed to each
stockholder or member at his place of residence
as shown on the books of the corporation and
deposited to the addressee in the post office
with postage prepaid, or served personally:
Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise
his appraisal right under the conditions
provided in this code. (n)
It may be extended or shortened by an
amendment of the Articles of Incorporation by a
majority vote of the directors subject to the
ratification of the stockholders owning or
representing at least 2/3 of the Outstanding
Capital Stock at a meeting duly called for that
purpose.
In extension or shortening of the corporate
term, Section 37 is categorical; the vote must
be cast at the meeting called for that purpose.
Written assent will not be sufficient.
Section 11 provides that the extension of the
original terms, as indicated in the Articles of
Incorporation shall be made:
(1) Not earlier than five years prior to the
expiration of the term indicated in the
Articles of Incorporation.
(2) Unless there are Justifiable Reasons for an
earlier extension, as may be determined by
the SEC.
POWER TO INCREASE OR DECREASE THE
CAPITAL STOCK OR TO CREATE, INCUR
BONDED INDEBTEDNESS
Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. – No corporation shall increase
or decrease its capital stock or incur, create or
increase any bonded indebtedness unless
approved by a majority vote of the board of
directors and, at a stockholder’s meeting duly
called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the
increase or diminution of the capital stock, or
the incurring, creating or increasing of any
bonded indebtedness. Written notice of the
proposed increase or diminution of the capital
stock or of the incurring, creating, or
increasing of any bonded indebtedness and of
the time and place of the stockholder’s meeting
at which the proposed increase or diminution
of the capital stock or the incurring or
increasing of any bonded indebtedness is to be
considered, must be addressed to each
stockholder at his place of residence as shown
on the books of the corporation and deposited
to the addressee in the post office with postage
prepaid, or served personally.
A certificate in duplicate must be signed by a
majority of the directors of the corporation and
countersigned by the chairman and the
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secretary of the stockholders’ meeting, setting
forth:
(1) That the requirements of this section have
been complied with;
(2) The amount of the increase or diminution of
the capital stock;
(3) If an increase of the capital stock, the
amount of capital stock or number of shares of
no-par stock thereof actually subscribed, the
names, nationalities and residences of the
persons subscribing, the amount of capital
stock or number of no-par stock subscribed by
each, and the amount paid by each on his
subscription in cash or property, or the amount
of capital stock or number of shares of no-par
stock allotted to each stock-holder if such
increase is for the purpose of making effective
stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred,
created or increased;
(5) The actual indebtedness of the corporation
on the day of the meeting;
(6) The amount of stock represented at the
meeting; and
(7) The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any bonded
indebtedness.
Any increase or decrease in the capital stock or
the incurring, creating or increasing of any
bonded indebtedness shall require prior
approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept
on file in the office of the corporation and the
other shall be filed with the Securities and
Exchange Commission and attached to the
original articles of incorporation. From and
after approval by the Securities and Exchange
Commission and the issuance by the
Commission of its certificate of filing, the
capital stock shall stand increased or
decreased and the incurring, creating or
increasing of any bonded indebtedness
authorized, as the certificate of filing may
declare: Provided, That the Securities and
Exchange Commission shall not accept for
filing any certificate of increase of capital stock
unless accompanied by the sworn statement of
the treasurer of the corporation lawfully
holding office at the time of the filing of the
certificate, showing that at least twenty-five
(25%) percent of such increased capital stock
has been subscribed and that at least twenty-
five (25%) percent of the amount subscribed
has been paid either in actual cash to the
corporation or that there has been transferred
to the corporation property the valuation of
which is equal to twenty-five (25%) percent of
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the subscription: Provided, further, That no
decrease of the capital stock shall be approved
by the Commission if its effect shall prejudice
the rights of corporate creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the same,
with the approval by a majority vote of the
board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called
for the purpose.
Bonds issued by a corporation shall be
registered with the Securities and Exchange
Commission, which shall have the authority to
determine the sufficiency of the terms thereof.
(17a)
Q. WHAT ARE THE MODES OF INCREASING
THE CAPITAL STOCK?
If the capital is originally 1M divided into 1M
shares with a par value of P1.00 per share, you
can increase the capital stock in either of the
three ways:
1. Increasing the no. of shares to 2M, without
increasing the par value you arrive at an
additional 1M increase in capital stock; or
2. You may retain 1M no. of shares and
increase the par value; or
3. You increase both, for example, 1.5M
shares for P1.50 per share, you will arrive
at an increase of additional 1M in the
capital
Q. WHY SHOULD A CORPORATION
INCREASE ITS CAPITAL STOCK?
For acquisition of business or to expand its
business
Q. LIMITATION IMPOSED IN DECREASING
THE CAPITAL STOCK
No decrease in capital stock shall be allowed if
it will prejudice the rights of the creditors or
other 3rd parties.
This is why the SEC is duty bound to
determine whether or not to approve or allow a
decrease in capital stock.
It will never become valid and effective until the
SEC gives its stamp of approval.
Q. WHAT ARE THE MODES OF DECREASING
CAPITAL STOCK?
Just do the reverse of the modes to Increase
1. Decrease the number of shares without
decreasing the par value;
2. Decrease the par value without decreasing
the number of shares; or
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3. Decrease both the number of shares and
the par value.
Q. WHY SHOULD A CORPORATION
DECREASE ITS CAPITAL, CONSIDERING
THAT IT MAY NOT DO SO IF IT WILL
PREJUDICE THE RIGHTS OF CREDITORS
OR OTHER 3RD PERSONS?
There must be a valid reason for decreasing the
capital stock because it may be a violation of
the Trust Fund Doctrine.
If it is decreased, the capital is decreased and it
will be violative of this Trust Fund Doctrine
then the SEC will not allow a decrease in
capital stock.
TRUST FUND DOCTRINE
Subscriptions to capital stock, inclusive of the
unpaid portion thereof, constitutes a fund
which the creditors have a right to rely upon
the satisfaction of their claims.
1. To reduce or wipe out existing deficits
where creditors will not thereby be
affected.
The corporation has 10M authorized capital. It
used up 5M to manufacture toys for kids of
young ages. After the production, it was
discovered that the toys contain a material
dangerous to the health of children. The
corporation, instead of selling it openly to the
public, burned these toys. There is a deficit
now of 5M.
It can reduce now the value of its capital stock
because no creditor will be affected. This is a
valid reason.
2. To reduce or wipe out Capital Surplus
If the capital is more than necessary to
procreate the business. You put up a
corporation and you plan to build a grocery
store in a city but mayor of the city already has
5 grocery stores. The mayor does not want to
give you a permit to open another grocery store.
So instead, you built a Sari-Sari Store. But
your capital is 10M.
In this case, you can decrease your capital
stock.
3. To write down the value of fixed assets if
there is a decline in their actual value.
You put up Transport services with a capital
stock of 10M. This 10M was used to purchase
1.3J Toyota vios at P500,000.00 per piece. You
bought 20 of these. In the ordinary wear and
tear, in 2 years, the value of these cabs went
down to P250,000.00 and these are the only
assets of the corporation.
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You can also decrease the capital stock to that
same extent of the depletion of the value of the
fixed assets because also, no creditors will
thereby be affected.
POWER TO DENY PRE-EMPTIVE RIGHTS
Section 39. Power to deny pre-emptive right. –
All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class, in
proportion to their respective shareholdings,
unless such right is denied by the articles of
incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance
with laws requiring stock offerings or minimum
stock ownership by the public; or to shares to
be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt.
Pre-emptive right is the right granted by law to
all existing stockholders to subscribe to all
issues or dispositions of shares of any class so
as to maintain the respective proportionate
interest in the corporation, that is, their voting
and dividend rights.
If you are holding, for instance, 10% of the OCS
of a corporation, and the corporation issues
additional 1M shares of stocks, being a holder
of 10% of the Outstanding Capital Stock, you
are entitled to subscribe to 10% of the 1M that
will be issued by the corporation so that you
will retain your 10% dividend right and voting
right for that matter.
If you did not subscribe, then definitely, there
will be a depletion of your voting and dividend
right.
Q. May this right be denied? How?
The Articles of Incorporation or the Amendment
of the Articles may deny the stockholders their
right of Pre-Emption.
XPN:
(1) If they are to be issued in compliance with
the law in requiring the minimum stock
ownership by the public.
(2) If they are to be issued in good faith with
the approval of the stockholders
representing at least 2/3 of the
Outstanding Capital Stock either in
exchange of property needed by the
corporation or in payment of previously
incurred indebtedness.
The validity of issuance of additional shares
may be questioned if done in breach of trust.
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Thus, even if the pre-emptive right does not
exist, either because the issue comes within
the exceptions provided for under Section 39,
or because it is denied or limited by a provision
in the articles of incorporation, the issue of
shares may still be objectionable if:
XPN to the XPN:
(1) The directors acted in breach of trust; and
(2) Their primary purpose is to perpetuate a
shift of control of the corporation or to
freeze out the minority interest.
You increased your capital because the articles
do not allow the exercise of stockholders’ pre-
emptive rights. But the purpose is to freeze out
the minority. The minority was able to elect a
representative in the Board because of
cumulative voting.
The 20% capital was increased by another 1M.
(1M is the ACS). Minority was not able to
exercise their right of pre-emption because it
was denied in the provision in the articles.
They can no longer vote a representative
because their 20% was reduced to 10%.
You can question that. (Ruby Industrial
Corporation v. Lim)
Section 39 provides, ‘All issues or disposition of
shares of any class’
In earlier cases, Benito vs. SEC and Dy vs.
SEC, the Supreme Court excluded from the
coverage of the right of pre-emption originally
unsubscribed portion of the Original Capital
Stock.
Example:
Authorized Capital Stock is 1M; number of
shares subscribed is 250,000; so there’s a free
portion of 750,000 left unsubscribed. If the
corporation will subsequently issue the the
remaining 750,000 unsubscribed shares, then,
the Supreme Court held, in these two
particular case, that it does not extend to
originally unsubscribed shares.
When a corporation, at its inception, first
offered its shares or subscription it is deemed
to have offered ALL of its authorized shares for
subscription of the stockholders.
A stockholder cannot, thus, complain, to a
dilution of his interest if the corporation later
offers the unsubscribed portion for
subscriptions to other persons because he is
deemed to have waived his right of pre-emption
if that be the case.
It appears however, that although these rulings
were handed down during the effectivity of the
Corporation Code, which became effective May
1, 1980, the facts obtaining in these 2
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particular cases were placed before the
Corporation Code became effective.
And the wording of the law now is very clear
and specific: “Existing stockholders shall have
the right to subscribe to all issues or
disposition of shares of any class”, even
Treasury Shares are now also covered.
Q. WHAT TYPES OF SHARES ARE COVERED
BY THESE PRE-EMPTIVE RIGHTS? ALL
TYPES OF SHARES.
The Pre-emptive rights of a stockholder in a
Close Corporation, if not denied also by a
provision in the Articles of Incorporation, is
Absolute.
Meaning, those instances provided for under
Sec. 39, as to when a stockholder may
nonetheless be able to exercise the right of
pre-emption, that is,
(1) Those issued in compliance with the law
requiring minimum stock ownership by the
public; and
(2) Those issued in good faith, with approval of
the stockholders owning or representing at
least 2/3 of the outstanding capital stock,
either in exchange of property needed by the
corporation or for previously incurred
indebtedness
Will not apply to a stockholder in a Close
Corporation
Section 102. Pre-emptive right in close
corporations. – The pre-emptive right of
stockholders in close corporations shall extend
to all stock to be issued, including reissuance
of treasury shares, whether for money, property
or personal services, or in payment of corporate
debts, unless the articles of incorporation
provide otherwise.
Q. MAY A STOCKHOLDER WHO HAS NOT
PAID HIS SUBSCRIPTION IN FULL OF THE
CAPITAL STOCK—BE ABLE TO EXERCISE
HIS RIGHT OF PRE-EMPTION?
Yes, by virtue of Sec. 72.
Section 72. Rights of unpaid shares. – Holders
of subscribed shares not fully paid which are
not delinquent shall have all the rights of a
stockholder. (n)
POWER TO DISPOSE OF ALL OR
SUBSTANTIALLY ALL OF THE CORPORATE
ASSETS AND/OR PROPERTIES
Section 40. Sale or other disposition of assets.
– Subject to the provisions of existing laws on
illegal combinations and monopolies, a
corporation may, by a majority vote of its board
of directors or trustees, sell, lease, exchange,
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mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets,
including its goodwill, upon such terms and
conditions and for such consideration, which
may be money, stocks, bonds or other
instruments for the payment of money or other
property or consideration, as its board of
directors or trustees may deem expedient,
when authorized by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in
case of non-stock corporation, by the vote of at
least to two-thirds (2/3) of the members, in a
stockholder’s or member’s meeting duly called
for the purpose. Written notice of the proposed
action and of the time and place of the meeting
shall be addressed to each stockholder or
member at his place of residence as shown on
the books of the corporation and deposited to
the addressee in the post office with postage
prepaid, or served personally: Provided, That
any dissenting stockholder may exercise his
appraisal right under the conditions provided
in this Code.
A sale or other disposition shall be deemed to
cover substantially all the corporate property
and assets if thereby the corporation would be
rendered incapable of continuing the business
or accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the
stockholders or members, the board of
directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease, exchange,
mortgage, pledge or other disposition of
property and assets, subject to the rights of
third parties under any contract relating
thereto, without further action or approval by
the stockholders or members.
Nothing in this section is intended to restrict
the power of any corporation, without the
authorization by the stockholders or members,
to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and
assets if the same is necessary in the usual
and regular course of business of said
corporation or if the proceeds of the sale or
other disposition of such property and assets
be appropriated for the conduct of its
remaining business.
In non-stock corporations where there are no
members with voting rights, the vote of at least
a majority of the trustees in office will be
sufficient authorization for the corporation to
enter into any transaction authorized by this
section.
If the corporation sells disposes all or
substantially all of its assets and/or properties.
The stockholders or members consent or
approval is required for its validity, 2/3 of the
Outstanding Capital Stock, or 2/3 of the
members, in cases of a non-stock corporation.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Q. WHEN IS A SALE OR DISPOSITION
CONSIDERED AS SUBSTANTIAL SO AS TO
REQUIRE STOCKHOLDERS’ APPROVAL FOR
ITS VALIDITY?
If the corporation would be rendered incapble
of continuing business or accomplishing the
purpose for which it was incorporated = then
the approval of the stockholders would be
required for its validity.
Q. THE CORPORATION IS ENGAGED IN
REALTY BUSINESS. THE PRIMARY
PURPOSE SAYS THAT:
“THE CORPORATION IS FORMALLY
ORGANIZED FOR THE PURPOSE OF
OWNING, ACQUIRING, DISPOSING OR
SELLING ANY AND ALL TYPES OF REAL
PROPERTIES”.
THE CORPORATION HAS THE PIECE OF
PROPERTY IN BCDA AREA. THE
CORPORATION, THROUGH A BOARD
RESOLUTION, NOW DECIDES TO SELL THAT
PIECE OF PROPERTY. IS THE
STOCKHOLDERS CONSENT OR APPROVAL
REQUIRED EVEN IF THAT IS THE ONLY
PROPERTY OF THE CORPORATION?
No. Section 40 provides, that if the sale or
disposition is in the Usual or Regular course of
its business, stockholders’ approval is not
required for its validity or if the proceeds are to
be appropriated for the conduct of its
remaining business, stockholders’ approval is
not required for its validity even if that is the
only property of the corporation.”
Q. THE CORPORATION IS ENGAGED IN THE
MANUFACTURING BUSINESS AND IT HAS A
PROPERTY LOCATED IN ABCD AREA
WHERE IT HAS ITS FACTORY/PLANT,
WAREHOUSE, INVENTORIES AND OFFICES.
IT SELLS ITS PLANT. WILL IT REQUIRE
STOCKHOLDERS’ APPROVAL?
GR: Supposed to be, Yes, because if it has no
more plant, it is no longer capable of
continuing the business for which it was
organized.
XPN: But the intention, however, is that, so
that the corporation will be able to acquire
more modern or complex facility.
If that be the case, then stockholders’ approval
will not be required because the proceeds are to
be appropriated for the conduct of its business.
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Q. WILL THE ACQUIRING CORPORATION OR
WILL THE PURCHASER BE LIABLE FOR THE
DEBTS AND OBLIGATIONS OF THE SELLING
CORPORATION IF THE ASSETS AND
PROPERTIES ARE SOLD OR
SUBSTANTIALLY ALL OF THE ASSETS ARE
SOLD TO A 3RD PARTY. WILL THE
PURCHASER, THE 3RD PARTY BE LIABLE
FOR THE DEBTS AND OBLIGATIONS OF
THE SELLING CORPORATION?
GR: No, by virtue of the Corporate Entity
Theory.
In the case of Yu vs. NLRC, Twin Ace Holdings
acquired all the assets and properties of
Tanduay Distillery Inc. There was a labor
problem and the laborers won after Twin Ace
acquired all the assets of Tanduay Distillery.
The laborers now wanted to enforce the award
against Twin Ace Holdings.
The Supreme Court held that Twin Ace exists
separately and independently from Tanduay
Distillery Inc. It is not liable for the debts and
liabilities of the selling corporation.
XPN:
1. Where the purchaser expressly or impliedly
agrees to assume such debts or liabilities;
2. Where the transaction amounts to a merger
or consolidation under Section 80.
The debts and liabilities of the constituent
corporations will accrue for and in behalf of the
absorbing or consolidated corporation without
further act and deed.
3. Where the purchasing corporation is a mere
continuation of the selling corporation;
4. Where the transaction is entered into
fraudulently in order to escape liability for
such debts and/or obligations.
POWER TO ACQUIRE ITS OWN SHARES
Section 41. Power to acquire own shares. – A
stock corporation shall have the power to
purchase or acquire its own shares for a
legitimate corporate purpose or purposes,
including but not limited to the following cases:
Provided, That the corporation has unrestricted
retained earnings in its books to cover the
shares to be purchased or acquired:
1. To eliminate fractional shares arising out of
stock dividends;
2. To collect or compromise an indebtedness to
the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale; and
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code. (a)
Q. WHAT MAY BE A LEGITIMATE PURPOSE
FOR A CORPORATION TO ACQUIRE ITS
OWN SHARES?
1. To eliminate fractional shares—arising out
of stock dividends;
2. To collect or compromise an indebtedness
to the corporation arising out of unpaid
subscription in a delinquency sale and to
purchase delinquent stocks sold during
that sale;
3. To pay dissenting or withdrawing
stockholders entitled thereto, as provided
for in Section 81;
4. To redeem redeemable shares;
5. To pay withdrawing stockholders in a close
corporation, as provided for in Section 105;
6. To eliminate capital surplus;
NB: This is not exclusive because the law
provides that “including but not limited to the
following”
GR: The Corporation must have Unrestricted
Retained Earnings.
XPN:
1. Redemption of redeemable shares, as
provided for in Section 8.
2. Withdrawing stockholders in a Close
Corporation; A stockholder in a close
corporation may, for any reason, withdraw
therefrom and compel the corporation that
he be paid the value of his shares. Provided
only that the corporation has sufficient
assets to cover debts and liabilities
exclusive of capital, as provided for in
Section 105.
3. In cases of Deadlocks in a Close
Corporation; the remedy available is for a
stockholder to file a case in court to settle
the matter in cases of deadlocks. The court,
the proper forum, may appoint a
provisional director in order to break the
deadlock. The court or the provisional
director may compel any stockholder to sell
his shares in favor of the corporation
irrespective of the existence of unrestricted
retained earnings, as provided for in
Section 104.
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Q. A IS A STOCKHOLDER OF 100 SHARES.
HE PAID 50,000 OF THE VALUE OF HIS
SHARES. HE DID NOT YET PAY THE
REMAINDER OF 50,000 AND THE
CORPORATION CALLS FOR THE PAYMENT
OF UNPAID SUBSCRIPTIONS. HE DID NOT
PAY ON THE DATE SPECIFIED. HIS SHARES
WERE DECLARED DELINQUENT AND
SUBJECTED TO DELINQUENCY SALE
WHERE THE CORPORATION MAY BID. THE
CORPORATION PRECISELY MADE A CALL
FOR THE PAYMENT OF THE UNPAID
SUBSCRIPTIONS OF THE STOCKHOLDERS
BECAUSE IT HAS BEEN INCURRING
LOSSES. MAY THE CORPORATION BID FOR
ITS SHARES?
No. One of the essential requisites is that it
must have Unrestricted Retained Earnings.
Q. CORPORATION EARNED 500,000
PROFITS. IT HAS DEBTS TO PAY 250,000.
THE CORPORATION DECIDED TO MAKE
USE OF THE REMAINING 250,000 AS
RESERVES FOR POSSIBLE
CONTINGENCIES. WHAT HAPPENS?
The entire 500,000 is now restricted. The
corporation cannot reacquire its own shares
because it must come from unrestricted
retained earnings. The corporation has no
surplus profits in this case.
POWER TO INVEST FUNDS IN ANOTHER
CORPORATION.
Section 42. Power to invest corporate funds in
another corporation or business or for any
other purpose. – Subject to the provisions of
this Code, a private corporation may invest its
funds in any other corporation or business or
for any purpose other than the primary
purpose for which it was organized when
approved by a majority of the board of directors
or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two
thirds (2/3) of the members in the case of non-
stock corporations, at a stockholder’s or
member’s meeting duly called for the purpose.
Written notice of the proposed investment and
the time and place of the meeting shall be
addressed to each stockholder or member at
his place of residence as shown on the books of
the corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder shall have appraisal
right as provided in this Code: Provided,
however, That where the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in the
articles of incorporation, the approval of the
stockholders or members shall not be
necessary. (17 1/2a)
It may do so with the concurrence or vote of at
least 2/3 of the Outstanding Capital Stock or
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
2/3 of the Members in case of Non-Stock
Corporation
The approval or consent of the stockholders
will not be required for its validity if it is
necessary to accomplish the primary purpose
of its organization.
In the case of Dela Rama v. Mao Sugar, Mao
Sugar was engaged in the production of sugar
and it invested its funds in Philippine Fibers
engaged in the manufacture of sugar bags. One
of the stockholders questioned the Board
Resolution investing the corporate funds in the
manufacture of sugar bags because it did not
secure the approval of the stockholders.
The Supreme Court held that Stockholders’
approval is not required if it is necessary to aid
in carrying out its primary purpose. The test is
whether or not a logical relation exists between
the act done and the corporate purpose in a
substantial and not in a remote fancible sense.
If there is, then the corporation may engage in
such an activity even without stockholders’
approval.
Q. WHAT IF THE CORPORATION INVEST ITS
FUNDS TO CARRY OUT ITS SECONDARY
PURPOSE? WILL STOCKHOLDERS’
APPROVAL BE REQUIRED?
EXAMPLE: CORPORATION IS ENGAGED IN
REALTY BUSINESS. ITS SECONDARY
PURPOSE IS CONSTRUCTION OF ANY OR
ALL TYPES OF BUILDINGS, TENEMENTS,
ETC. THE BOARD DECIDES TO INVEST ITS
FUNDS IN THE CONSTRUCTION BUSINESS.
WILL STOCKHOLDERS’ APPROVAL BE
REQUIRED FOR ITS VALIDITY?
Yes. Investment of corporate funds in any other
business or purpose other than the primary
purpose requires the intervention of the
stockholders. Thus, stockholders’ approval
would still be required if it is to carry out any of
the secondary purpose or purposes indicated in
the Articles of Incorporation.
POWER TO DECLARE DIVIDENDS
Section 43. Power to declare dividends. - The
board of directors of a stock corporation may
declare dividends out of the unrestricted
retained earnings which shall be payable in
cash, in property, or in stock to all
stockholders on the basis of outstanding stock
held by them: Provided, That any cash
dividends due on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses, while
stock dividends shall be withheld from the
delinquent stockholder until his unpaid
subscription is fully paid: Provided, further,
That no stock dividend shall be issued without
the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding
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capital stock at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital
stock, except: (1) when justified by definite
corporate expansion projects or programs
approved by the board of directors; or (2) when
the corporation is prohibited under any loan
agreement with any financial institution or
creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been secured; or
(3) when it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies. (n)
Of course, this power is granted only to stock
corporations because non-stock corporations
cannot allot their surplus profits by way of
dividends.
So this power to declare dividends is available
only to stock corporations. The requirement is
that it must have unrestricted retained
earnings. The corporation cannot thus, declare
dividends if it will use its capital or stated
capital.
The Board of Directors determine the nature of
the dividends to be declared whether they be in
cash, property or stock.
But if the Board decides to declare or pay stock
dividends the approval of at least 2/3 of the
Outstanding Capital Stock will be required for
its validity. Stock dividends, if they are to be
declared, require the consent of the
stockholders.
Q. WHAT ARE STOCK DIVIDENDS?
Those that are to be paid in the form of the
shares of stocks of the declarant corporation.
Example: X Corporation declares stock
dividends to be paid out of its unissued stocks.)
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Q. A COMPANY ACQUIRED SHARES OF
STOCKS OF SAN MIGUEL CORPORATION.
THEY BOUGHT 100,000 SHARES OF SAN
MIGUEL CORPORATION (SMC) WAY BACK
(5) YEARS AGO. A IS NOW ALREADY A
STOCKHOLDER OF SMC FOR 100,000
SHARES. IN THE COURSE OF TIME, SMC
DECLARED STOCK DIVIDENDS IN FAVOR
OF A, BEING ONE OF THEIR
STOCKHOLDERS AND A RECEIVED
ADDITIONAL 100,000 SHARES OF STOCKS
OF SMC. A NOW HAS 200,000 SHARES. IF A
CORPORATION WOULD WANT TO DECLARE
THESE 100,000 SHARES AS DIVIDENDS TO
ITS OWN STOCKHOLDERS, WILL
STOCKHOLDERS’ APPROVAL BE REQUIRED
FOR ITS VALIDITY?
No. These are not stock dividends, these are
Property dividends. It is not their shares that
were declared. It should have come from the
Declarant Corporation because property
dividends are those that are paid by way of
property where there is surplus in that form
like bonds, notes, evidences of indebtedness or
shares of stocks. Just like in this situation,
there was a surplus, so they can declare that
as property dividends.
Again, that is not Stock Dividends, therefore,
stockholders’ approval will not be required for
its validity.
Q. ARE SUBSCRIBERS TO SHARES OF
STOCKS NOT FULLY PAID ENTITLED TO
THE FULL PAYMENT OF THE DIVIDENDS
DUE THEM?
A SUBSCRIBED 100,000 SHARES BUT HE
STILL DID NOT PAY A SINGLE CENTAVO.
THE CORPORATION DECLARES P1.00 FOR
EVERY 1 SHARE HELD BY STOCKHOLDERS.
HOWEVER, HE STILL HASN’T PAID EVEN A
SINGLE CENTAVO TO HIS SUBSCRIPTIONS.
IS HE ENTITLED TO P100,000.00?
Yes. Unless, he has been declared Delinquent,
subscribers to shares of stock not fully paid
shall have all the rights of a stockholder, as
provided for in Section 72.
Section 43 speaks of the facts that if they are
Delinquent shareholders, they shall be entitled
nonetheless to dividends provided that it is by
way of cash dividends, but it shall first be
applied to the amount of his delinquency plus
costs and expenses, if any, and the remainder
be paid to him.
If it is by way of stock dividends, it shall be
withheld from him until he pays the amount of
his delinquency.
The amount or number of stocks that would be
paid to the stockholders as their shares of the
dividends will be based on their proportionate
interest in the corporation.
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Q. HOW DO YOU VALUE STOCK
DIVIDENDS? IS IT THE FAIR MARKET
VALUE AT THE TIME OF ITS DECLARATION
OR THE ACTUAL VALUE OF THE ORIGINAL
ISSUANCE?
In PLDT vs. National Telecommunications
Company, the Supreme Court held that it
cannot be said that there is no consideration,
because there must be a consideration for the
issuance of shares of stocks, otherwise, there
would be watered stocks involved in the
issuance of stock dividends.
Dividends, regardless of the form they are
declared, whether they be cash, property or
stock, are valued at the amount of the declared
dividend taken from the unrestricted retained
earnings of a corporation.
Thus, the value in the declaration in case of
Stock dividends is the actual value of the
original issuance of the said stocks. In case of
Stock Dividends, it is akin to a forced purchase
of stocks.
In case of stock dividends, it is the amount that
the corporation transfers from its surplus
profits account to its capital account. This is
why the declaration of dividends is also called
as Capitalization of unrestricted retained
earnings, in the sense that nothing will be lost
in the net assets of the corporation.
Example:
Corporation has 1M ACS. It made 1M
unrestricted retained earnings. 2M total assets.
The corporation decides to declare this 1M as
stock dividends.
This may now form part of the capital stock of
the corporation.
Capitalization of Unrestricted retained
earnings, the amount P1M did not leave the
coffers of the corporation. It remained as part
and parcel of the assets of the corporation.
What was issued to the stockholders will only
be a piece of paper the Stock certificate. The
declaration of the dividends may or may not
effect a decrease in the Total Assets of a
corporation. Even before they declared the 1M
dividends, it was already an asset of the
corporation because it is the corporation who
earned it. It forms part of the capital. There is
no corresponding decrease in the assets of the
corporation if it is by way of Stock dividends.
However, if it is by way of cash or property
dividends, the 1M was declared as cash
dividends, then the 1M will disappear. There is
a corresponding decrease in the total assets of
the Corporation.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Q. MAY THE STOCKHOLDERS COMPEL THE
BOARD OF DIRECTORS TO DECLARE
DIVIDENDS?
We have to qualify.
Corporations are prohibited under sec. 43, 2nd
paragraph. From retaining surplus profits or
Unrestricted Retained Earnings in excess of
100% of their paid-up capital.
NB: That the basis is paid-up capital not the
subscribed or authorized capital
Q. THE CORPORATION HAS PAID UP
CAPITAL IS 1M AND THEY EARNED
SURPLUS PROFITS OF 2M. MAY IT BE
COMPELLED TO DECLARE DIVIDENDS?
GR: Yes. At least to the same extent of more
than 100% of 1M. They may be forced to
declare 1m as dividends either by way of
property, cash or any combination of them.
XPN:
1. Where there is a definitive expansion
program approved by the Board;
2. When the corporation is prohibited under
any loan agreement with any financial
institution or creditor from declaring
dividends without securing his/its consent
and such consent has not yet been secured;
3. When it is clearly shown that such
retention is necessary under special
circumstances as when there is a need for
special reserves for possible contingencies;
Q. WHAT IF IT IS NOT IN EXCESS OF 100%
OF THE PAID UP CAPITAL? MAY THE
BOARD BE COMPELLED TO PAY OR
DECLARE DIVIDENDS?
GR: No
XPN: Preferred shares. Preferred shares may be
granted the right or the preference to be paid
their dividends particularly if it is in the
Mandatory-If-Earned type of preferred shares,
those that are mandated to be paid dividends
every year that profits are earned. So if there is
that type of share, then he can compel the
corporation that he be paid his dividends due
to contractual obligations.
POWER TO ENTER INTO MANAGEMENT
CONTRACT
Section 44. Power to enter into management
contract. – No corporation shall conclude a
management contract with another corporation
unless such contract shall have been approved
by the board of directors and by stockholders
owning at least the majority of the outstanding
capital stock, or by at least a majority of the
members in the case of a non-stock
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corporation, of both the managing and the
managed corporation, at a meeting duly called
for the purpose: Provided, That (1) where a
stockholder or stockholders representing the
same interest of both the managing and the
managed corporations own or control more
than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing
corporation; or (2) where a majority of the
members of the board of directors of the
managing corporation also constitute a
majority of the members of the board of
directors of the managed corporation, then the
management contract must be approved by the
stockholders of the managed corporation
owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by
at least two-thirds (2/3) of the members in the
case of a non-stock corporation. No
management contract shall be entered into for
a period longer than five years for any one
term.
The provisions of the next preceding paragraph
shall apply to any contract whereby a
corporation undertakes to manage or operate
all or substantially all of the business of
another corporation, whether such contracts
are called service contracts, operating
agreements or otherwise: Provided, however,
That such service contracts or operating
agreements which relate to the exploration,
development, exploitation or utilization of
natural resources may be entered into for such
periods as may be provided by the pertinent
laws or regulations. (n)
It is now an express power conferred to all
corporations registered under the provisions of
the Code.
The corporation may enter into a management
contract by:
(1) Majority vote of the members of the Board
of Directors
(2) Subject to the vote of the stockholders
owning or representing a majority of the
Outstanding Capital Stock.
Higher voting percentage is required, 2/3 of the
Outstanding Capital Stock is required:
(1) When a stockholder or stockholders
representing the same interest of the
managing and managed corporation owns
or controls more than 1/3 of the total
outstanding stocks entitled to vote, of the
managing corporation;
(2) when a majority of the Board of Directors
of the managing corporation also
constitutes a majority of the members of
the Board of the managed corporation
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
ULTRA VIRES ACTS
Section 45. Ultra vires acts of corporations. –
No corporation under this Code shall possess
or exercise any corporate powers except those
conferred by this Code or by its articles of
incorporation and except such as are necessary
or incidental to the exercise of the powers so
conferred. (n)
Those that cannot be performed or executed by
a corporation because they are not within the
express, inherent or implied powers, as defined
by its Charter or Articles of Incorporation)
A corporation can only do such acts and things
as the law allows it to do; inclusive of the
purpose or purposes for which it is formed or
organized.
If it acts beyond such powers and authority,
the act performed is “Ultra Vires” act:
(1) Allowing a collateral attack on the part of
the contracting parties either on the
corporation itself, or the 3rd party dealing
with it; and
(2) Avoid liability therefrom.
XPN:
(1) Clearly beneficial to the company;
(2) Necessary to promote the interest/welfare
of the corporation or even its employees; or
(3) In the legitimate furtherance of its
business.
Any activity or transaction which is merely
incidental or auxiliary to the main business of
the corporation may be rightfully undertaken.
There must be a Logical Relation between the
act done and the corporate purpose or
purposes, in order that the corporation may
undertake the same. If there is, then it is
within the implied powers of the corporation
and thus, not ultra vires. (Montelibano v.
Bacolod Mortia Milling)
In the case of Carlos vs. Mindoro Sugar, this
case involves the PhilTrust. PhilTrust, as the
name implies, is engaged in the buying, selling
and disposition of bonds, notes, evidences of
indebtedness and other forms of securities.
PhilTrust guaranteed the payment of these
bonds. Later on, however, PhilTrust did not
want to comply with the guarantees claiming
that it was an ultra vires act.
The Supreme Court held that it is not Ultra
Vires for PhilTrust to guarantee payment
because it would make the bonds, notes,
evidences of indebtedness more readily
marketable.
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It is in furtherance of the purpose of its
business of acquiring, selling or disposing the
bonds, notes or evidences of indebtedness.
Even if they may be Ultra Vires, if it is not
illegal per se, they may become binding and
enforceable either by:
1.) Ratification, express or implied;
2.) Estoppel.
BY LAWS
Section 46. Adoption of by-laws. – Every
corporation formed under this Code must,
within one (1) month after receipt of official
notice of the issuance of its certificate of
incorporation by the Securities and Exchange
Commission, adopt a code of by-laws for its
government not inconsistent with this Code.
For the adoption of by-laws by the corporation
the affirmative vote of the stockholders
representing at least a majority of the
outstanding capital stock, or of at least a
majority of the members in case of non-stock
corporations, shall be necessary. The by-laws
shall be signed by the stockholders or members
voting for them and shall be kept in the
principal office of the corporation, subject to
the inspection of the stockholders or members
during office hours. A copy thereof, duly
certified to by a majority of the directors or
trustees countersigned by the secretary of the
corporation, shall be filed with the Securities
and Exchange Commission which shall be
attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed
prior to incorporation; in such case, such by-
laws shall be approved and signed by all the
incorporators and submitted to the Securities
and Exchange Commission, together with the
articles of incorporation.
In all cases, by-laws shall be effective only
upon the issuance by the Securities and
Exchange Commission of a certification that
the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall
not accept for filing the by-laws or any
amendment thereto of any bank, banking
institution, building and loan association, trust
company, insurance company, public utility,
educational institution or other special
corporations governed by special laws, unless
accompanied by a certificate of the appropriate
government agency to the effect that such by-
laws or amendments are in accordance with
law. (20a)
Section 47. Contents of by-laws. – Subject to
the provisions of the Constitution, this Code,
other special laws, and the articles of
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
incorporation, a private corporation may
provide in its by-laws for:
1. The time, place and manner of calling and
conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and
conducting regular or special meetings of the
stockholders or members;
3. The required quorum in meetings of
stockholders or members and the manner of
voting therein;
4. The form for proxies of stockholders and
members and the manner of voting them;
5. The qualifications, duties and compensation
of directors or trustees, officers and employees;
6. The time for holding the annual election of
directors of trustees and the mode or manner
of giving notice thereof;
7. The manner of election or appointment and
the term of office of all officers other than
directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the
manner of issuing stock certificates; and
10. Such other matters as may be necessary for
the proper or convenient transaction of its
corporate business and affairs. (21a)
Section 48. Amendments to by-laws. – The
board of directors or trustees, by a majority
vote thereof, and the owners of at least a
majority of the outstanding capital stock, or at
least a majority of the members of a non-stock
corporation, at a regular or special meeting
duly called for the purpose, may amend or
repeal any by-laws or adopt new by-laws. The
owners of two-thirds (2/3) of the outstanding
capital stock or two-thirds (2/3) of the
members in a non-stock corporation may
delegate to the board of directors or trustees
the power to amend or repeal any by-laws or
adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees
to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked
whenever stockholders owning or representing
a majority of the outstanding capital stock or a
majority of the members in non-stock
corporations, shall so vote at a regular or
special meeting.
Whenever any amendment or new by-laws are
adopted, such amendment or new by-laws shall
be attached to the original by-laws in the office
of the corporation, and a copy thereof, duly
certified under oath by the corporate secretary
and a majority of the directors or trustees,
shall be filed with the Securities and Exchange
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Commission the same to be attached to the
original articles of incorporation and original
by-laws.
The amended or new by-laws shall only be
effective upon the issuance by the Securities
and Exchange Commission of a certification
that the same are not inconsistent with this
Code. (22a and 23a)
All corporations registered under the general
provisions of this Code must adopt and file its
by-laws with the SEC, within a period of (1)
month from the date of its registration, if not
filed simultaneously with the Articles of
Incorporation.
However, the By-Laws may be adopted and
filed prior to incorporation or after
incorporation.
If it is prior to the incorporation, the SEC, as a
matter of policy, will require their simultaneous
filing with the Articles of Incorporation;
The law uses the word ‘must’ adopt and file a
by-law.
Q. WHAT COULD BE THE EFFECT OF THE
NON-FILING OF THE BY-LAW OR THE NON-
ADOPTION OF THE CORPORATE BY-LAWS
WITHIN THE PERIOD SPECIFIED BY LAW,
WITHIN 30 DAYS FROM DATE OF ITS
INCORPORATION? WILL IT RESULT TO THE
AUTOMATIC DISSOLUTION OF THE
CORPORATION?
No. The word ‘must’ is not always imperative.
The tendency is to interpret the word as a
reasonable construction of the statute in which
it is used will demand or require. The
deliberations of the legislature would show that
it was not the intention to make it imperative.
Taken as a whole and under the principle that
“the best interpreter is the statute itself”,
Section 46 reveals the intent of the legislature
to attach a directory and not a mandatory
meaning to the word “must”.
Although the Corporation Code requires the
filing of the by-laws within the period of 1
month, it does not expressly provide for the
consequences of its non-filing.
However, the consequences of non-filing have
been rectified by P.D 902-A which granted the
SEC then the power to:
Suspend or revoke after proper notice and
hearing, among others, the certificate of
registration of a corporation for its failure to file
the by-laws within the required period.
Failure to file and adopt by-laws would thus,
not result to the automatic dissolution of the
corporation. In this particular case, the
Corporation Code and P.D 902-A are statutes
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
in pari materia and should therefore be read,
interpreted, construed and harmonized with
one another.
P.D 902-A is categorical and specific: it is
merely a GROUND for suspension/revocation
of corporate franchise. Meaning, there must be
Notice and Hearing. (Loyola Grand Villas
Homeowners Association v. CA)
The by-laws will become valid and effective
only:
Upon the approval of the SEC to the effect that
it is not contrary to law.
The SEC must go through the provisions of the
by-laws and ensure that they are not contrary
to law.
REQUISITES OF A VALID BY-LAWS
1. It must not be contrary to Law, Morals,
Public Order or Public Policy.
There was a by-law provision which granted the
directors compensation even after they have
served their term of office. This is contrary to
law.
Any provision in the by-law that runs counter
to the provisions of the Corporation Code is
deemed as if it is not written at all. (Barretto v.
La Previsoria)
Election of directors who are not members of
the Corporation.
This is also not valid. It is contrary to law.
(Grace Christian High School v. CA)
2. It must not be inconsistent with the Articles
of Incorporation.
Example:
Q. ARTICLES OF INCORPORATION STATES
THAT THERE SHALL BE SEVEN MEMBERS
OF THE BOARD BUT IN THE BY-LAWS, IT
WAS STATED THAT THERE SHALL BE NINE
MEMBERS OF THE BOARD. IN CASE OF
CONFLICT, WHICH SHOULD PREVAIL?
That written in the Articles of Incorporation
should prevail because the Articles of
Incorporation is a 3-fold contract. The by-laws
are mere rules of governance of the
corporation.
THREE FOLD CONTRACT
a) Between and among the stockholder,
members, directors and officers;
b) Between them or any of them and the
corporation;
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c) The corporation and the State, insofar as
its right to exist as such corporation is
concerned.
.
3. It must be general and uniform in its effect
and applicable to all alike or similarly
situated
4. It must not impair obligations and
contracts or vested rights.
5. It must be reasonable. (Gokungwei v. SEC)
By-laws are also subject to amendment by:
(1) The majority vote of the directors. Subject to
the approval or ratification of at least a
majority of the stockholders owning or
representing at least majority of the
Outstanding Capital Stock
(2) Amendment of the Articles of Incorporation
requirement is 2/3 of the Outstanding Capital
Stock;
Amendment of the Article of Incorporation may
take effect:
(1) Upon the approval of the SEC
In the case of By-Laws, it will never become
valid and effective until and unless the SEC
gives its stamp of approval, as provided for in
Section 48.
The by-laws and the Articles of Incorporation
are (2) separate and distinct document.
MEETINGS
Section 49. Kinds of meetings. – Meetings of
directors, trustees, stockholders, or members
may be regular or special. (n)
Two Types of meetings:
1. Board of Directors or Trustees’ Meeting
2. Stockholders’ Meeting
Section 50. Regular and special meetings of
stockholders or members. - Regular meetings of
stockholders or members shall be held
annually on a date fixed in the by-laws, or if
not so fixed, on any date in April of every year
as determined by the board of directors or
trustees: Provided, That written notice of
regular meetings shall be sent to all
stockholders or members of record at least two
(2) weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings of stockholders or members
shall be held at any time deemed necessary or
as provided in the by-laws: Provided, however,
That at least one (1) week written notice shall
be sent to all stockholders or members, unless
otherwise provided in the by-laws.
AUSL/CORPORATION LAW
Notice of any meeting may be waived, expressly
or impliedly, by any stockholder or member.
Whenever, for any cause, there is no person
authorized to call a meeting, the Securities and
Exchange Commission, upon petition of a
stockholder or member on a showing of good
cause therefor, may issue an order to the
petitioning stockholder or member directing
him to call a meeting of the corporation by
giving proper notice required by this Code or by
the by-laws. The petitioning stockholder or
member shall preside thereat until at least a
majority of the stockholders or members
present have chosen one of their number as
presiding officer. (24, 26)
Whether they be Board of Directors or Trustees
Meeting or Stockholders’ Meeting, there are two
types:
1. Regular
2. Special
REQUISITES FOR A VALID MEETING
1. Insofar as stockholders’ or members’
meetings are concerned, under Section 50,
it must be held on the date fixed in the By-
Laws or in accordance with law;
If there is no date fixed in the by-laws it shall
be on any date of April as may be determined
by the Board of Directors.
2. Prior Notice must be given;
In stockholders’ meetings, the requirement is
that, notice must be sent two weeks before the
annual or regular meeting;
If it is a special meeting one week before the
meeting;
NB: The two weeks or one week requirement of
sending out notices may be shortened or
extended validly by a provision in the Articles of
Incorporation or By-laws;
In the case of Directors v. Tan, the by-laws of
the corporation required that notices shall be
sent at least five days, which is less than 1
week prior to the meeting.
The notices were posted only two days before
the scheduled meeting. One of the stockholders
questioned the validity of the resolutions
passed in that meeting which was actually
election of the board of directors.
The Supreme Court ruled that the meeting is
invalid. The manner and mode of sending out
notices must be complied with.
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3. It must be held at the Proper Place
Section 51. Place and time of meetings of
stockholders of members. – Stockholder’s or
member’s meetings, whether regular or special,
shall be held in the city or municipality where
the principal office of the corporation is located,
and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall,
for purposes of this section, be considered a
city or municipality.
Notice of meetings shall be in writing, and the
time and place thereof stated therein.
All proceedings had and any business
transacted at any meeting of the stockholders
or members, if within the powers or authority
of the corporation, shall be valid even if the
meeting be improperly held or called, provided
all the stockholders or members of the
corporation are present or duly represented at
the meeting. (24 and 25)
It must be held in the city or municipality
where the principal office is located or
established and as far as practicable, at the
principal office of the corporation
Section 93. Place of meetings. – The by-laws
may provide that the members of a non-stock
corporation may hold their regular or special
meetings at any place even outside the place
where the principal office of the corporation is
located: Provided, That proper notice is sent to
all members indicating the date, time and place
of the meeting: and Provided, further, That the
place of meeting shall be within the Philippines.
Section 93 empowers a Non-Stock Corporation
to validly provide in their by-laws that the
Members’ Meetings may be held anywhere
within the Philippines;
Provided, that proper notice is sent to all
members
There is no such grant or authority granted
empowering a Stock Corporation to validly
provide in their Articles or by-laws that
stockholders meetings may be held anywhere
within the Philippines.
If there is no provision in the by-laws of the
Non-Stock Corporation empowering to call
meetings even beyond the territorial
boundaries of the city or municipality where it
has its Principal Office, the rule regarding
Stock Corporations will be applicable, as
provided for in Section 87.
It merely empowers the Non-Stock Corporation
the power and authority to validly provide in
the by-laws that meetings of members may be
held ANYWHERE in the Philippines.
Metro Manila is considered as one single city or
municipality
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
If the principal office is located anywhere in
Metro Manila, they can also hold their meetings
anywhere within Metro Manila.
Q. SAN MIGUEL CORPORATION HAS ITS
PRINCIPAL OFFICE IN MANDALUYONG CITY
BUT THEY ARE HOLDING THEIR MEETINGS
AT THE PICC GROUNDS, PASAY CITY. IS IT
VALID?
Yes. Because Metro Manila is considered as
one single city or municipality.
The same holds true in cases of Non-Stock
Corporations.
4. It must be called by the proper person or
officer.
Section 54. Who shall preside at meetings. –
The president shall preside at all meetings of
the directors or trustee as well as of the
stockholders or members, unless the by-laws
provide otherwise. (n)
Meetings are to be called by the President or
the Secretary, on orders of the President,
unless the By-laws provide for a different
person.
Q. IF THERE IS A PERSON AUTHORIZED TO
CALL THE MEETING, BUT HE FAILS,
REFUSES OR NEGLECTS TO DO SO, MAY
THE STOCKHOLDERS PETITION THE
PROPER FORUM FOR AN AUTHORITY TO
CALL THE SAME?
EXAMPLE: THE PRESIDENT IS THE ONE
AUTHORIZED TO CALL THE MEETING. HE
IS THERE AT THE PRINCIPAL OFFICE OF
THE CORPORATION EVERYDAY. THE
STOCKHOLDERS WANTED TO CALL A
MEETING BECAUSE THEY FOUND OUT
THAT THE FINANCIAL STATEMENTS THAT
WERE PRESENTED TO THEM IN THE LAST
STOCKHOLDERS’ MEETING 2 WEEKS AGO
CONTAIN DATA REGARDING MISUSE AND
MISAPPLICATION OF CORPORATE FUNDS.
SO, THEY WANTED TO CLARIFY THE SAME
WITH ALL OTHER STOCKHOLDERS
SIMILARLY SITUATED. BUT THE
PRESIDENT REFUSE TO CALL THE
MEETING BECAUSE HE KNOWS THAT HE
WILL BE FOUND OUT AS THE ONE BEHIND
THE MISUSE AND MISAPPLICATION OF THE
CORPORATE FUNDS. WHAT IS THE
APPROPRIATE REMEDY? MAY THE
STOCKHOLDERS PETITION THE PROPER
FORUM FOR AN AUTHORITY TO CALL THE
MEETING?
Yes. It must be by way of Mandamus. The clear
intent of the legislature when they deleted the
phrase “if the officer fails or refuses to call the
same” is a stockholder can no longer be
authorized by the court to call the meeting and
preside thereat. (Afable v. SEC)
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5. The quorum and voting requirements must
be complied with.
Section 52. Quorum in meetings. – Unless
otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the
stockholders representing a majority of the
outstanding capital stock or a majority of the
members in the case of non-stock corporations.
GR: The stockholders owning or representing at
least a majority of the Outstanding Capital
Stock would constitute a quorum;
XPN: If the voting requirement would be more
than a majority necessarily, the quorum
requirement must also be at least equal to the
voting requirement imposed by the law
The VOTING requirement would VARY.
2/3 in some instances and majority in other
instances.
Q. DO YOU INCLUDE NON-VOTING SHARES
IN ARRIVING AT THE VOTING
REQUIREMENT IMPOSED BY THE LAW?
Section 6 provides that non-voting shares are
not included in determining the voting
requirement imposed by the Code, unless:
They are nonetheless entitled to vote under the
penultimate paragraph of Section 6
If they fall under any of the enumeration
provided in Section 6, then they are included in
the determination of the voting requirement
imposed by the law.
Q. MANAGEMENT CONTRACT. IF THERE
ARE 1M SHARES, 200,000 ARE NON-
VOTING, WHAT IS MAJORITY VOTE?
It shall be based on the 800,000 only, because
you exclude the non-voting shares. They are
not entitled to vote.
Q. AMENDMENT OF THE ARTICLES, 1M
OUTSTANDING STOCKS; 200,000 NON-
VOTING; WHAT WOULD BE THE BASIS OF
YOUR 2/3? WILL IT BE 2/3 OF 800,000 OR
2/3 OF 1M?
2/3 of 1M, because even if they are non-voting
shares, Section 6 states that they are
nonetheless entitled to vote in cases of
amendments of the Articles of Incorporation.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
NB: Five Essential requisites for a valid Meeting
1. It must be held on the date fixed in the by-
laws or in accordance with law;
2. Prior notice must be given;
3. It must be held at the proper venue;
4. It must be called by the proper
person/officer; and
5. The quorum and voting requirements must
be complied with.
Q. A MEETING WAS HELD ON JUNE 10. THE
BY-LAWS PROVIDE THAT THE ANNUAL
MEETING OF THE STOCKHOLDERS SHALL
BE ON THE LAST SUNDAY OF MAY. NOTICE
REQUIREMENT WAS DONE 5 DAYS BEFORE
THE MEETING. PLACE OF PRINCIPAL
OFFICE IS IN QUEZON CITY BUT THE
MEETING WILL BE HELD IN BAGUIO CITY.
VICE-PRESIDENT CALLED THE MEETING.
WHAT WOULD BE THE RESULT OF THE
MEETING IMPROPERLY HELD OR CALLED?
WHAT WOULD BE THE STATUS OF ANY
RESOLUTION PASSED BY THE
STOCKHOLDERS AT A MEETING
IRREGULARLY OR ILLEGALLY HELD
AND/OR CONDUCTED? WILL THEY HAVE
ANY BINDING FORCE OR EFFECT?
GR: Not Valid
XPN: It may have a valid force and effect.
Section 51, 2nd paragraph provides that any
meeting improperly held or called shall
nonetheless be valid if all the stockholders or
members are present or duly represented.
DIRECTORS’ OR TRUSTEES’ MEETINGS
Directors normally would refer to the governing
board of a Stock Corporation. In Non-Stock
corporations they are normally called the Board
of Trustees.
However, Non-Stock Corporations and other
special corporations may their governing Board
by any other name.
Section 138. Designation of governing boards.
– The provisions of specific provisions of this
Code to the contrary notwithstanding, non-
stock or special corporations may, through
their articles of incorporation or their by-laws,
designate their governing boards by any name
other than as board of trustees. (n)
There’s nothing likewise that bar or prevent
Non-Stock corporations from using the term
‘directors’ to designate their governing board.
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TWO TYPES OF DIRECTORS MEETINGS
1. Regular - those that are held monthly or as
may be provided for in the by-laws;
2. Special - at any time upon call of the
President as provided for in the by-laws;
VENUE OF MEETINGS OF DIRECTORS
Section 53. Regular and special meetings of
directors or trustees. – Regular meetings of the
board of directors or trustees of every
corporation shall be held monthly, unless the
by-laws provide otherwise.
Special meetings of the board of directors or
trustees may be held at any time upon the call
of the president or as provided in the by-laws.
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-laws
provide otherwise. Notice of regular or special
meetings stating the date, time and place of the
meeting must be sent to every director or
trustee at least one (1) day prior to the
scheduled meeting, unless otherwise provided
by the by-laws. A director or trustee may waive
this requirement, either expressly or impliedly.
GR: Anywhere within or without the Philippines
XPN: Unless otherwise provided for in the by-
laws
QUORUM AND VOTING REQUIREMENT IN
DIRECTORS’ MEETINGS
Majority of their number as fixed in the articles
of incorporation would constitute a Quorum.
Majority of those present at which there is a
quorum would constitute Voting Requirement
Q. MAY THE VOTE OF 3 MEMBERS OF A 7-
MAN GOVERNING BOARD PASS A VALID
CORPORATE ACT OR TRANSACTION?
GR: Yes. Because the voting requirement is
majority of those present at which there is a
quorum.
XPN:
(1) Election of corporate officers because the
law requires a majority vote of the entire
number of the board.
(2) Unless the Articles of Incorporation or By-
Laws provide for a higher quorum or voting
requirement.
Directors are elected because of their business
acumen or their expertise in the day-to-day
management of the corporate affairs.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Q. SHOULD THEY BE PHYSICALLY PRESENT
DURING DISCUSSIONS OF MATTERS THAT
IS BROUGHT BEFORE THEM?
No. Because of the E-Commerce Law, Directors
can meet via teleconference or video
conference.
Q. MAY THE DIRECTORS DURING
DIRECTORS’ MEETING VOTE BY PROXY?
No. Sec. 25 is very clear and specific, Directors
cannot vote by proxy in directors’ meetings.
Q. THE AGENDA IN THE STOCKHOLDERS’
MEETING IS ELECTION OF DIRECTORS.
MR. A IS A DIRECTOR AND HE CANNOT
ATTEND THE SAID MEETING SO HE SENT A
PROXY. CAN HE VOTE BY PROXY?
Yes, because it is a stockholders’ meeting.
What Sec. 25 is saying is that they cannot vote
by proxy in Directors’ meetings.
So if they are acting as ordinary stockholders,
then they can vote by proxy.
Q. WHAT IS THE EFFECT OF DIRECTORS’
MEETING IF IT IS IMPROPERLY HELD OR
CALLED?
GR: They are without any force and effect.
XPN: They may be ratified expressly or
impliedly, or even by estoppel.
Express, if there is a subsequent formal
meeting of the board ratifying the act or
contract.
Implied, from the actuations of the responsible
corporate officers/directors
In the case of Lopez Realty v. Fontecha, one
of the directors was not notified of the meeting
for the purpose of granting certain benefits to
the employees, gratuity pay to the employees. A
resolution was passed granting the same. The
particular director concerned was not notified
because he was abroad. He said that the
resolution is without force and effect on the
ground of lack of notice.
The Supreme Court, however, found out that
the objecting director knew of the resolutions
passed and in fact, she was the very person
who signed the first 2 vouchers to pay the
gratuity pay arising out of the questioned
resolution. Therefore, she is estopped.
STOCKS AND STOCKHOLDERS
A person can be a stockholder, whether natural
or juridical, only in 3 ways:
1. By a contract of subscription;
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2. By acquisition or purchase of shares from
existing stockholders;
3. By purchase or acquisition of treasury
shares.
Section 60. Subscription contract. – Any
contract for the acquisition of unissued stock
in an existing corporation or a corporation still
to be formed shall be deemed a subscription
within the meaning of this Title,
notwithstanding the fact that the parties refer
to it as a purchase or some other contract. (n)
Subscription refers to:
A contract for the acquisition of shares of
stocks of an existing corporation or a
corporation still to be formed and the
agreement to pay the same.
Any contract for the acquisition of unissued
stocks in an existing corporation or a
corporation still to be formed, is deemed a
Subscription Contract, no matter how the
parties will refer to it.
Example:
Q. 1M ACS; 250,000 SUBSCRIBED CAPITAL;
THERE’S A FREE PORTION OF 750,000
STOCKS, THEY ARE UNISSUED STOCKS OF
THE CORPORATION. IF A PERSON WILL
WANT TO ACQUIRE A PART AND PARCEL
OF THAT FREE PORTION OF THE UNISSUED
STOCKS, MAY HE BUY OR PURCHASE IT?
Yes. If that is his intention, the law says—that
is a subscription contract, no matter how it
may be referred to.
There’s no longer such thing as becoming a
stockholder by purchase of unissued stocks of
a corporation.
As long as it came from the unissued stock of a
corporation that is a subscription.
The unambiguous interpretation is that the
person acquiring the unissued stock of a
corporation immediately becomes a stockholder
from the effectivity of the contract and acquires
all the rights and the corresponding liability to
pay the full value of the shares.
The unpaid portion of the subscription will
become a debt owing to the corporation and
just like any other indebtedness, he is bound to
pay the same.
Unlike in the case of a sale or purchase:
Under the Civil Law, the obligation of the
parties would be reciprocal and dependent on
one another.
If the corporation is unable or no longer in a
position to issue a valid stock certificate, you
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
cannot compel the acquiring stockholder to pay
the unpaid portion thereof.
Q. A CORPORATION IS ENGAGED IN THE
MANUFACTURING. THERE IS UNISSUED
STOCK IN THE CORPORATION, 750,000
UNISSUED STOCKS. A PERSON WANTS TO
ACQUIRE 100,000 OF THE 750,000
UNISSUED STOCKS. THE AGREEMENT
STIPULATES THAT, “HE WILL NOT BECOME
A STOCKHOLDER UNTIL AND UNLESS HE
PAYS THE FULL AMOUNT OF THE
ACQUISITION COST”. HE ONLY PAID 50%.
THE CORPORATION WAS DESTROYED BY
FIRE INCLUDING ALL ITS PROPERTIES
TURNING EVERYTHING INTO ASHES. MAY
THE CORPORATION COMPEL THE
ACQUIRING STOCKHOLDER TO PAY THE
BALANCE OF ITS ACQUISITION COST
DESPITE THE FACT THAT HE WILL NOT BE
CONSIDERED AS ITS STOCKHOLDER UNTIL
HE PAYS ITS ACQUISITION COST IN FULL?
Under the Civil Code, he should not be liable to
pay because there is no consideration. The
certificate of stock that will be issued by the
corporation is a mere scrap of paper. It is
valueless.
But under Section 60 of the Corporation Code
No matter how the parties refer to it, a
Subscription Contract.
The acquiring stockholder is much bound to
pay the debt owing to the corporation. Unpaid
subscriptions will be a debt owing to the
corporation.
NB: There is no distinction between purchase
or sale and/or subscription insofar as unissued
stocks of the corporation is concerned.
Section 62. Consideration for stocks. – Stocks
shall not be issued for a consideration less
than the par or issued price thereof.
Consideration for the issuance of stock may be
any or a combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually
received by the corporation and necessary or
convenient for its use and lawful purposes at a
fair valuation equal to the par or issued value
of the stock issued;
3. Labor performed for or services actually
rendered to the corporation;
4. Previously incurred indebtedness of the
corporation;
5. Amounts transferred from unrestricted
retained earnings to stated capital; and
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6. Outstanding shares exchanged for stocks in
the event of reclassification or conversion.
Where the consideration is other than actual
cash, or consists of intangible property such as
patents of copyrights, the valuation thereof
shall initially be determined by the
incorporators or the board of directors, subject
to approval by the Securities and Exchange
Commission.
Shares of stock shall not be issued in exchange
for promissory notes or future service.
The same considerations provided for in this
section, insofar as they may be applicable, may
be used for the issuance of bonds by the
corporation.
The issued price of no-par value shares may be
fixed in the articles of incorporation or by the
board of directors pursuant to authority
conferred upon it by the articles of
incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at
least a majority of the outstanding capital stock
at a meeting duly called for the purpose. (5 and
16)
Shares of stocks cannot be issued for a
consideration less than its par or issued value.
If they are issued below the par/issued value,
they are considered as “watered stocks”.
Watered stock are shares of stocks issued by
the corporation as fully paid up when in fact,
the full value thereof has not been paid or
promised to be paid.
Example:
Par value of the shares is P1.00 per share.
The corporation CANNOT issue it for only P0.80
per share, otherwise, it will be considered as
watered stock.
Q. THE PAR VALUE OF THE SHARES is
P1.00 PER SHARE; BUT THE FAIR MARKET
VALUE IN THE COURSE OF ITS OPERATION
IS ALREADY P12.00 PER SHARE. MAY IT BE
ISSUED FOR A CONSIDERATION OF P10.00
WITHOUT VIOLATING THE RULE AGAINST
WATERED STOCKS?
Yes, it may be issued. For the purpose of
determining whether or not there is stock
watering, it is the par value, not the fair market
value.
Q. WHAT IS THE EXTENT OF THE
LIABILITY OF DIRECTORS AND THE
STOCKHOLDER HOLDING THE WATERED
STOCK?
Those voting or consenting to the issuance of
watered stock or those having knowledge
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
thereof but do not interpose their written
objections with the corporate secretary are
Solidarily Liable with the stockholder to the
corporation and its stockholders and its
creditors for the difference between the par
value/issued value and the amount for which
they were actually issued.
Even passive directors or officers may be held
Solidarily Liable with the stockholder
concerned if they have knowledge of the
issuance of the watered stock but did not
interpose their written objections with the
corporate secretary.
Q. 10M AUTHORIZED CAPITAL STOCK,
DIVIDED INTO 1M PER COMMON SHARES
WITH A PAR VALUE OF P1.00 PER SHARE
AND 9M = NO PAR VALUE SHARES;
AMOUNT SUBSCRIBED IS 500,000 SHARES
WITH PAR VALUE, 4M SHARES NO PAR
VALUE SHARES;
A WANTS TO ACQUIRE THE REMAINING
500,000 OF THE PAR VALUE SHARES AND
THE CORPORATION ISSUES IT IN FAVOR
OF A FOR ONLY P0.80.
THERE’S A DIFFERENCE OF P0.20. P0.20 X
500,000 IS P100,000, IT IS THE WATER IN
THE 500,000 SHARES INVOLVED.
THE NO PAR VALUE SHARES OF 4M HAS
BEEN DULY SUBSCRIBED. A ALSO WANTS
TO ACQUIRE 1M NO PAR SHARES.
UNDER THE RULES IN CORPORATION LAW,
THE NO PAR VALUE SHARES SHOULD NOT
BE ISSUED AT LESS THAN P5.00 PER
SHARE AND FOR PURPOSES OF
DETERMINING HOW MUCH SHOULD BE THE
ISSUE PRICE OF A NO PAR VALUE SHARE,
IT IS DETERMINED BY THE PROVISION IN
THE ARTICLES OF INCORPORATION. THE
ARTICLES OF INCORPORATION MAY
PROVIDE THAT IT SHALL BE DETERMINED
BY THE BOARD OF DIRECTORS.
ASSUME THAT THE BOARD OF DIRECTORS
DECIDED THAT THE ISSUE PRICE OF THE
NO PAR VALUE SHARES SHALL BE P10.00
PER SHARE. A, IN ACQUIRING 1M NO PAR
VALUE SHARES, HE ACQUIRES IT FOR
ONLY P9.00 PER SHARE, A DIFFERENCE OF
P1.00. THERE’S ALSO STOCK WATERING
TO THE EXTENT OF P1.00 PER SHARE AND
THEREFORE, 1M IS THE “WATER” IN THE
1M NO PAR VALUE SHARE. IS A LIABLE TO
PAY THE DIFFERENCE?
1st scenario, Yes, A is liable solidarily with the
directors and officers concerned to pay the
difference between the P1.00 and P0.80.
2nd scenario, No. A is not liable. Under Section
6, No par value shares, once issued, are
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deemed fully paid and non-assessable. The
directors are the only ones who are liable.
The consideration for the issuance of shares of
stocks may either be any combination of the
following:
1. Actual cash paid
2. Property, Tangible or Intangible, actually
received by the corporation
3. Labor or Services actually rendered
4. Previously incurred indebtedness
5. Stock Dividends, amounts transferred from
unrestricted retained earnings to stated
capital.
6. Outstanding stocks exchanged for stocks in
the event of reclassification or of
conversion.
Certificates of stocks cannot be issued until:
The full amount of the subscription together
with the interest and expenses has been paid.
No certificate can thus be issued to a
subscriber of shares of stocks to cover what he
may have already correspondingly paid for.
Q. HE SUBSCRIBED TO 1M SHARES. HE
ALREADY HAS PAID FOR 500,000, P1.00
PER SHARE, OUT OF HIS SUBSCRIPTION OF
1M. MAY THE SUBSCRIBER BE ISSUED A
CERTIFICATE OF STOCK CONSISTING OF
500,000 SHARES?
No. Stock subscriptions are now deemed
Indivisible.
He has not paid any single share of stock. He
has paid P0.50 for each share that he has
subscribed. This is applied pro rata to his
entire subscription.
He cannot be issued a stock certificate. He is
not the owner of a particular number of shares
which may have been sufficient to cover his
payments because they are applied to the total
number of shares subscribed.
STOCK CERTIFICATES
Section 63. Certificate of stock and transfer of
shares. – The capital stock of stock
corporations shall be divided into shares for
which certificates signed by the president or
vice president, countersigned by the secretary
or assistant secretary, and sealed with the seal
of the corporation shall be issued in
accordance with the by-laws. Shares of stock
so issued are personal property and may be
transferred by delivery of the certificate or
certificates indorsed by the owner or his
attorney-in-fact or other person legally
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
authorized to make the transfer. No transfer,
however, shall be valid, except as between the
parties, until the transfer is recorded in the
books of the corporation showing the names of
the parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares
transferred.
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation.
Stock certificates may be transferred by the
Delivery of the stock certificate Duly Endorsed
by the owner or his attorney-in-fact.
No transfer, however, shall be valid except as
between the parties, until the transfer is
recorded in the books of the corporation.
No shares of stocks against which the
corporation holds any unpaid claims shall be
transferrable in the books of the corporation.
This word Unpaid Claims means, unpaid
portion of the subscription of the particular
stockholder concerned.
It does not include any other kind of
indebtedness which the shareholder may have
that is due to the corporation.
Example:
The shareholder has already paid his shares in
full and he no longer has any other debts. If he
transfers his shares, it must be recorded in the
books of the corporation, of course, to be Valid
and Binding against other 3rd parties.
In the case of Citibank vs. CA, a Stockholder
incurred a debt to the corporation. He has
already paid his unpaid shares. He is now
fully-paid. He wanted to transfer it but the
corporation does not want to.
The Supreme Court held that he should
transfer it because there are no unpaid claims
in the shares he subscribed and fully paid.
GR: The mode and manner of transferring
shares as provided for by law must be complied
with.
Endorsement alone, without delivery, of the
certificate of stock is not sufficient to effect a
valid transfer. (Embassy farms vs. CA)
On the other hand, delivery alone (without
endorsement is not also a valid transfer of
shares of stocks. (Razon v. IAC)
NB: Section 63 uses the word may be
transferred.
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XPN:
(1) It was ruled that a duly notarized deed is
also an effective mode of transferring shares
(Rural Bank v. Salinas)
XPN to (1): Where a certificate of stock has
already been issued by the corporation, a mere
notarized deed will not be sufficient for a valid
transfer of shares of stocks. It must also be
coupled with the delivery of the endorsed stock
certificate to the transferee. (Rural Bank of
Lipa vs. CA)
Rationale: It is necessary to avoid fraudulent
and fictitious transfers. For what would prevent
a scrupulous businessman or stockholder to
transfer his shares by a notarized deed and
then subsequently selling his shares by
endorsing and delivering the same to the
transferee? That would result to a Double Sale.
While it may be transferred by endorsement
coupled with the delivery of stock certificate, it
cannot be by a mere notarized deed without the
certificate being delivered and endorsed to the
transferee, if the certificate of stock has already
been issued by the corporation.
(2) The transferor is in Estoppel.
In the case of Tan v. SEC, the transferee is the
brother of the transferor and the transferee
already exercise his rights as a stockholder and
was in fact elected as a member of the Board of
Directors at a point in time when the transferor
was still the President of the corporation.
The transferor in this case was rightfully
considered as in Estoppel.
The Supreme Court held that Endorsement or
Delivery is not essential, where the person
sought to be considered as a stockholder is an
officer of the corporation and has custody of
the stock and transfer.
SUMMARY:
GR: The basic rule is Endorsement and
Delivery of the stock certificate.
XPN:
(1) It may be effected by a mere notarized deed,
if there is no stock certificate issued yet;
(2) The transferor is considered as in Estoppel.
XPN to the XPN:
(1) If a stock certificate has already been
issued, then it cannot be effected by a
mere notarized deed.
It must still be coupled with the Delivery of the
Endorsed Stock Certificate
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Q. ARE CERTIFICATES OF STOCK
NEGOTIABLE INSTRUMENTS?
No. They are Non-Negotiable.
While they may be transferred by the delivery of
the endorsed stock certificate, they are merely
quasi-negotiable therefore, they are non-
negotiable in the sense that the transferee
takes it without prejudice to all the rights and
defenses which the true or lawful owner may
have as may be obtaining under a particular
set of facts or circumstances, subject only to
the rules governing estoppel.
Q. A’S CERTIFICATE OF STOCK WAS
STOLEN BY HIS BROTHER, B. B FORGED
A’S ENDORSEMENT AND TRANSFERRED IT
TO C, PURCHASER IN GOOD FAITH AND
FOR VALUE. DOES C ACQUIRE A BETTER
TITLE THAN A?
No. Because A can always raise the defense
that it was stolen from him and the
endorsement was forged. It is subject to all the
rights and defenses which the true or lawful
owner may have. C, the stock certificate being
non-negotiable, is not even a Holder in Due
Course.
Even if C will transfer it to another person, D
also a transferee in good faith and for value, D
will not likewise acquire title no matter how
innocent they may be because it is subject to
all the rights and defenses which the true and
lawful owner may have.
XPN: Unless the rules governing estoppel will
apply.
Q. B DID NOT STEAL A’S CERTIFICATE. A
WAS RUNNING AWAY FROM A CASE FILED
AGAINST HIM IN THE PHILIPPINES SO HE
ENDORSED THE STOCK CERTIFICATE TO
HIS BROTHER, B. B SOLD THE STOCK
CERTIFICATE TO C, PURCHASER IN GOOD
FAITH AND FOR VALUE. WILL C ACQUIRE
TITLE?
Yes. A has clothed B with apparent title and
authority over the shares of stocks covered by
the certificate of stock. Whoever is in
possession is legally presumed to be the owner
thereof. It was endorsed and delivered by the
owner, A. He is now in estoppel. Under Section
63, there is a valid transfer. A has no defense
available.
GR: The Code requires likewise that these
transfers of shares of stocks should be
recorded in the stock and transfer book. It shall
not be valid until the same has been duly
registered in the books of the corporation.
XPN: But insofar as the contracting parties
themselves are concerned, a transfer of shares
of stocks, even if it is not recorded in the books
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of the corporation is valid and binding between
them.
Section 63 is categorical; no transfer shall be
valid except as between the parties, until the
transfer is recorded in the books of the
corporation.
It is valid between the contracting parties even
if it is not recorded in the books of the
corporation. It will not be, however, valid and
binding against the corporation or any other 3rd
party in interest until—they are registered in
the books of the corporation. (Uson Case)
If the corporation fails or refuses to register a
valid transfer, Mandamus is the appropriate
remedy.
The right of an assignee or transferee to have
the stock transferred in his name in the books
of the corporation is an inherent right flowing
from his ownership of shares of stocks.
Whenever the corporation refuses to register
the transfer, Mandamus will lie to compel the
officer to record the same in the stock and
transfer book of the corporation.
The duty of the corporation to record transfer
of shares of stocks is ministerial, and if it is
refused without good cause, it may be
compelled to do so by Mandamus.
Q. THE TRANSFER OF THE SHARES OF
STOCKS IS VIOLATIVE OF THE
NATIONALIZATION LAWS. MAY THE
CORPORATION BE COMPELLED TO
RECORD THE TRANSFER?
No. Because of the “no-transfer clause” in the
Articles of Incorporation which would
guarantee compliance with the statutory
requirements particularly, the nationalization
laws.
No-transfer clause provides substantially that:
No transfer of shares of stocks which will
reduce the ownership of Filipino citizens to less
than that allowed by law shall be recorded in
the books of the corporation.
Valid between the contracting parties; Not Valid
against the corporation and other 3rd parties.
Q. UNDER SEC. 63 ITSELF, THE
CORPORATION HAS UNPAID CLAIMS OVER
THE SHARES OF STOCKS TO BE
RECORDED AS TRANSFERRED. THE
SHARES WERE TRANSFERRED BUT NOT
YET FULLY PAID. MAY THE CORPORATION
BE COMPELLED TO TRANSFER IT?
No. There is good cause.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
In the case of Tay v. CA, the supposed
transferee is not yet a prima facie owner or
holder of the share of stocks.
n order that Mandamus may issue, the alleged
transferee must have a Clear Legal Right to the
thing demanded.
It is the imperative duty on the part of the
respondent to perform the act required. It
neither confers nor imposes duties and is never
issued in doubtful cases.
In this case, the creditor sought to compel the
corporation to record the transfer by virtue of
the failure of the debtor to pay his debts
pursuant to a contract of pledge. Debtor
endorsed stock certificate to the creditor but he
failed to pay. So, the creditor went to the
corporation to have the transfer of shares
recorded.
The Supreme Court held that you cannot do
that. Mandamus will not issue. By virtue of the
failure of that creditor to sell the shares at a
public auction or private auction sale pursuant
to the contract of pledge. Again, there is good
cause.
Take note the provision in the Civil Code: The
pledgor remains to be the owner until the
pledgee sells the thing pledged at a public
auction sale.
In this case, the creditor is not yet the prima
facie owner of the shares. Mandamus will not
issue because there is good cause for the
refusal on the part of the corporation to record
the transfer.
The right to transfer shares is also an inherent
right flowing from ownership of stocks.
However, the right to transfer may be regulated
or restricted reasonably, that is.
GR: Generally, it is not subject to restrictions
or regulations.
XPN:
But may be regulated or reasonably restricted
by the law itself or even by agreement of the
parties (Lambert v. Fox)
(1) For instance, in a case of a Close
corporation, the law itself imposes a
restriction
Section 96 (1). Definition and applicability of
Title. - A close corporation, within the meaning
of this Code, is one whose articles of
incorporation provide that: (1) All the
corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding twenty (20); (2) all the
issued stock of all classes shall be subject to
one or more specified restrictions on transfer
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 AUSL/CORPORATION LAW REVIEWER/AJP-SFO
permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make
any public offering of any of its stock of any
class. Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or
controlled by another corporation which is not
a close corporation within the meaning of this
Code.
Section 96 provides that the Articles of
Incorporation of a Close Corporation must
provide that: the number of the stockholders
shall not exceed 20 Specified persons.
If a stockholder in a Close corporation transfers
his shares to a person who is not one of those
specified persons, the corporation will refuse.
(2) Shares transferred when the corporation
has unpaid claims; the law itself imposes a
prohibition that the corporation can refuse
registration.
(3) There may also be restrictions imposed by
Special Law.
Example: Violation of nationalization Law, the
corporation will not record the transfer.
(4) Agreement of Parties
In the case of Lambert v. Fox, the 2 major
stockholders agreed not to sell their shares for
a period of 1 year which is beneficial to both
parties and the corporation itself. The other
stockholder transferred his shares before the 1
year period.
The Supreme Court held that the 1 year period
is reasonable. It may be reasonably restricted
by agreement of the parties. In this particular
case, it is beneficial not only to the contracting
parties but also to the corporation.
GR: Subscribers to shares of stocks are not
generally required to pay interest on their
unpaid subscriptions.
XPN: They may be required to pay interest if
the by-laws or the contract of subscription
requires the same.
So if there’s no provision in the by-laws or the
contract of subscription requiring payment of
interest of the unpaid subscriptions of the
stockholders, then he is not bound to pay any
interest.
If there is an interest, itt will be at the rate
indicated in the contract or in the by-laws.
If there is an interest but it fails to indicate the
rate, then it shall be the Legal Rate of interest.
If there is no specification that they are liable to
pay interest in the by-laws or in the contract of
AUSL/CORPORATION
subscription, then they are not bound to pay
any interest.
Two Remedies of the corporation to enforce
payment of unpaid subscriptions to its capital
stock:
1. By way of a Delinquency Sale
2. By a Direct Action in Court
Section 67. Payment of balance of
subscription. – Subject to the provisions of the
contract of subscription, the board of directors
of any stock corporation may at any time
declare due and payable to the corporation
unpaid subscriptions to the capital stock and
may collect the same or such percentage
thereof, in either case with accrued interest, if
any, as it may deem necessary.
Payment of any unpaid subscription or any
percentage thereof, together with the interest
accrued, if any, shall be made on the date
specified in the contract of subscription or on
the date stated in the call made by the board.
Failure to pay on such date shall render the
entire balance due and payable and shall make
the stockholder liable for interest at the legal
rate on such balance, unless a different rate of
interest is provided in the by-laws, computed
from such date until full payment. If within
thirty (30) days from the said date no payment
is made, all stocks covered by said subscription
shall thereupon become delinquent and shall
be subject to sale as hereinafter provided,
unless the board of directors orders otherwise.
Section 68. Delinquency sale. – The board of
directors may, by resolution, order the sale of
delinquent stock and shall specifically state the
amount due on each subscription plus all
accrued interest, and the date, time and place
of the sale which shall not be less than thirty
(30) days nor more than sixty (60) days from
the date the stocks become delinquent.
Notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by registered
mail. The same shall furthermore be published
once a week for two (2) consecutive weeks in a
newspaper of general circulation in the
province or city where the principal office of the
corporation is located.
Unless the delinquent stockholder pays to the
corporation, on or before the date specified for
the sale of the delinquent stock, the balance
due on his subscription, plus accrued interest,
costs of advertisement and expenses of sale, or
unless the board of directors otherwise orders,
said delinquent stock shall be sold at public
auction to such bidder who shall offer to pay
the full amount of the balance on the
subscription together with accrued interest,
costs of advertisement and expenses of sale, for
the smallest number of shares or fraction of a
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 AUSL/CORPORATION LAW REVIEWER/AJP-SFO
share. The stock so purchased shall be
transferred to such purchaser in the books of
the corporation and a certificate for such stock
shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock
covering such shares.
Should there be no bidder at the public auction
who offers to pay the full amount of the
balance on the subscription together with
accrued interest, costs of advertisement and
expenses of sale, for the smallest number of
shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid
for the same, and the total amount due shall be
credited as paid in full in the books of the
corporation. Title to all the shares of stock
covered by the subscription shall be vested in
the corporation as treasury shares and may be
disposed of by said corporation in accordance
with the provisions of this Code.
Section 69. When sale may be questioned. –
No action to recover delinquent stock sold can
be sustained upon the ground of irregularity or
defect in the notice of sale, or in the sale itself
of the delinquent stock, unless the party
seeking to maintain such action first pays or
tenders to the party holding the stock the sum
for which the same was sold, with interest from
the date of sale at the legal rate; and no such
action shall be maintained unless it is
commenced by the filing of a complaint within
six (6) months from the date of sale. (47a)
Section 70. Court action to recover unpaid
subscription. – Nothing in this Code shall
prevent the corporation from collecting by
action in a court of proper jurisdiction the
amount due on any unpaid subscription, with
accrued interest, costs and expenses. (49a)
GR: Unpaid portion of subscriptions of the
shareholders will never become due and
demandable.
XPN:
(1) A call is made by the board of directors for
the payment of the unpaid portion or any
part thereof.
(2) The contract stipulates the date or dates
when they will respectively fall due.
If a call is made specifying the date or dates
when the shareholders or subscribers should
pay their unpaid subscription and the
stockholder concerned did not pay on the date
specified, the shares will thereby become
deliquent and will subject the shares to a
delinquency sale. The shares will become
subjected to an auction sale subject, of course,
to:
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Notice and Publication, not earlier than 30
days but not more than 60 days from the date
of delinquency.
It will be sold to the bidder who tenders or
offers to pay the full amount of the balance of
the subscription or inclusive of interest and/or
cost and expenses, if any, for the least number
of shares.
The winning bidder in this particular case is
the bidder who tenders to pay the balance of
the unpaid portion of the subscription of the
stockholder
Q. SO IF IT IS TO BE SOLD AT PUBLIC
AUCTION, BUT THERE WERE NO BIDDERS
WHO APPEARED DURING THE AUCTION
SALE. MAY THE CORPORATION BID?
Yes. Sec. 70 provides that, if there is no bidder,
the corporation may bid subject to the
provisions of this Code.
Q. A SUBSCRIBED 100,000 SHARES
VALUED AT P1M. HE PAID P500,000, SO HE
HAS A BALANCE OF P500,000. THE
CORPORATION IS IN DIRE NEED OF MONEY
FOR THE OPERATION OF ITS BUSINESS SO
THE BOARD OF DIRECTORS DECIDED TO
MAKE A CALL FOR THE UNPAID PORTION
OF THE SUBSCRIPTION OF A. THE
CORPORATION HAS DEBTS AMOUNTING TO
P10M AND IN ORDER TO RAISE FUNDS TO
PAY THE INDEBTEDNESS, THEY MADE A
CALL FOR THE UNPAID PORTION OF THE
SUBSCRIPTION OF THE STOCKHOLDERS
INCLUDING A. IT SPECIFIED THE DATE
WHEN IT SHOULD BE PAID. A DID NOT PAY.
A’S 100,000 SHARES ARE NOW
DELINQUENT AND THE BOARD OF
DIRECTORS CAN NOW SELL THESE SHARES
AT A PUBLIC AUCTION SUBJECT TO
PUBLICATION. THERE IS AN ADDITIONAL
COST OF P5,000. SO YOU NOW HAVE
P505,000. THERE ARE NO BIDDERS. NO
BIDDER APPEARED. MAY THE
CORPORATION BID?
No, the corporation may bid subject to the
provisions of this Code. This is acquisition of
its own shares and as a rule, a corporation
cannot generally reacquire its own shares if it
has no Unrestricted Retained Earnings. The
corporation cannot bid. It must have
unrestricted retained earnings as a General
Rule.
Q. IF THE CORPORATION CANNOT BID
BECAUSE IT HAS NO UNRESTRICTED
RETAINED EARNINGS, IS THE
CORPORATION NOW LEFT WITHOUT
RECOURSE TO ENFORCE PAYMENT OF THE
UNPAID SUBSCRIPTION OF A?
No. It can go for a Direct Action in Court.
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Q. ASSUME THAT THERE IS A
DELINQUENCY SALE HELD AND
CONDUCTED BUT IT WAS CONDUCTED NOT
IN ACCORDANCE WITH THE PROCEDURES
LAID DOWN IN THE CODE.
EXAMPLE: THERE WAS NO PUBLICATION
OF THE AUCTION SALE OR WAS ONLY
PUBLISHED ONCE. A’S SHARES WERE SOLD
WITH ONLY ONE PUBLICATION. CAN A
QUESTION THE VALIDITY OF THE SALE OF
HIS SHARES AT PUBLIC AUCTION?
Two conditions would be required in order that
he may question the validity of the sale of his
shares at public auction.
REQUISITES TO ASSAIL A DELIQUENCY
SALE
(1) He must tender payment of the acquisition
cost to the winning bidder; and
(2) He must institute the claim or complaint
within six months from the date of the sale
Absence of any one of them, he cannot
question the validity of the sale of his shares at
public auction even if it was irregularly or
illegally bidded out.
Rationale of the 6-month period: There may
be an instance that a certain person is
interested because if the corporation can raise
money, he knows that it will be back in its two
feet.
Q. WHO IS THE WINNING BIDDER IN A
DELINQUENCY SALE?
The bidder who tenders to pay the full amount
of the delinquency plus cost and expenses, if
any, for the least number of shares.
Q. IS THERE SUCH A THING AS “HIGHEST
BIDDER” IN A DELINQUENCY SALE?
None. In fact, the winning bidder is the Lowest
Bidder from the wordings of the statute, that is.
The bidder who tenders to pay the full amount
of the delinquency plus cost and expenses, if
any, for the least number of shares.
Example:
X, Y and Z bidded for the delinquency sale of
shares of A. They have to tender the full
amount of the unpaid subscription plus cost
and expenses, if any for the least number of
shares. So all of them will bid P505,000 for the
100,000 shares of A.
X says he will acquire 99,000 shares for
P505,000.
Y says he will acquire 95,000 shares.
Z said he will acquire 90,000 shares.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
The winning bidder is Z. He is the Lowest
bidder, not the highest bidder. Effectively, the
winning bidder in a delinquency sale is the
Lowest bidder.
The 90,000 shares will now be credited or
registered in the name of Z. The 10,000 shares
remaining will still remain in the name of the
delinquent stockholder, he remains to be a
stockholder.
Section 71. Effect of delinquency. – No
delinquent stock shall be voted for or be
entitled to vote or to representation at any
stockholder’s meeting, nor shall the holder
thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code,
until and unless he pays the amount due on
his subscription with accrued interest, and the
costs and expenses of advertisement, if any.
Q. WHAT HAPPENS IF A’S SHARES HAS
BEEN DECLARED DELINQUENT? WHAT IS
THE EFFECT OF DELINQUENT SHARES VIS
A VIS THE RIGHTS OF THE DELINQUENT
STOCKHOLDER?
He loses his right to vote and be voted upon
and is not entitled to any of the rights of a
stockholder, except the right to receive
dividends in accordance with Section 43.
Section 43 (1). Power to declare dividends. -
The board of directors of a stock corporation
may declare dividends out of the unrestricted
retained earnings which shall be payable in
cash, in property, or in stock to all
stockholders on the basis of outstanding stock
held by them: Provided, That any cash
dividends due on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses, while
stock dividends shall be withheld from the
delinquent stockholder until his unpaid
subscription is fully paid: Provided, further,
That no stock dividend shall be issued without
the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting
duly called for the purpose. (16a)
Section 43 provides that if the shares are
delinquent, then:
Any cash dividends due the delinquent
stockholder shall first be applied to the amount
of his delinquency plus cost and expenses, if
any. If any of it remains, it would be paid to
him.
But if it is a stock dividend, it shall be withheld
from him until he pays the amount of his
delinquency.
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Q. A’S SHARES ARE DELINQUENT. HE IS A
DIRECTOR OF THE CORPORATION.
PENDING THE SALE OF HIS SHARES, IS HE
STILL QUALIFIED TO BE A DIRECTOR?
OWNERSHIP OF SHARES OF STOCKS
STANDING IN HIS NAME IN THE BOOKS OF
THE CORPORATION IS THE QUALIFICATION
IN ORDER THAT ONE MAY BE A DIRECTOR.
WILL HE LOSE HIS RIGHT TO BE A
DIRECTOR?
No, until and unless all his shares are bidded
out and sold to the winning bidder, he remains
the owner of the shares of stock. It is still
registered in his name in the books of the
corporation. Therefore, he remains as a
stockholder, and even if it may be sold at
public auction, he can still continue acting as
the director.
LOST OR DESTROYED CERTIFICATE
The lost or destroyed certificate may be
replaced after (1) year from the date of the last
publication.
Section 73. Lost or destroyed certificates. –
The following procedure shall be followed for
the issuance by a corporation of new
certificates of stock in lieu of those which have
been lost, stolen or destroyed:
1. The registered owner of a certificate of stock
in a corporation or his legal representative shall
file with the corporation an affidavit in
triplicate setting forth, if possible, the
circumstances as to how the certificate was
lost, stolen or destroyed, the number of shares
represented by such certificate, the serial
number of the certificate and the name of the
corporation which issued the same. He shall
also submit such other information and
evidence which he may deem necessary;
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, said corporation shall publish a
notice in a newspaper of general circulation
published in the place where the corporation
has its principal office, once a week for three (3)
consecutive weeks at the expense of the
registered owner of the certificate of stock
which has been lost, stolen or destroyed. The
notice shall state the name of said corporation,
the name of the registered owner and the serial
number of said certificate, and the number of
shares represented by such certificate, and
that after the expiration of one (1) year from the
date of the last publication, if no contest has
been presented to said corporation regarding
said certificate of stock, the right to make such
contest shall be barred and said corporation
shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and
issue in lieu thereof new certificate of stock,
unless the registered owner files a bond or
other security in lieu thereof as may be
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
required, effective for a period of one (1) year,
for such amount and in such form and with
such sureties as may be satisfactory to the
board of directors, in which case a new
certificate may be issued even before the
expiration of the one (1) year period provided
herein: Provided, That if a contest has been
presented to said corporation or if an action is
pending in court regarding the ownership of
said certificate of stock which has been lost,
stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be
suspended until the final decision by the court
regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence
on the part of the corporation and its officers,
no action may be brought against any
corporation which shall have issued certificate
of stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described.
(R.A. 201a)
Q. MAY IT BE ISSUED EARLIER THAN 1
YEAR?
Yes. If the owner files a bond satisfactory to the
Board of Directors.
CORPORATE BOOKS AND RECORDS
Section 74. Books to be kept; stock transfer
agent. – Every corporation shall keep and
carefully preserve at its principal office a record
of all business transactions and minutes of all
meetings of stockholders or members, or of the
board of directors or trustees, in which shall be
set forth in detail the time and place of holding
the meeting, how authorized, the notice given,
whether the meeting was regular or special, if
special its object, those present and absent,
and every act done or ordered done at the
meeting. Upon the demand of any director,
trustee, stockholder or member, the time when
any director, trustee, stockholder or member
entered or left the meeting must be noted in the
minutes; and on a similar demand, the yeas
and nays must be taken on any motion or
proposition, and a record thereof carefully
made. The protest of any director, trustee,
stockholder or member on any action or
proposed action must be recorded in full on his
demand.
The records of all business transactions of the
corporation and the minutes of any meetings
shall be open to inspection by any director,
trustee, stockholder or member of the
corporation at reasonable hours on business
days and he may demand, in writing, for a copy
of excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation who
shall refuse to allow any director, trustees,
stockholder or member of the corporation to
examine and copy excerpts from its records or
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minutes, in accordance with the provisions of
this Code, shall be liable to such director,
trustee, stockholder or member for damages,
and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of
this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the
board of directors or trustees, the liability
under this section for such action shall be
imposed upon the directors or trustees who
voted for such refusal: and Provided, further,
That it shall be a defense to any action under
this section that the person demanding to
examine and copy excerpts from the
corporation’s records and minutes has
improperly used any information secured
through any prior examination of the records or
minutes of such corporation or of any other
corporation, or was not acting in good faith or
for a legitimate purpose in making his demand.
Stock corporations must also keep a book to be
known as the "stock and transfer book", in
which must be kept a record of all stocks in the
names of the stockholders alphabetically
arranged; the installments paid and unpaid on
all stock for which subscription has been
made, and the date of payment of any
installment; a statement of every alienation,
sale or transfer of stock made, the date thereof,
and by and to whom made; and such other
entries as the by-laws may prescribe. The stock
and transfer book shall be kept in the principal
office of the corporation or in the office of its
stock transfer agent and shall be open for
inspection by any director or stockholder of the
corporation at reasonable hours on business
days.
No stock transfer agent or one engaged
principally in the business of registering
transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the
Philippines unless he secures a license from
the Securities and Exchange Commission and
pays a fee as may be fixed by the Commission,
which shall be renewable annually: Provided,
That a stock corporation is not precluded from
performing or making transfer of its own
stocks, in which case all the rules and
regulations imposed on stock transfer agents,
except the payment of a license fee herein
provided, shall be applicable. (51a and 32a;
P.B. No. 268.)
Section 75. Right to financial statements. –
Within ten (10) days from receipt of a written
request of any stockholder or member, the
corporation shall furnish to him its most recent
financial statement, which shall include a
balance sheet as of the end of the last taxable
year and a profit or loss statement for said
taxable year, showing in reasonable detail its
assets and liabilities and the result of its
operations.
At the regular meeting of stockholders or
members, the board of directors or trustees
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
shall present to such stockholders or members
a financial report of the operations of the
corporation for the preceding year, which shall
include financial statements, duly signed and
certified by an independent certified public
accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the
financial statements may be certified under
oath by the treasurer or any responsible officer
of the corporation. (n)
All corporations registered under the general
provisions of the Code are required to keep
certain books and records.
(1) Records of all business transactions.
(2) Minutes of meetings of all stockholders and
the directors
(3) Stock and transfer book
(4) Membership book, in cases it is non-stock
corporation
(5) Financial statements
These books and records are subject to
inspection by the stockholders or members
during reasonable hours on any business day.
Either personally, or through his authorized
representative, either with or without the
presence of the stockholder himself. (W.
Philpats v. Phil. Manufacturing Corp.)
Non-stockholders, even if they are the heirs of
the deceased stockholder cannot inspect
corporate books and records of the corporation
where their parent may have been such a
shareholder.
In the case of Joselito Puno vs. Puno
Enterprises, the right of inspection of the
corporate books and records is based upon his
ownership of shares in the corporation and the
necessity of self-protection. After all, a
stockholder has the right to be intelligently
informed about the corporate affairs. Such
right rests upon the underlying corporate
assets and property. Similarly therefore, only
stockholders of record are entitled to dividends
declared by the corporation a right inherent in
ownership of shares.
In this case, the owner passed away. The
Supreme Court ruled that, upon the death of a
stockholder, the heirs do not automatically
become the stockholders of the corporation and
acquire the rights and privileges of the
deceased shareholder of the corporation.
The stocks must be distributed first to the
heirs in estate proceedings and the transfer of
stock must be recorded in the books of the
corporation as required by Sec. 63 of the Code.
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The corporation, as a rule of thumb, will not
look beyond its stock and transfer book to
determine who its stockholders are, who may
have the right to vote, be voted upon, receive
dividends, inspect the corporate books and
records.
If you are not one of them listed in the stock
and transfer book, you have no right as a
stockholder at all.
Shares must first be transferred in favor of the
heirs of the deceased stockholder through an
intestate proceeding or extrajudicial. Until and
unless it has been recorded in the books of the
corporation, nobody can vote or receive
dividends for and in behalf of the deceased
stockholders.
Q. MR. A IS A STOCKHOLDER OF A
HOLDING COMPANY. EXAMPLE, SAN
MIGUEL CORPORATION, BUT HE IS NOT A
STOCKHOLDER OF SAN MIGUEL BREWERY
INTERNATIONAL, LTD. IN HONGKONG. CAN
HE INSPECT THE BOOKS AND RECORDS OF
SAN MIGUEL BREWERY LTD. IF HE IS NOT
A STOCKHOLDER OF THAT SUBSIDIARY
BUT HE IS A STOCKHOLDER OF SAN
MIGUEL CORPORATION ITSELF?
(Gokongwei vs. SEC)
GR: No.
XPN: But in this case, San Miguel Brewery
International is a Wholly Owned Subsidiary of
San Miguel Corporation. Meaning, all the
shares of stocks are owned and held by San
Miguel Corporation.
It would be more in accord with equity, good
faith and fair dealing to construe the statutory
right of the stockholders’ right of inspection to
cover the books and records of the Wholly
Owned subsidiary. It must, however, be wholly
owned.
Because apparently, the 2 entities , the holding
and the subsidiary, are legally being operated
as separate and distinct companies. There’s no
such thing as right of inspection that may be
granted to the stockholder of the holding
company if he is not also a stockholder of the
subsidiary.
Q. AYALA CORPORATION IS ALSO A
HOLDING COMPANY. AMONG THE
SUBSIDIARIES ARE AYALA LAND, INC.,
GLOBE TELECOMM., BPI. THESE ARE
SUBSIDIARIES OF AYALA CORPORATION. A
IS A STOCKHOLDER OF AYALA
CORPORATION BUT HE IS NOT A WHAT APPLIES?
STOCKHOLDER OF AYALA LAND, BPI OR
GLOBE TELECOMM. CAN HE INSPECT THE
BOOKS AND RECORDS OF GLOBE, BPI OR
AYALA LAND?
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
No. They are not Wholly Owned Subsidiaries of
Ayala Corporation. In fact, all these 3
subsidiaries are listed companies. Listed in the
sense that the shares are being traded openly
in the stock exchange.
No right of inspection on the part of Mr. A who
is a stockholder of Ayala Corporation over the
subsidiaries of Ayala Corporation because they
are treated separately and independently. In
fact, under the law, all these corporations have
independent directors as required by law.
GR: The corporation Cannot Refuse the
stockholders to inspect the books and records
if it is during reasonable hours on any
business day;
And if they are refused, the remedy available to
the stockholders again would be:
(1) Mandamus with a claim for damages and/or
attorney’s fees
(2) Criminal Complaint for a violation of its
right under Section 144 of the Code.
XPN: The corporate officers involved have some
defensive positions that they may advance in
order to justify their failure or refusal to allow
the right of inspection:
(1) Improper use of information secured
through previous examination; or
(2) That he is not acting in Good Faith or for a
Legitimate Purpose.
NB: Note that this right of inspection may also
be Restricted or Regulated.
In the case of Gonzales v. PNB, Gonzales was
able to acquire 1 share of the capital stock of
the PNB and he wanted to inspect the books
and records of the bank. But PNB was created
by special charter. It has its own charter
created by special law. And the special law
creating the charter of PNB provides that the
financial books and records of the PNB shall be
subject to inspection ONLY by the Monetary
Board of the Central Bank.
Q. CAN GONZALES INSPECT THE BOOKS
AND RECORDS?
No. Section 4 of the Code provides that,
Corporations created by law shall be governed
primarily by the law of their creation
supplemented only by the provisions of the
Code when pertinent.
It is the special charter creating it. It will NOT
be the Corporation Code.
He is not entitled to inspect the books and
records of the PNB.
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MERGERS AND CONSOLIDATION
Section 76. Plan or merger of consolidation. –
Two or more corporations may merge into a
single corporation which shall be one of the
constituent corporations or may consolidate
into a new single corporation which shall be
the consolidated corporation.
The board of directors or trustees of each
corporation, party to the merger or
consolidation, shall approve a plan of merger or
consolidation setting forth the following:
1. The names of the corporations proposing to
merge or consolidate, hereinafter referred to as
the constituent corporations;
2. The terms of the merger or consolidation and
the mode of carrying the same into effect;
3. A statement of the changes, if any, in the
articles of incorporation of the surviving
corporation in case of merger; and, with respect
to the consolidated corporation in case of
consolidation, all the statements required to be
set forth in the articles of incorporation for
corporations organized under this Code; and
4. Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable. (n)
Section 77. Stockholder’s or member’s
approval. – Upon approval by majority vote of
each of the board of directors or trustees of the
constituent corporations of the plan of merger
or consolidation, the same shall be submitted
for approval by the stockholders or members of
each of such corporations at separate corporate
meetings duly called for the purpose. Notice of
such meetings shall be given to all stockholders
or members of the respective corporations, at
least two (2) weeks prior to the date of the
meeting, either personally or by registered mail.
Said notice shall state the purpose of the
meeting and shall include a copy or a summary
of the plan of merger or consolidation. The
affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the
members in the case of non-stock corporations
shall be necessary for the approval of such
plan. Any dissenting stockholder in stock
corporations may exercise his appraisal right in
accordance with the Code: Provided, That if
after the approval by the stockholders of such
plan, the board of directors decides to abandon
the plan, the appraisal right shall be
extinguished.
Any amendment to the plan of merger or
consolidation may be made, provided such
amendment is approved by majority vote of the
respective boards of directors or trustees of all
the constituent corporations and ratified by the
AUSL/CORPORATION LAW
affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital
stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such
plan, together with any amendment, shall be
considered as the agreement of merger or
consolidation. (n)
Section 78. Articles of merger or consolidation.
– After the approval by the stockholders or
members as required by the preceding section,
articles of merger or articles of consolidation
shall be executed by each of the constituent
corporations, to be signed by the president or
vice-president and certified by the secretary or
assistant secretary of each corporation setting
forth:
1. The plan of the merger or the plan of
consolidation;
2. As to stock corporations, the number of
shares outstanding, or in the case of non-stock
corporations, the number of members; and
3. As to each corporation, the number of shares
or members voting for and against such plan,
respectively. (n)
Section 79. Effectivity of merger or
consolidation. – The articles of merger or of
consolidation, signed and certified as herein
above required, shall be submitted to the
Securities and Exchange Commission in
quadruplicate for its approval: Provided, That
in the case of merger or consolidation of banks
or banking institutions, building and loan
associations, trust companies, insurance
companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained. If the
Commission is satisfied that the merger or
consolidation of the corporations concerned is
not inconsistent with the provisions of this
Code and existing laws, it shall issue a
certificate of merger or of consolidation, at
which time the merger or consolidation shall be
effective.
If, upon investigation, the Securities and
Exchange Commission has reason to believe
that the proposed merger or consolidation is
contrary to or inconsistent with the provisions
of this Code or existing laws, it shall set a
hearing to give the corporations concerned the
opportunity to be heard. Written notice of the
date, time and place of hearing shall be given to
each constituent corporation at least two (2)
weeks before said hearing. The Commission
shall thereafter proceed as provided in this
Code. (n)
Section 80. Effects of merger or consolidation.
– The merger or consolidation shall have the
following effects:
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1. The constituent corporations shall become a
single corporation which, in case of merger,
shall be the surviving corporation designated in
the plan of merger; and, in case of
consolidation, shall be the consolidated
corporation designated in the plan of
consolidation;
2. The separate existence of the constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and powers and shall be
subject to all the duties and liabilities of a
corporation organized under this Code;
4. The surviving or the consolidated
corporation shall thereupon and thereafter
possess all the rights, privileges, immunities
and franchises of each of the constituent
corporations; and all property, real or personal,
and all receivables due on whatever account,
including subscriptions to shares and other
choses in action, and all and every other
interest of, or belonging to, or due to each
constituent corporation, shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act or
deed; and
5. The surviving or consolidated corporation
shall be responsible and liable for all the
liabilities and obligations of each of the
constituent corporations in the same manner
as if such surviving or consolidated corporation
had itself incurred such liabilities or
obligations; and any pending claim, action or
proceeding brought by or against any of such
constituent corporations may be prosecuted by
or against the surviving or consolidated
corporation. The rights of creditors or liens
upon the property of any of such constituent
corporations shall not be impaired by such
merger or consolidation. (n)
EFFECTS OF MERGERS AND/OR
CONSOLIDATION
The surviving or consolidated corporation shall
thereupon and thereafter possess all the rights,
privileges and immunities and franchises of
each of the constituent corporations.
Constituent corporations – are the parties to
the Merger or Consolidation.
All property and all receivables due on
whatever account, including subscriptions to
shares and other choses in action and all and
every other interest of, belonging to, or due to
each constituent corporations shall be deemed
transferred and vested in the surviving or
consolidated corporation without further act or
deed
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Example:
A absorbed X company. The absorbed
corporation has debts of P100M to Z.
Such debt is already the debt of the absorbing
corporation automatically because item 4 says,
“Without further Act or Deed”.
Q. A LENT P100M. B ABSORBED A
COMPANY. CAN THE ABSORBING
CORPORATION ENFORCE THE CLAIM OF A
AGAINST THE DEBTOR?
Yes. Automatically, without any further act or
deed
Q. IN THE CASE OF BPI V. BPI EMPLOYEES
UNION, BPI ABSORBED FAR EAST BANK
AND TRUST COMPANY (FEBTC). ARE THE
EMPLOYEES OF FEBTC ALSO ABSORBED
BY BPI?
The Supreme Court held No.
In legal farlance, human beings are never
embraced in the term Assets and Liabilities.
They are not chattels. Moreover, BPI’s
absorption of former FEBTC employees was
neither by operation of law nor legal
consequence of the contract.
There was no government regulation or law
that compelled the merger of the 2 banks or the
absorption of the employees of the dissolved or
absorbed corporation by the surviving
corporation.
Had there been such a regulation, the
absorption of the employees of the non-
surviving entity or the absorbed entity of the
merger would have been mandatory on the
surviving corporation or the absorbing
corporation.
In fact, the Corporation Code does not also
mandate the absorption of the employees of the
non-surviving corporation in cases of merger.
Otherwise, this would have been included in
Section 80.
The articles of merger and the plan of merger
dated April 2000 did not contain any specific
stipulation with respect to the employment
contracts of the existing personnel of the
dissolved or the absorbed corporation.
Unless expressly assumed, labor contracts
such as employment contracts and CBAs are
not enforceable against a transferee of the
enterprise.
Why? Because labor contracts are in personam
and therefore, binding only between the
parties. A labor contract merely creates an
action in personam and does not create any
real right which should be respected by 3rd
parties.
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This conclusion draws its force from the right
of the employer to select who its employees
should be and to decide when to engage them
as protected under the Philippine Constitution.
The same can only be restricted by law through
the exercise of police power.
It is contrary to public policy to declare the
FEBTC employee, the employees of the
absorbed corporation, as forming part of the
assets and liabilities of FEBTC that were
transferred and absorbed by BPI in the articles
of merger.
Assets and liabilities in this instance should be
deemed to refer only to Property Rights and
Obligations.
APPRAISAL RIGHT
Section 81. Instances of Appraisal right. – Any
stockholder of a corporation shall have the
right to dissent and demand payment of the
fair value of his shares in the following
instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares, or of authorizing preferences in
any respect superior to those of outstanding
shares of any class, or of extending or
shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Q. WHAT IS APPRAISAL RIGHT?
The right of a stockholder to object on certain
corporate acts and transactions and compel the
corporation that he be paid the fair value of his
shares.
This right is not, therefore, at all times
available in all matters where a stockholder
may dissent on corporate acts or transactions.
It is available only in the instances provided for
by law. Section 81 enumerates the intances
when the dissenting stockholder may exercise
this right.
But it may also be exercised under Section. 42
of the Code:
Investments of corporate funds in another
corporation or business other than the primary
purpose, the objecting stockholder, if such be
the case, may exercise his appraisal right as
per specific provision of Sec. 42.
NB: Note that this is not available in all
instances, under item 1 of Section 81, in
amendments of articles of incorporation.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
Because the amendment must change or
restrict the right of the stockholder involved.
To some, it may not change or restrict the right
of the stockholder. To others, it may change or
restrict the right of the stockholder.
Under Section 86, one of the instances when
the dissenting stockholder may lose his right to
be paid the value of his shares is when the
proper forum, the SEC, finds that the
stockholder is NOT entitled thereto.
As a general rule, in order that the dissenting
stockholder may be able to be paid the fair
value of his shares, the corporation must have
Unrestricted Retained Earnings.
Q. WHAT HAPPENS IF HE IS NOT PAID THE
VALUE OF HIS SHARES?
He will recover his position or rights and
privileges as a stockholder entitled to receive
dividends.
Because the effect, from the time of the
demand of the fair value of the shares of stocks
or until the action, corporate act or transaction
has been abandoned, all rights accruing to the
shares of the stockholder exercising his
appraisal right including voting and dividend
rights will be suspended.
Provided that if the stockholder is NOT paid the
value of his shares within 30 days after the
award, his voting and dividend rights shall be
immediately restored.
Q. MAY THE STOCKHOLDER EXERCISING
HIS APPRAISAL RIGHT, IF ALSO A
DIRECTOR, LOSE HIS RIGHT TO BE AND
ACT AS A DIRECTOR?
No. Unless his shares have been fully paid by
the corporation, he remains the stockholder of
record.
Q. AT WHAT POINT IN TIME OR WHEN WILL
THE FAIR VALUE OF THE SHARES OF THE
OBJECTING STOCKHOLDERS BE
DETERMINED OR BASED?
The day before the meeting where he
interposed his objection.
NON-STOCK CORPORATIONS
Section 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 officers,
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
necessary or proper, be used for the
furtherance of the purpose or purposes for
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which the corporation was organized, subject to
the provisions of this Title.
The provisions governing stock corporation,
when pertinent, shall be applicable to non-
stock corporations, except as may be covered
by specific provisions of this Title. (n)
Section 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, agricultural and like chambers, or
any combination thereof, subject to the special
provisions of this Title governing particular
classes of non-stock corporations. (n)
A non-stock corporation is one where no part of
its income is distributable as dividends to the
members, trustees or officers.
TWO REQUISITES IN ORDER THAT A
CORPORATION MAY BE CONSIDERED AS
STOCK:
(1) Capital stock divided into shares;
(2) Authority to distribute allotments of its
surplus profits by way of dividends
The provision under Section 87 governing
Stock Corporations, when pertinent, also
applies to Non-Stock Corporations, except as
may be covered by specific provisions of Title
11.
VOTING RIGHTS OF MEMBERS IN A NON-
STOCK CORPORATION.
Section 89. Right to vote. – The right of the
members of any class or classes to vote may be
limited, broadened or denied to the extent
specified in the articles of incorporation or the
by-laws. Unless so limited, broadened or
denied, each member, regardless of class, shall
be entitled to one vote.
Unless otherwise provided in the articles of
incorporation or the by-laws, a member may
vote by proxy in accordance with the provisions
of this Code. (n)
Voting by mail or other similar means by
members of non-stock corporations may be
authorized by the by-laws of non-stock
corporations with the approval of, and under
such conditions which may be prescribed by,
the Securities and Exchange Commission.
In the case of a non-stock corporation, under
Section 89: Each member shall be entitled to 1
vote per candidate.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
GR: Cumulative voting is not generally allowed.
XPN: The By-laws of a Non-Stock Corporation
may limit, broaden or deny voting rights of the
members. So the articles and by-laws may also
allow members to cumulate their votes in the
election of directors.
GR: The members are entitled to proxy voting.
XPN: Proxy voting may be denied by a provision
in the articles or by-laws of a non-stock
corporation.
Members in Non-Stock corporation may vote by
mail or other similar means subject to the rules
and regulations that may be imposed by the
SEC.
In Stock Corporations, there’s no such thing as
voting by other similar means. They may cast
their written assents in amendment of the
articles of incorporation.
In Non-Stock, the SEC may allow members to
vote by other similar means subject to the
terms and conditions that may be imposed by
that government agency.
GR: The nature of membership is generally
Personal and Non-Transferrable
XPN: Unless the by-laws provide otherwise. It
may however, be subject to transfer if the by-
laws allow transfer.
Q. CLUB SHARES, THEIR SHARES ARE
SUBJECT TO TRANSFER BUT WILL THE
TRANSFEREE HAVE THE SAME RIGHT,
PRIVILEGE TO COMPEL THE CORPORATION
THAT HE BE RECOGNIZED AS A MEMBER?
No. Admission of membership is subject to the
rules and regulations that may be imposed by
the non-stock corporation.
In the Cebu Country Club Case, a non-profit
and non-stock membership club may have the
right to approve or disapprove an application
for proprietary membership. The right should
not be exercised arbitrarily.
In this case, there was an amendment of the
Articles of Incorporation of Cebu Country Club.
Section 3 of the Cebu Country Club’s by-laws,
requiring the unanimous vote of the directors
for the admission of membership in the club.
But it was not printed in the application form
that was handed to the applicant. The original
provision of the by-laws was silent regarding
the manner in which one may be admitted as
to how many votes.
So, under the original provision then, majority
vote was required. But the amendment was
introduced requiring now the unanimous vote
of the Board of Directors. The amendment took
place more than 12 years prior to the
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application of the petitioner. Petitioner filled up
the old form.
Cebu Country Club explained that the
amendment was not printed in the application
due to economic reasons.
The Supreme Court held finds this excuse
flimsy and unconvincing. Such amendment,
aside from being extremely significant was
introduced.
The Court applied Section 19 of the Civil Code:
Every person must, in the exercise of his rights
and in the performance of his duties, act with
justice, give everyone his due and observe
honesty and good faith.
True it is that a non-stock corporation may
have its own set criteria or standards in the
admission of members. It cannot, however, be
exercised arbitrarily.
PLACE OF MEETING
Section 93. Place of meetings. – The by-laws
may provide that the members of a non-stock
corporation may hold their regular or special
meetings at any place even outside the place
where the principal office of the corporation is
located: Provided, That proper notice is sent to
all members indicating the date, time and place
of the meeting: and Provided, further, That the
place of meeting shall be within the Philippines.
Anywhere in the Philippines if there is a by-law
provision authorizing it in a Non-Stock
Corporation.
There is no such authority granted to a Stock
corporation. It must be within the territorial
boundaries of the city/municipality where it
has its principal office.
So if there’s nothing in the by-laws in a Non-
Stock Corporation authorizing the calling of
meetings of members anywhere in the
Philippines, then the same rules apply:
Only within the territorial boundaries of
the city or municipality where it has its
principal office.
Because absent any, the rules
governing Stock corporations shall also
apply, as provided for in Section 87
That is merely an authority under Sec. 93. It
merely grants a non-stock corporation the
power/authority to validly provide in their by-
laws that they can hold meetings anywhere in
the Philippines.
TRUSTEES AND OFFICERS
Section 92. Election and term of trustees. –
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
trustees of non-stock corporations, which may
be more than fifteen (15) in number as may be
fixed in their articles of incorporation or by-
laws, shall, as soon as organized, so classify
themselves that the term of office of one-third
(1/3) of their number shall expire every year;
and subsequent elections of trustees
comprising one-third (1/3) of the board of
trustees shall be held annually and trustees so
elected shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular
term shall hold office only for the unexpired
period.
No person shall be elected as trustee unless he
is a member of the corporation.
Unless otherwise provided in the articles of
incorporation or the by-laws, officers of a non-
stock corporation may be directly elected by the
members.
Unless otherwise provided for in the articles of
incorporation or by-laws, the number may
exceed 15.
Example:
Integrated Bar of the Philippines National
Chapter, they have 21 members. It is a non-
stock corporation and rightfully so, they can
have more than 15 members in the Board.
Other corporate officers like the President,
Secretary, Treasurer, among others may be
directly elected by the members.
However, not all Corporations may elect the
other corporate officers.
Section 97. Articles of incorporation. – The
articles of incorporation of a close corporation
may provide:
1. For a classification of shares or rights and
the qualifications for owning or holding the
same and restrictions on their transfers as may
be stated therein, subject to the provisions of
the following section;
2. For a classification of directors into one or
more classes, each of whom may be voted for
and elected solely by a particular class of stock;
and
3. For a greater quorum or voting requirements
in meetings of stockholders or directors than
those provided in this Code.
The articles of incorporation of a close
corporation may provide that the business of
the corporation shall be managed by the
stockholders of the corporation rather than by
a board of directors. So long as this provision
continues in effect:
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1. No meeting of stockholders need be called to
elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the corporation
shall be deemed to be directors for the purpose
of applying the provisions of this Code; and
3. The stockholders of the corporation shall be
subject to all liabilities of directors.
The articles of incorporation may likewise
provide that all officers or employees or that
specified officers or employees shall be elected
or appointed by the stockholders, instead of by
the board of directors.
CLOSE CORPORATIONS
Section 96. Definition and applicability of
Title. - A close corporation, within the meaning
of this Code, is one whose articles of
incorporation provide that: (1) All the
corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding twenty (20); (2) all the
issued stock of all classes shall be subject to
one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make
any public offering of any of its stock of any
class. Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or
controlled by another corporation which is not
a close corporation within the meaning of this
Code.
Any corporation may be incorporated as a close
corporation, except mining or oil companies,
stock exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with public
interest in accordance with the provisions of
this Code.
The provisions of this Title shall primarily
govern close corporations: Provided, That the
provisions of other Titles of this Code shall
apply suppletorily except insofar as this Title
otherwise provides.
All the 3 qualifying conditions provided for
under Sec. 96 must be present in order for it to
be considered as a close corporation. (San
Juan Structural Steel v. CA)
THE QUALIFYING CONDITIONS REQUIRED
BY LAW MUST ALL BE PRESENT:
(1) All the corporation’s issued stock of all
classes, exclusive of treasury shares, shall
be held of record by not more than a
specified number of persons, not exceeding
twenty (20);
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
(2) all the issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by this
Title; and
(3) The corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class.
Therefore, the fact that husband and wife own
99.98% of the shares of stocks of a corporation,
the .2% being held by their children will not
make it a close corporation.
The family corporation was supposed to have
been organized that way but there were NO
continuing provisions in the Old Corporation
Law that would guarantee the continued
existence of the family corporation as may have
been intended by the stockholders.
The old law did not contain any provision as to
the number of stockholders in a family
corporation. So a family corporation therefore,
may not necessarily be a close corporation.
(San Juan Structural Steel v. CA).
There was also no provision in the old law as to
who may qualify to own or hold shares of
stocks in a family corporation. Whereas Section
96, in relation to Sec. 99 requires that they
shall be held by specified persons.
The old law likewise did not mandate the family
corporation to provide in its articles of
incorporation that its shares of stocks shall be
subjected to one or more specified restrictions
on their transfer.
While the law as it stands now, requires the
Close corporation to provide for restrictions on
transfers of shares of stocks in all of its classes
of shares. All of its shares of any class are
subjected to one or more specified restrictions
allowed by the Code.
In the old law, there was no prohibition for the
family corporation to list their shares in the
stock exchange or to make public offering with
respect to their shares. While the law now bars
close corporations from listing their shares in
the stock exchange or make any public offering
of any of its shares of stock.
Note that not any type of business or endeavor
may be undertaken by a close corporation.
2nd paragraph of Section 96 provides that Close
corporations cannot be formed for purposes of
engaging in:
(1) Mining/of oil companies,
(2) Stock Exchange;
(3) Banks;
(4) Insurance companies;
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(5) Public utilities;
(6) Educational institutions and corporations
declared to be vested with Public Interest.
DISTINCTION OF CLOSE AND ORDINARY
CORPORATION
The special provisions of Title XII of the Code
applies only to a Close corporation. As a matter
of comparison between the close corporation
and the ordinary regular corporation, there are
numerous actual and possible distinctions
between the close corporation and the
regular/ordinary stock corporation:
(1) The Number of Stockholders.
In a Close corporation, 20 specified persons;
In an Ordinary stock corporation there is no
limitation as to their numbers and ordinarily, it
does not specify who may become a
stockholder
(2) The Number of Directors
Section 97. Articles of incorporation. – The
articles of incorporation of a close corporation
may provide:
1. For a classification of shares or rights and
the qualifications for owning or holding the
same and restrictions on their transfers as may
be stated therein, subject to the provisions of
the following section;
2. For a classification of directors into one or
more classes, each of whom may be voted for
and elected solely by a particular class of stock;
and
3. For a greater quorum or voting requirements
in meetings of stockholders or directors than
those provided in this Code.
The articles of incorporation of a close
corporation may provide that the business of
the corporation shall be managed by the
stockholders of the corporation rather than by
a board of directors. So long as this provision
continues in effect:
1. No meeting of stockholders need be called to
elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the corporation
shall be deemed to be directors for the purpose
of applying the provisions of this Code; and
3. The stockholders of the corporation shall be
subject to all liabilities of directors.
The articles of incorporation may likewise
provide that all officers or employees or that
specified officers or employees shall be elected
(6) Validity of Corporate Act
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or appointed by the stockholders, instead of by
the board of directors.
If there are 20 stockholders and the
stockholders themselves are considered
directors, then effectively, you have 20
directors.
Ordinarily in stock corporations, not less than
5, not more than 15;
(3) Shares of Stock
In a Close corporation, all of its shares of any
class are subjected to one or more specified
restrictions on transfers of share.
While in ordinary stock corporation, generally,
there are no restrictions. Generally in the sense
that, it is discretionary on the part of other
stock corporations to also provide certain
reasonable restrictions on transfers of shares
but they are merely discretionary. Unlike in a
Close corporation, where it is mandatory.
Shares of stocks of a Close corporation cannot
be sold openly to the general public or listed in
the stock exchange;
There is no such prohibition in the other type
of Stock corporation.
(4) Management of the Corporation
Stockholders in a close corporation can take
active part in the management of the
corporation by vesting management unto them.
Unlike in the case of ordinary stock
corporation, where it is specifically provided
that all corporate powers, all business are
conducted and all properties are controlled by
the Board of Directors.
(5) Liability
Section 100(5). Agreements by stockholders. -
5. To the extent that the stockholders are
actively engaged in the management or
operation of the business and affairs of a close
corporation, the stockholders shall be held to
strict fiduciary duties to each other and among
themselves. Said stockholders shall be
personally liable for corporate torts unless the
corporation has obtained reasonably adequate
liability insurance.
Those active in the management in a close
corporation are personally liable for corporate
tort unless the corporation has obtained an
adequate liability insurance.
While directors of ordinary stock corporations
are liable only if they have acted fraudulently,
in bad faith or in gross negligence.
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Directors in a close corporation, if there is any,
can validly act even without a meeting.
While directors in ordinary stock corporations,
as a rule, they must act as a body at a duly
constituted meeting.
Agreements between stockholders of a close
corporation regarding the operation and affairs
of the corporation can be validly made, under
Section 100, which would have no binding
force and effect in ordinary stock corporations
since stockholders agreements cannot limit the
discretion of the board in the management of
the corporate affairs.
(7) Articles of Incorporation
The articles of incorporation of a close
corporation may also provide that all officers
and even employees shall be elected or
appointed by the stockholders.
Whereas, in ordinary stock corporations, they
are elected by the Board of Directors.
Likewise, the articles of incorporation of a close
corporation may provide for a greater quorum
and voting requirement in meetings of
Stockholders And Directors, as provided for in
Section 97.
Whereas in case of ordinary stock corporation,
while the articles or by-laws may provide for a
greater quorum and voting requirements in
Directors’ Meetings, under Sec. 25, those for
the stockholders’ meeting cannot be altered
Rationale: Doctrine of Limited Capacity
(8) Pre-Emptive Right
Section 102. Pre-emptive right in close
corporations. – The pre-emptive right of
stockholders in close corporations shall extend
to all stock to be issued, including reissuance
of treasury shares, whether for money, property
or personal services, or in payment of corporate
debts, unless the articles of incorporation
provide otherwise.
The Pre-emptive rights of a stockholder in a
Close Corporation is absolute if not denied by a
provision in the articles of incorporation.
Example: Those issued in compliance with good
faith with the approval of the stockholders
owning or representing at least 2/3 of the
outstanding capital stock in exchange of
property needed by the corporation or
previously incurred indebtedness, Pre-Emptive
rights cannot be exercised in Ordinary Stock
Corporation even if it is not denied by a
provision in the articles.
If a Close Corporation is involved, the situation
is different. Section 102 provides that it may be
exercised even for money or previously incurred
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indebtedness or for property needed by the
corporation. It speaks of all issues without any
exception.
Q. FIRST EXCEPTION: THOSE THAT ARE
ISSUED IN COMPLIANCE WITH THE LAW
REQUIRING MINIMUM STOCK OWNERSHIP
BY THE PUBLIC, WILL THIS NOT APPLY TO
A CLOSE CORPORATION?
There’s no such animal as public offering in a
close corporation. It cannot list in the stock
exchange or make any public offering of any of
its shares of any class. That is why it is said
that if it is not denied by a provision in the
articles of incorporation or any amendment
thereto, the pre-emptive rights of stockholders
in a close corporation will thereby be absolute.
(9) Appraisal Rights
Section 105. Withdrawal of stockholder or
dissolution of corporation. – In addition and
without prejudice to other rights and remedies
available to a stockholder under this Title, any
stockholder of a close corporation may, for any
reason, compel the said corporation to
purchase his shares at their fair value, which
shall not be less than their par or issued value,
when the corporation has sufficient assets in
its books to cover its debts and liabilities
exclusive of capital stock: Provided, That any
stockholder of a close corporation may, by
written petition to the Securities and Exchange
Commission, compel the dissolution of such
corporation whenever any of acts of the
directors, officers or those in control of the
corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial
to the corporation or any stockholder, or
whenever corporate assets are being misapplied
or wasted.
Likewise, a stockholder of a Close Corporation
can withdraw therefrom and compel the
corporation that he be paid the value of his
shares for any reason. With a limitation only
that the corporation has sufficient assets to
cover its debts and liabilities exclusive of
capital.
Meaning, there is no need for the corporation to
have unrestricted retained earnings in order
that the withdrawing stockholder may be paid
the value of his shares.
While in ordinary stock corporation, they may
do so only in the exercise of their appraisal
right, under Sec. 81 or unless, of course, they
sell their shares to another person.
(10) Business Judgment Rule
The Business Judgment Rule which is
obtaining in Ordinary Stock Corporation may
not apply to a Close Corporation in cases of
Deadlocks. (sec.104)
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The proper forum may interfere in the
management of the corporate affairs in a Close
Corporation in cases of deadlocks and may
even order the dissolution, among others, of
the corporation even if the stockholders and/or
directors are acting in good faith within the
scope of their powers and authority.
If that is the case in Ordinary Stock
Corporation, the courts cannot interfere in the
business judgment of the directors,
stockholders.
But in a Close Corporation, Section 104 is
specific and it may even appoint a provisional
director who will break the deadlock.
In a Close Corporation, it may provide for a
greater quorum and voting requirement in
stockholders’ meeting so if the articles provide
that the voting requirement in investments of
corporate funds in another purpose or
business other than the primary purpose shall
be 3/4 (75%), if this is not met, there will be a
deadlock.
Q. WHAT IS THE REMEDY AVAILABLE?
Any stockholder may file a petition before the
proper forum that it interferes and the proper
forum may even appoint a provisional director
who will break the deadlock. He may cast a
deciding vote.
Q. WHO IS THE PROVISIONAL DIRECTOR?
Appointee of the court. He is the extension of
the court. He directly interferes in the
management of the corporate affairs.
The court or even the provisional director
himself may even compel a stockholder that he
sell his shares to the corporation irrespective of
the existence of unrestricted retained earnings.
The court/the provisional director may even
prevent the implementation of any provision or
any resolutions passed by the stockholders or
the directors.
(11) Transfer of Shares
Section 99. Effects of issuance or transfer of
stock in breach of qualifying conditions. -
1. If stock of a close corporation is issued or
transferred to any person who is not entitled
under any provision of the articles of
incorporation to be a holder of record of its
stock, and if the certificate for such stock
conspicuously shows the qualifications of the
persons entitled to be holders of record thereof,
such person is conclusively presumed to have
notice of the fact of his ineligibility to be a
stockholder.
2. If the articles of incorporation of a close
corporation states the number of persons, not
exceeding twenty (20), who are entitled to be
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holders of record of its stock, and if the
certificate for such stock conspicuously states
such number, and if the issuance or transfer of
stock to any person would cause the stock to
be held by more than such number of persons,
the person to whom such stock is issued or
transferred is conclusively presumed to have
notice of this fact.
3. If a stock certificate of any close corporation
conspicuously shows a restriction on transfer
of stock of the corporation, the transferee of the
stock is conclusively presumed to have notice
of the fact that he has acquired stock in
violation of the restriction, if such acquisition
violates the restriction.
4. Whenever any person to whom stock of a
close corporation has been issued or
transferred has, or is conclusively presumed
under this section to have, notice either (a) that
he is a person not eligible to be a holder of
stock of the corporation, or (b) that transfer of
stock to him would cause the stock of the
corporation to be held by more than the
number of persons permitted by its articles of
incorporation to hold stock of the corporation,
or (c) that the transfer of stock is in violation of
a restriction on transfer of stock, the
corporation may, at its option, refuse to register
the transfer of stock in the name of the
transferee.
5. The provisions of subsection (4) shall not be
applicable if the transfer of stock, though
contrary to subsections (1), (2) or (3), has been
consented to by all the stockholders of the
close corporation, or if the close corporation
has amended its articles of incorporation in
accordance with this Title.
6. The term "transfer", as used in this section,
is not limited to a transfer for value.
7. The provisions of this section shall not
impair any right which the transferee may have
to rescind the transfer or to recover under any
applicable warranty, express or implied.
Likewise, the transferee of the shares of stocks
of a Close Corporation cannot compel the Close
Corporation to register in its books the transfer
at the objection of any one stockholder, if it
breaches any of the qualifying conditions
provided for in the articles of incorporation
under Section 99.
Q. A STOCKHOLDER SOLD HIS SHARES TO
A PERSON NOT SPECIFIED. CAN THAT
TRANSFEREE COMPEL THE CORPORATION
TO REGISTER THE TRANSFER?
No. At the objection of any one stockholder of a
Close Corporation, it cannot be registered.
Whereas, in the case of Ordinary Stock
corporation, it is generally a ministerial duty on
the part of the corporation to register the
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transfer, as provided for in the case of Rural
Bank of Lipa v. CA. If it is refused without good
cause, it may be compelled to do so by
mandamus.
(12) Dissolution
Any stockholder in a Close Corporation may
petition the proper forum for the corporate
dissolution of the said company on the
grounds, among others, provided for under
Section 105.
If you take a look at Sec. 105, even mere
dishonesty or any act that is detrimental to any
stockholder is a ground for the dissolution of
the Close Corporation.
Whereas dissolution may be had only in
Ordinary Corporations on the grounds provided
for by the Corporation Code, PD 902-A, and
other special laws.
Dissolution is not the appropriate remedy of a
stockholder if they are protected or they may be
protected in some other legal means.
In the case of Republic v. Bisaya Land
Transport Co, there was misuse and
misapplication of the funds of the corporation
by certain corporate officers to the detriment of
the corporation and the stockholders. It is an
Ordinary corporation.
The 2 stockholders went to court and sought
for the dissolution of the corporation.
The Supreme Court held that, no you have
other remedies available in law
Q. WILL THIS APPLY IN A CLOSE
CORPORATION?
No. Because even mere dishonesty, any act
that may be detrimental to any of the
stockholders or the corporation itself is a
ground for the dissolution of a Close
Corporation.
SPECIAL CORPORATIONS
TWO TYPES OF SPECIAL CORPORATIONS:
(1) Educational (Stock or Non-Stock)
(2) Religious (Corporation Sole or Religious
Society)
EDUCATIONAL CORPORATIONS
Section 106. Incorporation. – Educational
corporations shall be governed by special laws
and by the general provisions of this Code. (n)
The special law spoken here is the Education
Act of the Philippines and under the provision
of this law, once they are recognized by the
government as such institutions of learning, it
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must be incorporated within a period of 90
days under the provisions of the Corporation
Code. This refers to institutions of learning
issuing certificates of completion in the
academic field.
The governing board in an Educational Stock
corporation should not also be less than 5 but
not more than 15. It can be anywhere between
5-15. But this is not entirely true.
Because if it is an Educational Non-Stock
Corporation, the number of the governing
board should be in multiples of 5 only.
Q. WHO MAY BE MEMBERS OF THE BOARD
OF DIRECTORS?
Art. XIV, sec. 4, 1987 Constitution—
Educational Institutions other than those
established by religious order, mission boards
and charitable organizations shall be owned
solely by citizens of the Philippines or
corporations 60% of the capital is owned by
such citizens. The control and administration
of educational institutions shall be vested in
citizens of the Philippines.
GR: Therefore, foreigners may own or hold
shares in an Educational Corporation, but they
are not generally qualified to be members of the
Board of Directors.
Because directors are corporate managers and
the management of educational institutions are
vested solely to citizens of the Philippines.
XPN: Nonetheless, they may still qualify to sit
and act as members of the Board if the
educational involved is established by religious
order, mission board and charitable
organization.
Q. MAY AN EDUCATIONAL INSTITUTION
ISSUING CERTIFICATES OF COMPLETION
IN THE ACADEMIC FIELD BE FORMED OR
ORGANIZED AS A STOCK CORPORATION?
No. Educational institutions issuing certificates
of completion in the academic field can no
longer be organized as a stock corporation by
virtue of B.P Blg. 232. It now prohibits the
formation of an institution of learning issuing
certificates of completion in the academic field
as a stock corporation. They may only be
organized now as a non-stock corporation.
In fact, under that B.P Blg. 232, those that
were formed or organized as Stock corporations
are being urged to convert themselves into
Non-Stock corporations.
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RELIGIOUS CORPORATIONS
Section 110. Corporation sole. – For the
purpose of administering 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
archbishop, bishop, priest, minister, rabbi or
other presiding elder of such religious
denomination, sect or church.
Corporation Sole can be formed not by any
person. It is formed and organized by one
single person or individual, either by the:
(1) Chief Archbishop;
(2) Bishop;
(3) Priest;
(4) Rabbi;
(5) Presiding Elder; or
(6) Head of any religious Denomination, Sect or
Church.
Section 112. Submission of the articles of
incorporation. – The articles of incorporation
must be verified, before filing, by affidavit or
affirmation of the chief archbishop, bishop,
priest, minister, rabbi or presiding elder, as the
case may be, and accompanied by a copy of the
commission, certificate of election or letter of
appointment of such chief archbishop, bishop,
priest, minister, rabbi or presiding elder, duly
certified to be correct by any notary public.
From and after the filing with the Securities
and Exchange Commission of the said articles
of incorporation, verified by affidavit or
affirmation, and accompanied by the
documents mentioned in the preceding
paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties of the
religious denomination, sect or church
theretofore administered or managed by him as
such chief archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held in trust
by him as a corporation sole, for the use,
purpose, behalf and sole benefit of his religious
denomination, sect or church, including
hospitals, schools, colleges, orphan asylums,
parsonages and cemeteries thereof. (n)
In comparison with Ordinary corporations, it
commences to exist and is vested with juridical
personality upon the filing of the Articles of
Incorporation with the SEC.
In comparison to the provisions of Sec. 19
which provides that a corporation commences
to exist and will be vested with a juridical
personality upon the issuance of the certificate
of registration or incorporation by the SEC.
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The corporation sole has the same right, power
and privilege to own, hold and acquire
properties like any other corporation.
Q. BUT IS THE CORPORATION SOLE
POSSESSED WITH THE SAME POWER,
RIGHT OR PRIVILEGE TO DISPOSE, SELL,
MORTGAGE ITS REAL PROPERTIES LIKE
ANY CORPORATION?
Section 113. Acquisition and alienation of
property. – Any corporation sole may purchase
and hold real estate and personal property for
its church, charitable, benevolent or
educational purposes, and may receive
bequests or gifts for such purposes. Such
corporation may sell or mortgage real property
held by it by obtaining an order for that
purpose from the Court of First Instance of the
province where the property is situated upon
proof made to the satisfaction of the court that
notice of the application for leave to sell or
mortgage has been given by publication or
otherwise in such manner and for such time as
said court may have directed, and that it is to
the interest of the corporation that leave to sell
or mortgage should be granted. The application
for leave to sell or mortgage must be made by
petition, duly verified, by the chief archbishop,
bishop, priest, minister, rabbi or presiding
elder acting as corporation sole, and may be
opposed by any member of the religious
denomination, sect or church represented by
the corporation sole: Provided, That in cases
where the rules, regulations and discipline of
the religious denomination, sect or church,
religious society or order concerned
represented by such corporation sole regulate
the method of acquiring, holding, selling and
mortgaging real estate and personal property,
such rules, regulations and discipline shall
control, and the intervention of the courts shall
not be necessary. (159a)
GR: No. It needs a court order under Section
113. True it is, under that same provision, it
may own, hold, acquire properties. It cannot
dispose or even encumber or even mortgage
real properties. Thus, it must obtain an order
by application for leave from the RTC where the
real property is located for the purpose of its
disposition or encumbrance.
XPN: Unless it has rules and regulations or
discipline providing for the method of
disposition or encumbrance of real properties
such court order will no longer be required for
its validity.
The religious societies just like any other
ordinary non-stock corporation organized by
not less than 5 but not more than 15
incorporators created for the purpose of
securing secular purposes.
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DISSOLUTION AND WINDING UP Voluntary Dissolution where creditors are

Dissolution is the extinguishment of corporate
franchise and the termination of corporate
existence.
THERE ARE 3 MODES OF DISSOLUTION
(1) Expiration of the corporate term;
(2) Voluntary Surrender of the Corporate
Franchise;
(3) Involuntary Dissolution
EXPIRATION OF THE CORPORATE TERM
When the period of corporate life expires, the
corporation ceases to be a body corporate for
the purpose of continuing the business for
which it is organized.
thereby affected.
Section 119. Voluntary dissolution where
creditors are affected. – Where the dissolution
of a corporation may prejudice the rights of any
creditor, the petition for dissolution shall be
filed with the Securities and Exchange
Commission. The petition shall be signed by a
majority of its board of directors or trustees or
other officers having the management of its
affairs, verified by its president or secretary or
one of its directors or trustees, and shall set
forth all claims and demands against it, and
that its dissolution was resolved upon by the
affirmative vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-
thirds (2/3) of the members at a meeting of its
stockholders or members called for that
purpose.

There is no need to institute a quo warranto If the petition is sufficient in form and
proceeding to determine up to what point in substance, the Commission shall, by an order
time it was dissolved because the period is reciting the purpose of the petition, fix a date
provided for in the Articles of Incorporation. on or before which objections thereto may be
filed by any person, which date shall not be
When such period expires without any less than thirty (30) days nor more than sixty
extension having been made pursuant to law, (60) days after the entry of the order. Before
the corporation is dissolved automatically such date, a copy of the order shall be
insofar as the continuation of its business is published at least once a week for three (3)
concerned (PNB v. CFI) consecutive weeks in a newspaper of general
circulation published in the municipality or city
VOLUNTARY DISSOLUTION where the principal office of the corporation is
situated, or if there be no such newspaper,
Voluntary Dissolution where no creditors are then in a newspaper of general circulation in
affected the Philippines, and a similar copy shall be
posted for three (3) consecutive weeks in three
Section 118. Voluntary dissolution where no (3) public places in such municipality or city.
creditors are affected. – If dissolution of a
corporation does not prejudice the rights of any Upon five (5) day’s notice, given after the date
creditor having a claim against it, the on which the right to file objections as fixed in
dissolution may be effected by majority vote of the order has expired, the Commission shall
the board of directors or trustees, and by a proceed to hear the petition and try any issue
resolution duly adopted by the affirmative vote made by the objections filed; and if no such
of the stockholders owning at least two-thirds objection is sufficient, and the material
(2/3) of the outstanding capital stock or of at allegations of the petition are true, it shall
least two-thirds (2/3) of the members of a render judgment dissolving the corporation and
meeting to be held upon call of the directors or directing such disposition of its assets as
trustees after publication of the notice of time, justice requires, and may appoint a receiver to
place and object of the meeting for three (3) collect such assets and pay the debts of the
consecutive weeks in a newspaper published in corporation. (Rule 104, RCa)
the place where the principal office of said
corporation is located; and if no newspaper is Shortening of the corporate term under Section
published in such place, then in a newspaper 120 will partake of the nature of an
of general circulation in the Philippines, after amendment of the articles of incorporation. It
sending such notice to each stockholder or may have the effect also of the dissolution of
member either by registered mail or by the corporation.
personal delivery at least thirty (30) days prior
to said meeting. A copy of the resolution Section 120. Dissolution by shortening
authorizing the dissolution shall be certified by
corporate term. – A voluntary dissolution may
a majority of the board of directors or trustees
be effected by amending the articles of
and countersigned by the secretary of the incorporation to shorten the corporate term
corporation. The Securities and Exchange pursuant to the provisions of this Code. A copy
Commission shall thereupon issue the of the amended articles of incorporation shall
certificate of dissolution. be submitted to the Securities and Exchange
Commission in accordance with this Code.
Upon approval of the amended articles of
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incorporation of the expiration of the shortened
term, as the case may be, the corporation shall
be deemed dissolved without any further
proceedings, subject to the provisions of this
Code on liquidation. (n)
Example:
The corporation was organized 25 years ago.
Term of existence is 50 years so 25 years from
now, it will be dissolved by expiration of term.
But the corporation shortens the corporate
term to the effect that it shall exist for a period
of 50 years from the date of its registration, it
shall exist only for the period of 25 years from
the date of its registration. So, effectively,
dissolving the corporation.
It will never become valid and effective until
and unless the SEC gives its stamp of approval.
Unlike in ordinary amendments of the articles
under Section 116 not acted upon by the SEC
it shall become valid and effective on the day of
its filing if not acted upon by the SEC without
cause attributable to the corporation. The
amendment shortening the corporate term will
have the effect of a dissolution, Section 120
requires the approval of the SEC.
INVOLUNTARY DISSOLUTION
Section 121. Involuntary dissolution. – A
corporation may be dissolved by the Securities
and Exchange Commission upon filing of a
verified complaint and after proper notice and
hearing on the grounds provided by existing
laws, rules and regulations. (n)
Upon filing of the verified petition or motu
proprio on grounds provided for by law, there
may also be grounds provided for by other
special laws.
(1) Non-user of corporate franchise
(2) Continuous inoperation for at least 5 years
(3) Failure to organize
(4) Failure to file by-laws
(5) Fraud in procuring its certificate of
registration under P.D 902-A
(6) Serious misrepresentation as to what a
corporation can do or is doing to the
damage and prejudice of the investing
public and/or the corporation itself
(7) Violation, refusal to comply with the lawful
orders of the SEC
(8) Violation of any of the provisions of the
Code
(9) In cases of deadlocks in a close corporation
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(10) In cases of gross mismanagement and
fraudulent conduct of its affairs
Other grounds provided for by special laws like
the Securities Regulation Code:
Any violation of the provision of the Securities
Regulation Code may cause the revocation of
the certificate of registration of a brokerage firm
or those engaged in the buying or selling of
securities for the account of their clients.
This is Involuntary Dissolution and involuntary
dissolution is an extreme remedy and the
courts proceed with extreme caution which
have for their object the forfeiture of a
corporate franchise and forfeiture will not be
allowed except upon express limitation or for
plain abuse of power for which the corporation
fails to fulfill the design or purpose of its
organization.
But when the abuse or violation constitutes or
threatens a substantial injury to the public or
such as to amount to a violation of the
fundamental conditions of its charter
dissolution will be granted.
In most cases, the courts will merely enjoy the
further commission of the questioned act.
In the case of Republic v. Bisaya Land, there
was misuse or misapplication of the corporate
funds and the stockholders complained seeking
for the dissolution of the corporation. The
courts should not have imposed the extreme
penalty of dissolution because there are other
remedies available to the stockholders
concerned.
In the first place, it does not threaten a
substantial injury to the public. It is between
and among themselves.
Q. WHAT IS THE EFFECT OF A
DISSOLUTION?
(1) The dissolution of a corporation not only
terminates its primary franchise to be and
act as a corporation but generally it also
prevents it from exercising other or
secondary franchises which may have been
conferred to it.
(2) It terminates its power to enter into
contract or to continue the business as a
going concern.
(3) It has been held that a corporation whose
corporate life expired cannot legally pursue
the business for which it is organized. It
cannot apply for a new certificate or a
secondary franchise for it is incapable of
receiving a grant. (Buenaflor vs.
Camarines Sur Industry)
(4) It is no longer possessed with a juridical
personality to continue its business.
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Neither can it enforce a contract entered
into it prior to its dissolution for the
purpose of continuing the business of its
organization. (Cebu Port Labor Union vs.
State Marine)
(5) In general, debts due to or by a corporation
are not extinguished by its dissolution. This
is the clear import of Sec. 145 under the
Miscellaneous provisions of the Code, when
it provides that:
Section 145. Amendment or repeal. – No right
or remedy in favor of or against any
corporation, its stockholders, members,
directors, trustees, or officers, nor any liability
incurred by any such corporation,
stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by
the subsequent dissolution of said corporation
or by any subsequent amendment or repeal of
this Code or of any part thereof. (n)
LIQUIDATION AND WINDING UP
Section 122. Corporate liquidation. – Every
corporation whose charter expires by its own
limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for
other purposes is terminated in any other
manner, shall nevertheless be continued as a
body corporate for three (3) years after the time
when it would have been so dissolved, for the
purpose of prosecuting and defending suits by
or against it and enabling it to settle and close
its affairs, to dispose of and convey its property
and to distribute its assets, but not for the
purpose of continuing the business for which it
was established.
At any time during said three (3) years, the
corporation is authorized and empowered to
convey all of its property to trustees for the
benefit of stockholders, members, creditors,
and other persons in interest. From and after
any such conveyance by the corporation of its
property in trust for the benefit of its
stockholders, members, creditors and others in
interest, all interest which the corporation had
in the property terminates, the legal interest
vests in the trustees, and the beneficial interest
in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs,
any asset distributable to any creditor or
stockholder or member who is unknown or
cannot be found shall be escheated to the city
or municipality where such assets are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation
shall distribute any of its assets or property
except upon lawful dissolution and after
payment of all its debts and liabilities.
Liquidation and Winding up refers to the act of
collecting all assets, properties and rights and
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the payment of all its debts, liabilities and
obligations and the ultimate distribution of the
remaining assets to the stockholders in
proportion to their respective subscription or in
accordance with their contract of subscription.
Because there may be, of course, shares of
stocks that are preferred in the distribution of
the remaining assets of the corporation. If that
be the case, then the preferred shareholders
shall be entitled to receive the preference
indicated in their contract of subscription
before they may, of course, transfer or give the
stockholders their share of the remaining
assets or properties of the corporation.
Despite the termination of the corporate
existence and the extinguishment of the
corporate franchise, a dissolved corporation,
however, under Section 122 of the Code, is still
possessed with a juridical personality for
another period of 3 years for the purpose of
prosecuting or defending suits filed for or
against it or to distribute its assets and close
and settle its affairs.
But this 3-year period provided for under
Section 122 should not be for the purpose of
continuing the business for which it is formed
or organized. Upon the expiration of the 3-year
period, the juridical personality of the
corporation ceases to exist for all intents and
purposes and as a general rule, it can no longer
sue or be sued. It no longer exists and has no
more valid existence. (Gelano v. CA)
This 3-year period of liquidation provided
under Section 122, however, is not an absolute
rule.
THERE ARE 3 MODES OF LIQUIDATION:
1. It may be undertaken by the Board of
Directors themselves;
2. By the appointment of an assignee or
trustee;
3. By the appointment of a receiver or a
liquidating trustee.
If the corporation opts to undertake the
liquidation itself through the governing Board
of Directors, it will only have a period of 3 years
within which to finish the task of liquidation.
Claims for or against the corporation not filed
within the 3-year period will become
unenforceable as there exist no more corporate
entity against which they can be enforced.
Actions pending for or against the corporation
when the 3-year period expires are abated
since after that period, the corporation ceases
to exist for all intents and purposes and is no
longer capable of suing or of being sued.
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But if the liquidation is undertaken by a
trustee, assignee, receiver, or liquidator, the 3-
year period will not apply. Why not?
If a trustee, assignee, receiver or liquidator is
appointed, the assets, rights properties of the
dissolved corporation will be conveyed to them.
The effect of the conveyance will make that
person the legal owner of the properties
conveyed subject only to the beneficial interest
of the stockholders and creditors alike.
So, being the legal owner, he can continue
defending, to sue or of being sued for the
benefit of the stockholders and creditors alike.
(Sumera v. Valencia, National Abaca v. Fore
and Board of Liquidators v. Kalaw)
Being the legal owner, he or they can continue
defending or prosecuting the case for the
benefit of the stockholders and creditors alike.
Q. MAY A CORPORATION DISSOLVED
TRANSFER ITS ASSETS AND/OR
PROPERTIES TO A NEW CORPORATION FOR
THE PURPOSE OF REINCORPORATING A
NEW AND CONTINUE THE BUSINESS OF
THE DISSOLVED ONE?
EXAMPLE: THE CORPORATION DISSOLVED
AND THERE IS LIQUIDATION. IT GATHERED
ALL ITS ASSETS, PROPERTIES, RIGHTS
AND AFTER PAYING ALL ITS DEBTS AND
LIABILITIES, THERE REMAINED MANY
MORE PROPERTIES. INSTEAD OF
DISTRIBUTING THESE TO THE
SHAREHOLDERS IN ACCORDANCE WITH
THEIR STOCKHOLDINGS, THE
CORPORATION WITH THE CONSENT OF ALL
THESE STOCKHOLDERS TRANSFERS THE
PROPERTIES TO A NEW CORPORATION
WHICH WILL CONTINUE THE BUSINESS OF
THE DISSOLVED ONE. IS THAT POSSIBLE?
Yes. In the case of Chung Ka Bio v. IAC, the
Board of Directors is not permitted to
undertake any activity outside of the usual
liquidation of the business of the dissolved
corporation.
But there is nothing to prevent the
stockholders from conveying their respective
stockholdings towards the creation of a new
corporation to continue the business of the old
one.
The Supreme Court stressed, winding up is the
sole activity of a dissolved corporation that
does not intend to incorporate anew. But if it
does it is not unlawful for the old Board of
Directors to negotiate and transfer the
remaining assets of the dissolved corporation to
the new corporation intended to be created as
long as the stockholders themselves have given
their consent.
3rd par of Section 122 provides that any assets
distributable to a creditor, stockholder or
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member who is unknown or cannot be found
shall be escheated to the city or municipality
where the property is located or organized.
FOREIGN CORPORATIONS
Q. WHETHER IT MAY SUE OR BE SUED IN
THE PHILIPPINES?
GR: It is not the lack of the required license but
doing business without the license, which bars
a foreign corporation from access to our courts.
(Universal Shipping v. IAC)
Doing or transacting business without a license
is what the law says so as to bar the foreign
corporation from access to our courts.
Q. SO WHAT CONSTITUTES “DOING OR
TRANSACTING BUSINESS” SO AS TO BAR
THE FOREIGN CORPORATION FROM
ACCESS TO OUR COURTS IF IT DOES
BUSINESS WITHOUT THE REQUISITE
LICENSE?
The term “doing business or transacting
business” implies a continuity of commercial
dealings. First thing that you have to
remember, is there continuity of commercial
dealings?
The performance of acts or works or the
exercise of some of the functions normally
incident to and in the progressive prosecution
of the purpose or objects of its organization.
XPN: A foreign corporation can sue and/or gain
access to our courts or other administrative
agencies if:
(1) The act involved is an isolated one or one
single transaction because there is no
continuity of commercial dealings; or
(2) The corporation is not here seeking to
enforce any legal or contractual rights
arising from or growing out of any business
transaction which it has transacted in the
Philippines; (Western Equipment v.
Reyes, Universal Products v. CA) or
(3) The purpose of the suit is to protect its
corporate name, trademark, trade name,
reputation, or goodwill; (General garments
v. Director, Converse Rubber v. Universal
Products, Fuma v. IAC) or
Because we have the Treaty of Paris to which
the Philippines became a signatory in 1965.
The member nations, the signatory countries
there allows each other’s national to sue on
other’s court even without registration in its
forum for the protection of industrial property
rights, protection of corporate name, goodwill,
trademark and its reputation whether or not it
is doing or it is not doing business in the
forum.
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(4) Or if it is based on a violation of the Revised
Penal Code; (Lacoste v. Fernandez)
In this case, Lacoste filed a criminal complaint
for infringement under the Revised Penal Code.
The Supreme Court held, No, it is not doing
business. Why? Because the distributor has an
independent status. The mere fact of
appointing a distributor or a representative
domiciled in the Philippines will not necessarily
result to its “doing business”.
Because if that distributor has an independent
status that is not doing business.
Independent Status, if the agent or distributor
is acting for and in its own name, for and its
own account not in the name and/or for the
account of the foreign corporation.
If that is the case, then the appointment of the
representative or distributor is NOT doing
business.
(5) The party is Estopped to challenge the
personality of the corporation by merely
entering into a contract or transaction with
it. (Communication Materials and
Designs v. CA)
(6) It is not instituting an action but it is
merely defending a suit filed against it.
(Time v. Reyes)
WITHDRAWAL OF A LICENSE OF A FOREIGN
CORPORATION
Section 136. Withdrawal of foreign
corporations. – Subject to existing laws and
regulations, a foreign corporation licensed to
transact business in the Philippines may be
allowed to withdraw from the Philippines by
filing a petition for withdrawal of license. No
certificate of withdrawal shall be issued by the
Securities and Exchange Commission unless
all the following requirements are met;
1. All claims which have accrued in the
Philippines have been paid, compromised or
settled;
2. All taxes, imposts, assessments, and
penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political
subdivisions have been paid; and
3. The petition for withdrawal of license has
been published once a week for three (3)
consecutive weeks in a newspaper of general
circulation in the Philippines.
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P. D. 902-A
P.D 902-A was signed into law by the then
President Marcos in the 70’s at a point in time
when he was still possessed with legislative
powers an authority.
It granted the SEC extensive powers and
authority from administrative, supervisory,
regulatory, investigative, prosecutory, and even
adjudicative or quasi-judicial powers and
functions carved out of the original
jurisdictions of the Regional Trial Court.
For more than 20 years, the SEC was vested
with original and jurisdiction provided for
under Sec. 5 of the Presidential Decree,
Original and Exclusive. This original and
exclusive jurisdiction of the SEC, particularly
Sec. 5 and 6 of the P.D was however
transferred to the courts of regular jurisdiction
that may be designated by the Supreme Court
pursuant to Sec. 5.2 of R.A 8799, Securities
Regulation Code of the Philippines, in the year
2000.
November 2002, the high Court made the
designation of these regular trial courts as the
Special Commercial Courts. Only them can
hear and decide controversies falling squarely
under Sec. 5 and Sec. 6 of the P.D.
P.D says: It is possessed with original and
exclusive jurisdiction to hear and decide cases
involving, among others, under Sec. 5:
a. Devises or schemes employed by or any act
of the board of directors, business
associates, its officers or partners,
amounting to fraud and misrepresentation
which may be detrimental to the interest of
the investing public and/or the corporation,
partners, members or associations or
organizations registered with the
commission;
This is the provision relied upon by the SEC in
pursuing revocation proceedings and the
institution of criminal actions for violation of
the securities laws against persons engaged in
what is commonly known as “Pyramiding
Schemes” or those engaged in the sale of
investment contracts with a promise of a very
high rate of return. Most of them are not
authorized to engage in that particular activity.
b. Controversies arising out of intra-corporate
or partnership relations, between and
among the stockholders, members, or
associates; between any or all of them and
the corporation, partnership or association
of which they may be stockholders,
members or associates, respectively; and
between the corporation, the partnership or
association and the State as it concerns
their individual franchise to be and act as a
corporation, partnership or association.
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c. Controversies in the election or
appointment of directors, trustees or
officers or managers of such corporations,
partnerships or associations.
d. Petitions of corporations, partnerships or
associations to be declared in a state of
suspension of payments in cases where the
corporation, partnership or association
possesses sufficient assets to cover its
debts and liabilities but foresees the
impossibility of meeting them when they
respectively fall due or in cases where the
corporation, partnership or association has
no sufficient assets to cover its liabilities
but is under management committee or a
rehabilitation receiver created pursuant to
the same decree.
With respect to item (b), intra-corporate
controversies:
the sole criteria of determining the existence of
intra-corporate controversy to place the case
within the exclusive and original jurisdiction of
the sec, which is now the special commercial
courts was only one, that there must be an
intra-corporate relationship.
If there is an intra-corporate relationship, then
it is an intra-corporate controversy and intra-
corporate relationship is a relationship between
stockholders, members, directors, partners,
associates, the officers, directors, etc.; or
between any or all of them and the corporation;
and third, the corporation and the State insofar
as the right of the corporation to exist as such
is concerned. If there is such a relationship, it
is an intra-corporate controversy to place the
case within the ambit of the original and
exclusive jurisdiction now of the special
commercial courts.
In PSBA v. Leano, the Supreme Court held
that, other than the intra-corporate
relationship, the controversy must arise out of
that relationship.
So there are 2 things to be considered in order
to place the case within the specialized
jurisdiction of the special commercial courts.
In Speed Distributing v. CA, the Supreme
Court stressed, to determine whether a case
involves an intra-corporate controversy and if it
is to be heard originally and exclusively by the
special commercial courts, 2 elements must
therefore concur:
1. The status of the relationship of the parties.
That is, there is an intra-corporate
relationship;
2. The nature of the questioned, that is, the
subject of the controversy. Meaning, the
controversy must arise out of that
relationship.
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The first element requires the existence of
intra-corporate relationship. The second
element requires that the dispute between and
among the parties must be intrinsically
connected with the regulation of the
corporation.
If the nature of the controversy involves
matters that are purely civil in character,
necessarily, the case does not involve intra-
corporate controversy and the case may be
heard by the courts of general jurisdiction and
not the special commercial courts.
In Peneyra v. IAC, a stockholder entered into a
contract with his own corporation for the
operation and management of the canteen in
the corporate headquarters. The controversy
arose out of a breach thereof.
The same cannot qualify to be an intra-
corporate controversy. Its roots being a
contractual breach separate and distinct from
the corporate relationship between the
stockholder and the corporation.
The controversy did not arise out of intra-
corporate relationship but by virtue of a
contractual breach.
Q. TRANSFERS OF SHARES OF STOCK. THE
TRANSFEREE OF THE SHARES OF STOCK
IS NOT AN ORIGINAL STOCKHOLDER. HE IS
AN OUTSIDER AND HE ACQUIRED SHARES
FROM A SELLING STOCKHOLDER. HE GOES
TO THE CORPORATION TO REGISTER THE
TRANSFER SO THAT IT MAY BE RECORDED
IN HIS NAME AND CAN EXERCISE HIS
RIGHTS AS A STOCKHOLDER. THE
CORPORATION REFUSED TO REGISTER
THE TRANSFER. IS THIS INTRA-
CORPORATE IF HE SUES THE
CORPORATION FOR MANDAMUS? WILL
THIS BE AN INTRA-CORPORATE
CONTROVERSY SUBJECT TO THE
ORIGINAL AND EXCLUSIVE JURISDICTION
OF THE SPECIAL COMMERCIAL COURTS?
OR MAY IT BE HEARD BY ANY ORDINARY
REGULAR COURT?
In Rivera v. Florendo, respondents are merely
seeking to register as stockholders due to an
alleged sale of shares of stock.
The same is not an intra-corporate controversy
and the regular courts have jurisdiction. They
are not yet stockholders.
In this case, the alleged vendor did not endorse
the certificate of stock that was allegedly sold
by him in favor of the purchaser and he even
specifically resisted that registration of the
transfer in the stock and transfer book of the
corporation. There was therefore no compliance
with the mode and manner of transferring
shares as mandated by Section 63 which says,
“Endorsement and Delivery of the stock
certificate”.
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In Abejo v. Dela Cruz, the Supereme Court
ruled, that there is no requirement that a
stockholder of a corporation must be a
registered one in order that the SEC may take
exclusive and original cognizance of the suit
seeking to enforce his right as a stockholder.
Because the SEC under the mandate of the
P.D, Section 5 has absolute jurisdiction,
supervision and control over corporations and
it’s even called upon to enforce the provisions
of the Corporation Code, among others, the
stock purchaser’s right to have his name
recorded in the books of the corporation.
In this case: The certificate was endorsed and
delivered to the transferee and the corporation
was notified of the transfer. But the corporation
refused the registration.
The Supreme Court held that this is intra-
corporate dispute because the transferor has
done all that he can and within his powers and
all that is required in order that he may be
considered as a stockholder. The provisions of
Sec. 63 regarding transfers of shares have been
duly complied with.
If he is merely seeking to be recognized as a
stockholder and the requirements for a valid
transfer has not been complied with, it will not
be an intra-corporate controversy.
But if the law or the manner in which transfer
is to be effected has been duly complied with,
he is for all intents and purposes already a
stockholder under the Abejo ruling and it will
become an intra-corporate controversy.
So it depends whether or not he has already
complied with all the requirements of the law in
order that he may be rightfully considered as a
stockholder.
If not, then it is not within the exclusive or
original jurisdiction of the special commercial
court.
But if it is in compliance with the law, then it is
intra-corporate only within the original and
exclusive jurisdiction of the special commercial
courts
For as long as the controversy revolves around
the question of the validity of the appointment,
election, or of removal of corporate directors
and officers Elected or Appointed by the Board
Of Directors, then the controversy is exclusively
cognizable by the special commercial court and
not the NLRC. (Tabang v. NLRC)
As long as the particular officer involved was
elected by the Board of Directors and he
questions the propriety or the manner or the
questions the validity by which he was removed
or ousted:
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It is cognizable originally and exclusively by the
special commercial courts.
XPN: This exclusive and original jurisdiction
will not apply:
(1) If the controversy is PURELY a labor
dispute;
(2) If the main cause of action is for the
recovery of unpaid wages, separation pay
and attorney’s fees without questioning the
validity of his removal or his ouster.
(Midland Construction v. Mobilia)
So the main consideration therefore, for
purposes of determining whether it is the NLRC
or the special commercial court that is
possessed with jurisdiction is, whether or not
the corporate officer involved asserts his right
as such officer or questions the manner or the
validity by which he was removed or ousted
therefrom.
If that is the case, then it is the special
commercial court.
If he does not question the manner in which he
was removed, but he merely seeks for
separation pay, backwages, etc.—then the
NLRC.
Sec. 5 also speaks of suspension of payments.
Petitions of corporations or associations to be
declared in a state of suspension payments
Note the Financial Rehabilitation and
Insolvency Act of 2010:
This matter rehabilitation, suspension of
payments is now covered by the Financial
Rehabilitation and Insolvency Act.
But the basics of suspension of payment and
rehabilitation is similarly situated with the P.D
902-A.
P.D 902-A, this was an amendment introduced
during the effectivity of P.D 902. It was
amended by insertions of these provisions on
suspensions of payments and rehabilitation of
distressed corporations.
The proper forum may issue an order
suspending payments of claims against a
distressed corporation in accordance with
Section 5(d) of the P.D.
The last sentence of Sec. 16 also provides that
upon appointment of a Management
Committee, Rehabilitation Receiver Board or
Body:
All actions for claims against the distressed
corporation, partnership or association under
management or receivership pending before
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any court, tribunal, board or body shall be
suspended accordingly.
THERE ARE 3 TYPES OF SUSPENSION OF
PAYMENTS
1. Simple suspension of payments, which
would be the mere deferments of the
payment of corporate liabilities or
obligations where the corporation has
sufficient assets to cover its debts and
liabilities but merely foresees the
impossibility of meeting them when they fall
due without appointment of a receiver or a
rehabilitation plan.
Example:
A Construction company engaged in general
construction enters into a contract with the
GSIS, Pag-Ibig and/or SSS for the construction
of 1,500 medium-sized housing units for the
members of these government agencies.
The stipulation provides that they will be paid
50% upon of 50% completion of the project and
the remainder, upon the completion of the
entire project. There was a stipulation as to
when the 50% payment will be made but there
are circumstances which prevented the
completion of the project. Of course, the
construction company secured a loan to
mobilize the project. The financial institution is
now bent on foreclosing the assets of the
corporation including the buildings or the
houses they have already constructed.
Of course, it has collectibles from GSIS, Pag-
Ibig and SSS but it cannot yet collect because
the project has not yet been completed. This
particular company can go to the proper forum
and seek for an order suspending the payment
of all actions or claims against it.
Let’s say for another 6 months until the entire
project will have been completed and it can
already collect from the SSS, Pag-Ibig and/or
GSIS. Considering the facts attendants and of
course, the contract executed between the
particular corporation and GSIS, Pag-Ibig and
SSS, the court will suspend actions for claims
against the corporation and it will say that they
should start paying the creditor on a certain
specified date.
It has sufficient assets to cover its debts and
liabilities but it merely foresees the
impossibility of meeting them when they fall
due.
2. Suspension of payments with the
appointment of a Management Committee
or a Receiver and with or without a
Rehabilitation Plan where the corporation
has sufficient assets to cover its debts and
liabilities but merely foresees the
impossibility of meeting them when they
respectively fall due.
AUSL/CORPORATION LAW REVIEWER/AJP-SFO
If it is without a rehabilitation plan, the
Receiver or the Management Committee will be
tasked to study the best way to put the
company back on its two feet and will thereby
recommend proper course to be taken in the
proper forum.
This is what Philippine Airlines did. It had
debts of over $2B in the early 90s and the
European creditors were already bent on
foreclosing the properties of PAL. PAL went to
the SEC and filed a petition for suspension of
all actions for claims against it with a
rehabilitation plan and the appointment of a
Management Committee. The SEC then issued
a suspension order and based on the
rehabilitation plan it submitted, the
Management Committee studied the plan and
recommended to the SEC the approval of the
said rehabilitation plan which was also
implemented by the Management Committee.
3. Suspension of payments with the
appointment of a Receiver or Management
Committee with or without a rehabilitation
plan where the corporation has no
sufficient assets to cover its debts and
liabilities.
This happened in the case of Victorias Milling.
Victorias Milling expanded its business. It is
engaged primarily in the manufacture of sugar.
It expanded its business and it used its funds
supposedly to continue its production of sugar
thinking that in a period of 2 years, they will
have an ROI, which it did not happen. So the
creditors were already bent on foreclosing the
manufacturing plant of Victorias Milling.
What did the management do? At a point in
time when it is still within the exclusive and
original jurisdiction of the SEC, they went to
the SEC, filed for a petition for suspension of
all actions for claims against the corporation
with the appointment of a Management
Committee without a rehabilitation plan and
prayed that the Management Committee to be
appointed shall study the best way to bring
back the corporation back on its 2 feet. The
SEC did just that.
One of the main tasks of the Management
Committee or the Receiver in cases of
suspensions of actions for claims against the
corporation is to meet with the creditors to
discuss the possibility of putting the
corporation back on its 2 feet and become
operational again.
What did the Management Committee do? It
asked the financial creditors, banking
institutions and other financial creditors of
Victorias Milling if they can convert their claims
into equity. They did. What happened?
The liabilities of Victorias Milling were erased
because the claims of the banking institutions
and financial institutions were converted into
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equity and barely 7 years thereafter, Victorias
Milling was already back on its 2 feet and had
this institutional creditors foreclose the
properties of Victorias Milling, they would have
incurred losses instead of making profits.
When the corporation was back on its 2 feet,
they sold their equity in Victorias Milling and
made much more money than if they should
have foreclosed the assets or properties of
Victorias Milling.
Yes, a corporation without sufficient assets to
cover its debts and liabilities may be granted a
breathing spell in order that they may get back
on its 2 feet and become operational again.
Q. WHAT IS THE REASON, THEREFORE, OF
SUSPENDING ALL ACTIONS FOR CLAIMS
AGAINST THE CORPORATION?
The reason for suspending actions for claims
against the corporation is not really to enable
the Management Committee or the
Rehabilitation Receiver to substitute the
defendant in any pending action against it
before any court, tribunal, board or body. (PAL
v. Spouses Kurangking)
Obviously, the real justification is to enable to
Management Committee or the Rehabilitation
Receiver to effectively exercise its or his powers
free from any judicial or extra-judicial
interference that might unduly hinder or
prevent the rescue of the debtor company. To
allow such other actions to continue would
only add to the burden of the Management
Committee or the Rehabilitation Receiver whose
time, effort and resources would be wasted in
defending claims against the corporation
instead of being directed towards restructuring
and/or rehabilitation.
EQUALITY IN EQUITY
In cases of suspension of all actions for claims
against a corporation, All preferred creditors
will lose their preference. (RCBC v. IAC)
Q. WHAT IS THE EFFECT OF THE
APPOINTMENT OF A MANAGEMENT
COMMITTEE, REHABILITATION RECEIVER
OR BOARD/BODY OR ORDER OF
SUSPENSION OF PAYMENTS FOR ALL
ACTIONS FOR CLAIMS AGAINST THE
CORPORATION?
For the guidance of the bench and the bar:
1. All claims against the corporation that are
pending before any court, tribunal or body
without distinction as to whether or not the
creditor is secured or unsecured shall be
suspended effective upon the order of
suspension of payments or upon the
appointment of a Management Committee,
Rehabilitation Receiver, Board or Body.
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2. Secured creditors will retain their
preference over unsecured ones but
enforcement of their preference will be
equally suspended upon the issuance of the
stay order or upon the appointment of the
Management Committee, Rehabilitation
Receiver, Board or Body.
However, in the event that rehabilitation is no
longer feasible and claims against the secured
or distressed corporation would eventually be
settled, the secured creditors will regain their
preference.
For instance, let’s say there are preferred
creditors but the court issues a suspension
order and appoints a rehabilitation receiver,
board or body.
In this case, the preferred creditors and the
unsecured or the unpreffered or secured will
have the same status. No one can assert a
preference over any other creditor. They will be
paid in accordance with the approved
rehabilitation plan.
Q. UNDER WHAT CIRCUMSTANCES MAY A
RECEIVER BE APPOINTED?
Sec. 6, PD 902-A: A Receiver may be appointed
whenever:
1. It is necessary in order to preserve the
rights of the parties litigants; and/or
2. To protect the rights of investing public and
creditors
The situations contemplated in these instances
are serious in nature. There must exist a clear
and imminent danger of losing corporate assets
if a Receiver or Management Committee is not
appointed.
Absent such a danger, such as where there are
sufficient assets to sustain the rehabilitation
plan and both investors and creditors are
amply protected the need of appointing a
Receiver will not exist.
SERIOUS SITUATION TEST
Simply put, the purpose of the law in directing
the appointment of a Receiver is to protect the
interest of the corporate investors and
creditors.
In the case of Price v. China Banking
Corporation, the only basis of the Court in
appointing a receiver was the finding that the
petition is sufficient in form and in substance.
However, it did not specify the reason or
ground to sustain such a finding. Clearly, the
petition failed to comply with the serious
situation test.
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Claims as used in the law would refer to debts
or demands of pecuniary nature. All actions for
claims against the corporation will be
suspended accordingly. It refers to debts or
demands of pecuniary nature. It means the
assertion of right to have money paid. It refers
to the right of payment whether reduced or not
to a judgment:
 Liquidated or Unliquidated;
 Fixed or Contingent;
 Matured or Unmatured;
 Disputed or Undisputed;
 Equitable;
 Secured or Unsecured.
As long as your demand is pecuniary in nature,
that will be suspended upon the issuance of
the stay order by the court or upon the
issuance of an order appointing a Management
Committee, Receiver, Board or Body.
Once suspension of payments becomes
effective, all actions for claims against the
corporation are suspended. (PAL v. Zamora)
They are ipso jure automatically suspended in
whatever stage the action may be found.
Even in the stage of foreclosure, execution
and/or consolidation, it cannot proceed. They
will all be suspended.
In PAL v. Heirs of Zamora, it was ruled that
he suspension of all actions for claims against
the corporation involved embraces all phases of
the suit. Be it before the trial court or any
tribunal or before the Supreme Court.
No other action may be taken including the
rendition of a judgment.
What are automatically suspended are the
proceedings of a suit and not just payment of
claims during the execution stage after the case
had become final and executory.
Once the process of rehabilitation, however, is
completed, the Court naturally will complete
the proceedings on the suspended action.
The actions that are suspended cover all claims
against the corporation. Whether for damages
founded on a breach of contract of
carriagelabor cases are not also excluded,
collections suit, or any other claims of
pecuniary nature. No exemption in favor of
labor claims is mentioned in the law. Neither
the claims of plan holders in a pre-need plan
are exempted.
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In Philippine Islands Corporation v.
Victorias Milling, unlike the provisions in the
Insolvency Law which exempts secured
creditors from the suspension effect of the
order issued by the court in an ordinary
suspension of payments proceedings, the
provisions of PD 902-A, when it comes to the
appointment of a Management Committee or of
a Rehabilitation Receiver, does not contain an
exemption for the secured creditor. All creditors
will stand on equal footing.
In Consuelo Metal Corporation v. Planters
Development Bank, the Supreme Court held
that a secured creditor’s right for closed
mortgage will merely be suspended upon the
appointment of a Management Committee,
Rehabilitation Receiver, Board or Body, or the
issuance of the stay order. Thus, the creditor or
the mortgagee may exercise his right to
foreclose the mortgage upon the termination of
the rehabilitation receiver proceedings or upon
the lifting of the stay order.
Because there are instances when, of course,
the court, may have approved a Rehabilitation
Plan. It is to be implemented by the
Rehabilitation Receiver or the Management
Committee. But there may be supervening
events that would cause the impracticability of
enforcing or of carrying out the plan as
indicated therein.
Q. ARE THE PROPERTIES OF AN
INDIVIDUAL DIRECTOR OR STOCKHOLDER
USED AS A SECURITY FOR THE
CORPORATE OBLIGATION COVERED BY A
SUSPENSION PAYMENTS ORDER BE
LIKEWISE SUSPENDED?
EXAMPLE:
A CORPORATION NEEDS MONEY AND IT
SECURES A LOAN FROM A FINANCIAL
INSTITUTION. THE FINANCIAL INSTITUTION
SAYS, “I WILL GIVE OUT THE LOAN,
PROVIDED THAT YOU PUT UP A SECURITY.”
BUT THE CORPORATION HAS NO
SUFFICIENT ASSETS. THE PRESIDENT OF
THE CORPORATION THEN PUT UP HIS
PERSONAL PROPERTY AS SECURITY FOR
THE LOAN. THE LOAN WAS GIVEN BUT THE
CORPORATION WAS STILL UNABLE TO PAY.
THE CREDITOR IS NOW BENT ON
FORECLOSING THE MANSION OF THE
PRESIDENT USED AS SECURITY FOR THE
LOAN AND THE CORPORATION GOES TO
THE REHABILITATION COURT AND FILED A
PETITION FOR THE SUSPENSION OF ALL
ACTIONS FOR CLAIMS AGAINST THE
CORPORATION. THE APPROPRIATE COURT
ISSUED THE STAY ORDER. CAN THE
FINANCIAL CREDITOR PROCEED WITH THE
FORECLOSURE OF THE PROPERTY USED
AS SECURITY FOR THE LOAN OF THE
CORPORATION?
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Yes. It is not an action for claims against the
corporation.
In Union Bank v. CA, the Supreme Court held
that a creditor can demand payment from the
surety solidarily liable with the corporation
seeking rehabilitation. It being not included in
the list of stayed claims. Surety whose liability
is solidary cannot claim protection from the
rehabilitation court, they not being the
financially distressed corporation that may be
restored. That is not a claim against the
corporation. Since it is not a claim against the
corporation, it is not suspended and the action
may proceed or the foreclosure may proceed.
The wording of the law is that, “all actions for
claims against the corporation will thereby be
suspended accordingly.”
It is the obligation of the receiver or the
management committee to enforce or carry out
the approved rehabilitation plan. The approved
rehabilitation plan would normally carry the
manner in which the creditors will be paid,
sources and application of funds and the like.
Under P.D 902-A, for so long as they are acting
in good faith, they are not subject to suits.
They are immune from suits.
Speaking of intra-corporate controversies, (Sec.
5B) it is subject to another set of rules.
Although the Rules of Court will supplement
the said rules—the interim rules on intra-
corporate controversies. It is semi-summary in
nature.
You have to attach the affidavits of your
witnesses in the pre-trial which will serve as
their direct testimony in court. If you do not
attach them, you will not have any evidence.
Subject, of course, to cross examination by the
other contending parties. There are prohibited
pleadings inclusive of postponement, motions
for reconsideration, and the like.
Venue of actions in intra-corporate
controversies would be the special commercial
courts where the principal office of the
corporation is located or is established. Like for
instance, election or appointment of directors
or officers.
If it is intra-corporate controversy: it can be
filed only in the special commercial court where
the principal officer of the corporation is
located or established.
In cases of intra-corporate controversies, the
ruling laid down to the effect that service of
summons must be made upon the persons
named in the statute does not apply in cases of
intra corporate controversies. It is subject to a
different rule, the interim rules on intra
corporate controversies.
Under sec. 5, rule 2 of the interim rules on
intra-corporate controversies: If the defendant
is a domestic corporation, service of summons
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may be made upon any of the statutory or
corporate officers indicated in the by-laws or
their respective secretaries. So if it is served
upon any of the directors, it is valid. The court
will acquire jurisdiction. In fact, if there is an
assistant finance manager indicated in the by-
laws as one of the officers of the corporation,
then it is also valid.
“Any of the statutory officers or their respective
secretaries”.
Appointment of Management Committee, Board
or Body without suspension of actions for
claims against the corporation
Q. WHEN MAY THE COURT APPOINT A
MANAGEMENT COMMITTEE, BOARD OR
BODY EVEN WITHOUT THE PRAYER FOR
THE SUSPENSION OF ALL ACTIONS FOR
CLAIMS AGAINST THE CORPORATION?
Under Sec. 6[D], 2 requisites must concur:
1. It must be shown that the corporate
property is in danger of being wasted or
destroyed. That the business of the
corporation is being diverted from the
purpose for which it is organized and
2. That there is a serious paralyzation of its
operations.
In the absence of a strong showing of imminent
danger of dissipation, loss or destruction of
assets or other properties of the corporation,
and the paralysis of its business, the mere
apprehension of future misconduct based upon
prior mismanagement will NOT authorize the
appointment of a management committee,
receiver, board or body.
If you appoint a management committee, you
are resting control of the corporate affairs from
the duly elected governing board of the
corporation. Note, however, in the case of RJ
Jacinto v. First Women’s Credit Corporation
The Supreme Court upheld the appointment of
a management committee for First Women’s
Credit Corporation based upon the findings of
the SEC hearing officer. It was based on an
audited financial statement the accuracy of
which was not questioned by the petitioner RJ
Jacinto and the defendants in this particular
case.
The SEC appointed an interim management
committee based on the audited financial
statements which was never questioned by RJ
Jacinto.
The funds of the corporation were being
transferred to the RJ Group of Companies
without corresponding board resolutions. There
was suspension of lending operations.
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The limitation of FWCC’s operations as a mere
collection of receivables as well as the inability
to pay its pending obligations amply support
the conclusion that there is imminent danger of
dissipation, loss, wastage or destruction of
corporate assets and/or properties.
Imminent Danger of dissipation, loss, wastage
or destruction of corporate assets and the
paralysis of its business. These are the twin
requirements before the proper forum may be
justified in appointing a Management
Committee, Board or Body under Sec. 6 [D] of
P.D 902-A.
Note that the court cannot unilaterally appoint
a Management Committee in businesses which
are under the supervision of other government
agencies.
Q. FOR INSTANCE, IN CASE OF BANKING,
CAN THE COURT PROCEED WITHOUT THE
INTERVENTION OF THE CENTRAL BANK?
No. It must be with the consent of the Central
Bank or the Insurance Commission if it is an
insurance company.
SECURITIES REGULATION CODE
The Securities Regulation Code was passed and
it replaced the old law which used to be what is
called as Merit Regulation where corporations
who wanted to list their shares in the stock
exchange would file an application for the sale
of its securities in the stock exchange and it
will be the SEC who will determine whether or
not the public should risk their money and buy
the shares of stocks in the said exchange to
what is called now as the “Full Disclosure
Rule”.
For so long as there is full and complete
disclosure of the security or the shares of the
issuer, the issuer is what we call the
corporation whose shares are being listed in
the stock exchange or whose shares will be
transacted or sold openly in the said exchange.
For as long as there is complete and full
disclosure of the issue in the market will be up
to the investing public whether or not they will
venture into that particular market or the
issue. It’s no longer the SEC which will
determine whether it is worth investing into.
Securities as defined under Sec. 3, cannot be
sold, offered for sale or distributed to the public
without a registration statement having been
filed and approved by the said SEC under Sec.
8 thereof.
The definition of securities under Sec. 3 is
broad enough particularly the last item thereof
to cover any type of instrument which may in
the future be determined by the SEC to have
the same effect like any bonds, notes,
evidences of indebtedness or shares of stocks.
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Even pre-need plans are considered as
securities under the definition of Sec. 3. This
definition of pre-need plans already came out
in a decision of the SC in the case of Abrera v.
Barsa.
Pre-need is a contract which provides for the
performance of future services or the payment
of future monetary consideration at the time of
actual need for which the planholders pay in
cash or installment at stated prices with or
without interest or insurance coverage and
would include life pension, education,
interment and other plans which the SEC may
from time to time approve.
So it is the SEC that enforces and implements
the provisions of the Securities Regulation
Code and therefore, it has jurisdiction over
these pre-need plans of the moment.
These securities enumerated in Sec. 3 as said
cannot be sold, offered for sale or distributed or
issued to the public without a registration
statement having been filed and approved by
the SEC.
Note Sec. 9 and 10 which enumerate certain
securities as exempted from the registration
statement of the SEC and exempt transactions.
They need not be registered with the SEC
before they may be sold openly to the general
public.
Even if they are duly registered pursuant to a
registration statement filed and approved by
the Securities and Exchange Commission, no
person can engage in the buying or selling of
securities either as broker, dealer, salesman or
associated person unless they are duly
registered and licensed by the SEC. They have
to pass a qualifying exam before they may be
qualified to act as brokers, dealers or
salesman.
If you want to buy or sell securities in the stock
exchange, you do it you course it through your
broker.
Example:
You have a stock certificate of San Miguel
Corporation. You want to sell those shares of
stock. You have to course it through your
broker. You must either have a cash account or
margin account with your broker in order that
you may engage in the buying or selling of
securities in the stock exchange.
Brokers are persons who are engaged in the
business of buying and/or selling securities for
their customers or for the account of others.
Salesman, agent, of course, would be those
that are employed by the broker for the
purchase and sale of securities.
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Dealers on the other hand are those engaged in
the buying and selling of securities for their
own account.
The Issuer is what is called the corporation
whose shares are being traded or listed in the
stock exchange.
Q. WHAT IS TENDER OFFER? WHEN
SHOULD A PERSON MAKE A TENDER
OFFER?
Section 19 is the provision involved.
(1) Any person or group of persons acting in
concert and who intends to acquire at least
15% of any class of an equity security of a
listed corporation, those whose shares are
listed in the stock exchange for trading; or
(2) Any class of equity security of a corporation
with assets of at least 50M and having 200 or
more stockholders with at least 100 shares
each; or
(3) Those who intend to acquire at least 30% of
such equity over a period of 12 months shall
make a tender offer to all stockholders by filing
with the SEC a declaration to that effect.
If you want to acquire 15% of the shares of
stocks of a listed company, you have to offer to
all existing stockholders to acquire their shares
at the same amount or under the same terms
and condition that you intend to acquire the
15%.
The rules and regulations of the SEC is very
clear. Once that 15% has been filled up, let’s
say:
Example:
100 of the existing stockholders offered to sell
their shares under the terms and conditions
which the person intending to acquire 15% of
the shares will be able to accommodate. Then if
it is fully accommodated, then that’s the end of
the tender offer. It’s a first-come-first-serve
basis. Or, of course, 30%, that is, if he wants to
acquire 30% of such an equity security over a
period of 12 months. Same rule applies.
PROXY SOLICITATION
Under the Corporation Code, Proxies is a
matter of right to stockholders and for the
validity of the proxy, it is enough that it be
signed by the stockholder. It need not be
notarized. If you solicit proxies under the
Corporation Code and it is not listed in the
stock exchange, nobody cares.
But under the Proxy Solicitation Rules of the
Securities Regulation Code:
A broker or dealer who holds or acquire proxies
for at least 10% or as such percentage as the
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SEC may prescribe of the outstanding shares of
the issuer, they shall submit a report
identifying the beneficial owners of the shares.
This is not required in ordinary stock
corporations.
This is for the protection of public investors.
Even if the management now will solicit
proxies, the management is now required to
submit what is called as “Proxy Statement”
attaching therewith the Proxy Form. The Proxy
Statement consists of no less than 28 pages. It
contains data as to why management is
soliciting proxies including the agenda that will
be taken up for that meeting. If you do not
comply with that, then you will be opening
yourself to the penal sanctions provided for
under Sec. 73 of the SRC.
The penal sanctions of Sec. 73 of the SRC
include any violation of the provisions of the
SRC including the rules and regulations
implemented being enforced by the SEC
pursuant to its rule-making power. The penal
sanction is a fine of not less than P50,000 nor
more than P5M and/or 7-21 years
imprisonment at the discretion of the court.
INDEPENDENT DIRECTOR
He is there supposedly to protect the interest of
the general investing public. He must have an
independent judgment from the management
itself.
This is covered by Sec. 38 of the SRC.
Just like the Tender Offer rule, any corporation
with a class of equity securities listed for
trading in an exchange, or
With assets in excess again of 50M and having
200 or more shareholders, at least 200 of them
holding at least 100 shares
Must appoint or elect at least 2 independent
directors or such independent directors shall
constitute at least 20% of the membership in
the Board of Directors whichever is lesser.
Q. WHO MAY QUALIFY TO BE AN
INDEPENDENT DIRECTOR?
An independent director is a person other than
an officer, or employee of the corporation, its
parent or subsidiaries or any other individual
having any relationship with the corporation
which would interfere with the exercise of
independent judgment in carrying out the
responsibilities of a director apart from his fees
and shareholdings which should not exceed 2%
of the outstanding stocks
If it exceeds 2%, you are not qualified to be an
independent director. Your stockholdings
should not be less than 2%
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Is INDEPENDENT of management and free
from any business or other relationship which
could or could reasonably perceive to materially
interfere with its exercise of independent
judgment in carrying out his responsibilities as
a director in the corporation.
In the case of Equitable, the independent
director they elected is also a director of a
subsidiary of Equitable Bank and therefore,
based on this rules of the SEC, he cannot
qualify to be an independent director. Because
it says, “a person other than officer or employee
of the corporation or its parents or
subsidiaries.”
He is not qualified to be an independent
director because he has a relationship with the
corporation itself through the subsidiary of the
corporation. It will interfere with the
management judgment of the particular
director concerned and he will not qualify to be
an independent director.
INSIDER TRADING
Under Sec. 27, it is unlawful for an insider to
buy or sell the security of an issuer while in
possession of a material non-public
information
With respect thereto of the securities, that is, is
not generally available to the public unless:
(1) The insider proves that the information was
not gained from such relationship; or
(2) If the other party selling to or buying from
the insider is identified and the insider
proves that he disclosed the information to
the other party; or
(3) He had reason to believe that the other
party is also in possession of the
information.
While in possession of a material non-public
information, the insider cannot buy or sell the
security involved. It is illegal under Sec. 27 of
the SRC.
Q. WHAT IS “MATERIAL NON-PUBLIC
INFORMATION” SO AS TO BAR THE
INSIDER FROM BUYING OR SELLING THE
PARTICULAR SECURITY?
Material non-public information, if it has not
been generally disclosed to the public and
would likely affect the market price of the
security after being disseminated to the public
and the lapse of reasonable time for the market
to absorb the information or would be
considered by a reasonable person important
under the circumstance in determining his
course of action, that is, whether or not to buy
or sell the security or hold on to the particular
security.
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If that is the case and he is in possession of a
material non-public information, he cannot buy
or sell the security involved.
Q. MANILA GAS CORPORATION IS ENGAGED
IN THE SEARCH AND DRILLING OF
NATURAL GAS. IT WAS ABLE TO DRILL A
NATURAL GAS OF COMMERCIAL QUANTITY.
THEY DID NOT DISCLOSE THE SAME TO
THE GENERAL PUBLIC. WHAT THEY DID
WAS, THE DIRECTORS AND OFFICERS
BOUGHT THE SHARES IN THE STOCK
EXCHANGE OF MANILA GAS ITSELF. THEY
DID NEVER DISCLOSE TO THE PUBLIC. ON
THE FOLLOWING DAY, KNOWING THAT IT
IS ILLEGAL FOR THEM TO TRADE IN THE
PARTICULAR SECURITY, THEY WENT TO A
PRINTER IN ORDER TO DISSEMINATE THE
INFORMATION THAT IN FACT THEY WERE
ABLE TO DRILL A NATURAL GAS OF
COMMERCIAL QUANTITY. THE PRINTER,
LOOKING AT THE DATA, INSTEAD OF
PRINTING IT IMMEDIATELY, ALSO BOUGHT
THE SHARES OF MANILA GAS BEFORE HE
PRINTED THE MATERIAL. WHAT IS THE
OFFENSE COMMITTED BY THE OFFICER OF
THE CORPORATION AND/OR OF THE
PRINTER IF ANY?
Insider Trading.
Q. IS THE PRINTER ALSO LIABLE? WHY?
WHO IS AN INSIDER?
Yes. Section 3.8
The issuer, director or officer or any person
performing similar functions or a person
controlling the issuer. A person whose
relationship or former relationship to the issuer
gives or gave him access to material
information about the issuer or the security
that is not generally available to the public.
The printer in this case was able to gain access
to material information about the issuer that is
not generally available to the public. He’s a
person whose relationship or former
relationship with respect to the issuer gave him
access to the information. He is also an insider.
Even government employees, directors or
officers of an exchange or clearing agencies or
any person who learns such information by
communication from any of these persons
would be considered insiders.
And while they are in possession of this
material non-public information, they cannot
buy or sell the particular security involved.
Even investment contracts are included in the
enumeration of securities. Normally, this is
also what is being used by the SEC and the
DOJ in pinning down the operators of what is
generally called, “The Pyramiding Scheme
Operators”.
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For purposes of the coverage of the meaning of
securities, investment contract is:
A contract, transaction, or scheme whereby a
person invests his money in a common
enterprise and is led to expect profits solely
from the efforts of the promoter or the 3rd
party.
In People v. Petralba, the Supreme Court held:
The touchstone is the presence of an
investment in a common venture premised on a
reasonable expectation of profits to be derived
from the entrepreneurial or managerial efforts
of others.
You cannot sell these securities to the general
public without a registration statement having
been filed an approved by the SEC. The
“general public” meaning, more than 19
persons.
If you sell securities to more than 19 persons
and it is not covered by exempt securities or
exempt transactions under Sec. 9 and 10, you
cannot do so without a registration statement
having been filed and approved by the SEC.
If you do that, you are violating the SRC and
you will find yourself facing the penal sanctions
provided for under Sec. 73 or even perhaps as
what the DOJ did, they may file a criminal
action for Syndicated Estafa which is non-
bailable.
OTHER FORMS OF FRAUDULENT AND
MARKET MANIPULATIONS
(1) Wash Sale
Any transaction in a security which involves no
change in the beneficial ownership thereof is
Wash Sale.
Example:
Mr. X is the owner of 10M shares of the
particular shares of stocks. He has brokers,
Broker 1 and Broker 2.
He calls his Broker 1 and say, “Buy 1M shares
of A company at P1.20 per share.”
He says to Broker 2, “Sell 1M shares of the
same corporate issue for P1.20”.
They matched and there was a trade. Mr. X
sold 1M shares in his name and he bought 1M
shares also in his account with Broker 2. There
was no change in the beneficial ownership of
the particular issue at hand. This is Wash Sale.
(2) Match orders
The buying or selling of a particular security
knowing that another interested party will also
offer to buy and/or sell the same type of
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security almost at the same time, almost at the
same price and almost at the same issue.
Example:
Mr. X called Broker 1 to Buy 1M shares of A
corporation at P1.20 per share at 9:30am;
Trading starts at 9:30
9:32, he called Broker 2 to sell 1M shares at
P1.20 per share.
The same, he matched his own order. Mr. X
placed an order for the buy and sale of the
particular security in the same issue, almost
the same volume, the same price. That is
Match Order.
Q. IS THIS ACTUATION OF MR. X ILLEGAL?
Not just yet. It must have the effect of showing
a false of active trading in the particular issue.
One transaction will not make a false
appearance of active trading in the particular
security. Mr. X has only 1 transaction so it is
not yet illegal.
It will only become illegal only if it creates false
or misleading appearance of active trading in
the particular issue.
Example:
Mr. X had actually 7 Broker firms, broker 3, 4,
5 and 6. Let us assume that account #1 is
under his name, account #3 is under his name,
account #5 under his name and vice versa. All
of them were under his name.
At 9:40, he calls broker 3 to buy 1M shares at
P1.30 per share.
He then call broker 4 to sell 1M shares at P1.30
per share at 10:05 all the way down until 11:59
before lunch.
He calls broker 5 and says, “Buy 1M shares at
P2.00 per share” and during that particular
day, Mr. X has placed 22 buy and sell orders
for the same security, using the same scheme
Wash Sale and Match Order.
Now, you have a false or misleading
appearance of active trading in the particular
issue. It now becomes illegal.
He may have also committed what we call
“Painting the Tape” and “Marking the Close”
(3) Painting the Tape
Refers to the buying and selling of securities to
fix the price of the particular security either of
increasing or of decreasing the value of the
shares or the security during regular trading
hours.
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Pushing up the price of the security, that is
Painting the Tape.
(4) Marking the Close
If you place a buy or sell order near or very
near the closing hours of the trading day. So
much so that no person can match your order
anymore.
Example:
You placed an order at 11:59, 1 second left
before the market closes, of P2.00 per share.
You have Marked the Close. Meaning, the
following trading day, all others selling their
shares, will of course, sell their shares at
P2.00.
(4) Insider Trading
While in possession of material information
non-public, you cannot trade or deal in the
particular issue of the said shares of stocks. It
is also illegal.
(5) Short Sale
Selling of security which the vendor or the
seller does not own, possess or hold.
Under the Code, Short Sale is illegal if it is not
in accordance with the rules and regulations of
the SEC.
Short sale, therefore, is illegal per se at this
point in time if the SEC is not yet or has not
yet come out with the rules and regulations
governing Short Sale.
(6) T3 or T4 Rule
Transaction date plus 3 days or Transaction
date plus 4 days
Example:
You transacted with the particular security, for
instance:
T3: Today you buy, 3 days thereafter, you must
pay the acquisition cost of the share; Today you
sold 100M shares, plus 3 days, you must
deliver the stock certificate.
Example:
Assume that there is an insider that knew that
the twin towers in New York will be bombed by
Osama Bin Laden, using the American Airlines
Planes. American Airlines shares are being
traded in most of the cities of the world. The
value of American Airlines shares is $1.20 per
share. The insider then sells 1M shares of
American Airlines at $1.00 per share. But in
reality, he has no shares.
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Sept. 9, the bombing happened. American
Airlines is the airline involved. The value of the
shares of American Airline on that very same
day went down to $0.50. Sept. 10, the insider
called his broker to buy 1M shares of American
Airlines at $0.50. He now has shares.
On the 4th day, a buyer will ask for the shares.
He will say that the shares are with his broker.
There you have it. The transaction has been
completed. He complied with his part of the
obligation.
SETTLEMENT OFFERS
At any time during an investigation or
proceeding under this Code, the parties being
investigated and/or charged, may propose in
writing an offer of settlement with the SEC.
Upon receipt of such offer or settlement, the
Commission may consider the offer based on
timing, the nature of the investigation or
proceeding, and the public interest.
The commission may only agree to a settlement
based on its finding that the settlement is in
the public interest. Any agreement to settle
shall have no legal effect until publicly
disclosed and such decision may be made
without a determination of the guilt on the part
of the person making it.
Example:
There was a short sale. The SEC has no rules.
It is therefore, illegal. So the SEC conducts an
investigation regarding the matter at hand.
During the investigation, he makes an offer
with the SEC, “I will pay P2M as fine for what I
did.”
Considering the timing, the public interest
involved, and the disclosure made to the
public, the SEC may accept the offer that he
pay P2M instead. If the SEC will accept the
offer, that will be the end of the investigation
without finding the guilt of the party involved.
Of course, if it will have an effect on the general
public, the SEC will decline.
LIMITATIONS OF ACTION
No action shall be maintained to enforce any
liability created under any other provision of
the Code unless:
(1) Brought within 2 years after the discovery
of the facts constituting the cause of action;
and
(2) Within 5 years after such cause of action
accrued.
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