1

LADIA NOTES:

CORPORATION LAW
 Corporation is one of the types of business organizations. It is also the most important in economic
development.
INTRODUCTION
 Sole proprietorship
 One man form of business entity, personally answers all liabilities, but enjoys all the profits with the
exclusion of others
 Limited shareholders responsibility
 Paid subscription in full, you are no longer liable
 Partnership
 Based on mutual trust and confidence
 Joint venture
 one time grouping of persons whether they be natural or juridical
 does not entail continuity because after the undertaking is completed it is already the end
 particular partnership and joint venture would be similar, but there is already a decision of the Supreme
Court declaring them as different
 when they do not register, it does not exist
 Foreign corporations enters into an agreement with a domestic corporation, it must be registered.
Generally they do not need to be registered.
 Corporations
 They may enter into joint venture, but generally they cannot enter into a partnership, but there are
exceptions allowed by the SEC: the 3 exceptions must go hand in hand
 The articles of incorporation expressly authorized the corporation to enter into contracts of
partnership;
 The agreement or articles of partnership must provide that all the partners will manage the
partnership; and
 The articles of partnership must stipulate that all the partners are and shall be jointly and severally
liable for all obligations of the partnership.
DEFINITION AND ATTRIBUTES
 4 attributes of a corporation
 Artificial being
 Created by operation of law
 Right of succession
 Powers, attributes and properties expressly authorized by law or incident to its existence.
 Doctrine of limited capacity
 Only such powers as are expressly granted to it by law and by its articles of incorporation including others
which are incidental to such conferred powers, those reasonably necessary to accomplish its purpose and
those which may be incidental to its existence
 Can do things as the law asks or allows it to do
 If it does anything beyond, it shall be considered as ULTRA VIRES
 General rule: Moral damages cannot be granted to corporations
 Exception: Filipinas Broadcasting Network Inc. vs. Ago Med
 In cases of slander, libel and other forms of defamation (should not qualify because the code does not
qualify whether natural or juridical) Art. 2219 of the civil code:

Art. 2219. Moral damages may be recovered in the following and analogous cases:
 2

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also
recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may bring the action mentioned in No. 9 of
this article, in the order named.

 Advantages (SEE LADIA BOOK)

 No. 2 may also be a disadvantage
 No. 5 may also be a disadvantage
 A corporation is a person, therefore protected by the due process clause and equal protection clause of the
Constitution
 3

CLASSIFICATION OF CORPORATIONS
 Section 3 Stock and non-stock
 Importance of knowing, determining what provisions of the code or the law may be applicable

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)

 Non-stock- title 10
 Stock- section 51
 Stockholders must generally cast their votes in the meeting; section 4 governed primarily by the law
creating them

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)

 Section 3
 The two requisites must always concur
 That they have a capital stock divided into shares; and,
 That they are authorized to distribute dividends or allotments as surplus profits to its stockholders on the
basis of the shares held by each of them.
 Section 4
 Created by a special law, they have their own character
 They are not immune from suit unless provided by the law of their creation
 Primarily governed by the law creating them
 Their subsidiaries are entirely different or independent from that of the other
 Close corporation
 There is no exemption it is absolute
 Public corporation
 Political or governmental purposes
 Those formed or organized for the government or a portion of the State or any of its political subdivision
and which have for their purpose the general good and welfare
 Private Corporation
 Immediate benefit, aim or advantage of private individuals
 Those formed for some private purpose, benefit, aim or end
 Distinction: public for governmental purpose
 Corporation Sole
 Exemption to the rule because it is composed only of one person
 An incorporator may also be a juridical person
 Close corporation
 There is exclusivity of shares of stock
 Section 96-105
 Restrictions to transfer shares
 Only those indicated can own shares
 Article must provide that there will be no public offering
 Open corporation
 openly admit investors
 example: stock exchange
 Domestic/ Foreign
 4

 Test
 Incorporation test
 If incorporated under the laws of the Philippines it is a domestic corporation
 ME Gray vs. CA
 Parent or Holding/ subsidiaries and affiliates
 Affiliates- no majority vote

SMC 12%

HERSHEY CBPl 12%

12%
Affiliate is subject to common control by the 12 % owners
 De jure
 cannot be attached by the state even in a quo warranto proceeding
 De facto
 exists by virtue of colorable compliance
 Attached directly only by the state in a quo warranto proceeding
 Corporation by estoppel
 So defectively formed, but still considered corporation, but only in relation to those who cannot deny their
existence section 20 and 21

FORMATION AND ORGANIZATION

 3 stages
 Creation
 Re-organization or quasi-reorganization
 Dissolution/winding-up
 Purpose clause
 Defining the scope of authority of the corporate enterprise pr undertaking. Both confirmed and limited
 4 limitations of purpose clause
 Lawful
 Specific or stated concisely Although in broad or general terms
 More than one, the primary and secondary must be specified
 Lawfully combined Capable of
 Provision that states, cannot be issued less than par, exception is treasury shares because it can be issued
less than par
 A corporation commences only upon issuance of the certificate, prior thereto it has no being and cannot
transact business. Promoters cannot act for a projected corporation
 Metro Manila- paid up capital requirement is 10 M
 Non- stock- mere mention of the operating capital
 Mention the authorized capital
 Restrictions
 Mandatory in close
 Not mandatory in ordinary
 Non-stock
 If value is not more than 100,000
 A corporation cannot use any other name unless it has been amended
 Section 19
 If confusingly similar it will not be allowed to be registered
 Verification slip from the records officer
 5

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)

 Words corporation or inc. either in full or abbreviated form must be included

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)

 Doctrine of secondary meaning

 A word or phrase originally incapable of exclusive appropriation [usually generic] with reference to an
article in the market, because of geographically or otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has become to mean that the article was his product.
 Section 18
 Lyceum of the Philippines case, the additional geographical name does not make it confusingly similar
 actual confusion is not necessary- Philips case “it is enough that there is probable confusion”
 2 requisites must be proven
 that the complainant corporation acquired a prior right over the use of such corporate name
 identical, deceptively or confusingly, patently deceptive
 principal office
 statement of principal office is required
 city and municipality not only province must be specified
 principal office NOT operations office
 necessary because it will establish the residence of corporations
 venue of actions for or against the corporations
 venue of meetings
 section 51 meetings may only be within the boundaries of the city where the principal office
 non-stock may be held anywhere in the Philippines, if provided in its by-laws
 where summons may be served
 registration of chattel mortgage must be registered in the register of deeds where the principal office is
located
 Clavecilla Radio System vs. Antillon
 action not upon a written contract
 city where the defendant resides
 term of existence
 corporate term required
 determining what point in time the juridical personality will cease to exist
 enter into contract only when it has juridical personality
 once it ceases to exist, it no longer has personality
 exist for another 3 years only for purposes of liquidation
 Dissolution- it is automatic
 When should extension be made?
 6

 General rule: Not earlier than 5 years

 Exception: unless there are justifiable reasons
 May it be extended after expiration?
 Alhambra cigar vs. SEC once it ceases to exist it has no vested politic, exist only for a period of 3 years only
for liquidation and for that purpose only
 Article 5 How many incorporators should there be?
 5-15
 May a corporation be an incorporator?
 General rule: only natural persons
 Exception: cooperatives and corporation primarily organized to hold equities in rural banks
 How about minors?
 NO, because they must be of legal age
 May a corporation organized by incorporators consisting solely of foreigners
 Yes, there is no nationality requirement only residence, as long as majority are residents of the Phil
 Define incorporators <sec.5>
 Those person mentioned in the articles as originally forming the corporation and who are signatories of the
articles of incorporation.
 Must be signatories to be 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)

 Define corporators <sec.5>

 All persons who compose the corporation at any given time and need not be among those who execute the
articles of incorporation at the start of its formation and organization.
 Originally or subsequently
 Section 5 provides:
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-
stock corporation are called members. (4a)
 May a corporation be a corporator?
 YES. There is nothing to prevent a corporation from being a stockholder
 Incorporator must subscribe to 1 share
 There are those that are exclusively reserved to Filipinos
 An incorporator maybe a corporator as long as he is a stockholder
 section 6

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.
 7

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.

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)

 How many directors should there be?

 General rule: Not less than 5 not more than 15
 Exceptions:
 Educational corporations registered as non stock corporation whose number of trustees, though not less
than five and not more than [15] should be divisible by five [5], meaning they must have either five, ten, or
fifteen trustees and no other;
 In close corporations where all the stockholders are considered as members of the board of directors
thereby effectively allowing twenty members in the board.
 8

 The by-laws of a corporation may provide for additional qualifications and disqualifications of its members
of the board of directors or trustees. However it may not do away with the minimum disqualifications lay
down by the Code.
 Qualifications of the governing board
 Requires mere residency <sec. 23>

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.

 May a domestic corporation have a governing board consisting solely of foreigners?

 YES, section 23 majority of them must be residents of the Philippines, no nationality requirement
 Anti-dummy act <sec.2-A>
 If the business undertaking or activity is only partially nationalized, aliens can be elected as such directors,
[unless the law provides otherwise] but their number shall only be in proportion to their equity or
participation in the capital stock of the corporation.
 Disqualifications <sec.27>
 The disqualifications provided for is absolute and may not be done away with. Corporate by-laws may,
however, provide for additional qualifications and disqualifications.

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)

 Section 27 and 23 minimum disqualifications and qualifications

 Lee vs. CA
 By laws may provide for additional
 Gov’t vs. El hogar Filipino, Gokongwei vs. SMC
Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M No. of shares 1M shares par value 1.00
Amount of shares subscribed
50 K A
50 K B
C 250K
D
E
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the maximum amount it cannot issue more unless amended
Maximum shares it can issue is 1M shares unless amended
 How much shares should be subscribed?
 Must be at least 25% of the authorized capital stock
 Paid- up must be at least 25%-minimum
 9

 Section 30
 Total subscription compliance with minimum 25% total
 Any combination would comply with the minimum required by section 30

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)

 Minimum for a domestic corporation?

 In no case shall the paid- up capital be less than 5k
 Is there a minimum authorized capital imposed by the code?
 If there is minimum paid-up logically there should also be a minimum capital =5000
 Minimum paid-up capital for a financing company metro manila 10 M if located in MM
 Shares of stock
 Purpose of classification
 To specify and define the rights and privileges of the stockholders;
 For regulation and control of the issuance of sale of corporate securities for the protection of purchasers
and stockholders.
 As a management control device.
 To comply with statutory requirements particularly those which provide for certain limitations on foreign
ownership and shares like overseas employment agencies requiring to own at least 75% of the shares of
stock thereof.
 To better insure return on investment which can be affected through the issuance of redeemable shares or
preferred shares, i.e., granting the holders thereof, preference as to dividends and/or distribution of assets
in case of liquidation; and,
 For flexibility in price, particularly, no par shares may be issued or sold from time to time at different price
depending on the net worth of the company since they do not purport to represent an actual of fixed value.
 Section 6
 Each shall be equal in all respects to every other share
 Preferred shares
 Specific preference
 Dividends or during liquidation
 No par
 Can sell it with the network of the corporation
 Distinction between the subscribed and outstanding stocks?
 Section 137

Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in
this Code, means the total shares of stock issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares. (n)

 Voting and dividend rights, it refers to the outstanding capital stocks

 Only outstanding stocks are allowed to vote and receive dividends
 Actually the same
 Treasury shares
 are also subscribed shares
 while they remain in the treasury, no voting and dividend rights
 10

 may be reissued by the corporation

 once reissued they become outstanding stocks again
 common shares
 carry the right to vote
 preferred shares
 grants the holder preference
 preference as to dividends
 preference as to distribution of the remaining assets upon dissolution or
 both
 YOU MUST STATE THE PREFERENCE BECAUSE IF NOT THEY ARE PRESUMED TO BE EQUAL
 It may include such other preferences not inconsistent with the Code. This is so because Section 6 of the
said law allows a stock corporation to issue preferred shares subject only to the limitations imposed
therein which are:
 They can be issued only with sated par value; and,
 The preferences must be stated in the articles of incorporation and in the certificate of stock, otherwise,
each share shall be, in all respect, equal to every other share.
 Participating
 Must be stated because the presumption is that it is participating
 Cumulative
 Irrespective of whether or not they where earned
 Preferred
 May be denied
 Unless denied they are still entitled
 What if hindi i-declare kahit na may dividends rights for the previous years? May they be denied dividend
rights because they are non holders of non-cumulative? NOTE: YOU CANNOT COMPEL THE CORPORATION
TO DECLARE DIVIDENDS UNLESS IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43

Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock
to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown
that such retention is necessary under special circumstances obtaining in the corporation, such as when
there is need for special reserve for probable contingencies. (n)

 It depends because there are three types of non-cumulative preferred shares

 Discretionary dividend type
 Mandatory if earned
 Earned cumulative or dividend credit type
 Compare cumulative share from non-cumulative, earned cumulative or dividend credit type
 Cumulative share –whether or not earned
 Non-cumulative earned cumulative or dividend credit type- only if earned
 Par
 11

 stated par value; shall not be issued less than par

 No par
 without stated par value
 once fully paid no longer liable
 Corporations cannot use its capitals in declaring dividends; not all can issue no par value section 6
 Voting
 entitled to vote at any motion brought up in writing
 Non-voting
 not entitled to vote
 What types of shares may be denied of the right to vote?
 Preferred and redeemable shares
 Is it correct to state that common shares can never be denied the right to vote?
 Only preferred and redeemable shares are denied unless provided in this code
 PWEDENG MA-DENY YUNG COMMON SHARES, KASI YUNG FOUNDER’S SHARES MERON SILANG
EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO PWEDE SILANG BUMOTO WITH REGARDS TO
SOMETHING NA HINDI NA SAKOP NG COMMON SHARE RIGHTS
 Example: founders shares- may be given certain rights and privileges
 Even common shares may be denied the right to vote of founders’ shares issued <sec.7>

Section 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation
may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where
the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited
period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The
five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange
Commission. (n)

 Do you include non-voting shares in passing a valid corporate act?

 Even non-voting shares are entitled to vote under section 6
 Redeemable shares
 Discretionary/optional
 Obligatory or mandatory
 Generally a corporation can reacquire its own shares if it has unrestricted retained earnings
 Exception: redeemable shares may be reacquired irrespective of retained earnings
 Treasury shares
 They are treasury while in the treasury account of the corporation
 May they be reissued by the corporation?
 YES
 If they are reissued will they be denied the right to vote?
 Once reissued they shall become outstanding stocks again and purchasers shall be entitled to all the rights
and privileges as the other holders have
 Section 57 treasury shares have no voting and dividend rights. Why not?

Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as
such shares remain in the Treasury. (n)

 Answer: commissioner vs. manning page 62 first par.

“Although authorities may differ on the exact legal and accounting status of so-called treasury
shares, they are more or less in agreement that treasury shares are stocks issued and fully paid for and
reacquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are
therefore issued shares but being in the treasury they do not have the status of outstanding shares.
Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be
 12

re-issued or sold again, such shares, as long as it is held by the corporation as a treasury share, participates
neither in dividends, because dividends cannot be declared by the corporation to itself, nor in meetings of
the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will
be effectively lost and the directors will be able to perpetrate their control of the corporation, though it still
represents a paid for interest in the property of the corporation. The foregoing essential features of a
treasury stocks are lacking in the questioned shares.
In this case, and under the terms of the trust agreement, the shares of stock of Reese participated
in dividends which the trustee received and the said shares were voted upon by the trustee in all
corporation meetings. They were not, therefore, treasury shares.”
 When the law speaks of outstanding rights it does not include treasury shares
 Treasury shares may be reissued
 They are actually assets of the corporation
 Once re-issued they become outstanding stocks again
 The corporation may cancel them; in effect there will be a reduction in the outstanding capital stocks
 The code does not require ordinary corporations to provide for restrictions, but it does not likewise
prohibit restrictions
 Example: right of first refusal
 The restriction must be contained in the articles of incorporation
 If provided in by-laws but not in the articles of incorporation then it will not be binding
 Restrictions and preferences are mandatorily required in close corporations
 If it does not provide restrictions it is not a close corporation
 Specified persons- close corporations
 If not one of those specified you are not included because there is exclusivity in close corporations
 Should also be in the by-laws not only in the articles of incorporation
 No transfer clause
 Execution clause
 Acknowledgment
 Treasurer affidavit part of the articles of incorporation
 Section 23-27 minimum qualifications, but there may be additional
 Grounds for disapproval
 Only substantial and not strict is required
 May the SEC refuse or reject registration?
 <Section 17>

Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. -
The Securities and Exchange Commission may reject the articles of incorporation or disapprove any
amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the
Commission shall give the incorporators a reasonable time within which to correct or modify the
objectionable portions of the articles or amendment. The following are grounds for such rejection or
disapproval:

1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the
form prescribed herein;

2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations;

3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false;

4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not
been complied with as required by existing laws or the Constitution.
 13

No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-

banking institutions, building and loan associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and other corporations governed by special
laws shall be accepted or approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such articles or amendment is in
accordance with law. (n)

 But the grounds in section 17 are not exclusive

 When will the corporation commence to exist?
 Section 19

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)

 A corporation de jure can come into existence only upon the issuance of the certificate of registration by
the SEC? TRUE OR FALSE?
 TRUE
 EXCEPTION: CORPORATION SOLE <sec. 112>

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)

 CORPORATION SOLE- upon filing of the verified articles of incorporation, once filed it is vested with a
judicial capacity
 General rule section 19
 Vested with judicial capacity upon issuance of the certificate by the SEC
 However it is not accurate according to Atty. Ladia because there are those that can issue for
example cooperatives- BUREAU OF COOPERATIVES which register, home insurance guaranty
corporation- HOME OWNERS
 Cagayan Fishing vs. Sandika
 14

Corporations are created by law

 Commence to exist upon issuance by the CONCERNED government corporation or agency
 Prior there to it has no being
 The transfer of the property was not valid, it likewise did not have the right to transfer
 De jure
 Strict or substantial compliance
 De facto
 4 requisites must go hand in hand take out anyone of them there can be no de facto corporation
 There is a valid statute under which the corporation could have been created as a de jure corporation.
 An attempt, in good faith, to form a corporation according to the requirements of law, which goes far
enough to amount to a “colorable compliance” with the law;
 A user of corporate powers, the transaction of business in some way as if it were a corporation; and,
 Good faith in claiming to be and doing business as a corporation.
 Are the rights and obligations between officers and directors of a de jure and de facto the same?
 YES. Governed by the same law, rules and regulations
 Only important in determining, is for the purpose of applying the rules with regards to the direct and
collateral attack
 The existence of a de jure cannot be questioned even by the State, either directly or indirectly
 Existence of a de facto can be questioned only by the State directly in a quo warranto proceeding only
 Municipality of Malabang vs. Benito
 What is the missing link so as to consider it a de facto? A law, because the executive order is unconditional
 An unconditional act affords no rights, creates no office
 Legal contemplation it was never passed at all
 It can therefore be questioned by any person
 If the certificate of registration has not been issued, may a corporation de facto exist?
 NO!
 Number 4 requirement, good faith in claiming to be and doing business as a corporation
 Hall vs. Piccio
 Missing link is good faith
 The certificate was not yet issued by the SEC, the members knew and therefore they were not acting in
good faith, therefore anybody can question its existence
 15

Corporation by estoppel
 So defectively formed so that they are not to be considered a de jure or de facto
 General partners- liable even beyond his promise even his personal properties are prone to attachment
 Lozano vs. Delos Santos
 Founded on principle of equity
 Exercise corporate powers
 Enters with business with 3rd parties
 When there is no 3rd persons involved and the problem arises between there members, therefore they
themselves know that there is no corporation by estoppel
 Albert vs. University
 1965 case, no section 21 yet
 Applied where the rules governing agency
 A person purporting in behalf of a non existing corporation
 Section 21, you arrive at the same decision
 Chiang Kai Siek vs. CA
 SC based its decision from the provision of the education act
 It cannot immune itself by virtue of its non compliance with the law
 Assuming there was no law?
 YES, it may still be sued as a school for the past 32 years the school represented itself as possessed of
juridical personality
 General rule: a 3rd party transacting with a non existent corporation shall be estopped to deny
 Asia banking vs. standard products
 General rule: absence of fraud a person who has dealt with a non incorporated corporation shall be stopped
to deny from actions in which it had benefited
 Exemptions: when there is fraud the general rule shall not apply
 Salvatierra vs. Garlitos
 As a general rule a person who has contracted it a corporation lacking personality
 Doctrine is not applicable where fraud takes part in the transaction
 Another exemption
 International express travel and tours vs. CA
 No fraud in this case
 How come Kahn was made liable?
 Doctrine of incorporation
 Applies only if that person is trying to escape from a contract where he is benefited
 In this case petitioner is not trying to escape liability, but rather the one claiming from the contract
 Would this apply to foreign corporation?
 YES, it may apply
 Georg Grotjahn vs. Isnami
 A foreign corporation cannot gain access to our courts unless they attain a license to engage in business in
the Philippines but applying corporation by estoppels, the court allowed
 Municipality of Malabang case
 No law, hence may be questioned by any person
 An unconstitutional act is not a law, t confers no rights, it imposes no duties, it affords no protections, it
crates o office, it is in legal contemplation, as inoperative as though it had never been passes
 Hall vs. Piccio
 No good faith
 Corporation by estoppel
 Admission, conduct or agreement
 Will not apply among members themselves there must be a 3rd party
 Cannot escape when benefited
 General rule: you deal with a corporation, as to estop it
 16

 Exceptions: 1. fraudulently misrepresents the third person may file an action directly to those members, 2.
3rd party will not be estopped if he is not trying to escape liability
 2 possible remedies
 Chiang kai siek case
 Albert case
 What would be the effect if the corporation failed to commence transaction?
 Automatic
 Operated but becomes subsequently inoperative for 5 years only a ground for suspension, proper notice
and hearing
 Commencement
 Example realty company

CORPORATE CHARTER AND ITS AMENDMENTS

 What do you understand by the word charter? Is it the same as articles of incorporation?
 Corporate charter is broader
 Franchise
 Primary power granted by the state to be and act as a corporation
 Secondary franchise is the right or privilege that the corporation may exercise
 You cannot issue investment contracts without a secondary franchise, kailangan primary muna hindi
pwede mauna secondary kasi sa section 19 it does not exist until issued with a certificate of registration or
incorporation
 Corporate entity
 Corporation exist separately and independently from the stockholders
 Stockholders cannot bring an action, to bring back the properties of a corporation
 Corporation has no interest in the individual properties of its members
 Sulo ng Bayan vs. Araneta
 Corporation cannot bring an action for the recovery of the properties of its members
 Caram vs. CA
 Stockholders cannot be held liable for the legitimate obligations of the corporation, they exist separately
and independently from one another
 Cruz vs. Dalisay
 Final judgment against a corporation cannot be enforced against stockholders
 Rustan Pulp vs. CA
 Corporation exist separately and independently
 Corporation are juridical entities, they exist only in legal contemplation, can act only through its authorized
representatives
 Soriano vs. CA
 They are not personally liable
 They where signed for and in behalf of the corporation
 Palay inc. vs. Clave
 Liabilities incurred by the corporation cannot be enforced against stockholders, etc., even if stockholders,
etc. happens to own a substantial interest in the corporation, mere ownership does not disregard the
corporate entity theory
 Corporate entity for legal or legitimate purposes only
 Two or more corporations, one of them will be treated as a mere alter-ego
 You cannot pierce the veil of corporate fiction when there are no facts attendant in the case
 Corporate Entity Theory
 The corporation is possessed with a personality separate and distinct from the individual stockholders or
members and is not affected by the personal rights, obligations or transactions of the latter
 Instrumentality rule
 17

 Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may
be disregarded
 Courts are concerned with reality and not form
 Mere ownership of all or substantially all of the shares of stock of a corporation is not, in itself, insufficient
ground for disregarding the separate corporate personality. And for the separate personality of the
corporation to be disregarded, the wrong doing must be clearly and convincingly established
 Fraud must be proven by clear and convincingly evidence amounting to more than preponderance. It
cannot be justified by speculation and can never be presumed. And only if it sought to hold the
stockholders liable directly for corporate debt
 Palacio vs. Fely
 Piercing the veil of corporate fiction
 Fely trans and the other corporation is one and the same
 Marvel bldg. vs. David
 There must be facts before the court will be justified in piercing the veil of corporate fiction
 Corporation was a mere extension of the personality of the person
 Yutivo and sons vs. Court of Tax Appeals
 What where the facts or circumstances arrived by the court here?
 Subscribed capital where all advanced by Yutivo, the board where the same as Yutivo
 Commissioner of Internal Revenue vs. Norton and Harrison
 Court applied the general rule
 Mere substantial ownership does not mean that it has a same corporate entity
 La Campana Coffee Factory, Inc. vs. KKM
 Two corporations managed by the same family, workers were made interchangeably
 Emilio Cano vs. CIR
 Sued in there official capacity
 Reverse of Soriano vs. CA (signed in their official capacity)
 Tesco vs. WCC
 The two corporations where located in the same office
 Claparols vs. CIR
 Same as NAFLU and A.C. Ransom
 Concept builders vs. NLRC
 Instrumentality rule. What is the instrumentality rule? “where one corporation is so organized and
controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the “instrumentality” may be disregarded.”
 Has no separate mind of its own. What is the degree of control?
 Control, not mere majority or complete stock control, but complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own.
 Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff’s legal
rights; and,
 The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
 The absence of one of the elements prevents “piercing the corporate veil.” In applying the “instrumentality”
or “alter ego” doctrine, the courts are concerned with reality and not form, with how the corporation
operated and the individual defendant’s relationship to that operation.
 There must facts and circumstances before warrant piercing the veil of corporate fiction
 The control necessary does not mean stock ownership
 MCConnel vs. CA
 were located in the same floor
 18

 “while the mere ownership of all or nearly all of the capital stock of a corporation does not necessary mean
that it is a mere business conduit of the stockholder, that conclusion is amply justified where it is shown, as
in the case before us, that the operations of the corporation were so merged with the stockholders as to be
practically indistinguishable from them. To hold the latter liable for the corporation’s obligations is not to
ignore the corporation’s separate entity, but merely to apple the established principle that such entity
cannot be invoked or used for purposes that could not have been intended by the law that created that
separate personality.”
 Tan boon bee vs. Jarencio
 Why would a drug company need a printing machine
 The property must be in pursuance of a company business
 Cease vs. CA
 Alter-ego or the extension of the person of forest ware does the court pierced the veil of corporate fiction
 As to not deprive the holders of their successional rights
 Mere ownership of all or substantially all is not a justification of piercing the veil of corporate fiction
 Fraud must be proven by clear and convincing evidence cannot presume or speculate, there must be facts
and circumstances
 Fraud must be clear and convincing evidence more than preponderance
 19

 Remo Jr. vs. IAC

 The resolution was not entered to defraud anyone
 Del Rosario vs. National Labor Commission
 The wrongdoing must be clearly established
 There must be facts to support
 Payment of claims cannot thus be presumed
 Indophil Textile Mill vs. CALICA
 How do you distinguish this ruling to La Campana, having the same issues:
 La campana, one payroll, employees were made interchangeable. Acrylic had its own standards
 PNB vs. Ritratto Group
 Control test
 Not mere majority but rather complete
 Twin Ace was only a subsequent interested party
 Assets and machineries
 Amendment of the articles of incorporation
 Express power granted to a corporation
 Section 16
 Appraisal right
 Section 81 to object on certain acts and transactions

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)

 Right granted only in specified instances

Are non-voting shares included in amending the articles of incorporation
 100/s XYZ-----ABC
 100/s
To
10 100/s
=1M/S what would be the 2/3?
Section 6 last paragraph
Voting shares are excluded except the foregoing instances
1 1
2 2
3 3
4 4
5 5
 6
1 & 2=absent 1&2=absent but gave their written assent
3 & 4= objected 3&4=objected
5 & 6= approved the amendment 5&6=approved
Would there be a valid amendment?
 20

 Special amendments 37 & 38 shortening that would result to dissolution require prior approval by the SEC

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 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)

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 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.
 21

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 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)

 The vote must be cast at the meeting called for that purpose
 Written assent would not suffice
 When do amendments become valid and effective?
 Only upon the approval of the SEC TRUE OR FALSE?
 FALSE because it can be valid upon the date of filing if not acted upon within 6 months without fault
attributable to the corporation
 Why is it retroactive?
 What provision may be amended, altered or repealed
 Can you change name, address for example she married or changed address?
 NO. you cannot change that
 Fait accompli, are beyond the powers or authority of the corporation to change, alter or modify. These
would include the following:
 Names of the incorporators and
 The incorporating directors or trustees,
 The name of the treasurer originally or first elected by the subscribers or members to act as such until his
successor has been duly elected and qualified,
 The number of shares and amount originally subscribed and paid out of the original authorized capital
stock of the corporation,
 The date and place of execution of the articles of incorporation,
 The signatories and acknowledgment thereof.
 All other provisions or matters stated or contained in the articles are subject to amendment.
 Founder’s or signatories hindi pwede palitan
 Names, nationalities- you cannot
 Capital- right granted by law to all corporation
 Paid up capital- NO
 Restriction and transfer of shares in ordinary stock corporations
 You can, but close corporation cannot
 Section 96, otherwise it will not be a close corporation
 22

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.

 Transfer clause, executor clause, acknowledgment, treasury affidavit-NO

 Philippine First Insurance case
 Mere change in the name of a corporation or by merely complying with the law is general amendment
 It does not change its personality. It is the same person in a different name. the charter is the same
 Amendment of a corporate term
 Extending the same can never be made 7 years prior? TRUE or FALSE
 FALSE. It can be if there are justifiable reasons for earlier extension as may be determined by the SEC
 Can you extend the corporate term if it has already expired?
 Once the term expires without an amendment having happen it ceases to exist as a body politic. It is
dissolved automatically on the day it expires.
 Alhambra cigar and PNB case
 Instances when the SEC allowed extension whose term has already expired
 All of them involved are institutions of learning, it was the case in order to avoid confusion that would arise
later on.
 23

BOARD OF DIRECTORS/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.

 Controlled by the board of directors

 Authority are however restricted to the day to day
 Stockholders may have all the profit but will turn over the management to the governing board
 But unless the law provides the power may be delegated
 General rule
 Corporations must sit and act as a body
 Will be bound by corporate officers if they acted within the 5 classification page 150
 Ramirez vs. Orientalist Co.
 What was the position of Fernandez in this case? TREASURER
 Why did the court rule that actions of Fernandez bound the corporation when he is not even a board of
director?
“If a man is found acting for a corporation with the external indicia of authority, any person not
having notice of want of authority, may usually rely upon those appearances; and if it be found that the
directors had permitted the agent to exercise that authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to
have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never
have been granted.”
 Contracts must be made by the director and not the stockholders
 Actions of the stockholders in such matters is only advisory and not in any way binding in the corporation
 Barreto vs. La previsora Filipina
 Everything emanates from the board of directors
 Stockholders action is merely advisory except their approval or vote is necessary to prove a valid
corporate act
 Qualifications:
 No citizenship requirement, at least majority must be residents
 Can have a governing board consisting solely of foreigners
 But we have to take into consideration partly nationalized industries and other laws which prohibits or
limits foreign ownership
 Anti-dummy act
 Utilization development of natural resources 60% must be owned by Filipino citizens, therefore they only
own 40%---10 members they can only have 4 seats, but not entirely correct because the law may provide
otherwise; educational institutions restricted to Filipinos, but there are exceptions when created by
religious and charitable institutions.
 By-laws may provide additional qualifications and disqualifications
 24

 To qualify as a director he must own at least 1 share

 Should the stockholder be the equitable or beneficial owner in order to qualify as a director?
 NO, it is not necessary, as long as you are listed in the books as owner of one share
 Lee vs. CA
 As long as you are listed in the books as owner of one share
 Under the old law he must be the beneficial owner and legal owner thereof but in the new law it is not
required as long as it stands in his name he is qualifies
1 A-100t/S B (own in the trust of X) is B qualified to be a director?
2
3-10
2– transferring their voting rights in favor of VT

Other rights will accrue in favor of them, but not the voting rights
voting rights must be recorder in the books of the corporation that it is transferred
PNB-IFL- wholly owned subsidiary of PNB
PNB will assign to PNB-IFL nominal shares and PNB-IFL now will be able to be nominated
 Gen. Rule:
 Term of one year who will serve as such until there successors are elected and qualified
 Exception:
 Non-stock corporation can serve for a term of 3 years
 Educational non-stock- term of the governing board can be 5 years
 May this term exceed one year?
 Yes, they may serve in a hold over capacity until their successors have been duly elected and qualified
 Detective and protective bureau vs. Cloribel
 In the by-laws, managing director must be elected from among themselves
 Must be duly elected and qualified

How are the directors elected?

1-100T/S
2-100T/S
3-100T/S
to 10=1M/S
 Do you include the vote of 1 & 2 to have a quorum to have a valid meeting?
 NO, quorum requirements is 401,000
Quorum requirement is 501k

Holders of non-voting shares are only entitled to vote in last par. Of section 6
1-200k
2-200k
3-200k
4-100k
5-100k
6-100k
7-50k
8-40k
9-5k
10-5k
=1MS
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10, tumakbo and ninominate nila yung sarili nila and cast
all their shares on themselves
 Who wins? Or who gets elected?
 No vote requirement, the one who gets the most number of votes gets elected, section24.
 25

 What is cumulative voting?

 Process of multiplying the number of shares to the number of director to be elected
 Matter of right granted to stockholders in a stock corporation

1 to 5 has 200k/s and members of the same family- majority 800k they have 4M votes they are guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes
 Cumulative to allow the minority to have a rightful representation in the board
 Is it allowed in a non-stock corporation?
 Not generally available
 Section 89 unless the articles or by-laws allow cumulative voting

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.

 Other corporate officers other than the governing board section 25

Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a treasurer who
may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws. Any two (2) or more positions may be held
concurrently by the same person, except that no one shall act as president and secretary or as president
and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by
law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation
shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority
of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

 Is the president required to be a stockholder. YES

 The chairman may be another person
 The president may also be another person
 Prohibited is president to be secretary or treasurer at the same time
 Board of director must sit and act as a body to arrive at a corporate act
 26

 What would constitute a quorum if 5 then 3 must be present

 May the vote of 2 members past a 5 man governing board pass a valid corporate act?
 YES. Voting requirement is majority of directors present at which there where a quorum
1 1 and 2 present=valid voting requirement
2 1 and 2 voted yes
3 3 voted no
4
5

 Is it absolute?
 NO, except in the election because it requires the majority of all the members of the board
 If by-laws or articles provide a higher voting requirement
 27

Artificial beings must act through its members and act as a body to have a valid corporate act
 Exception:
 Delegation
 Expressly conferred
 Where the officer or agent is clothed with actual or apparent authority
 Otherwise it will not bind the corporation
 Yao ka sin trading case “already asked in the bar”
 Only bind the corporation to the extent of authority confined to him or virtue of customs, usage and policy
 Must pass first the controller and counsel
 What if the notice requirement is not complied with?
 Lopez realty vs. Fontecha
 Notice requirement must be complied with hence it should have been with force and effect, but according
to the SC, it may be ratified expressly if there is a subsequent meeting called for that purpose
 Impliedly through acts
 Asuncion was aware of the corporations obligation
 There was implied ratification or she was estopped

 Pua casim vs. Neumark and Co.

 Considered 3 circumstanced
 Check which was the proceed of the loan which was endorsed and deposit in the corporate account
 Neumark as president and also stockholder

 Yu chuck vs. Kong Li Po

 General manager usually has the power to hire but the SC said the contract must be reasonable
 The contract here is so onerous that it would throw the corporation into insolvency

 Francisco vs. GSIS

 GSIS cannot evade the binding effect of the telegram
 Only 15 months later that the corporation said there was a mistake
 The silence coupled with the unconditional acceptance of the other subsequent remittances is binding to
the corporation

 Board of liquidators vs. Kalaw

“Settled jurisprudence has it that where similar acts have been approved by the directors as a
matter of general practice, custom and policy, the general manager may bind the company without formal
authorization of the board of directors. In varying language, existence of such authority is established, by
proof of the course of business, the usages and practices of the company and by the knowledge which the
board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the
affairs of the corporation. So also, “xx authority to act for and bind a corporation may be presumed from
acts of recognition in other instances where the power was in fact exercised.” “xx Thus, when, in the usual
course of business of a corporation, an officer has been allowed in his official capacity to manage its affairs,
his authority to represent the corporation may be implied from the manner in which he has been permitted
by the directors to manage its business.”
In the case at bar, the practice of the corporation has been to allow its general manager to negotiate
and execute contracts in its copra trading activities for and in NACOCO’s behalf without prior board
approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on
all corporate contracts. But that Board itself, by its acts and through acquiescence, practically laid aside the
by-law requirement of prior approval.
 Kalaw signed alone and said contracts were submitted to the board of directors after its consummation and
not before
 28

 Buenaseda vs. Bowen

 Express ratification is made through a formal board action
 Implied ratification is through: silence or acquiescence, acceptance benefits and lastly recognition or
adoption
 An unauthorized act may nevertheless be binding either by express or implied by estoppels
 By virtue of silence the board had impliedly accepted the act
 By recognition or adoption
 By virtue of payment of obligations arising therefore- Lopez realty
 May directors or trustees be disqualified to act as such?
 YES, crime, etc. disqualifications in book
 Possess or dispossess any of the qualifications or disqualifications , cease to hold at least one share
 May directors be ousted from office?
 At least 2/3 of members representing outstanding capital stock. Again notice requirement must be
complied with

1-200 1-5 same family

2-200
3-200
4-100
5-100 electing
6-100 6 to 10 not related
7-50
8-40
9-5
10-5 outstanding director

 Meetings called by the president or the secretary ordered by the president

 It depends if the removal is without cause they cannot do so because removal without cause shall not
deprive the minority stockholders or members of the right of representative
 If with cause they can even if it will prejudice the rights of the minority, provided of course additional
requirements by-laws and articles of incorporation
 Who will fill up the vacancy created due to the ouster of a member of the board of directors <section 29>

Section 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or
trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote
of at least 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)

 Other than by removal or expiration of term they do not have the power
 When will the vacancies be filled up?
 Is notice required, to fill up vacancies due to removal?
 What if the vacancy is due to an increase, can it be filled up in the same meeting where in the number is
increased?
 Election due to removal-in the same meeting notice is not required
 Election due to increase in number- it must be so stated in the meeting
 29

 Section 30

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)

 Generally not entitled to receive compensation because they render it gratuitously

 Unless the by-laws allows
 Stockholders may also grant pursuant to a majority vote
 Must not exceed net income of 10% tax of the preceding year
 Acting in special capacity
 In, sum directors may receive compensation when
 there is a provision in the by-laws to that effect
 When the stockholders, by a majority vote of the outstanding capital stock grant the same; and,
 If the director renders extra-ordinary or unsual service
 Central cooperative exchange vs. Tibe
 By-laws may allow, stockholders may also allow such
 What do you understand by the phrase “as such directors”
 Western institute vs. Salas
 Compensation was granted without by-laws authority
 Prohibition is not a sweeping rule
 Members of the board may receive when they receive in a special capacity
 Mere act of the board will suffice
 Is the 10% ceiling applicable to other officers?
 NO. the phrase “as such director” was used twice <Section 30>
 The SC ruled that the 10% ceiling will not likewise apply if they acted in a capacity other than “as such
directors”
 Government vs. El Hogar
 Judicial intervention is not proper
 The appropriates remedy is to those who can make or unmake the by-laws

Liability of corporate officers

 Obligations incurred by those acting for and in behalf of the corporations are not there’s BUT there are
exceptions even if they are acting for and in behalf of the corporation

 Tramat vs. CA
 General rule was applied in the case
 Ong acted as officers and acted within the scope of his authority
 Court laid down 4 instances when even if acting within the scope of his authority he is held solidarily liable
 He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders
or other persons;
 He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
 He agrees to hold himself personally and solidarily liable with the corporation;
 He is made, by a specific provision of law, to personally answer for his corporate action.
 Watered stocks- issued, fully paid up when in fact they have not been fully paid or promised as such
 30

 Llamado vs. CA
 The corporate entity theory cannot be used as a defense to escape liability in violation of B.P. 22
 Where the check is drawn by a corporation the persons who signed the check shall be liable.
 Uichico vs. NLRC
 Labor case corporate directors and officers are solidarily liable with the corporation for the termination of
employment of corporate employee done with malice and bad faith

3 fold duty of directors

 obedient
 diligent
 loyal
 Business judgment rule
 Questions of policy and management are left solely to the honest decision of the board of directors and the
courts are without authority to substitute its judgment as against the former. The directors are the
business managers of the corporation and as long as they act in good faith, its actuations are not subject to
judicial review. Montelibano vs. Bacolod Murcia Milling
 questions of policy and management are left solely to the board of directors
 BOD, business manager of the corporation and as long as they act in good faith, its actuations are not
subject to judicial review
 They are not insurer of the property of the company, they were guarantors that the enterprise undertaken
by the corporation shall be successful

 Montelibano vs. Bacolod Murcia Milling Co.

 Directors are not liable due to imprudence or honest error of judgment
 Duty of loyalty of corporate directors
 31,32,33,34
 31,32,33- specific instances when corporate officers may violate loyalty
 32,33 self-dealing and interlocking director
 Corporate opportunity doctrine
 It places a director of a corporation in the position of a fiduciary and prohibits him form seizing a business
opportunity and/or developing it at the expense and with the facilities of the corporation. He cannot
appropriate to himself a business opportunity which in fairness should belong to the corporation.
 Last paragraph of section 31 and the provision of section 34 make reference to recovery of “forbidden
profits”
 Distinction between section 31 and 34 relative to the ratification by the stockholders
 The second paragraph of section 31 which makes a director liable to account for profits if he attempts to
acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in
confidence as to which equity imposes a disability upon him to deal in his own behalf is not subject to
ratification by the stockholders. Whereas, in section 34 if a director acquires for himself a business
opportunity which should belong to the corporation, he is bound to account for such profits unless his act is
ratified by the stockholders owning ore representing at least 2/3 of the outstanding capital stock.
 If reposed in him in confidence, not subject to ratification
 If the acquisition is merely that of a business opportunity which has not been reposed in him in confidence,
the same may be subject to ratification by the stockholders.
 31

Director x co.
A-REALTY
B
C Z owns property and is going abroad never to Return, he wants to sell for 25M the fair
market value is 30M
D
E
E goes to Z and offers to pay the property for 26 M and later he sells it for 30M making 4M profit, one of the
stockholders learned and complains that he should submit the profits. E said that he will move for ratification of
his actuation. Can it be ratified?
 It can be ratified he merely acquired a business owning to the corporation
 It would be different if it was entrusted in his confidence
Another scenario:
Had A not attended the meeting he would not have known of the sale it is then a matter reposed in him in
confidence
 A corporation cannot reaquire its share if it has no restricted unretained earnings
 Strong vs. Rapide
 What duty did he violate?
 He violated his duty of loyalty
 The law would be impotent if the sale were not invalidated

Self-dealing director and interlocking director

 What is a self-dealing director?
 Director of a corporation dealing or transacting business with his corporation
 Are the contracts and dealing of a self0dealing director valid?
 General rule: voidable
 May the contracts of a self-dealing director be valid per se.
 YES. If all the 4 conditions are present they will be valid per se
 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;
 That the vote of such director or trustee was not necessary for the approval of the contract;
 That the contract is fair and reasonable under the circumstances; and
 That in case of an officer, the contract has been previously authorized by the board of directors.
 When do they become voidable?
 When any of the two requisites are absent it is voidable, but subject to ratification by 2/3 of the
outstanding capital stock or 2/3 of the member
 Requisites for ratification (subject to ratification by the stockholders holding or representing at least 2/3 of
the outstanding capital stock or 2/3 of the members.)
 it must be at a meeting called for the purpose
 full disclosure of the adverse interest of the director concerned must be made
 the contract is fair and reasonable under the circumstances
 Problem if self-dealing director involved owns all or substantially all of the shares of stock of the
corporation thereby making it easily possible to have the contract ratified
 last sentence of section 32 should be made to apply by determining the reasonableness and fairness of the
contract

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;
 32

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)

 Prime white cement vs. IAC

 a director of a corporation owes a position in trust
 in case of conflict between himself and that of the corporation, he cannot sacrifice the interest of the
corporation to his own advantage
 as a director he should have acted in a manner as not to unduly prejudice the corporation
 he cannot be allowed to enrich himself
 May corporate directors purchase the corporate property?
 Mead vs. Mccullogh

Interlocking director
-a director of one corporation who deals and transacts business with another corporation who is himself a director
 director of X company also a director of Y corporation
 Both companies enter into a contract and A sits, is the contract valid?
 Yes on the ground of fraud or if it is unfair
 May be subject to the provision of section 32
 Section 32 contract may become voidable, hence it may also be ratified

X Co. Y Co.
A owe 20% A owe 20%
Is it generally valid or voidable? VALID
25% 25% VALID
15% 25% VOIDABLE SUBJECT TO section 32
More than 20 substantial
 BOD mismanages corporate officers. Who may file a suit?
 General rule: BOD which can institute a case because it has all the powers. To allow stockholders to file
would violate the doctrine of corporate entity and may result to multiplicity of suits
 Stockholders cannot therefore generally file a case EXCEPT of course in a DERIVATIVE SUIT
 33

Derivative suit
 An action based on injury to the corporation-to enforce a corporate right- wherein the corporation itself is
joined as a necessary party, and recovery is in favor of and for the corporation.
 Remedy granted by law to stockholders to institute a case to remedy a wrong done directly to the
corporation and indirectly to the stockholders, if the board refuses to do so. Otherwise if not they would be
left without any recourse
 Available suits
 individual or personal
 Wrong done against his person as a stockholder
 Class suit
 Filed by a stockholder in representation of other stockholders
 A wrong or redress done, a derivative suit in nature
 Intra-corporate remedies
 Demand to the BOD to institute such action
 Negated by the BOD
 The one who instituted must be a stockholder at the date when the act was done, must have been a
stockholder by that time
 Demand will not be required if the majority of the BOD are the one’s guilty of the wrong charged
 The corporation must be made a party in the case whatever side will not matter because under Philippine
law misjoinder is not a ground for dismissal
 Non-joinder is a ground for dismissal
 Any benefit should inure to the corporation
 Stockholder bringing the action is entitled to reimbursement such as attorney’s fee ONLY IF the case is
SUCCESSFUL to avoid harassment suit to their management
 Pascual vs. Orozco
 By virtue of the fact that he is a stockholder, may maintain a derivative suit
 Depend on how, when and what reason
 Seeking for the years 1898 all the way 1907
 Only became a stockholder in 1903
 He can sue only in 1903 forward because he must be a stockholder
 The right of action is personal in nature. He became a stockholder only in 1902
 Derivative suit
 By a stockholder to address a wrong done against the corporation and the stockholder indirectly
 Essential requisite must have been a stockholder from the time the act complained of took place
 Cannot institute an action from the years he was still not a stockholder
 Everett vs. Asia Banking
 Stockholders cannot ordinarily commence suit in equity and such is in the hands of its BOD however there
are exceptions when the BOD will not sue since they are themselves principals to the fraud.
 Republic vs. Cuaderno
 The facts constitute sufficient cause of action
 It is not the corporate interest to shield one from criminal prosecution which is personal interest
 Perez is not suing in his behalf, but in behalf of the corporation
 Western institute vs. Salas
 Assuming it was filed in the proper forum would there argument that it is a derivative suit prosper? NO. it
is people of the Philippines vs. individual director, it must be stated in the complaint that it is being
instituted as a derivative suit and for and in behalf of the corporation
 Granting arguendo, that this is a derivative suit, the same is still outrightly dismissible for having been
wrongfully filed in the regular court devoid of any jurisdiction to entertain the complaint. The case should
have been filed with the SEC which exercises original and exclusive jurisdiction over derivative suits, they
being intra-corporate disputes, per Section 5 (b) of P.D. 902-A
 34

 San Miguel vs. Khan

 Was a demand made? NO
 It is not necessary because he objected in the board meeting, but still it was adopted therefore it was
useless
 Chase vs. Buencamino
 Argument that he should be in estoppels since he filed in the U.S.
 Assuming the case prospered in the U.S. would not estoppels apply as against him? NO for estoppels to step
in it must be a case by the corporation
 Reyes vs. tan
 Corporate director are guilty of breach of trust
 A stockholder may institute an action to remedy a wrong done
 Fraud in the conduct of corporate affairs
 Gamboa vs. Victoriano
 Is derivative suit appropriate in this case
 They are not vindicatory damage done to the corporation, but rather they where vindicating damage
against him
 Violation of their rights as individuals, hence derivative suit is not the remedy
 Evangelista vs. Santos
 Derivative suit is not proper
 Claim is not for the benefit of the corporation, but rather his individual benefit
 From the cases above cited, these are the requirements and the procedures that must be followed in order
that a derivative suit may prosper
 That the party bringing the suit should be a stockholder as of the time the act or transaction complained of
took place, or whose shares have evolved upon him since by operation of law. This rule, however, does not
apply if such act or transaction continues and is injurious to the stockholder or affect him specifically in
some other way.
The number of his hares is immaterial since he is not suing in his own behalf or for the protection or
vindication of his own right, or the redress of a wrong done against him, individually, but in behalf and for
the benefit of the corporation.
 He has tried to exhaust intra-corporate remedies, he has made a demand on the board of directors for the
appropriate relief but the latter had failed or refused to heed his plea. Demand, however, is not required if
the company is under the complete control of the directors who are the very ones to be sued (or where it
becomes obvious that a demand upon them would have been futile and useless) since the law does not
require a litigant to perform useless acts;
 The stockholder bringing the suit must allege in his complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other stockholders similarly situated, otherwise, the case is
dismissible. This is because the cause of action actually devolves on the corporation and not to a particular
stockholder.
 The corporation should be made a party, either as party-plaintiff or defendant, in order to make the court’s
judgment binding upon it, and thus, bar future litigation of the same issues. On what side the corporation
appears loses importance when it is considered that it lay within the power of the court to direct the
making of amendment of the pleading, by adding or dropping parties, as may be required in the interest of
justice. Misjoinder of parties is not a ground to dismiss action; and,
 Any benefit or damages recovered shall pertain to the corporation. This is so because in all instances,
derivative suit is instituted for and in behalf of the corporation and not for the protection or vindication of a
right or rights of a particular stockholder, otherwise, the aggrieved stockholder should institute, instead, an
individual or personal suit to vindicate his personal or individual right. Or, for that matter, representative
or class suit for all other stockholders whose rights are similarly situated, injured or violated, personally or
individually.
 Executive committee
 Not allowed under the OLD law
 How may executive committee created and constituted?
 35

 Section 35

Section 35. Executive committee. - The by-laws of a corporation may create an executive committee,
composed of not less than three members of the board, to be appointed by the board. Said committee may
act, by majority vote of all its members, on such specific matters within the competence of the board, as
may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1)
approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the
board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or
repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5)
a distribution of cash dividends to the shareholders.

 Said committee may act and bind the corporation by the majority vote of all its members except with
respect to those matters provided for in sec. 35 these are:
 Approval of any action for which shareholders’ approval is also required
 The filing of vacancies in the board;
 Amendment or repeal of by-laws or the adoption of new by-laws;
 Amendment or repeal of any resolution of the board which by its express terms is not so amenable or
repealable; and,
 Distribution of cash dividends to the shareholders.
 May the board alone create an executive committee without any authority provided for the by-laws?
 NO board of directors must sit and act as a body to have a valid transaction
 May a non-member of the board of directors be a member of the executive committee?
 NO, all of them must be members of the board of directors
 BOD cannot act by proxy it would be abdication of powers
 Purpose clauses necessary because it confers and also limits the actual authority of the corporation
 36

CORPORATE POWERS AND AUTHORITY

 Corporate authority may be classified into three classes namely:
 Those expressly granted or authorized by law inclusive of the corporate charter or articles of
incorporation;
 Those impliedly granted as are essential or reasonably necessary to the carrying out of the express powers;
 Those that are incidental to its existence.
 Section 36 to 45- POWER GRANTED BY LAW

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;

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)

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
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
 37

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)

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 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 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.
 38

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)

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.

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, 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.

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;

 39

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

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this
Code. (a)

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)

Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent
stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the approval of stockholders representing not less than
two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their
paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by
the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such as when there is need for special reserve for probable
contingencies. (n)

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 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)
 40

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)
 41

Section 36
 Where should the corporation be sued?
 principal office is important because it establishes the residence of the corporation and determining
service of summons, venue of action
 it can be sued in the city or municipality where its principal office is found
 Principal office is also important for venue of meetings
 Non-stock corporation may provide in its by-laws that the venue of meeting be anywhere in the Philippines
 Upon whom service of summons be made?
 Section 11. Service upon domestic private juridical entity- when the defendant is a corporation, partnership
or association organized under the laws of the Philippines with a juridical personality, service may be made
upon the president, managing partner, general manager, corporate secretary, treasurer, or in house
counsel.
 Delta motor vs. Mangosing
 strict compliance is necessary
 should be served to those named in the statute
 secretary of a dep’t are not those included in the statute
 E.B. Villarosa vs. Benito
 decision En Banc repeals all other pronouncement
 section 13 Rule 14 was repealed
 the old rules was ambiguous and broad and at all time illogical
 the particular revision under Section 11 of Rule 14 was explained by retired Supreme Court Justice Florenz
Regalado, thus:
“xxx the then section 13 of this Rule allowed service upon a defendant corporation to “be made on
the president, manager, secretary, cashier, agent or any of its directors.” The aforesaid terms were
obviously ambiguous and susceptible of broad and sometimes illogical interpretations, especially
the word “agent” of the corporation. The Filoil case, involving the litigation lawyer of the
corporation who precisely appeared to challenge the validity of service of summons but whose very
appearance for that purpose was seized upon to validate the defective service, is an illustration of
the need for this revised section with limited scope and specific terminology. Thus the absurd result
in the Filoil case necessitated the amendment permitting service only on the in-house counsel of the
corporation who is in effect an employee of the corporation, as distinguished from an independent
practitioner.”
 notes: additional knowledge
 special appearance enter for that particular appearance you are not the counsel in the case
 would apply only if it does not involve an intra-corporate controversy (controversy between and among
the stockholders)
 upon any of the statutory officers or officers fixed in the by-laws any secretary, any of the directors; any
managers in the by-laws
 Seal
 merely ministerial or permissive
 Power to amend
 section 16
 special 37,38,120
 Power to adopt by-laws
 section 46-48
 Power to issue or sell stocks and to admit members
 stock of stockholders and provision governing non-stock
 Power to acquire or alienate real or personal property
 is there any limitation? YES
 Two specific limitation
 Section 36, as lawful transactions of business of the corporation may reasonably and necessarily require
 Constitution and law
 42

 Luneta vs. A.D. Santos

 Importance of the purpose clause
 Cannot have the power to acquire
 Cannot engage in land transportation
 Doctrine of limited capacity
 Gov’t vs. El Hogar
 As the lawful transaction of its business may reasonably represent
 Director of Lands vs. CA
 Exception to the rule in the constitution
 Alienable public land
 Converts the property to a private land automatically once converted it can now be registered
 Power to make donation
 Limitation section 36 par.9
 These are circumstances, however, under which a donation by a corporation may be to its benefit as a
means of increasing its business or promoting patronage. Thus, paragraph 9 of section 36 expressly
authorizes a corporation to make donations. The only limitations imposed are the following:
 The donation must be “reasonable”;
 It must be for public welfare, or for hospital, charitable, scientific, cultural or similar purpose; and,
 It shall not be in aid of political party or candidate, or for purposes of partisan political activity.
 Power to establish pension
 Include any act to promote and improve the convenience, welfare and benefit of the employees or offices
 Republic vs. Acoje
 While as a rule an ultra-vires act is one committed outside the object for which a corporation is created as
defined by law, there are however certain corporate acts that may be performed outside of the scope of the
powers expressly conferred if they are necessary to promote the interest or welfare of the corporation.
Thus, it has been held that “although not expressly authorized to do so a corporation may become a surety
where the particular transaction is reasonably necessary or proper to the conduct of its business,” and here
it is undisputed that the establishment local post office is a reasonable and proper adjunct to the conduct of
the business of appellant company. Indeed, such post office is a vital improvement in the living condition of
its employees and laborers who came to settle in its mining camp which is far removed from the postal
facilities or means of communication accorded to people living in a city or municipality.
 43

 Power to exercise such other powers essential or necessary to carry out its purpose (implied power)
 Acts in the usual course of business;
 Acts to protect debts owing to the corporation;
 Embarking in a different business;
 Acts in part or wholly to protect or aid employees; and,
 Acts to increase business
 Teresa Electric and Power Co. vs. P.S.C.
 Examined the articles of incorporation to arrive at its decision
 National Power vs. Vera
 For purpose of prohibiting the NAPOCOR
 The court must decide whether or not a logical and necessary relation exists between the act questioned
and the corporate purpose expressed in the NPC charter
 Importance of PLACE of registration
 Residence
 Venue
 Place of meetings
 Place or registration of chattel mortgage
 Power to extend its terms
 Once its term expires, already dissolved automatically, thus can no longer ask for extension
 After dissolution, it has 3 years to windup
 What are the modes of increasing capital stock?
 Increasing the par value of the existing number of shares without increasing the number of shares;
 Increasing the number of existing shares without increasing the par value thereof; and,
 Increasing the number of existing shares and at the same time increasing the par value of the shares.
 Why a corporation increases it capital stock?
 Generate funds, business expansion, or payment of liabilities, purposes of acquiring other business.
(example: to buy cars for the officers, purpose of acquiring other business, expansion, other valid reasons)
 How do you decrease capital stock and why a corporation decreases?
 Reduce or wipeout existing deficit where no creditors would thereby be effected
 When capital is more than necessary to procreate the business or reduction of capital surplus
 To write down the value of its fixed assets to reflect those present and actual
 NOTE: any increase or decrease of capital stock requires approval of government agency like SEC it can
never take place unless SEC approves the same
 Relevance of decrease of capital?
 To reduce or wipe out existing deficit where no creditors would thereby be affected;
 When the capital is more than what is necessary to procreate the business or reduction of capital surplus;
or,
 To write down the value of its fixed assets to reflect there present actual value in case where there is a
decline in the value of the fixed assets of the corporation.
 Examples: Php 10M capital for grocery business, mayor didn’t want to issue license/permit because mayor
has 3 other grocery stores, only allowed sari-sari store permit, reduce capital for sari-sari so that the
money will not sleep in bank
 Example: car rental agencies-Php 10M capital for 20 taxi’s, after some time each taxi is only 250K, nagmura
ang taxi, to reduce capital is to show actual assets
 Limitation imposed by law
 Decrease shall not in any way affect the rights of the creditors
 Philippine Trust Company vs. Rivera
 Without the appraisal of SEC, a decrease in capital stocks has no effect
 TRUST FUND DOCTRINE:
 44

 Subscription to capital stock of a corporation constitute a fund to which the creditors have a right to look
upon for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment of its debts.
 Madrigal vs. Zamora
 Decrease in capital has a subterfuge to evade payment
 Thus not valid and effective
 Must not prejudice creditors which includes the employees
 Bond
 Commonly understood as an obligation of a state, its subdivision or a private corporation, represented by a
certificate or an instrument for the principal and by detachable coupons for the payment of interests. In its
simplest term, it is one where an obligor obliges himself to pay a certain sum of money to another at a day
named.
 There are different kinds of bond but before they may be issued or floated by the corporation, the same
must be registered and approved by the SEC subject to the rules and regulations that may be adopted by
that agency. The procedure and requirements set forth in section 38 is the same as in increasing or
decreasing the capital stock except that the certificate does not have to state the matters required in sub-
section 2 & 3 thereof.
 45

Pre-emptive rights
 A right granted by law to all existing stockholders of a stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to their respective stockholdings, subject only to the
limitations imposed under section 39 of the Code.
 Internationally granted
 Pre-emptive rights, why it is granted?
 In order that the existing stockholders may maintain their proportionate right as not to dilute their right
 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.

 May it be denied? How?

 Yes, if provided by articles of incorporation or by an amendment
 However, pre-emptive rights is unavailable to shares in trading in stock exchange otherwise stockholders
must waive first their right before they may sell such.
 Exceptions
 When the shares to be issued is in compliance with laws requiring stock offerings or minimum stock
ownership by the public
 Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the
outstanding capital stock either
 In exchange for property needed for corporate purpose or,
 In payment of a previously contracted debt
 The exceptions, however will not apply to stockholders of a close corporation by virtue of a subsequent and
specific provision of the Code which provides that the “pre-emptive right of a stockholder in a close
corporation shall extend to all stock to be issued, including reissuance of treasury shares, whether for
money, property or personal services or in payment of a corporate debt, unless the articles of incorporation
provide otherwise, if not entirely absolute, in that it extends to all issuance and disposition of shares
 Such right of pre-emption may be lost by waiver of the stockholder, expressly or impliedly by his inability
or failure to exercise it after having been notified of the proposed issuance or disposition of shares
 When is it unavailable?
 In shares traded openly in stock exchange/market
 Is it applicable to close corporations?
 See section 96, close corporations must provide it first on its articles of incorporation, that its articles does
not really deny such pre-emptive rights.
 Section 102, will not apply to close corporations
 The right of pre-emptive rights is absolute in close corporations
“All issues or depositing shares of any class” form part of ACS
 Certain instances when a stockholder may nevertheless be unable to exercise this right:
 Issued for public ownership
 Issued in good faith, with approval of 2/3 of outstanding capital stock either a) in exchange for property
needed or b) for payment of a previously contracted debt
 Pre- emptive rights of stockholders in ordinary stock corporations may be denied
 if the shares are to be issued in compliance with laws requiring stock offering or minimum stock
ownership by the pubic
 In exchange for property needed for corporate purposes
 In payment of previously contracted debts
 46

 This rule, however, does not apply in a close corporation as the pre-emptive rights of the stockholders
thereof is broadened to include all issues without exceptions unless, of course, denied or limited by the
articles of incorporations. Section 102 provides:

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.

 Denial will not apply to a close corporation, ABSOLUTE

 section 96
 May a stock holder in a close corporation insist in the exercise of his pre-emptive rights?
 Yes, section 102
 What type or shares are covered by pre-emptive rights?
 Does it include those originally unsubscribed?
 NO. Benito vs. SEC
 Will the stockholders be able to exercise their pre-emptive right with respect to the old unissued shares?
 Pre-emptive rights is applicable only to new issued shares and not to the old unissued shares because it is
presumed that the original subscribers is deemed to have taken his shares knowing that they form a
definite proportionate part of the whole number of authorized shares
 When the shares, left unsubscribed are re-offered, he cannot therefore claim. DILUTION OF INTEREST
 Will the acquiring purchaser be liable for debts of the former corporation?
 Generally no, corporate entity theory because there may be instances when purchasing corporation may be
held liable
 May a corporation acquire its own shares?
 Yes
 Is there any restriction provided for by law in reacquiring its own shares?
 Yes, it must have been unrestricted retained earnings appearing in the books of corporation
 A corporation can never acquire its own shares if it has no unrestricted retained earnings
 False, exception close corporation and redeemable shares
EXAMPLE:
ACS 2M
SUBSCRIBED 1M
PAID UP 1M
 100K
 100K
TO
10 100K
 If 1-5 became 200K each, may 6-10 demand the exercise their pre-emptive right?
 YES
 May 1-5 subscribe to the unsubscribed capital stock to the exclusion of 6-10?
 If a corporation makes 2M unrestricted retained earnings, it is the shares and not the number of persons
that matters
 May 6-10 complain for a dilution of their interest?
 YES, it’s an internationally recognized right because it includes “all issues and disposition of shares of any
class” and all kinds of shares new or old
 If the remaining unsubscribed shares are issued, it’s an issuance of any class
 May a corporation sell/dispose all or substantially all of its corporate assets and liabilities?
 YES
 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION 4) PRIOR WRITTEN NOTICE 5) SALE SUBJECT TO
PROVISIONS OF EXITING LAWS 6) DISSENTING STOCKHOLDERS HAVE THE RIGHT TO EXERCISE THEIR
APPRAISAL RIGHT
 47

 If a corporation sells substantially all of it assets and properties, will the buyer assume liability?
 NO, EXCEPT
 Express or implied agreement to the purchase
 Where the transaction amounts to consolidation or merger of the corporations
 When purchasing corporation is merely a continuation of the selling corporation
 Where the transaction is entered into fraudulently in order to escape liability for such debt
 Legitimate purpose: for a corporation to reacquire its own shares
 Limitation: it must have surplus/unrestricted retained earnings
 Exception: may redeem irrespective of unrestricted retained earnings
 Exercise of stockholders’ right to compel “close corporation” to purchase his shares
 Where corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital
stock
ACS 1M
SUBSRIBED 1M
PAID-UP 1M
ASSETS 500K
1M PROFITS
 500K LIABILITIES
____________________
500K RESERVES IN A CLOSE CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED
STOCKS
X – REALTY CORPORATION
 THE ONLY PROPERTY OF THE CORPORATION
 BOARD OF DIRECTORS DECIDED TO SELL IT
Will it need the approval of the stockholders?
 NO, 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
 If X is a manufacturing company, then it can sell its only property upon approval of the stockholders
because it will render itself capable of continuing its business, BUT if the proceeds will be used to purchase
a better one for the continuance of its business, then it does not need the approval of the stockholders
 Conditions for the valid exercise of this power are the following
 Resolution by the majority vote of the board of directors/trustees
 Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the
members;
 The ratification of the stockholders or members must be made at a meeting duly called for that purpose
 Prior written notice of the proposed action and of the time and place of meeting must be made addressed
to all stockholders of record, either by mail or personal service;
 The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and
monopolies
 Any dissenting stockholder shall have the option to exercise his appraisal right
 IDP vs. CA
 Consent of the members was not secured
 Edward Nell Co. vs. Pacific Farms
 Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, except:
 Where the purchaser expressly or impliedly agrees to assume such debts;
 Where the transaction amounts to a consolidation or merger of the corporations;
 Where the purchasing corporation is merely a continuation of the selling corporation;
 Where the transaction is entered into fraudulently in order to escape liability for such debts.
 Power to acquire own shares
 48

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

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions
of this Code. (a)

 The corporation must at all times have “unrestricted retained earnings” to exercise this corporate power
 Steinberg vs. Velasco
 For as long as there are debts and liabilities, a corporation may not reacquire its shares (subject to
exceptions)
 Creditors of a corporation have the right to assume that so long as there are outstanding debts and
liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and
that it will not declare dividends to stockholders when the corporation is insolvent.
 Power to invest funds <sec.42>

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)

 For any other purpose other than the primary purpose, stockholder’s consent or approval is necessary
 Thus, if it’s for the secondary purpose, it is necessary
 If it’s in connection with the primary purpose, only board resolution is necessary
 Requirements and steps to be followed for a valid investment of corporate funds are:
 Resolution by the majority of the board of directors or trustees;
 Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the
members in case of non-stock corporations;
 The ratification must be made at a meeting duly called for that purpose;
 Prior written notice of the proposed investment and the time and place of the meeting shall be made,
addressed to each stockholder or member by mail or by personal service, and;
 Any dissenting stockholder shall have the option to exercise his appraisal right
 Dela rama vs. Ma-ao Sugar
 There is a substantial and not remote connection between the sugar bags and the sugar manufacture, thus
stockholder’s approval is not necessary for validity
 A private corporation, in order to accomplish its purpose as stated in its articles of incorporation, and
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge, or dispose of shares
 49

bonds, securities and other evidences of indebtedness of any domestic or foreign corporation. Such an act,
if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when
the purchase of shares of another corporation is done solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval of the stockholders is necessary.
 Gokongwei vs. SEC
 Investments made by SMC is necessarily connected with its primary purpose and this was ratified in a
meeting
 Submission of previous action is a sound corporate practice
 Redeemable shares
 Closed corporation (see section 105)
 For any reason, compel the value of shares “withdrawal shares” provided corporation has sufficient funds
to cover its debts and liabilities

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.

 If shares are reacquired, what happens?

 It becomes treasury shares
 Stockholder’s consent/ approval is not necessary and mere board action is sufficient if in accordance with
primary purpose
 The logical relation of act done and primary purpose of corporation and between the board of directors to
undertake submission of acts is a sound corporate practice
 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 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)

 What are dividends?

 Corporate profits set aside, declared and ordered by the Board of Directors to be paid to the stockholders.
 What are property dividends?
 Those paid in property surplus
 50

 Like tables and chairs? Can tables and chairs make surplus profits?
 No, they do not make surplus, bonds, etc.
 Where should dividends come from?
 Stock dividends are declared as stocks coming from corporation
 Who declares dividends to be declared? Do stockholders have any say?
 Board of Directors, if stock approval of 2/3 outstanding capital stock
ACS-1M SUB-1M P.U.-1M 1M-U.R.E. (surplus profits of the corporation)
1-100k
2-100k
To
10-100k
1M
 Board decides to declare 1M, how much will each receive? May the board declare stock dividend
 NO. that would be over issuance of shares, violation of securities regulation code
 It must have a free portion
 The corporation may increase its capital
 Z co. 1M to X Co. is 2/3 of Xco. Stockholders reacquired?
 No, because in property 2/3 is not required
 What is the effect of declaration of dividends with regards to the assets of a company?
 As compared to stock dividends, the declaration of cash or property dividends have the effect of reducing
corporate assets to the extent of dividends declared.
 Neither would stock dividends increase the proportionate interest of the stockholders of the corporation
although it will have the effect of increasing the subscribed and paid-up capital of the corporation. It gives
the stockholders nothing in the way of distribution of assets but merely divides his existing shares into
smaller units.
 Earnings belong to the corporation until declared or given
 Revocation
 No revocation of dividend may be has unless it has not been officially communicated to the stockholders or
is in the form of stock dividends which is revocable at any time prior to distribution.
 Stock dividends- no reduction, you capitalize your restricted retained earnings, what is issued is a piece of
paper. The restricted earnings remain in the corporation
 Cash and property- reduces corporate assets
 Stock dividends increase corporate assets? No, it will only have the effect of increasing the subscribed and
paid-up capital of the corporation
 Will there be a corresponding increase in their proportionate interest?
 REMAINS THE SAME
 Exception: when stock dividends will result in a fractional share
ACS-2M 1-100K 200 (10%) *VOTING AND DIVIDEND RIGHTS STILL THE SAME
SUB-1M TO 10%
PU-1M 10-100K
ACS 2M
SUB 1M
PU 1M
1M RE
1 100K
2 100K
TO
10 100K
1M
 May they be compelled?
 NO. You cannot declare if it does not come from unrestricted retained earnings.
 1M-U.R.E. (is it true there is no way to compel?)
 51

 2M-U.R.E.
 May they be compelled to declare dividends
 Mandatory if earned, the board may be compelled to declare dividends
 if exceeds 100% of the paid-up capital the boards may be compelled
ACS 2M 1M U.R.E.
SUB 1M
PU 800K
1-100K 50K PU
2-100K 50K
TO
10-100K
1M
 Will 1 and 2 receive full amount of dividends?
 YES. They are entitled however if they are declared delinquent, the amount due them shall first be applied
to his delinquency plus expenses.
 Delinquency occurs, you are called to pay, but you failed to pay. In case of stock dividend, the delinquent
stock holder will not be entitled thereto until he has paid his subscription in full.
 Are non-stockholders entitled to receive dividends?
 No, tock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil
fruits.
 How did the court decide dividends in the case of Neilsen
 Stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered.
 Whether cash, property or stock, only stockholders may receive dividends. Dividends are fruits of
investments. They come from the U.R.E. or surplus profits of the corporation.
ACS 2M 1M U.R.E.
SUB 1M JULY 24 DECLARATION JULY 31
PU 1M
 100K 100T JULY 26-Y(NEW ONE WAS DECLARED TO Y) JULY 30- 100K

TO TO HAVE THE TRANSFER RECORDED
10 100K
1M
 Insofar as 1 and Y who has a better right? Already declared, but not yet paid?
 Right to receive vest upon declaration. Who ever owns at the time of declaration owns the dividends
 Unless there is a stipulation to the contrary
 TRUST FUND DOCTRINE
 The power to declare it if paid-up capital is not maintained or is impaired
 Trust fund must be kept intact for the protection of creditors who have the right to rely on such
subscription and the paid-up capital for the satisfaction of their claims
 Cannot accumulate surplus unreasonably
 Basis is the paid-up capital
 Entitled to dividends
 Irrespective of whether the subscription is full
 Illegally declared
 Declare dividend with the belief that it formed part of the U.R.E., but yun pala sa capital
 Directors are not liable, unless sec31 acted in bad faith or gross negligence in the conduct of corporate
affairs
 Directors even if acting in behalf of the corporation, may still be held solidarily liable
 Power to enter into management contract
 New provision
 52

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 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)

 The requirement for a valid management contract are as follows:

 Resolution of the board of directors

 Approval by the stockholders holding or representing a majority of the outstanding capital stock or
majority of the members in case of non-stock corporation of both the managing and the managed
corporation
 The approval of the stockholders or members must be made at the meeting called for that purpose
 The contract shall not be for a period longer than 5 years for any one term, except those which relate to
exploration, development or utilization of natural resources which may be entered into for such periods as
may be provided by pertinent laws and regulations
 Every corporate act emanates from the BOARD
 Is the voting requirements of a majority stockholder ABSOLUTE?
 Not only a majority but 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock
corporation would be required for the approval of a management contract in the following instances:
 Where the stockholders representing the same interest of both the managing and managed corporation
own or control more than 1/3 of the total outstanding capital stock of the managing corporation; and
 Where a majority of the members of the board of directors of the managing corporation also constitute a
majority of the directors of the managed corporation
 Where the contract would constitute the management or operation of all or substantially all of the business
of another corporation, whether such contracts are called service contracts. If it will not constitute the
management of all or substantially all of the business of another corporation the first paragraph of section
44 will apply and not that of the second, that is, only the vote of the stockholders holding or representing at
least a majority of the outstanding capital stock or majority of the members in the case of non-stock
corporation will be required.
 How long?
 Not longer than 5 years for any one term
 Exception: exploration, development or utilization of natural resources
 What is an ultra-vires act or contract?
 Doctrine of limited capacity. Corporation can do such acts and things as it is allowed to do
 Acts beyond it will be ultra vires, allowing a collateral attack
 53

 If not illegal per se merely voidable. Can be ratified expressly or impliedly or even stopped as equitable
grounds
 Ultra-vires acts which are not illegal per se may become binding and enforceable either by satisfaction,
estoppels or equitable grounds
 Consequences of ultra-vires acts?
 On the corporation itself
 The proper forum, in accordance with the provisions of PD 902-A, as amended and R.A. No. 8799 may
suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of the
corporation for serious misrepresentation as to what the corporation can do or is doing to the great
damage or prejudice of the general public
 On the rights of the stockholders
 A stockholder may bring either an individual or derivative suit to enjoin a threatened ultra-vires act or
contract. If the act or contract has already been performed, a derivative suit for damages against the
directors may be filed, but their liability will depend on whether they acted in good faith and with
reasonable diligence in entering into the contract.
 On the immediate parties
 The courts have not agreed as to the legal effect of a corporate contract outside of its authorized business
but Ballatine gives the following summary of the doctrines evolved:
 If the contract is fully executed on both sides, the contract is effective and the courts will no interfere to
deprive either party of what has been acquired under it
 If the contract is executory on both sides, as a rule, neither party can maintain an action for its non-
performance
 Where the contract is executor on one side only, and has been fully performed on the other, the courts
differ as to whether an action will lie on the contract against the party who has received benefits of
performance under it. Majority of the courts, however, hold that the party who has received benefits
from the performance is estopped to set up that the contract is ultra-vires to defeat an action on the
contract. This is more in conformity with the doctrine that no person shall be allowed to enrich himself
at the expense of another
 Pirovano vs. Dela Rama
 Court looked into the purpose clause
 The purpose clause empowers and limits
 Articles likewise provide that it may deal with any of its money
 “deal” broad enough to cover the donation it is not then ultra-vires
 Not illegal per se hence (law of agency) excess powers are subject to ratification
 Ratified by passing the resolution in question
 Carlos vs. Mindoro Sugar Co.
 PTC- trust company as such, it also has implied powers as to make them more attractable
 Not ultra-vires in pursuance of its legitimate business
 Japanese war notes vs. SEC
 Non-stock corporations cannot make profits and distribute profits to its shareholders
 Ultra-vires because Japanese war notes is a non-stock corporation
 Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN SUNDIANG)
 The negotiable instruments law which holds an accommodation party liable on the instrument to a holder
for value, although such holder at the time of taking the instrument knew him to be only an accommodation
party, does not include nor apply to corporations which are accommodation parties. This is because the
issue or indorsement of negotiable paper by a corporation without consideration and for the
accommodation of another is ultra-vires
 Corporate officers may guarantee or endorse an accommodation only if specifically authorized
Section 36 paragraph 11
Section 10
Section 14 and 15
 Corporate powers depend on the agreement of the stockholders rather than any director
 54

 It may sell and it may guarantee, contract not necessarily illegal, it will in the absence of proof to the
contrary presumed within its power. Corporations are presumed to contract with in its powers- CARLOS
CASE
 Purpose clause may be stretched to cover PLDT internet. It may be within its business.
 May it sell computers? NO! other line of business. Its trading!
 55

BY-LAWS
 By-Laws
 Rule adopted by the corporation for its internal governance
 Is the adoption of by-laws mandatory?
 When should the by-laws be adopted or filed? Can it not be adopted earlier?
 After incorporation- within 1 month (emanates from the BOARD)
 Prior-more convenient (signed by the incorporators)
 Who will sign the adoption clause?
 Majority of the stockholders or members attested to by the corporate secretary
 What happens if the corporation fails to adopt the by-laws from the tie provided by the law? Would there
be an automatic revocation or suspension?
 Proper notice and hearing, must first be complied with
 Loyola grand villas vs. CA
 Not the SEC, but the HIGC
 Must – not always imperative
 Filing of by-laws mandatory
 Empowered by SEC
 Merely a ground, there must be proper notice and hearing
 Not affect the status of the corporation as a juridical person
 Subject the corporation to a fine, as may be issued by the SEC
 When do by-laws become effective?
 Until and unless the SEC gives it stamped of approval
 Suspension of any government agency. The permission must first be secured- section 46
 Elements of a valid by-law
 It must not be contrary to law, public policy or morals;
 It must not be inconsistent with the articles of incorporation;
 It must be general and uniform in its effect or applicable to all alike or those similarly situated;
 It must not impair obligations and contracts or vested rights; and’
 It must be reasonable.
 Must not be inconsistent with existing laws. Not be inconsistent with articles of incorporation
 By-laws
 None filing would not affect the status of the corporation, Loyola grand villas case
 The word “must” is not always imperative
 Stockholders are conlusively presumed to know the provisions of the by-laws
 How about 3rd persons?
 NO. unless there is actual knowledge of the same they are not presumed to know of the provisions of the
by-laws
 Fleischer vs. Botika Nolasco
 Shares of stock are personal properties
 Shares of stock may transfer to whom ever he wishes
 The by-laws is contrary to law
 Articles of incorporation
 May provide reasonable restriction
 By-laws merely internal laws
 Articles is the contract between and among the parties and corporation
 Gov’t vs. El Hogar
 Did the court categorically ruled here that the provision in the 5th cause of action is valid?
 Rules governing equity, considering the fact that there was always lack of quorum
 Section 29 BOD if still constituting a quorum may fill up a vacancy other than by removal, etc.
 Gokongwei vs. SEC
 Section 48 allows a corporation to amend it by-laws
 56

 Section 47 of the code, the by-laws may provide for the qualification and disqualification
 It cannot be said Gokongwei has a vested rights
 Prevent directors from taking advantage of position to promote his individual interest to the damage of
others
 The validity or reasonableness of a by-laws is a question of law
 Subject to the limitations that reasonableness of a by-law is a mere matter of judgment
 Rule of the majority and not the tyranny of the minority
 May the by-laws be amended altered or appealed?
 YES. HOW? Two modes
 By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or
members in a non-stock corporation, at a regular or special meeting called for that purpose;
 By the board of directors alone when delegated by 2/3 of the outstanding capital stock or 2/3 of the
members in a non-stock corporation.
 This delegated power, however, is considered revoked whenever a majority of the outstanding capital
stock or members shall so vote at a regular or special meeting.
 If it is to be amended what is the proceeding?
 Section 48 2nd paragraph provides:

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 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)

 Baretto vs. La Previsora

 Any corporate act emanates from the board
 Directors themselves cannot amend the by-laws if they were not granted the same
 Section 48
 The power granted is not subject to revocation T or F?
 FALSE
 If the by-laws are amended when will they become valid?
 Upon issuance of the SEC that they are not inconsistent
 What if the SEC failed to act within 10 months without fault attributable to the corporation?
 T or F any amendment of the by-laws will never become valid until it gives its stamp of approval even after
1 year
 TRUE. Articles of incorporation and by-laws are different
 57

MEETINGS
 Meetings
 Meetings of stockholders 1. Date fixed in the by-laws or by-law
 Meetings of director or trustees
 Meetings are regular and special
 Meetings of stockholders
 What is regular and what is special?
 When are regular meetings of the stockholders held?
 Fixed date provided by the by-laws
 What if there is no date?
 April
 Why april?
 Point in time the audited financial statement have been prepared
 What if in the date specified in the by-laws or by the law itself the meeting was not convened, for instance
lack of quorum or force majeure?
 It may be postponed on a reasonable date
 Notice requirement?
 Regular- 2 weeks prior notice
 Special- 1 week
 May the notice requirement be lessened?
 By-laws may provide a longer or a shorter duration
 What if the notice requirement is not complied with?
 What happened to any act passed in a meeting when notice requirement was not required with?
 Voidable, subject to ratification
 Board of directors vs. Tan
 Notice requirement is the by-laws is a mandatory requirement
 Improperly served, any action will be invalidated at the objection of any stockholder or member
 Must be held in the proper place
 Where should it be held?
 Apparent from the foregoing provision is that meetings of stockholders must, at all times, be held in the city
or municipality where the principal office of the corporation is located and, as far as practicable, in the
principal office of the corporation.
 May the by-laws of a corporation provide that meetings be held anywhere in the Philippines?
 While there is no provision authorizing a stock corporation to hold stockholders’ meetings outside of the
City of Municipality where the principal office is located, the law allows a non-stock corporation to provide
in its by-laws any place of members’ meeting provided that proper notice is sent to all members indicating
the date, time and place of the meeting which shall be within the Philippines.
 T or F the by-laws of a stock corporation may validly provide that meetings shall be held anywhere in the
Philippines?
 FALSE. Non-stock corporations lang pwede provided nakalagay sa by-laws and provided proper notice is
given
 Corporation can do only such things as the law allows it to do, DOCTRINE OF LIMITED CAPACITY
 San Miguel office located in Ortigas Center. May stockholders meeting be held in PICC center?
 YES. Metro Manila, one single city
 Must be called by the proper party
 Who calls?
 President until and unless there is a provision , secretary on order of the president
 What if there is nobody who can call?
 The petitioner, stockholder may petition the court
 What if there is a person who can call, but he fails or neglects to call the meeting? May a stockholder
petition to authorize a meeting?
 58

 Ponce case only applies when there is NO person authorized to call the meeting. If there is a person, but
neglects his duty. Ponce will not apply.
 Writ of injunction may never be issued ex parte
 Is there any exception?
 Section 28 only instance

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)

 Cases of removal or ouster of a director

 Mandamus would be appropriate remedy if there is a person authorized but refuses
 Quorum and voting requirement
 Majority stockholders or members constitute a quorum
 Is the presence of the majority owners of the outstanding capital stock ABSOLUTE to have a quorum?
 NO. when the code requires a higher quorum it must also be equivalent to the vote required
 Do you include non-voting shares in arriving at the voting requirement to have a valid corporate act?
 It depends.
 Section 6 last par. If it falls within the penultimate par. Of section 6
 Five requisites of a valid meeting
 It must be held on the date fixed in the by-laws or in accordance with law
 Prior notice must be given
 It must be held at he proper place
 It must be called by the proper party
 Quorum and voting requirements must be met
 Date not complied with, notice, place, not complied with and the person who called not authorized, what
happens to any resolution called?
 Section 51, any meeting shall be valid provided all the stockholders are present or duly represented and
provided it is within the power of the corporation. 3RD paragraph of 324
 If the voting requirement is met, any resolution passed in the meeting, even if improperly held or called will
be valid if all the stockholders or members are present or duly represented thereat. The last paragraph of
section 51 is clear on the matter when it provides:
“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.”
 Directors/trustees meeting
 Regular (monthly) and special (anytime)
 59

 May that be restricted (within or outside the Phil)

 YES. unless the by-laws provide otherwise.
 Is there any notice requirement?
 YES. 1 day unless otherwise provided by the by-laws
 What happens if notice is not complied with?
 If the notice requirement is not complied with the meeting is illegal and will not bind the corporation
except when subsequently ratified or in the case of a close corporation where the act of any one director
may bind the corporation even without a meeting under the special provision of Section 101 of the Code.
 Can notice be waived? <sec.53>

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. (n)

 YES. Expressly and impliedly

 SEC ruling
A special meeting is valid without notice where the directors are all present or where they consent
to the meeting. Presence at the meeting waives the want of notice. Moreover, it has been ruled that
the meeting of the directors without a formal call first being had, and notice thereof given to the
members, did not operate to invalidate it or to render the proceedings which were taken at it void,
for every member of the board were present, and their joint action had completely bound the
corporation as if the meeting has been called with due formality, and everyone of the directors had
received proper notice.
 What is the quorum and voting requirement in the directors meeting?
 Majority of the members of the board of directors (entire membership)
 Vote required to pass a valid corporate act?
 Majority of those present at which there is a quorum (3 present, vote of 2 sufficient)
 Exception, majority of all the members of the board in case of election of corporate officers, unless the
articles provide for a greater quorum or voting requirement
 Should the director or trustees be physically present?
 General rule, must sit and act as a body to have a valid corporate act
 Five man member board, a meeting was called today, should the physical presence or warm bodies
requires to constitute a quorum?
 NO. it is not required. Teleconference or video conference is allowed, E- commerce law
 Membership subject to laws
 Stockholder not yet
 May director vote by proxy?
 NO
 If A is a director and a meeting is called for the purpose of electing a new set of BOD can A vote by proxy?
 YES. Because it is a stockholders meeting
 If directors meeting, cannot vote by proxy
 Stockholder’s right to vote
 Inherent in stock ownership
 However this right is not always inherent, because it may be denied:
 60

 Redeemable and preferred shares, however if founders shares are issued others may be denied the
right to vote.
 May be denied by the articles of incorporation or contracts
 When not denied they may do so in person or by proxy
 May the right to vote by proxy be denied?
 May the articles of incorporation deny?
 May the by-laws validly provide that proxy voting is not allowed?
 NO
 Only non-stock may be denied proxy voting (may be broaden, limited or denied)
 Proxy voting is a matter of right granted by law
 Requirements of a valid proxy?
 Section 58
Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before
the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer
than five (5) years at any one time. (n)
 How long may a proxy exist?
 Maximum of 5 years
 Valid for the meeting in which it is intended
 Is proxy revocable?
 Generally revocable, unless coupled with interest
 Revocation
 A proxy, like agency in general is revocable unless coupled with an interest and revocation need not be
made by formal notice in writing. Revocation may be expressed to the proxy holder, to the election
committee, by a subsequent proxy to another or by sale of the shares. Thus it may be revoke orally by
conduct such that appearing and asserting the right to vote at a meeting by the registered owner of the
shares revokes a proxy previously given.
 Must be submitted to a validation committee
 By-laws of non-stock corporations may deny proxy voting
 What is voting trust agreement?
 One created by an agreement between a group of stockholders of a corporation and a trustee, or a group of
identical agreements between individual stockholders and a common trustee, whereby it is provided that
for a term o years or for a period contingent upon a certain event, or until the agreement is terminated,
control over the stock owned by such stockholders, shall be lodged in the trustee, either with or without
reservation to the owners or persons designated by them the power to direct how such control shall be
issued.
 It is a devise of binding stockholders to vote as a unit and thus assuring a desirable stability and continuity
in management in situations where it is needed.
 What is the effect of a voting trust agreement relative to the rights?
 Lee vs. CA must pass these criteria
 That the voting rights of the stock are separated from the other attributes of ownership;
 That the voting rights granted are intended to be irrevocable for a definite period of time; and,
 That the principal purpose of the grant of voting rights is to acquire voting control of the corporation.
 During the duration of the trust they are irrevocable unless there is a violation either by fraud
 Requisites
 Section 59

Section 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting
trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to
the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust
specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five
 61

(5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in
writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered
by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or
trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust
agreement.

The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which
shall be transferable in the same manner and with the same effect as certificates of stock.

The voting trust agreement filed with the corporation shall be subject to examination by any
stockholder of the corporation in the same manner as any other corporate book or record: Provided, That
both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books
and records in accordance with the provisions of this Code.

Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and
conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said
agreement.

No voting trust agreement shall be entered into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used for purposes of fraud.

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire
at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be
reissued in the name of the transferors.

The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a)

 Does it need to be notarized?

 Yes, otherwise it is ineffective and unenforceable
 Only legal ownership is transferred
 Being still the beneficial owner they may transfer these rights
 Is the right granted to a voting trust agreement absolute? (to inspect)
 NO.
 The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of
the corporation in the same manner as any other corporate book or record. Provided, that both the transfer
and the trustee or trustees may exercise the right of inspection of all corporate books and records in
accordance with the provisions of this Code.
 Legal title is transferred to the voting trustee
 May the voting trustee vote by proxy?
 Yes, legal owner may vote by proxy
 May the proxy holder vote by proxy?
 NO, (AGENT) an agent can have no other agent unless specifically allowed by the principal
 Stockholder executing as a proxy, is he qualified to be voted as a director?
 Why is he qualified to act as a director if the stockholder executes as a director?
 The beneficial owner of the shares in a voting trust is disqualified to be a director in a voting trust whereas
in a proxy, the owner of the shares may be elected as such since legal title thereof remains with him
 YES he remains to be the owner
 Is the stockholder executing in a voting trust agreement, is he qualified to act as a director?
 62

 NO. ceases to be stockholder of record, no longer the legal owner of shares

 May the corporation enforce the voting trust agreements executed by its stockholders?
 NO. NIDC vs. AQUINO
 Not a privy to the contract
 Rights liabilities of a stockholder are there in their individual capacity- corporate entity theory
 Voting trust agreements
 Normally executed in favor of banking and financial institutions
 So that they can vote a certain set of directors
 They will be more secured
 Voting pull agreement
 Enters into an agreement
 Pull all their shares to cast one vote
 Covered by rules governing contracts
 By pulling their votes they can decline the resolution passed by the board

END OF MIDTERMS
 63

STOCKS AND STOCKHOLDERS

 3 modes
 By a contract of subscription with the corporation;
 By purchase of treasury shares from the corporation; and,
 By purchase or acquisition of shares from existing stockholders.
 Section 60 subscription
 Any contract
 Whether existing or still to be formed

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)

 Under the old law the 4th mode is PURCHASE

 Purchase
 Reciprocal in nature
 Purchaser can neither require the issuance
P
Xco. Inc.

Authorized capital 1M
500 SUBSCRIBED
500 UNISSUED STOCKS (AS LONG AS GALING DITO)
Z wants to acquire 100K
Entered in June 50% shall be down payment remainder December 08
 he will not be considered a stockholder unless he has paid in full
August 08 property is ravaged by fire all are turned into shares
 Is Z liable to pay the balance of his acquisitions?
 YES, no matter how the party refer to it, it is considered subscription
 Once you subscribe, you become a stockholder which is entitled to all the liabilities of a stockholder
Z- subscribed to 100T/S of XCo.
Amount he paid 50k
Z did not pay on the date called and was declared a delinquent share
 Corporation paid 100T/S therefore the corporation reacquired the shares again, what are they called?
 Treasury shares
Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL LIABLE TO PAY THE UNPAID PORTION?
 IT WAS AGREED THAT IT WAS A PURCHASE AND WILL BE A STOCKHOLDER ONLY IF PAID IN FULL IS HE
LIABLE?
 NO, because that was a purchase
 First example galing sa unissued stock
 2nd example galling sa treasury shares hindi sa unissued share
 NO such thing as purchase of unissued stocks
 A subscription contract can be conditional provided there is nothing in the charter or statute prohibiting it
and not against public order, law, etc.
 Must it be in writing?
 NO, it may be oral
 5M should it be in writing to be valid and binding as a subscription?
 NO, statutes of frauds only applies to SALES
 Trillana vs. Quezon College
 64

 Counter proposal, therefore there was a need for an acceptance

 Facultative because it is in his own free will, it is void
 What may be used as a consideration and how much should be the consideration?
 Section 62 provides:

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

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)

 “Amounts transferred from unrestricted retained earnings to stated capital” what does it mean?
 Stock dividends will in effect capitalize the unrestricted retained earnings
 After 5 years the founders shares may be converted into common shares or other kinds of shares
 May shares of stocks be issued without consideration? Why?
 NO, two reasons by the SC, discriminatory against other stockholders and second unlawful, it prejudices the
right of the creditors “Trust Fund Doctrine”
 If issued without a consideration
 Section 65, they will be considered as watered stocks

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)
 65

 Subscribers may be compelled to pay the value

 Issuance of a certificate of stock is another thing
 What are the requisites for the issuance of a valid certificate of stock?
 It must be signed by the president or vice-president and countersigned by the secretary or assistant
secretary;
 It must be sealed with the corporate seal; and the entire value thereof (together with interest or expenses,
if any) should have been paid.
While it appears, that a subscriber to shares of stock cannot be entitled to the issuance of a certificate of
stock until the full amount of his subscription together with interest and expenses (in case of delinquent
shares) if any is due, has been paid, a subscriber to shares of stock, even if not yet fully paid, is entitled to
exercise all the rights of a stockholder and the corresponding liability that attach thereunder. Thus, the
Code provides:
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)
 Is the issuance of a certificate of stock necessary to consider the subscriber a stockholder?
 NO, shall be considered a stockholder even without a certificate of stock
 Instances when he may not be able to exercise his rights as such stockholder
 Declared delinquent
 When he exercises his appraisal right
 Are certificate of stocks transferrable?
 YES
 Are certificate of stocks considered negotiable?
 Quasi-negotiable
 Why are they considered quasi-negotiable when it may be transferred through endorsement and delivery?

Endorsement from
When issued by owner
Endorsed by owner- strict compliance

ANSWER: a certificate of stock is not regarded as negotiable in the same sense that a bill or note is negotiable, even
if it is endorsed in blank. Thus, while it may be transferred by endorsement coupled with delivery thereof, and
therefore merely quasi-negotiable, it is nonetheless non-negotiable in that the transferees takes it without
prejudice to all the rights and defenses which the true and lawful owner may have except in so far as the principles
governing estoppels may apply.
He acquired it by virtue of a forged instrument; no matter how innocent the purchaser is because it is subject to all
the rights and defenses

 What if A endorsed it?

 He is estopped, unless there are other available defenses
 Transfer is required to be recorded in the books of the corporation, however even if not recorded, it will be
valid between the parties. Non-registration will not however, affect the validity thereof at least in so far as
the contracting parties are concerned.

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 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.
 66

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation. (35)

 “Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as
against the corporation. Thus the, unrecorded transfer cannot enjoy the status of a stockholder; he cannot
vote nor be voted for, and he will not be entitled to dividends. The corporation will be protected when it
pays dividend to the registered owner despite a previous transfer of which it had no knowledge. The
purpose of registration therefore is twofold: to enable the transferee to exercise all the rights of a
stockholder and to inform the corporation of any change in shares ownership so that it can ascertain the
persons entitled to the rights and subject to the liabilities of a stockholder.”
Thus, it was also ruled by the High Court in Nautica Canning Corp. vs. Yumul that “A transfer of
shares not recorded in the stock and transfer book of the corporation is non-existent in so far as the
corporation is concerned.” This is so because “the corporation looks only through its books for the
purpose of determining who its stockholders are.”
 Registration is necessary for the following:
 To enable the corporation to know who its stockholders are;
 To enable the transferee to exercise his rights a s stockholders;
 To afford the corporation an opportunity to object or refuse registration of the transfer in case allowed by
law;
 To avoid fictitious and fraudulent transfers; and,
 To protect creditors who have the right to look upon stockholders, in case of no-payment or watered
shares, for the satisfaction of their claims.
 Duty of the secretary is ministerial, hence mandamus will lie if the secretary refuses to record the transfer,
but he cannot be compelled when the transferee’s title to the said shares has no prima facie validity or
uncertain
 Transfer- absolute and unconditional transfer to warrant registration in the books of the corporation in
order to bind the latter and other third persons.
 Other restrictions on the right to transfer shares would include:
 It is not valid, except as between the parties, until recorded in the books of the corporation;
 Shares of stock against which the corporation holds any unpaid claim shall not be transferable in the books
of the corporation; unpaid claims, refer to claims arising from unpaid subscription and not to any
indebtedness which a stockholder may owe the corporation such as monthly dues;
 Restrictions required to be indicated in the articles of incorporation, by-laws and stock certificates of a
close corporation;
 Restrictions imposed by special law, such as the Public Service Act requiring the approval of the
government agency concerned if it will vest unto the transferee 40% of the capital of the public service
company;
 Sale to aliens in violation of maximum ownership of shares under the Nationalization Laws;
 Those covered by reasonable agreement of the parties.
 Monserat vs. Ceron
 Does it include mortgage?
 NO, it is not an absolute transfer
 Will not affect the transfer through mortgage
 Absolute and unconditional transfer
 Only the transfer or absolute conveyance of the ownership of the title to a share need be entered and noted
upon the books of the corporation in order that such transfer may be valid, therefore, inasmuch as a chattel
mortgage of the aforesaid title is not a complete and absolute alienation of the dominion and ownership
thereof, its entry and notation upon the books of the corporation is not necessary requisite to its validity
 Chua guan vs. Magsasaka
 Was the mortgage valid and effective as against subsequent third parties
 Register of deeds where the corporation resides and if different in the register of deeds of owner’s domicile
 67

 Unson vs. Dinamito

 All transferred not register will not have a valid force and effect
 Right to transfer may be regulated
 May not be unreasonably restricted
 Violation of nationalization law- Central Bank
 Lambert vs. Fox
 Valid , may be reasonably regulated, restricted by agreement of parties
 Reasonable agreement by the parties
 Reasonable as to length of time
 Padgett vs. Babcock
 Any attempt to restrain transfer
 SC, in the absence of a valid lien upon its shares
 Valid restrictions shares are applicable
 Any restriction on a stockholder’s right to dispose of his shares must be construed strictly; and any attempt
to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon
its shares, and except to the extent that valid restrictive regulations and agreements exist and are
applicable. Subject only to such restrictions, a stockholder cannot be controlled in or restrained from
exercising his right to transfer by the corporation or its officers or by other stockholders, even though the
sale is to a competitor of the company, or to an insolvent person, or even though a controlling interest is
sold to one purchaser.
 Certificate of stocks are transferrable
 By endorsement and delivery of the stock certificate to the transferee
 In order to be valid, must be registered in the books. If not, will only be binding among parties
 How may shares of stock be transferred?
 Endorsement of stock certificate by owner or attorney-in-fact with delivery
 Embassy farms vs. CA
 Must be endorsed by owner or attorney-in-fact coupled with delivery
 Endorsed not delivered
 Proper mode and manner must be complied with
 Razon vs. IAC
 Delivered not endorsed
 Reverse of Embassy Farms
 Endorsement alone is not sufficient nor delivery without endorsement is not allowed
 Endorsement plus delivery is mandatory
 Is there any other mode of transferring stock?
 Notarized deed
 Deed of assignment
 Rural bank of Salinas vs. CA
 If denied or refused without good cause, mandamus will lie
 Tay vs. CA
 Mandamus may issue if petition has a clear legal right
 Never issued in doubtful cases
 Petitioner failed to establish a clear legal right and alleged ownership is without merit
 Did not acquire ownership by virtue of the contract of pledge
 In a contract of pledge there must be foreclosure
 In the case there was no attempt to foreclose
 Petitioner must have a prima facie right
 Nava vs. Peers Marketing
 A stock subscription is a subsisting liability from the time the subscription is made
 The subscriber is as much bound to pay his subscription as he would be to pay any other debt
 68

 No stock certificate was issued. Without stock certificate, which is the evidence of ownership of corporate
stock, the assignment of corporate shares is effective only between the parties to the transaction
 Exception to the general rule
 Rural Bank of Lipa vs. CA
 By notarized deed
 Certificate of stocks already issued must be coupled with delivery, exception (TAN vs. SEC)
 Stock certificate has already been issued it must be coupled with the delivery
 After certificate of stock is issued, may it be effectively transferred even without endorsement or delivery
of the stock certificate?
 Person sought to be a stockholder is an officer and has custody
 Endorsement and delivery is not necessary (TAN vs. SEC)
 Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)
 Persons sought to be stockholder is officer and has custody of the book (estopped)
 General Rule for valid transfer
 Certificate of stock must be endorsed by owner or attorney-in-fact coupled with delivery
 Exceptions
 Section 63 uses the word “may”
 Showing that there may be other modes of transferring shares
 Is there a time frame or fixed period as when transfer can be made?
 NO, (WON vs. WACK WACK)
 Won vs. Wack Wack
 Valid between contracting parties even if not recorded in corporation books
 Right accrues only if refused
 Statute of limitations does not apply in registration of shares of stock
 Must determined from the time of refusal
 Why are they non-negotiable when they may be transferred?
 Transferees pays it without prejudice to all the rights and defenses as the true and lawful owner may have
under the law except insofar as such rights and defenses are subject to the limitations imposed by the
principles governing estoppels
 De los Santos vs. Republic
 Why is he, not considered as the owner of shares? When it has been said that when endorsed by the owner
it is considered as strict certificate? Because certificate of stocks are non-negotiable
 Although a stock-certificate is sometimes regarded as quasi-negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery, it is well settled that the instrument is non-negotiable,
because the holder thereof takes it without prejudice to such rights or defenses as the registered owner or
creditor may have under the law, except insofar as such rights or defenses are subject to the limitations
imposes by the principles governing estoppels.
 69

Unauthorized issuance of stock certificates

100/s 100
XYZCo

100 pesos per share

Stolen by B and forged the signature of A
B sells to C will C acquire title? NO

ENDORSEMENT FORM
 C armed with the endorsement form certificate, sold to D (innocent purchaser for value), will D acquire
title?
 NO, subject to such rights and defenses as the true and lawful owner may have
 What if C now goes to the corporation and presents the form?
 Then the corporation shall cancel the old certificate and issues a new one, now in the name of C, now
registered in the name of C, will C acquire title?
 A found out what happened and goes to the corporation who has a better title C or A?
 A, A cannot be deprived of his right by virtue of an unauthorized transfer
 Corporation can compel C to deliver the new stock certificate because he made a representation that the
certificate where good.
 Armed with the new certificate issued to C, C delivers to D a purchaser in good faith and for value will D
acquire title?
 D will acquire title took the shares not by virtue of a forged or unauthorized transfer, but on the reliance
that the stock certificate is valid and owned by C
 Stock certificate now in possession of D. A knew of what happened and went to the corporation and
complains. Who will have a better title?
 the corporation may be compelled to recognize both, A as stockholder (non-negotiable) D, reliance that the
stock certificate is valid and existing and owned by C
 Forged transfers
 If the corporation should issue a new certificate in pursuance of a forged transfer, the corporation incurs no
liability to the person in whose favor it is issued and it may demand its return for cancellation. The
corporation in such case has been guilty of no misrepresentation. On the other hand, it is the duty of the
purchaser to determine that the endorsement of the owner is genuine. However, if the new certificate
issued to the purchaser comes into the hands of a bona fide purchaser for value, the corporation will be
stopped from denying validity thereof, since by issuing such new certificate it represents that the person
named therein is a stockholder of the corporation. The corporation is thus forced to recognize both the
original certificate and new certificate-the original, because the true owner could not be deprived of his
title by a forged transfer, and the new, because of its representation that the person named therein is the
owner of shares in the corporation. But if the recognition of both stockholders would result in an over issue
of shares, then only the original and true owner can be recognized as a stockholder. The bona fide
purchaser of the new certificate will however have a right of damages against the corporation. The
corporation, in turn, would have a right of action against the person who made false representations and in
whose favor it issued a new certificate. The true owner of the shares which were wrongfully transferred
would of course have a right to compel the corporation to issue him a certificate in lieu of the original one
which was wrongfully cancelled.
 Authorized capital stock 1M shares
 All are subscribed who will the corporation recognize as rightful owner A or D? if both will be recognized
there will be over issuance
 Only A citing citizens national bank vs. state (but if recognition of both stockholders would result in an over
issue of shares, then only the original and true owner can be recognized as a stockholder)
 by virtue of the doctrine of non-negotiability of certificate of stocks
 The true and lawful owner will never be deprived of his rights
 70

 What happens to D?
 D will have a cause of action against the corporation for the value of his acquisition cost inclusive of
damages, attorney’s fees and cost of suit
 D sues the corporation for the value of his acquisition cost, inclusive of damages, attorney’s fees and cost of
suit. What may the corporation do?
 NO defense, no valid defense, because it was represented to other parties that the certificate of stocks is
valid, subsisting, etc.
 2nd situation, what cause of action may the corporation have? Remedy?
 Third party complaint against C, but what if he is a purchaser for value? 4th party claim against B
 When may certificate of stocks be issued?
 Section 64 provides:

Section 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until
the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any
is due, has been paid. (37)

 A certificate of stock cannot be issued unless he fully paid the amount subscribed
 Subscription to the capital stocks of the corporation are indivisible
 Clear mandate of section 148 of the code is that the ruling of the court in Baltazar vs. Lingayen Gulf, no
longer holds true

Section 148. Applicability to existing corporations. - All corporations lawfully existing and doing
business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or
registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed
or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall
be governed by the provisions hereof: Provided, That if any such corporation is affected by the new
requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of
not more than two (2) years from the effectivity of this Code within which to comply with the same. (n)

 Subscription to shares of stocks are indivisible

 Also apparent is that once a subscriber has paid his subscription in full, he becomes entitled to be issued a
stock certificate and in the event that the corporation refuses to do so, the stockholder my institute a case
for mandamus with damages. Thus, it has been said that the duty of the corporate officers to issue stock
certificates to those entitled thereto is a ministerial duty enforceable by mandamus.
 Fua Cun vs. Summers and China Banking Corp.
 The court erred in holding the plaintiff as the owner of 250 shares of stock; “the plaintiff’s rights consist in
equity in 500 shares and upon payment of the unpaid portion of the subscription price he becomes entitled
to the issuance of certificate for said 500 shares in his favor.”
 No certificate of stock until the full amount has been paid.
 71

 Watered stock
 One which is issued by the corporation as fully paid-up shares, when in fact the whole amount of the value
thereof has not been paid.
 Basis is par value and not the fair market value
 Section 62 states that stocks shall not be issued for a consideration less than par or issued price thereof,
while section 13 states that in no case shall be paid-up capital be less than five thousand [P5000] pesos.
 If issued below par, issued value considered as water
 How may watered stocks be issued?
 For a monetary consideration less than its par or issued value;
 For a consideration in property, tangible or intangible, valued in excess of its fair market value;
 Gratuitously or under an agreement that nothing shall be paid at all; or
 In the guise of stock dividends when there are no surplus profits of the corporation.
 Why is stock watering illegal?
 The corporation is deprived of its capital thereby hurting its business prospects, financial capability and
responsibility;
 Stockholders who paid their subscriptions in full, or promised to pay the same, are injured and prejudiced
by the reduction of their proportionate interest in the corporation; and,
 Present and future creditors are deprived of the corporate assets for the protection of their interest.
 Corporation is prejudiced
 Stockholders, dilution of interest
 Creditors are prejudiced, virtue of right to look upon corporations properties for the satisfaction of their
claims
 What is the effect of issuance of watered stocks
 As to the corporation - when a corporation is guilty of ultra-vires or illegal acts which constitute an injury
to or fraud upon the public, or which will tend to injure or defraud the public, the State may institute a quo-
warranto proceeding to forfeit its charter for the misuse or abuse of its franchise.
 As between the corporation and the subscriber- The subscription is void. Such being the case, the
subscriber is liable to pay the full par or issued value thereof, to render it valid and effective.
 As to the consenting stockholders - They are stopped from raising any objection thereto;
 As to dissenting stockholders - In view of the dilution of their proportionate interest in the corporation,
they may compel the payment of the “water” in the stock solidarily against the responsible and consenting
directors and officers inclusive of the holder of the watered stocks;
 As to creditors - They may enforce payment of the difference in the price, or the water in the stock,
solidarily against the responsible directors/officers and the stockholders concerned; and’
 As against transferees of the watered stock – His right is the same as that of his transferor. If, however, a
certificate of stock has been issued and duly indorsed to a bona fide purchaser, without knowledge, actual
or constructive, the latter cannot be held liable, at least as against the corporation, since he took the shares
on reliance of the misrepresentation made by the corporation that the stock certificate is valid and
subsisting. This is because a corporation is prohibited from issuing certificates of stock until the full value
of the subscriptions have been paid and could not, therefore, deny the validity of the stock certificate it
issued as against a purchaser in good faith. Thus, Ballentine states that whether there is any liability on the
part of the transferee of watered stock is made to depend upon whether he acquired the same without
notice, either as purchaser or donee. If he had knowledge thereof, he is subject to the same liability as his
transferor.
 What is the nature of the liability of the corporate directors consenting to the issuance of watered stocks
and the extent of their liabilities?
 Solidarily liable with the holder of the watered stocks to the extent of the water from said shares of stocks
 Will all the directors be liable? What if you objected will you also be liable?
 If you do not issue a written objection, you are still liable
 Even passive directors may be liable
 72

 Those having knowledge thereof, but did not interpose their objection shall be liable
 Section 65 provides:

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)

 ACS-100M 100M/S PAR VALUE-1.00

SUBSCRIBED-50M FAIR MARKET VALUE-12.00/S
UNSUBSCRIBED-50M
A
B
C
D
E
There is a denial of pre-emptive rights and directors A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share.
 Is there stock watering if the fair market value is 12.00?
 No stock watering
 The basis is the par value
 The shares where in fact paid more than the par value indicated in the articles of incorporation
3 days later they sold their 10M share for P11.00 each, therefore making a profit.
 Can you question there actuations? What would be the cause of action?
 It may be questioned.
 Duty of loyalty or fiduciary duty as such directors
 They cannot advance their own motives to the damage prejudice of the corporation which they represents
and stockholders as a whole instead of it being sold outside
 500M would have gone to the coffers of the corporation, 500M should be there for the protection of
creditors
 They are placed in a fiduciary relationship
 Sila lang ba ang kikita, pano naman yung corporation, opportunity na yun para kumita
 When are unpaid subscriptions due and payable?
 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. (38)

 Remedies of the corporation to enforce payment of unpaid subscription

 By board action in accordance with the procedure laid down in sections 67 to 69 of the code
 73

 By a collection case in court as provided for in section 70

 Are subscribers of shares of stocks not fully paid, liable to pay interest?

 General rule is they are not liable to pay interest because the code says unless requires in the by-laws
 Aside from the mandate of the law that subscribers to shares of stock must pay the full value of their
subscription, they may likewise be required to pay interest on all unpaid subscriptions if so imposed in the
contract or in the corporate by-laws at such rate as may be indicated thereat or the legal rate if not so fixed.
Unless so required or provided, however, subscribers to shares of stock, not fully paid, are not liable to pay
interest on their unpaid subscriptions. The code thus provides:

Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation
interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of
interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the
legal rate. (37)

 Until a call is made, they are not due and payable, but still subject to the provisions of the contracts
 Procedures in case of sale of delinquent stocks

 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 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. (39a-
46a)

 Who is the winning bidder in a delinquency sale?

 Bidder who shall “offer to pay the full amount of the balance on the subscription together with accrued
interest, cost of advertisement and expenses of sale, for the smallest number of shares or fraction of a
share.”
 74

X Co. has 1M authorized capital stock

500 thousand is already subscribed

A subscribed to 100 thousand shares, 50 thousand is already paid leaving 50 thousand unpaid

The corporation is at a loss of 250 thousand, the board decides to make a call for the payment of the unpaid
subscriptions, however A could not paid, hence declared delinquent and decides to sell his share at a public
auction

55 thousand is to be paid, remaining balance plus cost and expenses

BIDDERS:

X-55K FOR 99,900 shares

Y-55K FOR 99,500 shares

Z-55K FOR 99,000 shares (winning bidder)

 Assume there is no bidder, may the corporation bid?

 NO. It cannot bid because the law says, subject to the provisions of this CODE. Section 68 and 41 should be
reconciled. Section 68 states that:

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.
(39a-46a)

 There was no unrestricted retained earnings in the example given therefore the corporation cannot bid ,
section 41, it states that:

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

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions
of this Code. (a)
 75

 What if the shares of A were sold without compliance of the requirements? May A question the sale?

 The law prescribes two conditions before an action to recover delinquent stocks irregularly sold may be
allowed. These are:

 The party seeking to maintain such action first pays or tenders to the party holding the stock the sum for
which the same was sold, with interest from the date of the sale at the legal rate; and,
 The action shall be commenced by the filing of a complaint within six months from the date of the sale.

 The reason for such is the stability of transactions of the shares of stock

 Suppose in the example, since there are no unrestricted retained earnings, hence the corporation cannot
bid, is the corporation left without any recourse?

 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)

 Velasco vs. Poizat

 The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay
any other debt, and the right of the company to demand payment is no less incontestable.
 Two available remedies: the first and most special remedy given by the statute consist in permitting the
corporation to put up the unpaid stock and dispose of it for the account of the delinquent subscriber. The
other remedy is by action in court.

 De Silva vs. Aboitiz and Co.

 Discretionary on the part of the board of directors to do whatever is provided in the said article relative to
the application of the part of the 70 percent of the profit distributable in equal parts on the payment of the
shares subscribed to and fully paid

 Lingayen Gulf vs. Baltazar

 Exception: pursuant to a bona fide compromise or to set off a debt due from the corporation, a release
supported by consideration, will be effectual as against dissenting stockholders and subsequent and
existing creditors. A release which might originally have been held invalid may be sustained after a
considerable lapse of time

 Apocada vs. NLRC

 Set-off is without any legal basis

 It was premature
 Unpaid subscriptions will become due and payable only upon certain instance
 Call or if there is a stipulation in contract
 If no call and no stipulation in contract then it will not be demandable or payable at all
 76

 Lumanlan vs. Cura

 Trust Fund Doctrine- subscription to the capital of a corporation constitute a fund to which the creditors
have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in order to realize assets for the payment of its debts.

 PNB vs. Bitulak

 Where it not for the promise, the defendants would have not subscribed
 Trust Fund Doctrine, it is established doctrine that subscriptions to the capital of a corporation constitute a
fund to which creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the
payment of its debts.
 A corporation has no power to release an original subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and under the conditions prescribed by the
statute or the charter or the articles of incorporation.

 Edward Keller and Co. vs. COB

 May the stockholder be held liable for the debts of the corporation? YES. To the extent of their unpaid
subscription
 As to the liability of the stockholders, it is settled that a stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid subscriptions

 Is there a prescriptive period wherein a demand for unpaid subscription should be made?

 NO. Garcia vs. Suarez case

 Garcia vs. Suarez

 Never became due and payable until there is a call made

 Prescription will not run until and unless there is demand
 Prescription should be determined from the time demand has been made and not from the time of
subscription

 If declared delinquent, what would be the effect as to the owner of said shares?

 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. (50a)
 However if the shares are not delinquent, subscribers to the capital of a corporation, though not fully paid,
are entitled to all the rights of a stockholder, according to section 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)

 May the rules governing delinquency sale apply to a non-stock corporation? Are there unpaid shares in a
non-stock corporation?
 77

 Rules governing stock corporations, when applicable, also applies to a non-stock corporation
 There are delinquent shareholders also in a non-stock corporation. Example is membership dues

 A corporation paid 50% of subscription and was later on declared delinquent when he could not pay upon
call; A is also a director of the corporation. Will A, upon declaration of delinquency , still be able to exercise
his right as a director?

 Yes, he loses all his right as a stockholder except his right to receive dividends
 He remains to be a director, only qualification to be a director is he must own at least 1 share and since it
still stands in his name pending the sale, he remains to be and act as a director
 Even if there is sale, he may still be director because the winning bidder may not bid or pay for all the
shares or there might be remaining shares, which would be credited in favor of the delinquent stockholder
 Section 43 provides:

Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock
to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown
that such retention is necessary under special circumstances obtaining in the corporation, such as when
there is need for special reserve for probable contingencies. (n)

 When a certificate of stock is loss or destroyed, what must be done by the owner thereof?

 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
 78

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)

 The rationale of the above-quoted law is to avoid duplication of certificates of stock and the avoidance of
fictitious and fraudulent transfers.

 When will the replacement certificate be issued?

 The code provides 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,

 Could it be issued earlier than 1 year?

 Yes it can be, the code states that:

unless the registered owner files a bond or other security in lieu thereof as may be 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.

 May corporate officers be held liable for the unauthorized issuance?

 YES, the code provides that:

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)

 Assuming the last paragraph is not there; would it be not the same, that they should be held liable due to
fraud, bad faith or negligence?

 YES. Section 31 provides that:

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
 79

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 there from suffered by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, 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)

 Certificate of stock was lost, the owner transfers his shares by way of a notarized deed will it be valid?

 He cannot do so, if a certificate of stock is issued by a corporation, a mere notarized deed will not suffice
 Deed of assignment was not sufficient since there was no endorsement (Rural Bank of Lipa vs. CA)

 Rights and liabilities of stockholders

 RIGHTS

 Participation in the management of the corporate affairs by exercising their right to vote and be voted upon either
personally or by proxy as provided for under sections 50 and 58 of the code;
 To enter into a voting trust agreement subject to the procedure, requirements and limitations imposed under section
50;
 To receive dividends and to compel their declaration if warranted under section 43;
 To transfer shares of stock subject only to reasonable restrictions such as options and preferences as may be allowed
by law inclusive of the right of the transferee to compel the registration of the transfer in the books of the corporation
as provided for in section 63;
 To be issued a certificate of stock for fully paid-up shares in accordance with 64;
 To exercise pre-emptive rights as provided for in section 39;
 To exercise their appraisal right in accordance with the provision of section 81 and in those instance allowed by law
such as section 42 and 105;
 To institute and file a derivative suit;
 To recover shares of stock unlawfully sold for delinquency as may be allowed under section 69;
 To inspect the books of the corporation subject only to the limitations imposed by section 73;
 To be furnished by the most recent financial statement of the corporation as by section 75;
 To be issued a new stock certificate in lieu of the lost or destroyed one subject to the procedure laid down in section
73;
 To have the corporation dissolved under section 118 to 121, and section 105 in a close corporation;
 To participate in the distribution of the assets of the corporation upon dissolution under section 122;
 In the case of a close corporation, to petition the SEC to arbitrate in the event of a deadlock as allowed under section
104; and,
 Also in the case of a close corporation, to withdraw therefrom, for my reason, and compel the corporation to purchase
his shares as provided for under section 105.

LIABILITIES

 To pay to the corporation the balance of his unpaid subscriptions subject to the provision of section 67 to 70;
 To pay interest on his unpaid subscription if required by the by-laws or by the contract of subscription in accordance
with section 66;
 To answer to the creditors for the unpaid portion of his subscription under the TRUST FUND DOCTRINE;
 To answer the “water” in his stocks as provided for in section 65;
 To be liable, as general partners, for all debts, liabilities and damages of a determinable corporation as envisioned
under section 21 (corporation by estoppel); and,
 To be personally liable for torts, in the event that a stockholder in a close corporation actively participates in the
management of the corporate affairs.
 80

CORPORATE BOOKS AND RECORDS

 What are these books and records that are required to be kept?

 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 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.)

 To summarize:
 81

 Records of all business transactions which include, among others, journals, ledger, contracts, vouchers and
receipts, financial statements and other books of accounts, income tax returns, and voting trust agreements
which must be kept and carefully preserved at its principal office;
 Minutes of all meetings of stockholders or members and of the directors or trustees setting forth in detail
the date, time, and place of meeting, how authorized, the notice given whether the same be regular or
special, and if special, the purpose thereof shall be specified, those present and absent, and every act done
or ordered done there at which ,must likewise be kept at the principal office of the corporation; and,
 Stock and transfer book showing the names of the stockholders, the amount paid or unpaid on all stocks for
which subscription has been made, a statement of every alienation, sale or transfer of stock made, if any the
date thereof, and by whom and to whom made which must also be kept at the principal office of the
corporation or in the office of its stock transfer agent.

These corporate books and records, inclusive of all business transactions and minutes of meetings, are
subject to inspection by any of the directors, trustees, stockholders or members of the corporation at
reasonable hours on business days and a copy of excerpts of said records may be demanded. In fact, in so
far as financial statement is concerned, the Code clearly provides:

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 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)

 May books and records be examined? Who may examine? Can they copy them? In whose expense?

 Yes, according to the code:

“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. “

 Is there any defense available that could be raised? By the corporate officers to justify the refusal?

 Yes, the code provides that:

“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.”

 What is the stock and transfer? Where should stock and transfer be kept? Can it be kept elsewhere?
 82

“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. “

 Stock and transfer agent

 Records every movement

 Person who monitors movement by the minutes or by the hours
 Non-stock corporation- stock and transfer books
 Club share- membership

 Are stockholders entitled to financial statements?

 Yes, they are entitled to a copy, the code provides that:

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 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)

 Audited financial statement filed in the SEC, 120 days from the end of the final year, or must be filed on or
before April of each year
 Must be stamp received by the BIR Sec

 Those in the stock exchange

 Disclosure of any matter that have to do with increasing and decreasing

 If not “kulong” violation of securities and regulation act

 Why is this right of inspection granted to a stockholder?

 The basis of the right of the stockholder to inspect the books and records of the corporation for a proper
purpose is to protect his interest as a stockholder. Thus, it has been said that:

“The right of the shareholders to ascertain how the affairs of his company are being conducted by
its directors and officers is founded by his beneficial interest through ownership of shares and the
necessity of self-protection. Managers of some corporations deliberately keep the shareholders in
ignorance or under misapprehension as to the true condition of its affairs. Business prudence
 83

demands that the investor keep a watchful eye on the management and the condition of the
business. Those in charge of the company may be guilty of gross incompetence or dishonesty for
years and escape liability if the shareholders cannot inspect the records and obtain information.”

 Is there any distinction of the right of inspection of a stockholder and that of a director?

 Yes, as compared to a stockholder or member, the right of a director or trustee to inspect and examine
corporate books and records is considered absolute and unqualified and without regard to motive. This is
because a director supervises, directs and manages corporate business and it is necessary that he be
equipped with all the information and data with regard to the affairs of the company in order that he may
manage and direct its operations intelligently and according to his best judgment in the interest of all the
stockholders he represents. Thus, while stockholders and members are entitled to inspect and examine the
books and records as provided in sections 74 and 75 they may not gain access to highly sensitive and
confidential information. In the case of directors. “it is not denied” that they have such access. This would
include, among others,

 Marketing strategies and pricing structure;

 Budget for expansion and diversification;
 Research and development;
 Sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms

 May this right be exercised, other than by the stockholders themselves?

 Yes, while the right is founded on stock ownership thus personal in nature it may be made by the
stockholder’s agent or representative since it may be unavailing in many instances

 What if the right of the stockholder to inspect is denied? What is his remedy?

 Mandamus
 Damages either against the corporation or responsible officer who refused the inspection
 Criminal complaint for violation of his right to inspect and copy excerpts of all business transactions and
minutes of meeting. Section 74 provides that 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 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. The latter provision imposes a penalty of a fine of not less than
P1,000 but not more than P10,000 or an imprisonment for not less than 30 days but not more than 5 years,
or both, at the discretion of the court. If the refusal is pursuant to a resolution or order of the board, the
liability shall be imposed upon the directors or trustees who voted for such refusal.

 Defense of the responsible corporate officer

 That the person demanding has improperly used any information secured through any prior examination
of the records or minutes of such corporation or of any other corporation;
 That he was not acting in good faith or for a legitimate purpose in making his demand;
 The right is limited or restricted by special law or the law of it creation.

 W.G. Philpotts vs. Philippine Manufacturing Co.

 The right of inspection given to a stockholder can be exercised either by himself or by any proper
representative or attorney-in-fact, and either with or without the attendance of the stockholder
 84

 The right may be regarded as personal, in the sense that only a stockholder may enjoy it; but the inspection
and examination may be made by another. Otherwise it would be unavailing in many instances.

 Note: Usually hires an auditor or accountant to safeguard his interest

 Pardo vs. Hercules Lumber Co.

 The law is clear, it may be exercised during reasonable hours on any business days, the by-laws cannot
deny this right all together
 The general right given by the statute may not be lawfully abridged to the extent attempted in this
resolution. It may be admitted that the officials in charge of a corporation may deny inspection when
sought at unusual hours or under other improper conditions; but neither the executive officers nor the
board of directors have the power to deprive a stockholder of the right altogether.
 The corporation, or its responsible directors and officers cannot unduly restrict this right of inspection and
may not arbitrarily set a few days of the year within which the stockholder may make the inspection.
 A by-law unduly restricting the right of inspection is undoubtedly invalid

 Vegaruth vs. Isabela Sugar Co.

 Directors of a corporation have the unqualified right to inspect the books and records of the corporation at
all reasonable hours.
 We do not conceive, however, that a director or stockholder has any absolute right to secure certified
copies of the minutes of the corporation until these minutes have been written up and approved by the
directors.

 May a stockholder of a holding company inspect the books and records of a subsidiary?

 It depends
 The right of the stockholders to examine corporate books extends to wholly-owned subsidiary which is
completely under the control and management of the parent company where he is such a stockholder. But
if the two entities (subsidiary and parent) are legally being operated as separate and distinct entities, there
is no such right of inspection on the part of the stockholder of the parent company.

AYALA- HOLDING COMPANY/PARENT COMPANY

SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not wholly-owned subsidiary)

 HOLD ATLEAST 50 +1 shares in order to be a PARENT COMPANY

 A, is a stockholder of Ayala, does he have a right to inspect the records of its subsidiaries?

 If wholly owned pwede, but its subsidiaries are not wholly owned kaya hindi pwede

 Gokongwei vs. SEC

 San Miguel corporation owns all of the shares of stock of San Miguel International
 It is wholly-owned
 It would be in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of such wholly-owned subsidiary which are in respondent
corporation’s possession and control
 85

 If being operated as separate and distinct corporations, there is no such right

 Telecommunications- special franchise, it is a legislative grant

 Gonzales vs. PNB

 Provisions of the old law was unqualified, when it granted stockholders the right to inspect
 However, whole seemingly enlarging the right of inspection, the new code has prescribed limitations to the
same. It is now expressly required as a condition for such examination that the one requesting it must not
have been guilty of using improperly any information secured through a prior examination and that the
person asking for such examination must be acting in good faith and for a legitimate purpose in making his
demand
 Admittedly, he sought to be a stockholder in order to pry into transactions entered into by the respondent
bank even before he became a stockholder. His obvious purpose was to arm himself with materials he can
use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the
same.
 Bank was created by a special law, it has its own charter and primarily governed by the law creating them
 The bank is only subject to the inspection of the Central Bank and any information pertaining to the bank is
confidential and shall not be revealed to any person other than the President of the Philippines, the
Secretary of Finance and the Board of Directors, nor shall any information relative to the funds in its
custody, its current accounts or deposits belonging to private individuals, corporations or other entities
except by order of a Court of Competent Jurisdiction, hence inspection sought to by the petitioner is
violative of the provisions of its charter and is even subject to penal sanctions

 Assuming you are a stockholder of PNB, and then it was privatized, may you already have the right to
inspect?

 No, unless its charter has been altered or repealed it is still subject to the same law

 3 stages in the life of a corporation

 Formation or birth
 We now discuss the union of the corporation
 The last would be its death or dissolution

MERGER AND CONSOLIDATION

 Merger and consolidation

 In corporate parlance it is called spin-off

 Almost a year ago San Miguel separated its brewery business
 San Miguel Corporation is now a full time holding company; it can later on absorb the company
 Corporations are granted by the code to merge or consolidate
 most common type of corporate recognition
 not the same in every case
 but most common in the weal financial or insolvent condition, aim is to bring it back to its financial
capability
 also a method of recapitalization

 purchase and sale of corporate assets is another form of corporate reorganization

 How do you value the assets of the merging corporation, do you consider goodwill?
 86

 First secure favorably recommendation of government agency

 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)

 Merger

 A union effected by absorbing one or more existing corporations by another which survives and continues
the combined business
 It is the uniting of two or more corporations by the transfer of property to one of them which continue in
existence, the other or the others being dissolved and merged therein.

A B

A transfers all assets, properties, rights, obligations, liabilities to B

B issues shares of stocks in exchange of the transfer

A is then dissolved and B SURVIVES

 Parties to a merger are called constituent corporation

 Consolidation

 The uniting or amalgamation of two or more existing corporations to form a new corporation
 In merger there is a surviving corporation, the others are dissolved, while in consolidation, all constituent
are dissolved and a new one organized

A B

 Like all other corporate acts, it emanates from the board

 The board of directors or trustees of each constituent corporations shall approve a plan of merger or
consolidation setting forth the matters required in section 76;
 87

 Approval of the plan by the stockholders representing 2/3 of the outstanding capital stock or 2/3 of
the member in non-stock corporations of each of such corporations at separate corporate meetings
called for the purpose;
 Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall be
given to all stockholders or members at least two (2) weeks prior to the scheduled meeting, either
personally or registered mail stating the purpose thereof;
 Execution of the articles of merger or consolidation by each constituent corporations to be signed by the
president or vice-president and certified by the corporate secretary or assistant secretary setting
forth the matters required in section 78;
 Submission of the articles of merger or consolidation in quadruplicate to the SEC subject to the
requirement of section 79 that if it involve corporations under the direct supervision of any other
government agency or governed by special laws the favorable recommendation of the government agency
concerned shall first be secured and;
 Issuance of the certificate of merger or consolidation by the SEC at which time the merger or
consolidation shall be effective. If the plan, however, is believed to be contrary to law, the SEC shall set a
hearing to give the corporations concerned an opportunity to be heard upon proper notice and thereafter,
the Commission shall proceed as provided in the Code.

 Although merger and consolidation is an express power granted to corporation, it is subject to limitations,
as maybe proscribed by law
 What would be the effect of merger or consolidation? <sec. 80>

 There will only be a single corporation. In case of merger, the surviving corporation or the consolidated
corporation in case of consolidation;
 The termination of the corporate existence of the constituent corporations, except that of the surviving
corporation or the consolidated corporation;
 The surviving corporation or the consolidated corporation will possess all the rights, privileges, immunities
and powers and shall be subject to all the duties and liabilities of a corporation organized under the Code;
 The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchises
of the constituent corporations, and all property and all receivables due, including subscriptions to shares
and other choses in action, and every other interest of, or belonging to or due to the constituent
corporations shall be deemed transferred to and vested in such surviving or consolidated corporation
without further act and deed; and,
 The rights of creditors or any lien on the property of the constituent corporations shall not be impaired by
the merger or consolidation.

 Is there a liquidation process in case of merger or consolidation?

 None, there is nothing to distribute

 Associated Bank vs. CA

 By virtue of a specific provision in the merger agreement

 Although the subject promissory note names CBTC as the payee, the reference to CBTC in the note shall be
construed, under the very provision of the merger agreement, as a reference to petitioner bank, “as if such
reference (was a) direct reference to the latter for all intents and purposes
 Section 80 par. 4 states:

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
 88

be deemed transferred to and vested in such surviving or consolidated corporation without further act or
deed; and

 Without further acts, meaning it is automatic

 When do merger and consolidation become effective? What if the SEC fails to act on it without fault
attributable to the corporation involved?

 It will never become valid until and unless the SEC gives its stamp of approval
 It will be up to the constituent corporation to follow it up
 It will never take effect until the SEC gives its approval and issues the articles of merger

 Granted 3 years to wing up unless there is a trustee to wing up its affairs

 Could there be liquidators and winding up with respect to the corporation in consolidation and merger?

 No, there is none

 No assets properties or rights to collect, they are transferred
 No debts and liabilities to pay because they become the liabilities of the surviving corporations
 No properties transferred because they will be the properties of the surviving corporations

 Hardest part is the financial act, regarding how many shares would be issued, probability of collection
and the like
 In merger and consolidation, there is due diligence and an economist is usually hired

APPRAISAL RIGHT

 Define appraisal

 Right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting
from certain corporate acts involving fundamental changes in corporate structure <sec. 81>

 What property? When may this right be exercises?

 Section 81 provides:

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)

 May it be exercised by a stockholder who dissents to the act of a business other than a primary purpose?

X Co. inc
 89

Principal office is in Quezon city, it was changed to Paranaque

A objects and makes a written demand. May he exercise his right of appraisal?

 It is not available in all amendments of the corporation

 It must be changing or restricting the rights of any stockholder

 What if the principal office is changed from QC to TAWI-TAWI, will it change or affect the rights of A?

 To some it may change or restrict the rights to others it may not

 How is the right exercised?

 According to section 82 of the code:

Section 82. How right is exercised. - The appraisal right may be exercised by any stockholder who
shall have voted against the proposed corporate action, by making a written demand on the corporation
within thirty (30) days after the date on which the vote was taken for payment of the fair value of his
shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the
appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to
such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair
value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.

If within a period of sixty (60) days from the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares,
it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by
the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the
majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30)
days after such award is made: Provided, That no payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earnings in its books to cover such payment: and
Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder
shall forthwith transfer his shares to the corporation. (n)

X Co.

Principal Office- QC, it was changed to Manila

A objects and makes a written demand for payment of fair value of shares. Can he make a demand of
payment of shares?

 True or False, no stockholder in a stock corporation can ever demand if the principal office is amended,
changing it from QC to Manila

 False, a stockholder in a close corporation may for any reason compel the close corporation that he be paid
the fair value of his shares

Can he exercise his appraisal rights in the first place? He hasn’t even paid his subscription in full.

 May a stockholder who hasn’t paid his subscription in full exercise his appraisal rights?
 90

 Yes, he can exercise his appraisal rights, by reconciling the provisions of section 72, section 82 and section
86

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)

Section 82. How right is exercised. - The appraisal right may be exercised by any stockholder who
shall have voted against the proposed corporate action, by making a written demand on the corporation
within thirty (30) days after the date on which the vote was taken for payment of the fair value of his
shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the
appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to
such stockholder, upon surrender of the certificate or certificates of stock representing his shares,
the fair value thereof as of the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.

If within a period of sixty (60) days from the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares,
it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by
the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the
majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30)
days after such award is made: Provided, That no payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earnings in its books to cover such payment: and
Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder
shall forthwith transfer his shares to the corporation. (n)

Section 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his
shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so
shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the
certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of
the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the
rights of a regular stockholder; and all dividend distributions which would have accrued on such shares
shall be paid to the transferee. (n)

 Notation is not mandatory, it is even discretionary because the code provides “at the option of the
corporation” because it never issued one for that matter since the subscriptions are not yet fully paid

 May the corporation be compelled to pay the interest of A

300 T, 150T, 150T and 0 unrestricted retained earnings

 No stockholder may be able to compel the corporation to pay the value of his shares if the corporation has
no unrestricted retained earnings

 False, a stockholder of a close corporation may for any reason, provided only that the corporation has
sufficient assets to cover its debts and liabilities

 General rule: there should be unrestricted retained earnings

 Exception: section 105 “close corporation”

 The procedure and requirements for the valid exercise of this rights are:
 91

 The stockholder must have voted against the proposed corporate action in any of the instances allowed by
law for the exercise of the right of appraisal;
 The written demand for payment must be made by the dissenting stockholder within thirty (30) days after
the date on which the vote was taken thereon. Failure to make the demand within the said period shall be
deemed a waiver on the part of the stockholder concerned to exercise his appraisal right;
 Surrender of the certificate of stock by the dissenting stockholder for notation in the corporate books and
the payment by the corporation of the fair market value of the said shares as of the day prior to the date on
which the vote was taken. If the stockholder and the corporation cannot agree on the fair market value
thereof, the same shall be determined in accordance with the provision of paragraph 2 of section 82;
 The fair value of the shares of the dissenting stockholder must be paid by the corporation only if it has
“unrestricted retained earnings” in its books to cover such payment. If the corporation has no unrestricted
retained earnings, the dissenting stockholder may not, therefore, be able to effectively exercise his
appraisal rights;
 Upon payment of the shares by the corporation, the dissenting stockholder shall transfer his shares to the
corporation.

 What would be the effect if the stockholder exercises his appraisal rights? What happens to his voting and
dividend rights if he exercises his appraisal rights?

 It will be suspended, with a limitation of 30 days, as provided for by section 83 of the code:

Section 83. Effect of demand and termination of right. - From the time of demand for payment of the
fair value of a stockholder's shares until either the abandonment of the corporate action involved or the
purchase of the said shares by the corporation, all rights accruing to such shares, including voting and
dividend rights, shall be suspended in accordance with the provisions of this Code, except the right
of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares within 30 days after the award, his voting and
dividend rights shall immediately be restored. (n)

 How do you compare the rights of a stockholder, declared delinquent compared to a dissenting stockholder
exercising his appraisal rights
 What if a stockholder exercising his appraisal rights is also a director, will he also lose his rights as a
stockholder?

 The shares remain to stand in his name until he is paid, unless there is a stipulation in the by-laws

 When may the right to be paid the value of his shares cease? Can he withdraw his right of appraisal?

 Yes, he may withdraw, but there must be consent by the corporation as provided for by section 83 of the
code:

Section 84. When right to payment ceases. - No demand for payment under this Title may be
withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn
with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the
corporation or disapproved by the Securities and Exchange Commission where such approval is necessary,
or if the Securities and Exchange Commission determines that such stockholder is not entitled to the
appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his
status as a stockholder shall thereupon be restored, and all dividend distributions which would have
accrued on his shares shall be paid to him. (n)

 Instances when the right of a dissenting stockholder to be paid the fair value of his shares ceases.
 92

 When he withdraws his demand for payment and the corporation consents thereto;
 When the proposed action is abandoned or rescinded by the corporation;
 When the proposed action is disapproved by the SEC where such approval is necessary;
 When the SEC determines that he is not entitled to exercise his appraisal right;
 When he fails to submit the stock certificate within ten (10) days from demand to the corporation for
notation that such shares are dissenting shares; and,
 If the shares are transferred and the certificate subsequently cancelled.

 Who bears the cost of appraisal?

 It depends
 The corporation bears the cost if

 The price offered by the corporation is lower than the fair value of the shares of the dissenting
stockholder as determined by the appraisers;
 Where an action is filed by the dissenting stockholder to recover such fair value and the refusal of the
stockholder to receive payment is found by the court to be justified.

 Dissenting stockholder will be liable for the cost and expenses of appraisal when

 When the price offered by the corporation is approximately the same as the fair value ascertained by
the appraisers;
 Where the action filed by the dissenting stockholder and his refusal to accept payment is found by the
court to be unjustified.

 The dissenting stockholder may also sell, transfer or assign his shares

Section 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his
shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so
shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the
certificates bearing such notation are transferred, and the certificates consequently cancelled, the
rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee
shall have all the rights of a regular stockholder; and all dividend distributions which would have
accrued on such shares shall be paid to the transferee. (n)

NON-STOCK CORPORATIONS

 What is a non-stock corporation?

 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

 What provision of the code will govern non-stock corporations? Would the provision governing stock
corporations also apply to non-stock corporations?

 Yes, 2nd par. Of section 87 provides:

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)
 93

 How is the right to vote exercised in a non-stock corporation compared to a stock corporation
 May a member in a non-stock corporation vote cumulatively?

 General rule is NO

 May it be granted or allowed by the by-laws?

 Yes

 May the right to cumulative voting be denied in a stock corporation?

 No, Doctrine of Limited Capacity

 May members in a non-stock corporation vote by proxy?

 Yes, section 89 provides that:

“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) “

 May the right to vote by proxy be validly denied in a stock corporation?

 No, it is a matter of right in a stock corporation

 May member of a non-stock corporation cast their vote by text?

 Yes, subject to the approval and terms and conditions of the SEC <sec. 89>

“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. “

 How about in stock?

 Voting by mail or other similar means may also be authorized and allowed by the by-laws of non-stock
corporations. Generally, in stock corporations, the vote must be cast at a duly constituted meeting. The only
exception, in case of the latter, is in the matter of general amendment of the articles of incorporation where
the written assent of the stockholder may be sufficient.

 How is the governing board constituted in a non-stock corporation? How many members?

 It may exceed 15 in a non-stock corporation unless the AOI or by-laws provide otherwise, as provided for
by section 92 of the code:

Section 92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than
fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire
every year; and subsequent elections of trustees 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
 94

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. (n)

 Qualifications?

 He is a member of the association;

 Majority thereof must be residents of the Philippines; and,
 Other qualifications as may be provided for in the by-laws.

 Governing board in a non-stock

 Board of Trustees, however section 138 provides that:

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)

 Disqualifications

 Section 27 also applies to a non-stock corporation, same holds true to the manner of removal <sec. 29 ad
30>

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)

Section 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of term, may
be filled by the vote of at least 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)

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)
 95

 Who elects the other officers?

 Directly by the general members unless the by-laws or articles provide otherwise. <sec.92>

“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. (n) “

 In stock corporations who elect officers?

 Directors

 The provision that stock corporations cannot validly provide that members cannot be voted by
stockholders is only a general rule because there is an exception section 97 of the code states that:

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 or appointed by the stockholders, instead of by the
board of directors.

 Nature of membership is non-transferrable and personal in nature unless the articles of incorporation or
by-laws provide otherwise

Section 90. Non-transferability of membership. - Membership in a non-stock corporation and all

rights arising there from are personal and non-transferable, unless the articles of incorporation or the by-
laws otherwise provide. (n)

 How is a membership requirement in a non-stock corporation

A holds a membership certificate

B goes to the corporation and compels the corporation to record the transfer in his name

 Membership in non-stock corporations may be acquired by complying with the provisions of its rules
prescribed in the by-laws. This is in consonance with the express power granted by law under section 36,
paragraph 6 of the code, authorizing them to admit members thereof and that authority carries with it the
power to prescribe rules on membership. It has thus been stated that in the absence of charter or statutory
restrictions, non-stock corporations may determine who shall be admitted to membership and how they
shall be admitted.

Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has
the power and capacity:
 96

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;

 They can provide the manner in which to admit depending on their own rules

 The power or authority to terminate members in non-stock corporations is said to be inherent but strict
compliance with the manner and procedure laid down in the by-laws must be observed, otherwise it may
render the expulsion ineffective and invalid.

Section 91. Termination of membership. - Membership shall be terminated in the manner and for
the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have
the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws. (n)

 Power is inherent and may be exercised in certain situations:

 When an offense is committed which, although it has no immediate relation to a member’s duty as such,
it is so infamous as to render him unfit for society of honest men, which is indictable at common law;
 When the offense is a violation of his duty as member of the corporation; and,
 When the offense is of a mixed nature, being both against his duty as a member of the corporation, and
also indictable at common law.

If the conduct of the member comes within any of this cases, it is a ground for valid expulsion although it
may not be expressly made so by the by-laws

 Chinese YMCA vs. Ching

 Right of the corporation to choose who the members are, cannot be inquired or intervened by the court
 The appealed decision thus contravened the establish principle that the courts cannot strip a member of a
non-stock corporation of his membership therein without cause.

 Lions Club International vs. CA

 Courts will not generally interfere on matters involving the internal affairs of an unincorporated
association such as election contest unless the acts complained of are arbitrary, oppressive, fraudulent,
violative of civil rights and the like
 General rule is that the courts will not interfere with the internal affairs of an unincorporated association
so as to settle disputes between the members, or questions of policy, discipline, or internal government, so
long as the government of the society is fairly and honestly administered in conformity with its by-laws and
the law of the land, and no property or civil rights are involved.
 Exceptions are the following:

 Where law and justice so require, and the proceedings of the association are subject to judicial review
where there is fraud, oppression, or bad faith, or where the action complained of is capricious,
arbitrary, or unjustly discriminatory
 To grant relief in case property or civil rights are invaded, although it has also been held that the
involvement of property rights does not necessarily authorize judicial intervention, in the absence of
arbitrariness, fraud or collusion.
 Are violative of the laws of the society, or the law of the land, as by depriving the person of due process
of law
 97

 There is lack of jurisdiction on the part of the tribunal conducting the proceedings, where the
organization exceeds its powers, or where the proceedings are otherwise illegal

 Corporations, stock and non-stock, may be dissolved in accordance and pursuant to the provisions of
Sections 118 to 121 of the Corporation Code and the pertinent provisions of P.D. 902-A, as amended. If such
be the case, the assets of the corporation are to be distributed in accordance with law and established
jurisprudence.
 If a non-stock corporation is dissolved how will its properties be distributed?

Section 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with
the provisions of this Code, its assets shall be applied and distributed as follows:

1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate
provision shall be made therefore;

2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which
condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance
with such requirements;

3. Assets received and held by the corporation subject to limitations permitting their use only for
charitable, religious, benevolent, educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed
to one or more corporations, societies or organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation according to a plan of distribution adopted
pursuant to this Chapter;

4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in
accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the
articles of incorporation or the by-laws, determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and

5. In any other case, assets may be distributed to such persons, societies, organizations or corporations,
whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to
this Chapter. (n)

 Non-stock corporations with 4Billion funds, may it be distributed for and among its members?

- Section 94 number 3 provides:

3. Assets received and held by the corporation subject to limitations permitting their use only for
charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring
return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or
more corporations, societies or organizations engaged in activities in the Philippines substantially similar
to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter;

 If there is no distributive agreement then they may do so through a plan of distribution under section 95

Section 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not
inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of
dissolution in the following manner:
 98

The board of trustees shall, by majority vote, adopt a resolution recommending a plan of
distribution and directing the submission thereof to a vote at a regular or special meeting of members
having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof
and the date, time and place of such meeting shall be given to each member entitled to vote, within the time
and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of
distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting
rights present or represented by proxy at such meeting. (n)

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.

 Between and among themselves, they feel and act alike

 Not more than 20 stockholders
 Specified persons, if you are not specified, you cannot be a stockholder
 All the issued stocks of all classes is subject to restrictions
 Shall not be listed in the stock exchange not publicly offered
 3 qualifying conditions must be contained in the articles of incorporation, to be considered as a close
corporation, if not, it will not be considered as such and will be governed by the general provisions of the
code
 Even if 100 % is owned by one person it will not be considered a close corporation without the 3 qualifying
provisions
 Identity of stockholders, specified persons
 Active management either as directors or partners in management
 Combination of the corporation and partnership type of business

 May any type of corporation, be organized as such close corporation?

 No, the 3 qualifying conditions must be present

 What if 2/3 of the outstanding capital stock is owned by another corporation which is also a close
corporation, will it be a close corporation?

 No, it will only be a closed corporation if 2/3 of the voting stocks of a close corporation is also owned by a
close corporation. It must be “voting” stocks
 Even if another corporation owns or controls 2/3 of the voting stocks of a close corporation, the latter may
still be considered as such close corporation if the corporation owning or controlling the shares is also a
close corporation.

“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.”
 99

 What kind of corporations cannot be a close corporation?

 Mining or oil companies,

 Stock exchange
 Banks and insurance companies,
 Public utilities
 Educational institutions
 Corporations vested with public interest

 Classification of directors

 Ordinary stock- no such right

 Close corporation-yes there is such a right

 Section 97 is a permissive provision

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.

 After classification what then?

 After classification, qualification and then restriction as provided for under the 3 qualifying conditions in
section 96

 Cumulative voting is restricted in close corporations if will be elected solely by a particular class
 In a close corporation, the articles of incorporation may provide for a greater quorum and voting
requirement in meetings of both stockholders or directors to increase the veto power of minority
stockholders, unlike in a stock corporation wherein only directors meetings may provide for greater
quorum requirement and in stockholders meeting which may not be altered or increased, as provide for in
section 25, following the doctrine of limited capacity
 The articles of a close corporation may likewise provide that the business of the corporation shall be
managed by the stockholders rather than by the board of directors. However the same must contain the
continuing provisions required in paragraph 2 of section 97, that is:

 No meeting of stockholders need be called to elect directors;

 Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to
be directors; and;
 The stockholders of the corporation shall be subject to all liabilities of directors.

 Liability of stockholders acting as directors in a close corporation are more extensive since they are
personally liable for corporate torts unless the corporation has obtained a reasonable adequate liability
 100

insurance, unlike a ordinary stock corporation, wherein directors thereof are only liable for corporate torts
only if they have been negligent or acted fraudulently in the performance of their functions.
 Restrictions

 In ordinary stock corporations, the restrictions must appear in the articles of incorporation as well as the
certificate of stocks
 In a close corporation, the restrictions must appear in the articles of incorporation, the by-laws and the
certificate of stocks. Otherwise, the same shall not be binding on any purchaser thereof in good faith

 What if the stockholders do not want to exercise their right or option to purchase may it be sold to any
person?

 Yes, any third person, section 98 provides:

Section 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer shares
must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not
be more onerous than granting the existing stockholders or the corporation the option to purchase the
shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If
upon the expiration of said period, the existing stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may sell his shares to any third person.

 ordinary stock corporations are liable only if acted in Bad faith, fraud or negligence in performance
of duty

 What if there are already 20 stockholders and they want to add 2 more, may it compel?

 In ordinary stock corporations, they may compel by mandamus

 In close corporations, may not be compelled to admit because it breaches the qualifying conditions

 Since they cannot be compelled, may they admit?

 Yes, provided all the stockholders consented or instead of consenting they decide to amend their articles of
incorporation
 Will have to amend the articles of incorporation to accommodate other purchasers of share
 Will cease to be a close corporation if it amends and becomes in excess of 20

 Unless all the stockholders consent they “may”

 What if the other stockholders object to register? What will be the remedy of the transferee?

 His remedy is rescission. The effect of rescission is mutual restitution

 How about the stockholder, what is his recourse?

 He may compel the close corporation to purchase his shares at their fair value for any reason, provided the
corporation has sufficient assets in its books to cover the debts and liabilities exclusive of capital
 In a close corporation, there is a withdrawing stockholder, unlike in an ordinary stockholder where there is
none, they may only do so in the exercise of appraisal rights
 101

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.

 Agreements may also be entered in a close corporation <sec.100>

 They can even agree to be partners in management

 Pre-incorporation
 Manner in which the business of the corporation shall be managed

 Board resolution

 Ordinary stock corporations- sit and act as a body at a duly constituted meeting, they may do so by virtue of
the E-Commerce Act through teleconference or video conference

 Exception to the rule: other officers may be directly appointed and hired by the stockholders
 Close corporations may validly act even without a meeting provided the conditions are obtained

Section 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide
otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be
deemed valid if:

1. Before or after such action is taken, written consent thereto is signed by all the directors; or

2. All the stockholders have actual or implied knowledge of the action and make no prompt objection
thereto in writing; or

3. The directors are accustomed to take informal action with the express or implied acquiescence of all the
stockholders; or

4. All the directors have express or implied knowledge of the action in question and none of them makes
prompt objection thereto in writing.

 Pre-emptive rights in a close corporation is absolute

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.

 Why is it said to be absolute?

 Because there is no public offering in a close corporation, otherwise it will not be considered as close
 102

 In a close corporation the pre-emptive rights is broadened to include all issues without exception unless
denied or limited by the articles of incorporation
 Section 39 is the governing provision concerning rights of the stockholder in an ordinary stock corporation
and it may be denied. If it is not denied a stockholder can exercise his pre-emptive rights for all issues of
shares whether money, property or previously incurred indebtedness.

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.

 Are treasury shares covered in the exercise of pre-emptive rights in ordinary stock corporations?
 As regards amendments

Section 103. Amendment of articles of incorporation. - Any amendment to the articles of

incorporation which seeks to delete or remove any provision required by this Title to be contained in the
articles of incorporation or to reduce a quorum or voting requirement stated in said articles of
incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds
(2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion
of shares as may be specifically provided in the articles of incorporation for amending, deleting or
removing any of the aforesaid provisions, at a meeting duly called for the purpose.

 What happens if there is a deadlock?

 Section 104 provides for a remedy

Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation
or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so
divided respecting the management of the corporation's business and affairs that the votes required for
any corporate action cannot be obtained, with the consequence that the business and affairs of the
corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and
Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the
dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems
appropriate, including an order: (1) cancelling or altering any provision contained in the articles of
incorporation, by-laws, or any stockholder's agreement; (2) cancelling, altering or enjoining any resolution
or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any
act of the corporation or its board of directors, stockholders, officers, or other persons party to the action;
(4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation
regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5)
appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the
circumstances may warrant.

A provisional director shall be an impartial person who is neither a stockholder nor a creditor of
the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any,
may be determined by the Commission. A provisional director is not a receiver of the corporation and does
not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and
powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings
of directors, until such time as he shall be removed by order of the Commission or by all the stockholders.
His compensation shall be determined by agreement between him and the corporation subject to approval
 103

of the Commission, which may fix his compensation in the absence of agreement or in the event of
disagreement between the provisional director and the corporation.

 Powers of the SEC in intra-corporate concerns has been transferred to the proper commercial courts
 Prohibit, even if acting in good faith
 Provisional director appointed by the court
 Requiring the purchase, irrespective of unrestricted retained earnings
 The provision of the law above-quoted gives the SEC a very wide discretion in respect to management of a
close corporation in the event of a deadlock. It may:

 Cancel or alter any provision in the articles of incorporation, by-laws or any stockholders agreement
 Cancel, alter or enjoin any resolution or other act of the corporation or its board of directors,
stockholders or officers
 Prohibit any act of the corporation or its board of directors, stockholders or officers or other persons
party to the action;
 Requiring the purchase of the par value of the shares of any stockholders, either by the corporation
regardless of availability of unrestricted earnings, or by the other shareholders,
 Appointment of a provisional director
 Dissolving the corporation; or
 Other relief as the circumstances may warrant.

 Section 105

 Dishonesty is a ground for dissolution of a close corporation

 Even one stockholder may petition for dissolution

 when there is a relief available, dissolution would not be available in an ordinary corporation

CLOSE CORPORATION ORDINARY STOCK

CORPORATION
 The number of No limitation as to
stockholders cannot number of shareholder
exceed 20
 To the extent that all Maximum number of
stockholders can be directors is 15
deemed directors,
the number of
directors can
effectively be more
than 15
 Shares of stock are Generally no
subject to specified restriction on transfer
restrictions of shares
 Shares of stock are No prohibition
prohibited from
being listed in the
stock exchange or
offered for sale to the
public
 Stockholders may Management is lodged
take an active part in in the Board of
 104

corporate Directors
management by
vesting management
to them rather than a
Board of Director
 Those active in Directors are liable for
management are torts only if they have
personally liable for acted negligently or
corporate torts fraudulently
unless the
corporation has
obtained an
adequate liability
insurance
 Directors can validly Directors must, as a
act even without a rule, act as a body at a
meeting duly constituted
meeting
 Agreements between Not valid and binding
stockholders since stockholders’
regarding the agreement cannot limit
operations of the the discretion of the
business can validly Board to manage
be made corporate affairs
 To the extent that Ordinarily, no such
directors may be classification and no
classified into one or restrictions on
more classes and to cumulative voting
be voted solely by a
particular class of
stock, cumulative
voting may, in effect,
be restricted
 The articles of Officers are elected by
incorporation may the Board of Directors
provide that all
officers shall be
elected or appointed
by the stockholders
 It may provide for Although the articles of
greater quorum and incorporation or by-
voting requirements laws may provide for
in meetings of greater quorum and
stockholders and voting requirements in
directors directors’ meeting
under section 25, those
for stockholders’
meeting cannot
generally be altered
 Restriction on Valid and binding if
transfer of shares indicated in the articles
should be indicated of incorporation and
in the articles of stock certificates
 105

incorporation, by-
laws and stock
certificates
 Pre-emptive rights of Pre-emptive rights
stockholders is may be denied as
broader as it include provided for in section
all issues without 39
exception
 A stockholder may Unless he sells his
withdraw and shares, a stockholder
compel the cannot get back his
corporation to investment nor compel
purchase his shares the corporation to buy
for any reason with his shares except in the
the limitation only exercise of his
that the corporation appraisal right
has sufficient assets
to cover its liabilities
exclusive of capital
stock
 The proper forum Courts cannot interfere
may interfere in the I the business
management of a judgment of the
close corporation in directors/stockholders
case of deadlocks “BUSINESS JUDGMENT
under Section 104, RULE”
even of the
directors/stockholde
rs are acting in good
faith
 Any stockholder may Dissolution may be had
petition the SEC for only on the grounds
corporate provided by the
dissolution on provisions of the Code
grounds among on dissolution and P.D.
others, provides for 902-A, as amended
in section 105
 Manuel Dulay Enterprises vs. CA

 What was the position of Manuel Dulay here? President, General Manager and Treasurer
 Cannot act both as president and treasurer at the same time
 Since it is a close corporation owned by the family of Manuel Dulay, save and except the secretary, it should
be governed by Title XII
 Petitioner is classified as a close corporation and consequently a board resolution authorizing the sale or
mortgage of the subject property is not necessary to bind the corporation for the action of its president. At
any rate, a corporate action taken at a board meeting without proper call or notice in a close corporation is
deemed ratified by the absent director unless the latter promptly files his written objection with the
secretary of the corporation after having knowledge of the meeting which, in this case, petitioner Virgilio
Dulay failed to do.
 Virgilio Dulay is a signatory witness, he knows very well about the deed of absolute sale, he is estopped

 Naguiat vs. NLRC

 106

 Section 100 par. 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.

 Family corporations is not automatically a close corporation the 3 qualifying conditions must be present.

SPECIAL CORPORATIONS

 2 types of special corporations

 Educational corporations
 Religious corporations
 Corporation Sole
 Religious Societies

 What provision governs educational corporations?

Section 106. Incorporation. - Educational corporations shall be governed by special laws and by the
general provisions of this Code. (n)

 Special laws like they Education Act of the Philippines

 These institutions of learning, once recognized by the government as such are mandated by law to be
incorporated within ninety (90) days under the provisions of the Corporation Code and must, perforce,
comply with the requirements and procedure laid down there under. Their failure to so will not immune
the educational institution from suit as a corporation. (Chiang Kai Siek Case)
 Favorable recommendation of government agency involved

 Two types of educational corporations

 Certificate of completion in the academic field

 Vocational and technical one’s

 Recommendation of DECS if certificate of completion in the academic field

 How is the governing board of an educational institution instituted?

 Non-stock- multiples of 5 only (example: 5,10,15)

 Stock- can be anywhere between 5 to 15

 Can they consist of 7 or 9 members?

 Yes, if stock

 Can they be incorporated also as non-stock?

 Yes
 B.P. 232 allows the organization of an educational institution that is stock corporation, only if they do not
issue a certificate of completion in the academic field

 Qualifications and disqualifications of the membership in the board of an educational corporation

 107

 Educational corporations are governed by special laws and general provisions, hence if there is no
provision in the special law, you go back to section 25 and 27 of the general provisions
 Stock- must be a stockholder
 Non-stock- must be a member
 By-laws may provide for additional qualifications and disqualifications

Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a treasurer who
may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws. Any two (2) or more positions may be held
concurrently by the same person, except that no one shall act as president and secretary or as president
and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by
law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation
shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority
of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

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)

 Article 14 section 4 par. 2 of the Constitutions

Educational institutions, other than those established by religious groups and mission boards, shall
be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of
the capital of which is owned by such citizens. The Congress may, however, require increased Filipino
equity participation in all educational institutions. The control and administration of educational
institutions shall be vested in citizens of the Philippines.

No educational institution shall be established exclusively for aliens and no group of aliens shall comprise
more than one-third of the enrollment in any school. The provisions of this sub section shall not apply to
schools established for foreign diplomatic personnel and their dependents and, unless otherwise provided
by law, for other foreign temporary residents.

 Management is left solely to citizens of the Philippines

 Board of Directors manages the corporate affairs, foreigners cannot therefore be elected in the board
 Exceptions are, mission boards and religious orders, which may have a governing board consisting of
foreigners

 Term of office of governing board in an educational institutions

 Can serve a term of 5 years. If that be the case, 1/5 of their number shall expire every year

 Non-stock or stock, can they serve for a 1 year term only?

 Yes, the articles of incorporation may provide that it be 1 year only

 108

 What are these religious corporations spoken off?

 Corporation sole and religious societies

 What is a corporation sole?

 Consists of one person only and his successor in some particular station, who are incorporated by law in
order to give them some legal capacities and advantages, particularly that of perpetuity, which in their
natural persons they could not have had

 May a corporation be organized by less than 5 natural persons?

 General rule, 5 to 15 natural persons(except cooperatives and corporations primarily organized to hold
equities in rural banks and may rightfully become incorporators thereof)
 Exception, corporation sole, consist of only one person

 May any person form or organize a corporation sole?

 No, not any person can form a corporation sole, section 110 provides:

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. (154a)

 Is it required to file the articles of incorporation in the SEC?

 Yes

 What should be contained in the articles of incorporation?

 Section 111 and section 112 provides for the contents and procedures

Section 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop,
bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file
with the Securities and Exchange Commission articles of incorporation setting forth the following:

1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires to become a corporation sole;

2. That the rules, regulations and discipline of his religious denomination, sect or church are not
inconsistent with his becoming a corporation sole and do not forbid it;

3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the
administration of the temporalities and the management of the affairs, estate and properties of his religious
denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction;

4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister,
rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the
religious denomination, sect or church to which he belongs; and
 109

5. The place where the principal office of the corporation sole is to be established and located, which place
must be within the Philippines.

The articles of incorporation may include any other provision not contrary to law for the regulation
of the affairs of the corporation. (n)

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)

 Is it required to indicate its terms of execution? Why not?

 Not required because they are supposed to exist in perpetuity

 However, it does not mean that it shall continue to exist forever, it merely means that it has the capacity of
continuous existence during a particular period until dissolved in accordance with law

 When will it acquire judicial personality? How do you compare this to other types of corporation?

 After the filing the verified articles of incorporation along with the documents required in Section 112 with
the SEC, immediately becomes endowed with corporate personality, this serves as an exception to the rule
that a corporation acquires juridical personality only upon the issuance of a certificate of incorporation by
the said government agency.
 Upon filing of verified articles of incorporation with the SEC, will not require the approval of SEC

 A corporation sole is possessed with the same power, rights and privileges, to own, acquire and hold or
convey properties like any other corporation? True or False

 False, they have the same power rights and privileges, but when it comes to alienation and acquisition, it
must possess a court order, however when there is a regulated method, a court order may be dispensed
with <sec. 113>

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:
 110

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)

 Since a corporation sole is consists only of one person, will the registration of the property in the name of
the corporation sole vest unto the head thereof the ownership of the property?

 No, it will not vest unto the head, the head is acting merely as a guardian

 Roman Catholic Apostolic Adm. Of Davao, inc. vs. Land Reg. Comm, et al.

 Act only as a guardian

 Ownership devolves upon the congregation or religious denomination
 A corporation consists of one person only and his successors (who will always be one at a time, in some
particular station), who are incorporated by law in order to give them some legal capacities and
advantages, particularly that of perpetuity, which in their natural persons they could not have had
 Roman Catholic Church has no nationality and that the framers of the Constitution, as will be hereunder
explained, did not have in mind the religious corporations sole when they provided that 60 percent of the
capital thereof be owned by Filipino citizens.

 Director of Lands vs. CA

 Alienable public land is converted into private land when the same has been openly, continuously and
exclusively in possession of the property as concept of an owner for 30 years, automatically that is

 Republic of the Philippines vs. IAC

 Determination of the character of the land should be in mind

 If they still form part of public domain they cannot be owned, but if they are converted into private land,
the constitutional prohibition will not apply

 If there is vacancy who will fill up the same? What if there is none, what must the successor do?

 According to section 114:

Section 114. Filling of vacancies. - The successors in office of any chief archbishop, bishop, priest,
minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession
to office and shall be permitted to transact business as such on the filing with the Securities and Exchange
Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified
by any notary public.

During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding
elder of any religious denomination, sect or church incorporated as a corporation sole, the person or
persons authorized and empowered by the rules, regulations or discipline of the religious denomination,
sect or church represented by the corporation sole to administer the temporalities and manage the affairs,
estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority
of the corporation sole during such vacancy. (158a)

 If a corporation exists in equity may it not be dissolved?

 111

Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by
submitting to the Securities and Exchange Commission a verified declaration of dissolution.

The declaration of dissolution shall set forth:

1. The name of the corporation;

2. The reason for dissolution and winding up;

3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or
church;

4. The names and addresses of the persons who are to supervise the winding up of the affairs of the
corporation.

Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the
corporation shall cease to carry on its operations except for the purpose of winding up its affairs. (n)

 While section 115 of the code provides for the process and procedure for the dissolution of a corporate
sole, there is nothing in the law itself which would prohibit it from amending its articles of incorporation
 It is believed that authorization for the dissolution by the particular religious denomination, sect or church,
as required in sub-paragraph 3 of section 115 would still be necessary in the case of amending the articles
of incorporation to affect dissolution.

 Expiration of a corporate term will not apply to a religious corporation

 May a corporation sole be dissolved by judicial decree?

 General rule: No, because a corporation sole, is by its very nature ecclesiastical and religious (doctrine of
separation of church and state)
 Exception: police power of the state, if its purpose is being carried out and is instead being used for illegal
purpose, it may be so dissolved

 What are religious societies?

 Under common law, a religious society is a body of persons associated together for the purpose of
maintaining religious worship.

 Is it also required to file its articles of incorporation to the SEC?

 No <sec. 116> “may”

 What should be contained in the articles of incorporation?

 Section 116 provides:

Section 116. Religious societies. - Any religious society or religious order, or any diocese, synod, or
district organization of any religious denomination, sect or church, unless forbidden by the constitution,
rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by
competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its
 112

temporalities or for the management of its affairs, properties and estate by filing with the Securities and
Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or
clerk or other member of such religious society or religious order, or diocese, synod, or district
organization of the religious denomination, sect or church, setting forth the following:

1. That the religious society or religious order, or diocese, synod, or district organization is a religious
organization of a religious denomination, sect or church;

2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to
incorporate, at a duly convened meeting of the body;

3. That the incorporation of the religious society or religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or church of which it forms a part;

4. That the religious society or religious order, or diocese, synod, or district organization desires to
incorporate for the administration of its affairs, properties and estate;

5. The place where the principal office of the corporation is to be established and located, which place must
be within the Philippines; and

6. The names, nationalities, and residences of the trustees elected by the religious society or religious
order, or the diocese, synod, or district organization to serve for the first year or such other period as may
be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)

 Is it required to indicate its term of existence?

 Likewise to exist in perpetuity, the law does not require to indicate its term of existence

 When will it acquire juridical personality?

 Only a corporation sole may come into existence without SEC approval, section 19 will thus govern, Vested
with judicial capacity upon issuance of the certificate by the SEC
 However it is not accurate according to atty. Ladia because there are those that can issue for
example cooperatives- BUREAU OF COOPERATIVES which register, home insurance guaranty
corporation- HOME OWNERS
 How may religious societies be dissolved?

 Go to the general rules governing dissolution, because the rules under special corporations do not provide
for such rule

DISSOLUTION

 What is dissolution?

 Extinguishment of the corporate franchise and the termination of corporate existence

 3 modes of dissolution

 By expiration of its term;

 By voluntary surrender of its primary franchise (voluntary dissolution);
 113

 By revocation of its corporate franchise (involuntary dissolution)

 Philippine National Bank vs. CFI

 When the period of corporate life expires, the corporation ceases to be a body corporate for purposes of
continuing the business for which it is organized. But it shall nevertheless be continued as a body corporate
for three years after the time when it would have be dissolved, for the purpose of prosecuting and
defending suits by or against it and for enabling it gradually to settle and close its affairs to dispose of and
convey its property and to divide its assets. There is no need for the institution of a proceeding for quo
warranto to determine the time and date of the dissolution of a corporation because the period of
corporate existence is provided in the articles of incorporation. When such period expires and without any
extension having been made pursuant to law, the corporation is dissolved automatically insofar as the
continuation of its business is concerned.
 The rights of the lessor and the lessee over the improvements which the latter constructed on the leased
premises are governed by Article 1678 of the Civil Code. The provision gives the lessee the right to remove
the improvements if the lessor chooses not to pay one half of the value thereof. However, in the case at bar
the law will not apply because the parties herein have stipulated in the contract their own terms and
conditions concerning the improvements before the termination of the lease. Petitioner PNB as assignee of
PBM succeeded to the obligation of the latter under the contract of lease. It could not possess rights more
than what PBM had as lessee under the contract. Hence, petitioner was duly bound to remove the
improvements before the expiration of the period of lease. Its failure to do so when the lease was
terminated was tantamount to a waiver of its rights and interest over the improvements on the leased
premise.

 3 modes of dissolution, 3 modes of voluntary dissolution and 3 modes of liquidation and winding
up- FREQUENTLY ASKED IN THE FINALS

 What are the 3 modes of voluntary dissolution?

 Voluntary dissolution where no creditors are affected; <sec.118>

 Voluntary dissolution where creditors are affected; <sec. 119>
 Shortening of corporate term. <sec. 120>

 Voluntary dissolution where no creditors are affected <sec.118>

 The formal and procedural requirements necessary are the following:

 Majority vote of the board of directors or trustees;

 Sending of notice of each stockholders or member either by registered mail or personal delivery at least
thirty (30) days prior to the meeting (scheduled by the board for the purpose of submitting the board
action to dissolve the corporation for approval of the stockholder or members.);
 Publication of the notice of time, place and subject of the meeting for three (3) consecutive weeks in a
newspaper published in the place where the principal office of said corporation is located or in a
newspaper of general circulation in the Philippines;
 Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding
capital stock or 2/3 of the members at the meeting duly called for the purpose;
 A copy of the resolution authorizing the dissolution must be certified by a majority of the board of directors
or trustees and countersigned by the corporate secretary;
 Issuance of a certificate of dissolution by the SEC.

 Should this be strictly complied with?

 114

 Yes, compliance with the requirements and formalities prescribed above is mandatory such that failure to
comply therewith will have no effect on the legal existence of the corporation.

 Will dissolution be effective and valid by a mere resolution of the BOD and stockholders?

 No, a mere resolution by the stockholders or the BOD of a corporation to dissolve the same does not affect
the dissolution but that some other steps, administrative or judicial is necessary. (Daguhoy Enterprises vs.
Ponce)
 Since it is the State which grants its right to exist, it is only through the State which can allow the
termination of its existence; without consent of the State, it will not be dissolved.

 Voluntary dissolution where creditors are affected <sec.119>

 By virtue of a petition, when there are creditors affected

 The following formalities would thus be required:

 Affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least
2/3 of the members at a meeting duly called for that purpose;
 Petition for dissolution shall be filed with the SEC signed by a majority of its board of directors or trustees
or other officers having the management of its affairs, verified by the president or secretary or one of its
directors or trustees, setting forth all claims and demands against it.
 Issuance of an order by the SEC reciting the purpose of the petition and fixing the date on or before which
objections thereto may be filed by any person, which date shall not be less than thirty days nor more than
sixty days after entry of the order.
 Before such date, a copy of the order must be published once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the city or municipality where the principal office is situated
or in a newspaper of general circulation in the Philippines.
 Posting of the same order for three (3) consecutive weeks in three (3) public places in such city or
municipality.
 Upon five (5) days’ notice, given after the date on which the right to file objections has expired, the SEC
shall hear the petition and try any issue made by the objections filed.
 Judgment dissolving the corporation and directing of its assets as justice requires and the appointment of a
receiver (if necessary in its discretion) to collect such assets and pay the debts of the corporation.

 The foregoing are also mandatory requirements

 Is the appointment of a receiver mandatory?

 No, it is merely permissive or discretionary on the part of the court. The code uses the word “may”; the law
intended to let the shareholders have the control of the assets of the corporation upon dissolution and
winding up.
 The directors may also undertake liquidation and winding up of its corporate affairs, and sound business
judgment, on how they will wind up

 Dissolution by shortening of corporate term <sec.120>

 Will be valid upon approval of the SEC, unlike general amendments, which will be deemed approved if not
acted upon by the SEC within 6 months from the date of filing for a cause not attributable to the
corporation.
 115

 Shortening of the corporate term partakes the nature of an amendment of the articles of incorporation.
Section 16 under general amendments allows “written assent” section 37 mandates that the vote must be
cast at a duly constituted meeting.

Section 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by
amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this
Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange
Commission in accordance with this Code. Upon approval of the amended articles of 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)

 Intra-corporate- special commercial courts

 Another way of dissolving a corporation is through 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)

 Dissolution is tantamount to the imposition of death penalty

 Instead of dissolving the corporation, courts normally enjoin the further commission of the questioned act
 The relief of dissolution will be awarded only where no other remedy is available and it will not be allowed
where the rights of the stockholders can be, or are, protected in some other way (Republic vs. Bisaya Land
Trans. Co. Inc.)

 What are the grounds for involuntary dissolution?

 It is commenced through a verified complaint or motu proprio by the proper courts

 Section 6 of PD 902-A provides for the grounds for involuntary dissolution as follows:

 Fraud in procuring its certificate of registration;

 Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage
to the general public;
 Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which
would amount to a grave violation of its franchise;
 Continuous inoperation for a period of at least five (5) years;
 Failure to file by-laws within the required period;
 Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period.

 Other grounds are provided for in the corporation code itself: among them are:

 Violation of any provision of the Code under section 144;

 In case of deadlock in a close corporation as provided for in section 105;
 In a close corporation, any acts of directors, officers or those in control of the corporation which is illegal or
fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder or
whenever corporate assets are being misapplied or wasted under section 105.

 Mere dishonesty is also a ground in a close corporation

 Other grounds can be found in other special laws like the Securities Regulation Code and the General
Banking Act as well as the Insurance Code.
 116

 Government vs. Philippine Sugar Estate

 It is necessary in order to secure judicial foreclosure of respondent’s charter to show a mis-user of its
franchise justifying such a forfeiture
 Object is to protect the public, and not to redress private grievances, the mis-user must be such as to work
or threaten a substantial injury to the public, or such as to amount to a violation of the fundamental
condition of the contract by which the franchise was granted and thus defeat the purpose of the grant
 Courts proceed with extreme caution which has for their object the forfeiture of corporate franchise, and
forfeiture will not be allowed, except under express limitation, or for plain abuse of power by which the
corporation fails to fulfill the design and 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, or its conduct is characterized by obduracy or pertinacity in
contempt of law, dissolution will be granted
 Did the court dissolve the corporation? No, it did not, it granted the corporation 6 months to cease and
desist the performance of the questioned act otherwise it will be dissolved

 Government vs. El Hogar

 3 causes of action, the first is that the corporation violated the law by holding on the property beyond that
provide for by law, the second is that the corporation undertook the management f petitioners belonging to
delinquent shareholders of the association, and lastly that the by-law provision, which empowers the BD to
cancel shares and to return to the owners thereof the balance returning from the liquidation

 Compare to Philippine Sugar Estate, wherein the court ruled conditional dissolution. Why decree
conditional dissolution in one and not in the other case?

 Because in El Hogar the government was at fault, the government wasn’t able to issue the certificate of title
on time
 When the case was instituted, El Hogar was already able to dispose the properties in question, in
Philippine Sugar Estate it was still the holding the properties in order to enrich itself at the expense of the
taxpayers

 Republic vs. Security Credit and Acceptance Corp. et al.

 The corporation here is a lending institution and not a banking institution

 Defendant corporation violated the law because before a corporation may engage into a banking activity it
must first obtain a secondary franchise from the Central Bank
 Defendant corporation threatens substantial injury to the general public, dissolution is warrant
 If there is a bank run kawawa naman yung depositors

 Republic vs. Bisaya Land Transportation Co. Inc

 The relief of dissolution will be awarded only where no other remedy is available and it will not be allowed
where the rights of the stockholders can be, or are, protected in some other way
 Misuse and misapplication of the funds and assets of the respondent were committed particularly by the
corporate officers, where they can instead be held personally liable
 Since there is another remedy available dissolution is not warranted

 Assuming the above stated corporation is a close corporation, would the court decree otherwise?

 Yes, because in a close corporation, mere dishonesty is a ground for the dissolution
 117

 Can even be dissolved by petition of only one stockholder on the grounds stated in the code < sec. 105>

 Financing Corporation of the Philippines vs. Teodoro

 Minority stockholders may not ask for the dissolution of a corporation in private suits and that such actions
should be brought by the Government through its legal officers, except in cases where the intervention
of the State, for one reason or another, cannot be obtained, as when the State is not interested
because the complaint is strictly a matter between the stockholders and does not involve, in the
opinion of the legal officer of the Government, any of the acts or omissions warranting quo
warranto proceeding , in which minority stockholders are entitled to have such dissolution. It
should be exercised if necessary in order not to entirely ignore and disregard the rights of said minority
stockholders, especially when said minority stockholders are unable to obtain redress and protection of
their rights within the corporation itself. Stockholders should not be left without recourse

 Present set up

 Any stockholder or member of a corporation can institute a dissolution proceeding against his own
corporation before the proper forum
 Special Commercial Courts, shall hear and decide intra-corporate disputes

 May a corporation ask for dissolution of the corporation when there is no prejudice to the general public?

 Yes, in a close corporation, a petition for the dissolution of the corporation may be instituted by any one
individual shareholder on the ground, even by mere dishonesty

 Effects of dissolution

 The dissolution of a corporation not only terminates its primary franchise to be a corporation, but
generally prevents it from further exercising other or secondary franchises which have been conferred to
its. It terminates its power to enter into contracts or t o continue the business as a going concern.
 Based on this general rule, the Supreme Court held that a corporation, whose corporate life expired, cannot
lawfully pursue the business for which it was organized. It cannot apply for a new certificate or a secondary
franchise for it is incapable of receiving a grant. Neither can it enforce a contract executed prior its
dissolution for the purpose of continuing the business of its organization.
 In general the rights and liabilities of the corporation are not extinguished by its dissolution.

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)

 Buenaflor vs. Camarines Sur Industry Corp.

 From that time on Camarines Sur was plying in an activity that was illegal
 A corporation where the corporate life has expired it cannot lawfully pursue the business for which it was
organized.
 the Supreme Court held that a corporation, whose corporate life expired, cannot lawfully pursue the
business for which it was organized. It cannot apply for a new certificate or a secondary franchise for it is
incapable of receiving a grant.
 Awarding it to Camarines Sur is tantamount to a medal for its illegal acts
 118

 It cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a grant. It was
not even a corporation de facto. And then, there is no application subscribed by the new corporation
 And yet as stated, the new corporation has not filed any application for certificate of public convenience in
Sabang, and has not published such application.

 Cebu Port Labor Union vs. State Marine Co

 Even a cursory reading of the provision would convey the idea clearly manifested in the limitation “but not
for the purpose of continuing the business for which it was established,” that the 3-year period allowed by
the law is only for the purpose of winding up its affairs.

 Gonzales vs. Sugar Regulatory Administration

 Instead of applying the corporation code, the court applied the constitutional provision
 Cannot be read as permitting to destroy the substantive rights
 Such would collide with the non-impairment of contracts clause of the constitution
 Complainants will have the right to follow the assets of the corporation in the hands of SRA or any other
agency for that matter

 After dissolution what next?

 Liquidation and winding up should follow

 What is the definition of liquidation and winding up?

 Collection of all corporate assets, the payments of all its debts and settlement of its obligations and the
ultimate distribution of the corporate assets, if any of it remains, to all stockholders in accordance with
their proportionate stockholdings in the corporation or in accordance with their respective contracts of
subscription.

 Preference upon liquidation

 If there are preferred shares, the preference granted to such should be complied with
 Preferred shares may give the holder thereof, preference only in the dividends but also in the distribution
of corporate assets upon liquidation or termination of the corporate existence. If such is the intent, the
contract of subscription must so indicate lest they are placed on equal footing with common shareholders
 Preference may be participating or non-participating

 Dissolved corporations are granted a period of 3 years to liquidate

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
 119

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. (77a, 89a, 16a)

 However the 3 year period is not absolute

 Liquidation may be undertaken in either of the 3 ways

 By the corporation itself through the BOD

 Usual method or procedure of liquidating a corporation and although there is no law authorizing it, neither
is there anything that prohibits the BOD from undertaking the same
 If this method is resorted to, the board will only have a period of 3 years to finish its task of liquidation
 Claims for or against the corporate entity not filed within the period will become unenforceable as there
exist no corporate entity against which they can be enforced
 Actions pending for or against the corporation when the 3 year period expires, are abated since after the
period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued

 By a trustee appointed by the corporation

 The corporation may opt to convey all corporate assets to a trustees who will take charge of liquidation
 If this method is used, the three year period limitation imposed by section 122 will not apply provided the
designation of the trustee is made within that period

 By appointment of a receiver

 A receiver may be appointed by the proper forum on petition or motu proprio upon the dissolution of the
corporation
 The appointment of a receiver is, however, permissive rather than mandatory and the law tends to
recognize that in cases of voluntary dissolution there is no occasion for the appointment of a receiver
except under special circumstances and upon proper showing
 If a receiver is appointed, the 3 year period fixed by law within which to complete the task of liquidation
will not likewise apply because the dissolved corporation is substituted by the receiver who may sue or be
sued even after that period

 Mere appointment of a receiver without anything more does imply in the dissolution of a
corporation

 National Abaca other Fibers Co. vs. Pore

 Actions pending for or against the corporation when the 3 year period expires, are abated since after that
period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued
 May be continued by the trustee provided done within the 3 year period
 120

 Should the corporation, therefore, finds it difficult to finish its liquidation, it may, at any time during the
three year period, convey all its assets and receivables to a trustee to prosecute and defend suits by or
against the corporation begun before the expiration of said period
 The effect of the conveyance is to make the trustees the legal owners of the property conveyed, subject to
the beneficial interest therein of creditors and stockholders

 Sumera vs. Valencia

 Thus it was held that when a corporation is dissolved and the liquidation of the assets is placed in the
hands of receiver or assignee, the period of 3 years prescribed by law is not applicable and the assignee
may institute all actions leading to the liquidation of the corporation even after the expiration of 3 years.
 If the corporation carries out the liquidation of its assets through its own officers and continues and
defends the actions brought by or against it, its existence shall terminate at the end of three years from the
time of dissolution; but if a receiver or assignee is appointed, with or without a transfer of its properties
within 3 years, the legal interest passes to the assignee, the beneficial interest remaining in the members,
stockholders, creditors and other interested persons and said assignee may bring an action, prosecute that
which has already been commenced for the benefit of the corporation, or defend the latter against any
other action already instituted or which may be instituted even outside of the period of three years fixed
for the offices of the corporation.

 Board of Liquidators vs. Kalaw

 If there is a trustee, assignee or liquidator, it can continue prosecuting suit even beyond the 3 year period
fixed by law because he becomes the legal owner of the rights, assets and properties conveyed to him

 Gelano vs. CA

 “Trustee” as used in the corporation statute must be understood in its general concept which could include
the counsel to whom was entrusted in the instant case, the prosecution of the suit filed by the corporation.
The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the
protection of its creditors and stockholders. Debtors like the petitioners herein may not take advantage of
the failure of the corporation to transfer its assets to a trustee, assuming it has any to transfer which
petitioner has failed to show, in the first place. To sustain petitioners’ contention would be to allow them to
enrich themselves at the expense of another, which all enlightened legal systems condemn.
 The counsel who prosecuted and defended the interest of the corporation may be considered as a “trustee”
at least with respect to the matter in litigation only

 May a corporation that is already dissolved, transfer and assign its assets and properties to a new
corporation which will continue the business of the dissolved one?

 Yes, provided all the stockholders gave their consent (Chung Ka Bio vs. IAC)

 Republic vs. Marsman Development Company & Chung Ka Bio vs. IAC

 During the three year period granted to a corporation to liquidate or wind up its affairs, the BOD is not
normally permitted to undertake any activity outside the usual liquidation of the corporation. There is,
however, nothing to prevent the stockholders from conveying their respective shareholdings toward the
creation of a new corporation to continue the business of the old. This is because winding up is the sole
activity of the dissolved corporation that does not intend to incorporate a new. If it does, however, it is not
unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation to
the new corporation intended to be created as long as the stockholders have given their consent (Republic
vs. Marsman Development Company)
 121

 Winding up is the sole activity of a dissolved corporation that does not intend to incorporate anew. If it does, however,
it is not unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation to the
new corporation intended to be created as long as the stockholders have given their consent (Chung Ka Bio vs. IAC)

 What happens to the remaining assets and properties of the dissolved corporation if liquidation and winding up as
provided in section 122 is not complied with, as a result of which the 3 year period has elapsed

 If the three year extended life has expired without a trustee or receiver having been expressly designated by the
corporation within that period, the board of directors o trustees itself, following the rationale of the Supreme Court’s
decision in Gelano vs. CA may be permitted to do so continue as” trustees” by legal implication to complete the
liquidation. Still in the absence of a BOD or BOT, those having any pecuniary interest in the assets, including not only
the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper
representations with the SEC, which has primary and sufficiently broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate concerns (Clemente vs. CA)

 According to atty. Ladia the ruling of the Supreme Court in the case of Clemente vs. CA is wrong, opinion is
further discussed after the Clemente Case

 Who owns the properties? SOCIEDAD ANONIMA

 The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and
liabilities of such entity or those of its owners and creditors. If the three year extended life has expired without a
trustee or receiver having been expressly designated by the corporation within that period, the board of directors o
trustees itself, following the rationale of the Supreme Court’s decision in Gelano vs. CA may be permitted to do so
continue as” trustees” by legal implication to complete the liquidation. Still in the absence of a BOD or BOT, those
having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make proper representations with the SEC, which has primary and
sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns

 According to atty Ladia: What happens to a corporation that is already dissolved, that has not been able to appoint a
trustee with in the 3 year period?

 a corporation dissolved which failed to exercise its rights granted in section 122 after the 3 year period has elapsed,
ceases to exist for all intents and purposes, it can no longer sue or be sued
 according to 122 of the code, the property should be escheated, accordingly:

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. (77a, 89a,
16a)
 122

FOREIGN CORPORATIONS

 Definition

 Section 123. Definition and rights of foreign corporations. - For the purposes of this Code, a foreign
corporation is one formed, organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have
the right to transact business in the Philippines after it shall have obtained a license to transact business in
this country in accordance with this Code and a certificate of authority from the appropriate government
agency. (n)

 What if the law of the state of the foreign corporation does not allow Filipino citizens to do business in their
country?

 The phrase “and whose laws allow Filipino citizens and corporations to do business in its own country or
state” is not, however, an accurate inclusion in the definition as ay corporation registered or organized
under the laws of another state is necessarily a foreign corporation whether or not the state of its
incorporation allow Filipino citizens or corporations to do business in that forum.
 The said phrase was inserted by the framers of the law only as a condition precedent to the grant of a
license of a foreign corporation to do business in the Philippines.

 Composed of 100% Americans; organized under the laws other than the Philippines

 The test is the “incorporation test”

 General rule: the place of its incorporation irrespective of the nationality
 Exception: control test would apply in determining the corporate nationality, i.e., the citizenship of the
controlling stockholders determines the nationality of the corporation

 If a foreign corporation wants to transact business in the Philippines, what must it do?

 Obtain a license

 How may it do so?

 According to sec. 125:

Section 125. Application for a license. - A foreign corporation applying for a license to transact
business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of
incorporation and by-laws, certified in accordance with law, and their translation to an official language of
the Philippines, if necessary. The application shall be under oath and, unless already stated in its articles of
incorporation, shall specifically set forth the following:

1. The date and term of incorporation;

2. The address, including the street number, of the principal office of the corporation in the country or state
of incorporation;

3. The name and address of its resident agent authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local office, all notices affecting the corporation;

4. The place in the Philippines where the corporation intends to operate;

 123

5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its
business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the
certificate of authority issued by the appropriate government agency;

6. The names and addresses of the present directors and officers of the corporation;

7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has
authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any;

8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation
has issued, itemized by classes, par value of shares, shares without par value, and series, if any;

9. A statement of the amount actually paid in; and

10. Such additional information as may be necessary or appropriate in order to enable the Securities and
Exchange Commission to determine whether such corporation is entitled to a license to transact business
in the Philippines, and to determine and assess the fees payable.

Attached to the application for license shall be a duly executed certificate under oath by the
authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the
country or state of the applicant allow Filipino citizens and corporations to do business therein, and that
the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a
translation thereof in English under oath of the translator shall be attached thereto.

The application for a license to transact business in the Philippines shall likewise be accompanied
by a statement under oath of the president or any other person authorized by the corporation, showing to
the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper
cases that the applicant is solvent and in sound financial condition, and setting forth the assets and
liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the
application.

Foreign banking, financial and insurance corporations shall, in addition to the above requirements,
comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations,
no application for license to transact business in the Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from the appropriate government agency, whenever
required by law. (68a)

 Is there any deposit or security requirement?

 Yes, within 60 days after the issuance of the license, a foreign corporation, except those engaged in foreign
banking or insurance, shall deposit with the SEC, for the benefit of creditors, securities consisting of bonds
or other evidence of indebtedness of the Philippine government or its political subdivision, or of
government owned or controlled corporation, shares of stock in “registered enterprises” as this term is
defined in R.A. 5186, shares of stock in domestic insurance companies and banks or any combination
thereof with an actual market value of 100,000
 Additional securities may be required by the SEC if the actual market value of the securities on deposit has
decreased by at least 10%. Section 126 of the code provides:

Section 126. Issuance of a license. - If the Securities and Exchange Commission is satisfied that the
applicant has complied with all the requirements of this Code and other special laws, rules and regulations,
the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose
or purposes specified in such license. Upon issuance of the license, such foreign corporation may
 124

commence to transact business in the Philippines and continue to do so for as long as it retains its authority
to act as a corporation under the laws of the country or state of its incorporation, unless such license is
sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special laws.

Within sixty (60) days after the issuance of the license to transact business in the Philippines, the
license, except foreign banking or insurance corporation, shall deposit with the Securities and Exchange
Commission for the benefit of present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of
government-owned or controlled corporations and entities, shares of stock in "registered enterprises" as
this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the
stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred thousand (P100,000.) pesos;
Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and
Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market
value to two (2%) percent of the amount by which the licensee's gross income for that fiscal year exceeds
five million (P5,000,000.00) pesos. The Securities and Exchange Commission shall also require deposit of
additional securities if the actual market value of the securities on deposit has decreased by at least ten
(10%) percent of their actual market value at the time they were deposited. The Securities and Exchange
Commission may at its discretion release part of the additional securities deposited with it if the gross
income of the licensee has decreased, or if the actual market value of the total securities on deposit has
increased, by more than ten (10%) percent of the actual market value of the securities at the time they
were deposited. The Securities and Exchange Commission may, from time to time, allow the licensee to
substitute other securities for those already on deposit as long as the licensee is solvent. Such licensee shall
be entitled to collect the interest or dividends on the securities deposited. In the event the licensee ceases
to do business in the Philippines, the securities deposited as aforesaid shall be returned, upon the licensee's
application therefor and upon proof to the satisfaction of the Securities and Exchange Commission that the
licensee has no liability to Philippine residents, including the Government of the Republic of the
Philippines. (n)

 Other than section 125 and 126. What other requirements are set under Philippine Law before a foreign
corporation may transact business in the Philippines

 Yes. A Resident agent is required. As a condition precedent to the grant of a license to do or transact
business in the Philippines, the foreign corporation is required to designate its resident agent on whom
summons and other legal processes may be served in all actions or legal proceedings against such
corporation
 Section 128 provides:

Section 128. Resident agent; service of process. - The Securities and Exchange Commission shall
require as a condition precedent to the issuance of the license to transact business in the Philippines by any
foreign corporation that such corporation file with the Securities and Exchange Commission a written
power of attorney designating some person who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or other legal proceedings against such
corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if
served upon the duly authorized officers of the foreign corporation at its home office. Any such foreign
corporation shall likewise execute and file with the Securities and Exchange Commission an agreement or
stipulation, executed by the proper authorities of said corporation, in form and substance as follows:

"The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being
granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if
at any time said corporation shall cease to transact business in the Philippines, or shall be without any
resident agent in the Philippines on whom any summons or other legal processes may be served, then in
 125

any action or proceeding arising out of any business or transaction which occurred in the Philippines,
service of any summons or other legal process may be made upon the Securities and Exchange Commission
and that such service shall have the same force and effect as if made upon the duly-authorized officers of
the corporation at its home office."

Whenever such service of summons or other process shall be made upon the Securities and
Exchange Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of
such summons or other legal process to the corporation at its home or principal office. The sending of such
copy by the Commission shall be necessary part of and shall complete such service. All expenses incurred
by the Commission for such service shall be paid in advance by the party at whose instance the service is
made.

In case of a change of address of the resident agent, it shall be his or its duty to immediately notify
in writing the Securities and Exchange Commission of the new address. (72a; and n)

 The necessity of the appointment of a resident agent is only for the purpose of receiving summons and
other legal processes in any legal action or proceeding against the foreign corporation

 Who may be appointed as a resident agent?

 Section 127 provides that:

Section 127. Who may be a resident agent. - A resident agent may be either an individual residing in
the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That
in the case of an individual, he must be of good moral character and of sound financial standing. (n)

 May a partnership be appointed as a resident agent?

 Yes, domestic corporation taken in its general sense not legal sense

 If there is a resident agent appointed. May summons be served to any officers of the corporation?

 No, if there is a resident agent, the designation is exclusive and service must be made only to the resident
agent or else the service is without force and effect unless made to him
 Thus, while the law allows service upon the SEC or any of its officers or agents within the Philippines
 The two modes may become effective only if the foreign corporation failed or neglected to designate such a
person or an agent
 Summons must be made only to resident agent except when there is no resident agent appointed
 Where such foreign corporation actually doing business here has not applied for a license to do and has not
designated an agent to receive summons, then service of summons on it will be made pursuant to the
provisions of the rules of court. If such foreign corporation has a license to do business, then summons to it
will be served on the agent designated by it for the purpose, or otherwise in accordance with the
Corporation Law (General Corporation of the Philippines vs. Union Insurance Soc. Of Canton Ltd.)

 If the foreign corporation conducts business in the Philippines without the license requirement. What is the
effect?

 Section 133 provides:

Section 133. Doing business without a license. - No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in
 126

any action, suit or proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws. (69a)

 if they do so, the responsible officers may be subjected to the penal sanctions provided for in section 144 of
the code, which may either be fine or imprisonment

 What if it is not doing business without a license?

 If it is not transacting business in the Philippines, even without a license, it can sue before the Philippine
Courts

 The general rule is that “it is not the lack of required license but doing business without a license which
bars a foreign corporation form access to our courts.”
 Exception:

 Foreign corporations can sue before the Philippine Courts if the act or transaction involved is an
“isolated transaction” or the corporation is not seeking to enforce any legal or contractual rights arising
from, or growing out of, any business which it has transacted in the Philippines
 Neither is a license required before a foreign corporation may sue before the forum if the purpose of
the suit is to protect its trademark, trade name, corporate name, reputation or goodwill;
 Or where it is based on a violation of the Revised Penal Code;
 Or merely defending a suit filed against it
 Or where a party is stopped to challenge the personality of the corporation by entering into a contract
with it.

 Rules laid down by the SC

 As to  As to
whether or whether or
not it can sue not it can be
sued
A foreign A foreign corporation
corporation transacting
transacting or doing businessin the
businessin the Philippines with the
Philippines with a requisite licensecan
license can suebefore be sued in the
Philippine Courts Philippine Courts
Subject to certain A foreign corporation
exceptions, a foreign transacting
corporation doing businessin the
businessin the Philippines without a
country without a license can be suedin
license cannot suein Philippine Courts
Philippine Courts
If it is not transacting if it is not doing
businessin the business in the
Philippines, even Philippines, it cannot
without a license, it be suedin Philippine
can suebefore the Courts for lack of
Philippine Courts jurisdiction
 127

 A foreign corporation not doing business in the Philippines, may it be sued?

 If it is not transacting business in the country it cannot be sued for lack of jurisdiction

 Is there any sanction that can be enforced to foreign corporations which are doing business without the
required license?

 Penal sanctions under section 144

 Any violation of the code is subject to such penal sanctions

 What would constitute doing business?

 The true test, however, seems to be whether the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organized or whether it has substantially retired from it and
turned it over to another. The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object of its organization
(Mentholatum Co. Inc. vs. Mangaliman)

 Mentholatum vs. Mangaliman

 The true test, however, seems to be whether the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organized or whether it has substantially retired from it and
turned it over to another. The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object of its organization
 Whatever transaction the Philippine-American Drug Co. had executed in view of the law, the Mentholatum
Co. did it itself. And the Mentholatum Co. being a foreign corporation doing business in the Philippines
without the license required by section 68 of the Corporation Law, it may not prosecute this action for
violation of trade mark and unfair competition

 Why is foreign corporations barred access from our courts if they do business without a license?

 Marshall-Wells Co. vs. Henry W. Elser and Co.

 Marshall-Wells Co. vs. Henry W. Elser and Co.

 The object of the statute was to subject the foreign corporation doing business in the Philippines to the
jurisdiction of its courts. The object of the statute was not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring a domicile for the purpose of business without
taking the steps necessary to render it amenable to suit in local courts.

 Bulakhidas vs. Navarro

 It is settled that if a foreign corporation is not engaged in business in the Philippines, it may not be denied
the right to file an action in Philippine courts for isolated transactions
 The object of section 68 and 69 of the Corporation law was not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring a domicile for the purpose of business without
taking the steps necessary to render it amenable to suit in the local courts. It was never the purpose of the
Legislature to exclude a foreign corporation which happens to obtain an isolated order for business from
the Philippines, from securing redress in the Philippine courts
 128

 The Swedish East Asia Co., Ltd. Vs. Manila Port Service

 It must stated that the section is not applicable to a foreign corporation performing single acts or “isolated
transactions.” There is nothing to show that the petitioner has been in the Philippines engaged in
continuing business or enterprise for which it was organized, when the sixteen bundles were erroneously
discharged in manila, for it to be considered as transacting business in the Philippines. The fact is that the
bundles, the value of which is sought to be recovered, were landed not as a result of a business transaction,
isolated or otherwise, but due to a mistaken belief that they were part of the shipment of forty similar
bundles consigned to persons or entities in the Philippines, there is no justification therefore, for invoking
the section

 There were 3 contracts entered into, how come they were still not considered as doing business? (Antam
Consolidted, Inc. vs. CA)

 Every case shall be judged in the light of its peculiar circumstances, where a single act or transaction
however, is not merely incidental or casual but indicates the foreign corporation’s intention to do other
business in the Philippines, said single act or transaction constitutes “doing” or “engaging in” or
“transacting” business in the Philippines
 In the case at bar, the transaction entered into by the respondent with the petitioners are not a series of
commercial dealings which signify an intent on the part of the respondent to do business in the Philippines
but constitute an isolated one which does not fall under the category of “doing business.”
 The records show that the only reason why the respondent entered into the second and third transactions
with the petitioner was because it wanted to recover the loss it sustained from the failure of the petitioners
to deliver the crude coconut oil under the first transaction and in order to give the latter a chance to make
good on their obligation. From these facts alone, it can be deducted that in reality there was only one
agreement between the petitioners and the respondent.
 The three seemingly different transactions were entered into by the parties only in an effort to fulfill the
basic agreement and in no way indicate an intent on the part of the respondent to engage in a continuity of
transactions with petitioners which will categorize it as a foreign corporation doing business in the
Philippines
 3 contracts, but according to the court was not doing business in the Philippines

 Far East Int’l import vs. Nankai Kogyo Co. Ltd.

 Only one contract , but according to the Supreme Court was doing business in the Philippines
 Every case shall be judged in the light of its peculiar circumstances, where a single act or transaction
however, is not merely incidental or casual but indicates the foreign corporation’s intention to do other
business in the Philippines, said single act or transaction constitutes “doing” or “engaging in” or
“transacting” business in the Philippines
 In the instant case, the testimony of Atty. Pablo Ocampo, that appellant was doing business in the
Philippines corroborated by no less than Nabuo Toshida, one of appellant’s officers, that he was sent to the
Philippines to look into the operation of mines, thereby revealing the defendant’s desire to continue
engaging in business here, after receiving the shipment of the scrap iron under consideration, making the
Philippines a base thereof.
 In such a case, the single act of transaction is not merely incidental or casual, but is of such character as
distinctly to indicate a purpose on the part of the operations for the conduct of a part of corporation’s
ordinary business

 If a corporation appoints a distributor or a representative, will it necessarily imply doing business in the
country?

 If the foreign corporation maintained an independent status during the existence of the disputed contract.
 129

 Appointment of a distributor or representative in the Philippines, unless it has an independent status

(transacts and does business in its own name and for its account and not of the foreign corporation)
 if that be the case the mere appointment of a distributor will not constitute doing business

 How do you know if it has an independent status?

 Communications Materials and Design vs. CA

 Communications Materials and Design vs. CA

 A perusal of the agreements between petitioner ASPAC and the respondents show that there are provisions
which are highly restrictive in nature, such as to reduce petitioner ASPAC to a mere extension or
instrument of the private respondents
 ITEC was doing business without a license, however ASPAC is estopped
 by entering into the Representative Agreement” with ITEC, petitioner is charge with knowledge that ITEC
was not licensed to engage in business activities in the country, and is thus stopped from raising in defense
such incapacity of ITEC, having chosen to ignore or even presumptively take advantage of the same
 In top-weld we ruled that a foreign corporation may be exempted from the license requirements in order to
institute an action in our courts if its representative in the country maintained an independent status
during the existence of the disputed contract. Petitioner is deemed to have acceded to such independent
character when it entered into the Representative Agreement with ITEC

 Western Equipment and Supply Co. vs. Reyes

 The company is not here seeking to enforce any legal or contract rights arising from, or growing out of any
business which it has transacted in the Philippine Islands. The sole purpose of the action is to protect its
reputation, its corporate name, its goodwill, whenever that reputation, corporate name or goodwill have
through the natural development of its trade, established themselves
 And it contends that its rights to the use of its corporate and trade name, is a property right, a right in rem,
which may assert and protect against all the world, in any of the courts of the world even in jurisdictions
where it does not transact business just the same as it may protect its tangible property, real or personal,
against trespass, or conversion
 Since it is the trade and not the mark that is to be protected a trademark acknowledges no territorial
boundaries or municipalities or states or nations, but extends to every market where the trader’s goods
have become known and identified by the use of the mark

 General Garments Corporation vs. Director of Patents

 A foreign corporation which has never done business in the Philippine Islands and which is unlicensed and
unregistered to do business here, but is widely and favorably known in the Islands through the use therein
of its products bearing its corporate and trade name has a legal right to maintain an action in the Islands
 Mentholatum case was subsequently derogated when Congress, purposely to “counteract the effects” of
said case, enacted R.A. 638, inserting Section 21-A in the Trademark Law, which allows a foreign
corporation or juristic person to bring an action in Philippine Courts for infringement of a mark or trade-
name, for unfair competition, or false designation of origin and false description, “whether or not it has
been licensed to do business in the Philippines under Act Numbered Fourteen hundred and fifty-nine, as
amended, otherwise known as Corporation Law, at the time it brings complaint.

 Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC and MIL-ORO MFG. Corp.

 Treaties for part of the law of the land

 130

 Quoting the Paris Convention and the case of Vanity Fair Mills Inc. vs. T. Eaton Co. this court further said:

“By the same token, the petitioner should be given the same treatment in the Philippines as we
make available to our own citizens. We are obliged to assure to nationals of countries of the Union
an effective protection against unfair competition on the same way that they are obligated to
similarly protect Filipino Citizen and firms

 The ruling in the aforecited case is in consonance with the Convention of the Union of Paris for the
protection of Industrial Property to which the Philippines became a party. Article 8 thereof provides that a
trade name shall be protected in all the countries of the Union without the obligation of filing or
registration, whether or not it forms part of the trademark

 Le Chemiste Lacoste vs. Fernandez

 The French company may gain access to our courts, in the first place it was not doing business in the
Philippines
 The marketing of its products in the Philippines is done through an exclusive distributor, Rustan
Commercial Corporation. The latter is an independent entity which buys and then markets not only
products of the petitioner but also many other products bearing equally well-known and established
trademarks and trade-names

 Assuming Rustans had no independent status would the SC grant Lacoste access to our courts?

 Even if Lacoste did business in the Philippines it can bring action because the case involves a violation of
our penal code
 Such was a violation of article 189 of the RPC, if prosecution follows after the completion of the preliminary
investigation being conducted by the Special Prosecutor the information shall be in the name of the People
of the Philippines and no longer the petitioner which is only an aggrieved party since a criminal offense is
essentially an act against the State. It is the latter which is principally the injured party although there is a
private right violated
 The records show that the goodwill and reputation of the petitioner’s products bearing the trademark
Lacoste date back even before 1964 when Lacoste clothing apparels were forst marketed in the Philippines.
To allow Hemandas to continue using the trademark Lacoste for the simple reason that he was the first
registrant in the Supplemental Register of a trademark used in international commerce and not belonging
to him is to render nugatory the very essence of the law on trademarks and trade names

 Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co.

 The law denies to a foreign corporation the right to maintain suit unless it has previously complied with a
certain requirement, then such compliance, or the fact that the suing corporation is exempt there from,
becomes a necessary averment in the complaint
 These are matters peculiarly within the knowledge of appellants alone, and it would be unfair to impose
upon appellee the burden of asserting and proving the contrary. It is enough that foreign corporations are
allowed by law to seek redress in our courts under certain conditions: the interpretation of the law should
not go so far as to include, in effect, an inference than those conditions have been met from the mere fact
that the party suing is a foreign corporation

 Olympia Business Machines Co. vs. E. Razon

 How do you distinguish this case with Atlantic?

 In Atlantic it dismissed the case, while in Olympia it did not
 131

 Time Inc. vs. Reyes

 We fail to see how these doctrines can be a propos in the case at bar, since the petitioner is not
“maintaining any suit” but is merely defending one against itself; it did not file any complaint but only a
corollary defensive petition to prohibit the lower court from further proceeding with a suit that it had no
jurisdiction to entertain

 What law govern foreign corporation doing and transacting business in the Philippines with a license

 Laws of the Republic of the Philippines save and except that would normally be those matters which
concern its formation, organization or dissolution, or those fixing the relationship, liabilities,
responsibilities, or duties of the stockholders, members or officers of the foreign corporation or their
relations to each other.
 In effect, intra-corporate or internal matters not affecting creditors or the public in general are governed
not by Philippine laws but the law under which the foreign corporation was formed or organized

Section 129. Law applicable. - Any foreign corporation lawfully doing business in the Philippines
shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class,
except such only as provide for the creation, formation, organization or dissolution of corporations or those
which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of
corporations to each other or to the corporation. (73a)

 Will the pre-emptive rights of a foreign corporation be governed by the same section of the code? Is the
pre-emptive rights of a stockholder in a domestic corporation same as the pre-emptive of a stockholder of a
foreign corporation.

 No

 M.E. Grey vs. Insular Lumber Company

 PNB vs. Gonzales, will this apply to a foreign corporation? How do you distinguish this case from a
Philippine law?
 Since it concerns the rights of stockholders it is the law of New York that should govern

 Is the license to do business of a foreign corporation subject to suspension or revocation? What are the
grounds?

 Section 134 provides:

Section 134. Revocation of license. - Without prejudice to other grounds provided by special laws,
the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by
the Securities and Exchange Commission upon any of the following grounds:

1. Failure to file its annual report or pay any fees as required by this Code;

2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;

3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange
Commission a statement of such change as required by this Title;
 132

4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment
to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time
prescribed by this Title;

5. A misrepresentation of any material matter in any application, report, affidavit or other document
submitted by such corporation pursuant to this Title;

6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political subdivisions;

7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is
authorized under its license;

8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation
or entity not duly licensed to do business in the Philippines; or

9. Any other ground as would render it unfit to transact business in the Philippines. (n)

 SEC does not have the sole authority to suspend or revoke the license of a foreign corporation doing
business in the Philippines, other government agencies like the Central Bank , the Insurance Commission
may also do so within their respective dominion, despite the provision of section 134
 If the SEC believes that revocation is warranted, section 135 provides that:

Section 135. Issuance of certificate of revocation. - Upon the revocation of any such license to
transact business in the Philippines, the Securities and Exchange Commission shall issue a corresponding
certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper
cases.

The Securities and Exchange Commission shall also mail to the corporation at its registered office in
the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation. (n)

 Voluntary withdrawal of license

 All 3 conditions must be complied with

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.

P.D. 902-A
 P.D. 902-A was amended by R.A. 8799 or the SECURITIES REGULATION CODE in the year 2000
 133

 The jurisdiction of SEC for cases falling under section 5 thereof was transferred to the courts of general
jurisdiction designated by the SC, they were called special commercial courts, the only exceptions were
revocation of corporate franchise and calling of elections
 However the SEC retained receivership or suspension payments within June 20,2000
 Jurisdiction of special commercial courts are exclusive and original, jurisdiction is conferred by law; 1
Special Commercial Court per region except MAKATI and QUEZON CITY which has two
 Devices or Schemes
 Pyramid scheme (misrepresentation)-Special Commercial Courts
 Syndicated estafa- not bailable
 Alleje case
 Falls squarely under sec. 5 (a) Special Commercial Courts
 Allegation corporate officers employing schemes in diverting
 Not only detrimental to corporation, but general membership
 Fraud must be stated with particularity
 Abad vs. CFI of Pangasinan
 Fraud must be stated with particularity otherwise it may be filed to any court
 Intra-corporate
 Exclusive and original jurisdiction of special commercial courts
 Sole criteria is there must be an intra-corporate relationship
 Pertaining to a controversy (speaks also of intra-partnership controversy, that partnership must be
registered with the SEC)
 Rule now
 Necessarily be an intra-corporate relationship; and,
 The controversy must arise out of said relationship
 Intra-corporate relationship alone will not suffice to put it in the ambit of special commercial courts and
courts of general jurisdiction may take cognizance
 Case of a transferee of shares of stock to compel the corporation to recognize him as a stockholder
 How can it be intra-corporate when he is not yet fully paid
 When the transferee has done all he can be required to do to render the transfer effectual and the
corporation refuses to register the transfer, the requirement of the registration is waived and the
transferee is considered technically a stockholder who may sue to enforce the right to have the transfer
registered
 Florendo vs. rivera, Embassy Farms
 The transferor withheld the delivery, they are not yet prima facie; it will not be considered intra-corporate
 Controversies in the appointment (asked in the bar)
 Cases involving election, appointment and removal
 In Andaya the court said that a corporate officer elected or appointed by the BOD is always a corporate act
 The fact that petitioner sought payment of his back wages, other benefits as well as moral and exemplary
damages and attorney’s fees in his complaint will not operate to prevent the SEC from exercising its
jurisdiction under P.D. 902-A. The jurisdiction will not wrest on the NLRC just because of that
 Tabang vs. NLRC
 Jurisdiction lies originally and exclusively to special commercial courts and not in the NLRC
 SEC has jurisdiction over cases of removal from employment of corporate officers
 The relationship of a person to a corporation, whether as officer or as agent or employee or not determined
by the nature of the servides performed, but by the incidents of the relationship on they actually exist
 Corporate officers dismissal is always a corporate act or intra-corporate controversy
 Midland construction vs. Movilla
 NLRC will be possessed of jurisdiction exception will not apply to mere recovery
 Main consideration
 Asserts his right to the office or questions the propriety or validity of his ouster or removal, it will be the
special commercial courts and not the NLRC
 134

 Securities Regulation Code

 Transferred jurisdiction of the SEC to Special Commercial Courts
 Suspension of payment, appointment of management receivership
 What is the reason for suspension of all claims?
 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 or body. The real justification is to enable the management committee
or rehabilitation receiver to effectively exercise 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 pr rehabilitation receiver,
whose time, effort and resources would be wasted in defending claims against the corporation instead of
being directed towards restructuring and rehabilitation.(PAL vs. Spouses Sadic and Kurangking)
 To enable the receiver to effectively exercise his or her power free form any judicial or extra-judicial that
may disturb
 3 types of suspension of payments
 Simple suspension of payments
 where deferment of payment of claims against a distress company; ask the court to be given time to the
payment of liability by postponing the payment
 When it has sufficient assets and liabilities but forces the impossibility of meeting them when they
respectively fall due
 Suspension of receiver with a management committee with a rehabilitation play or suspension of payments
accompanied by a proposal for rehabilitation (with or without rehabilitation)
 corporation has sufficient assets to cover its liabilities, but sees the possibility; is or without rehabilitation
plans; normally would attach the rehabilitation plan
 For purpose of economic development
 Suspension of payments when the corporation has no sufficient assets to its liabilities
 May it still be revived?
 Yes, it may still be revived
 How can a corporation with more liabilities than assets continue its operations profitably?
 Even if the distressed company has no sufficient assets and liabilities it can go for suspension
 It asked for a management committee without a receiver plan (Victorius Milling case)
 Convert their claims into equity
 Their liability was almost wiped out they became stockholders instead of creditors
 After 5 years those who converted sold it back to the corporation, thereby making profits
 Amendment is for the economic development of the country
 What if walang amendment, e mas maraming liabilities kesa assets
 Suspension order- all actions for claims against the corporation are accordingly suspended at whatever
stage the proceedings maybe
 Effect of suspension- you cannot foreclose
 What are claims?
 Debts or demands of pecuniary nature. Assertion of a right to have money paid
 Claims against the corporation shall be suspended, assertion of a right to have money paid; it must present
a monetary claim, liquidated or unliquidated
 Nullification of corporations does not present a monetary claim of pecuniary nature
 Union vs. CA
 It does not allow a mere individual to file the petition which is limited to corporations partnership or
associations.
 Where no authority is granted to hear petitions of individuals for suspension of payments, such petition are
beyond the competence of the SEC
 What happens if there is a suspension order?
 Explain the key phrase “quality is equity”
 135

 All creditors stand on equal footing, secure or unsecure, holding or lien or without a lien, no creditor may
enforce his lien while rehabilitation is going (Alemar case)
 No preference shall be given
 RCBC vs. IAC
 Decided on motion for reconsideration
 It court 7 years to decide authentication
 Rule of the thumb
 Automatic suspension even if not decreed in the decision itself
 Once lifted the preferred creditors will regain their preference
 Appointment of a management committee
 Take over the management committee of the distressed corporation
 Extraordinary and drastic remedy
 Without any remedy
 What is an intra-corporate controversy?
 Section 5(B)
 Sole criteria is whether there exists an intra-corporate dispute is that if there is an intra-corporate
relationship
 Why is there suspension of all actions against claims when a receiver is appointed?
 To enable the management committee to exercise its powers
 Sy Chim vs. Sy Siy Ho (before a management committee may be opt by a court)
 2 requisites for a valid appointment of management committee
 Imminent danger of dissipation, loss, wastage or destruction of assets or other corporate properties
 Paralysis of business operations, the mere apprehension of future misconduct based upon prior
management
 Save and except in the case of a close corporation in case of deadlock management committee is allowed to
take over right away
 Jacinto case
 2nd par of page 676
 2 requisites where present
 Wala ng mapautang, there was a paralyzation
 Sy Chim
 Did not appoint a management committee
 In the absence of a strong showing of an imminent danger of dissipation, loss wastage or destruction of
assets or other properties of a corporation and paralysis of its business operations, the mere apprehension
of future misconduct based upon prior mismanagement will not authorize the appointment of a
management committee
 Section 5 and 6(D) governed by separate rules; interim rules and intra-corporate controversy
 Venue of actions
 Rules of court- where the parties are residing
 Intra-corporate- no matter where the parties are residing it will be in the city or municipality where the
principal office is located
 Rehabilitation proceedings venue
 In rem
 Acquired upon publication without furnishing the creditors a copy of the petition and attachments thereof
 A creditor may now file the suspension proceedings; provides that creditors owns at least 25%
 Intra-corporate- rule 1 section 6
 Service of summons- rule 2 section 5
 Summons may be made to anyone
 In case of intra-corporate dispute, elections, fraud, etc; if they are governed by interim rules of procedure
on intra-corporate controversies
 Venue
 136

 Special commercial courts where principal office is located/established (section 5 rule 1)

 Matters of payment/suspension must be filed in the city/ municipality where corporation is located
 Under old rule, creditors have no right to institute an action for receivership; now creditors, if they sold
20% they can institute an action for receivership
 Section 5
 Service of summons may be made by fax/e-mail
 E.B. Villarosa vs. Benito
 Will apply only if it is not an intra-corporate controversy
 If the controversy arose out of an intra-corporate dispute rules on interim rules of procedure of intra-
corporate controversies shall govern
 Rule 4 section 17- immunity from suit
 Rehabilitation receiver shall not subject to any action, claim or demand in connection with any act done
omitted by him in good faith in the exercise of his functions and powers herein conferred
 Claim
 Right to payment, whether or not it is reduced to judgment, liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed, legal or equitable and secured or unsecured
 Investment contracts
 A contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to
expect profits primarily from the effects of others
 The management committee and rehabilitation receiver are empowered to:
 Take custody and control of all assets of the corporation
 Evaluate assets and liabilities, earnings operations of the corporation
 Determine the best way to protect the investors and creditors
 Study, review evaluate the feasibility of continuing operation and structures
 Submit recommendations to the RTC regarding rehabilitation plan
 Rehabilitate the corporation if determined to be feasible by the RTC
 Report to the RTC until the corporation is dissolved
THE SECURITIES REGULATION CODE (RA8799)

- Also known as the Blue Sky Law since it was enacted to protect the public from unscrupulous promoters who
stake business which have no basis and sell shares and interest therein to investors, who are then left holding
certificates representing nothing more than a claim to a square of the blue sky.

-SEC. 2. Declaration of State Policy. – The State shall establish a socially conscious, free market that regulates itself,
encourage the widest participation of ownership in enterprises, enhance the democratization of wealth, promote
the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize
if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create
distortions in the free market.

BROKER - person who buys and sells securities for the account of others.

DEALER - person who buys and sells securities for his/her own account in the ordinary course of business.

NOTE: No person shall engage in the business of buying or selling securities in the Philippines as a
broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as
such with the Commission. (Sec 28)

SECURITES - shares, participation or interests in a corporation or in a commercial enterprise or profit-making

venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It
includes:
CODE: COFDIPS
 137

 Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar
instruments;
 Other instruments as may in the future be determined by the Commission;
 Fractional undivided interests in oil, gas or other mineral rights;
 Derivatives like option and warrants;
 Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of
deposit for a future subscription;
 Proprietary or non proprietary membership certificates incorporations; and
 Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;

GR: Securities shall not be sold or offered for sale or distribution within the PH, without a registration statement
filed with and approved by SEC. Prior to such sale, information on the securities, in such form and with such
substance as the Commission may prescribe, shall be made available to each prospective purchaser. (Sec 8)

EXCEPT: Exempt Securities under Sec 9

 Any security issued or guaranteed by the Government of the PH, or by any political subdivision or agency
thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government.
 Any security issued or guaranteed by the government of any country with diplomatic relations with the PH,
or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, that the SEC
may require compliance with the form and content of disclosures the Commission may prescribe.
 Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory
body.
 Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation
of the Office of the Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of
Internal Revenue.
 Any security issued by a bank except its own shares of stock.

AND Exempt Transactions under Sec 10

 A judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or
bankruptcy.
 By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for
sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of this
Code, to liquidate a bona fide debt, a security pledged in good faith as security for such debt.
 An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner
thereof, or by his representative for the owner’s account, such sale or offer for sale, subscription or delivery
not being made in the course of repeated and successive transactions of a like character by such owner, or
on his account by such representative and such owner or representative not being the underwriter of such
security.
 Distribution by a corporation, actively engaged in the business authorized by its AOI, of securities to its
stockholders or other security holders as a stock dividend or other distribution out of surplus.
 Sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.
 Issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the
entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a
single sale.
 Issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right
of conversion entitling the holder of the security surrendered in exchange to make such conversion:
Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt
from the provisions of this Code, and that the security issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion fall within the class of securities entitled to
registration under this Code. Upon such conversion the par value of the security surrendered in such
exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold.
 138

 Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other trading
market.
 Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is
incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or
disposition of such securities, and only when the purpose for soliciting, giving or taking of such
subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be registered and duly incorporated, or its authorized
capital increased.
 The exchange of securities by the issuer with its existing security holders exclusively, where no commission
or other remuneration is paid or given directly or indirectly for soliciting such exchange.
 The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-
month period.
 The sale of securities to any number of the following qualified buyers: (i) Bank; (ii) Registered investment
house; (iii)insurance company; (iv) Pension fund or retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the
Bangko Sentral to engage in trust functions; (v) investment company or; (vi) Such other person as the
Commission may by rule determine as qualified buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets
under management.

PROTECTION OF SHAREHOLDERS INTEREST

 Tender Offers (Sec 19)

 Proxy solicitation (Sec 20)
 Internal record keeping and accounting (Sec 22)

TENDER OFFER – A publicly announced intention acting alone or in concert with others to acquire equity
securities of a company. (2002 Bar Exams)

Instances when Tender Offer is Required

 When the person intends to acquire 15% or more of the equity share of a public company pursuant to an
agreement made between or among the person and one or more sellers;
 When the person intends to acquire 30% or more of the equity share of a public company within a period of
12 months;
 When the person intends to acquire shares that would result in an ownership of more than 50% of the
equity shares of a public company.

PROXY SOLICITATION

NOTE: A broker or dealer who holds or acquires the proxy for at least ten per centum (10%) or such percentage as the
Commission may prescribe of the outstanding share of the issuer, shall submit a report identifying the beneficial owner
within ten (10) days after such acquisition, for its own account or customer, to the issuer of the security, to the
Exchange where the security is traded and to the Commission. (Sec 20.5)

FRAUDULENT TRANSACTIONS AND OTHER MARKET MANIPULATIONS

 Wash Sale (Sec 24.1(a)(i)) – any transaction in a security which involves no change in the beneficial
ownership thereof.
 Matched Order (Sec 24.1(a)(ii)) – order or orders for the purchase or sale of security with the knowledge
that a simultaneous order or orders of substantially the same size, time and price for the sale or purchase of
such security has, or will be entered by or for the same or different parties.
 139

Note: Wash sale and matched orders become illegal when they are used as a means to create false appearance
of active trading in the security concerned.

 Marking the close – placing the purchase order, at or near the close of the trading period. The price that
was closed will then be the price that will be posted on the following trading day.
 Painting the tape – involves a series of transactions that are reported publicly to give the impression of an
activity in a security.
 Squeezing the float – the part of an outstanding security intentionally held by dealers or other persons
with a view of reselling them later for profit.
 Hype and dump – Act employed by a person or group of persons of purchasing the outstanding capital
stock of a dormant public shell company for a nominal amount and merge it with their privately held
company. They would then gain control of the majority stocks of the merged entity. Stock certificates are
often re-issued in the name of the merged entity to relatives and associates who act as nominees of the
person or persons employing the device. They would then look for a broker-dealer who would be willing to
make a “hype” of the securities. The broker-dealer then generates volume and advance bid price. When the
market reaches a high price, they would “dump” their shareholdings and bail out.
 Boiler Room Operations – involves an intensive selling campaign through numerous salesmen by
telephone or through direct mail offerings for securities of either a certain type or from a specific issuer.
Investors are induced to purchase through hard-sell based on unfounded predictions and mailing of
misleading market letters.

Note: Marking the close, Painting the tape, Squeezing the float, Hype and dump, Boiler Room Operations
become unlawful if it is effected to either raise the price or induce the purchase of a security or of a controlling,
controlled, or commonly controlled company by others or to depress the price to induce the sale of a security,
whether of the same or of a different class, of the same issuer or of a controlling, controlled company or
common controlled company by others or to create active trading to induce the purchase through said devices
or schemes.

 Circulating or Disseminating Information – circulating an information that any of the security listed in
the exchange will or is likely to rise or fall because of manipulative market operations of any one or more
persons conducted for the purpose of raising or depressing the price of the security and thus inducing the
purchase of such security.
 Making False or Misleading Statements with respect to any material fact which he knew or had
reasonable ground to believe was so false or misleading for the purpose of inducing the purchase or sale of
such security.
 Pegging or Fixing Or Stabilizing the price of security effected either alone or with others through any
series of transactions for the purchase or sale thereof, if done for such purpose.
 Short sale – selling of security which the vendor does not own unless done in accordance with the rules
and regulations of the SEC.
 Insider Trading – the act of an insider to buy or sell security of the issuer while in possession of material
information with respect to such security that is not generally made known to the public unless (a) The
insider proves that the information was not gained from such relationship; or (b) If the other party selling
to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the
information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in
possession of the information.

Note: When is information “material non-public”? - if: (a) 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
a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable
person important under the circumstances in determining his course of action whether to buy, sell or hold a
security.
 140

Note: Who is an “insider”? - “Insider” means: (a) the issuer; (b) a director or officer (or person performing
similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship
to the issuer gives or gave him access to material information about the issuer or the security that is not
generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public; or (e) a person who learns such information by a
communication from any of the foregoing insiders.

INDEPENDENT DIRECTOR
Person other than an officer or employee of the corporation, its parent or subsidiaries, or any other
individual having a relationship with the corporation, which would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.

Corporations which require an Independent Director

 An exchange; or
 Any corporation with a class of equity securities listed for trading on an Exchange or with assets in excess
of P50M and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of
its equity securities or which has sold a class of equity securities to the public pursuant to an effective
registration statement shall have at least two (2) independent directors or such independent directors shall
constitute at least 20% of the members of such board, whichever is the lesser.

OPTION TRADING
 Put – a transferrable option or offer to deliver a given number of shares of stock at a stated price on any
given time during the stated period.
 Call – a transferrable option to buy a specified number of share at a stated price
 Straddle – a combination of put and call.

SETTLEMENT OFFERS
At any time, during an investigation or proceeding under this Code, parties being investigated and/or
charged may propose in writing an offer of settlement with the Commission. The Commission may only agree to a
settlement offer based on its findings that such settlement is in the public interest. Any agreement to settle shall
have no legal effect until publicly disclosed. Such decision may be made without a determination of guilt on the part
of the person making the offer.

DAMAGES
All suits to recover damages shall be brought before the Regional Trial Court, which shall have exclusive
jurisdiction to hear and decide such suits. The Court is authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.

NOTES
 If there are goods involved in the multimarket, it is beyond the jurisdiction of SEC (Ex First Quadrant)
 Criminal charge for violation of SRC is a specialized dispute, hence it must be first referred with SEC
(Baviera vs. Paglinawan G.R. No. 168380 Feb 8, 2007)
 T3 Rule in trading of Securities – Trading day + 3 more days you must comply with your obligations.