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Corporation Law Notes Under Atty Ladia Revised
Corporation Law Notes Under Atty Ladia Revised
Corporation is one of the types of business (3) Seduction, abduction, rape, or other lascivious acts;
organizations. It is also the most important in economic
development.
(4) Adultery or concubinage;
INTRODUCTION
(5) Illegal or arbitrary detention or arrest;
Sole proprietorship
(6) Illegal search;
- One man form of business entity, personally answers all
liabilities, but enjoys all the profits with the exclusion of
(7) Libel, slander or any other form of defamation;
others
- Limited shareholders responsibility
- Paid subscription in full, you are no longer liable (8) Malicious prosecution;
- Based on mutual trust and confidence (10) Acts and actions referred to in Articles 21, 26, 27,
28, 29, 30, 32, 34, and 35.
Joint venture
Doctrine of limited capacity Stockholders must generally cast their votes in the
meeting; section 4 governed primarily by the law
creating them
- 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 Section 4. Corporations created by special
reasonably necessary to accomplish its purpose and laws or charters. - Corporations created by special laws
those which may be incidental to its existence 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,
- Can do things as the law asks or allows it to do insofar as they are applicable. (n)
- If it does anything beyond, it shall be considered as
ULTRA VIRES
Section 3
General rule: Moral damages cannot be granted to
corporations - The two requisites must always concur
1. That they have a capital stock divided into shares; and,
2. That they are authorized to distribute dividends or
Exception: Filipinas Broadcasting Network Inc. vs. Ago
allotments as surplus profits to its stockholders on the
Med
basis of the shares held by each of them.
- Their subsidiaries are entirely different or independent - Defining the scope of authority of the corporate
from that of the other enterprise pr undertaking. Both confirmed and limited
4 limitations of purpose clause
Close corporation 1. Lawful
2. Specific or stated concisely
- There is no exemption it is absolute 3. More than one, the primary and secondary must
be specified
Public corporation 4. Lawfully combined
- Provision that states, cannot be issued less than par,
- Political or governmental purposes exception is treasury shares because it can be issued
- Those formed or organized for the government or a less than par
portion of the State or any of its political subdivision
and which have for their purpose the general good and A corporation commences only upon issuance of the
welfare certificate, prior thereto it has no being and cannot
transact business. Promoters cannot act for a projected
Private Corporation corporation
- Immediate benefit, aim or advantage of private Metro Manila- paid up capital requirement is 10 M
individuals
- Those formed for some private purpose, benefit, aim or Non- stock- mere mention of the operating capital
end
- Distinction: public for governmental purpose Mention the authorized capital
principal office - All persons who compose the corporation at any given
time and need not be among those who execute the
- statement of principal office is required articles of incorporation at the start of its formation and
- city and municipality not only province must be organization.
specified - Originally or subsequently
- principal office NOT operations office - Section 5 provides:
- necessary because it will establish the residence of Corporators in a stock corporation are called
corporations stockholders or shareholders. Corporators in a non-
- venue of actions for or against the corporations stock corporation are called members. (4a)
- venue of meetings
- section 51 meetings may only be within the boundaries May a corporation be a corporator?
of the city where the principal office
- non-stock may be held anywhere in the Philippines, if - YES. There is nothing to prevent a corporation from
provided in its by-laws being a stockholder
- where summons may be served
- registration of chattel mortgage must be registered in Incorporator must subscribe to 1 share
the register of deeds where the principal office is located
There are those that are exclusively reserved to Filipinos
Clavecilla Radio System vs. Antillon
An incorporator maybe a corporator as long as he is a
stockholder
- action not upon a written contract
- city where the defendant resides
section 6
term of existence
Section 6. Classification of shares. - The
- corporate term required shares of stock of stock corporations may be divided
into classes or series of shares, or both, any of which
- determining what point in time the juridical personality
classes or series of shares may have such rights,
will cease to exist privileges or restrictions as may be stated in the articles
- enter into contract only when it has juridical personality of incorporation: Provided, That no share may be
- once it ceases to exist, it no longer has personality deprived of voting rights except those classified and
- exist for another 3 years only for purposes of liquidation issued as "preferred" or "redeemable" shares, unless
- Dissolution- it is automatic 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
When should extension be made? series of shares may have a par value or have no par
value as may be provided for in the articles of
- General rule: Not earlier than 5 years incorporation: Provided, however, That banks, trust
- Exception: unless there are justifiable reasons companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to
issue no-par value shares of stock.
May it be extended after expiration?
- Alhambra cigar vs. SEC once it ceases to exist it has no Preferred shares of stock issued by any
corporation may be given preference in the distribution
vested politic, exist only for a period of 3 years only for
of the assets of the corporation in case of liquidation
liquidation and for that purpose only and in the distribution of dividends, or such other
preferences as may be stated in the articles of
Article 5 How many incorporators should there be? 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
- 5-15
directors, where authorized in the articles of
incorporation, may fix the terms and conditions of
May a corporation be an incorporator? preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be effective upon
- General rule: only natural persons the filing of a certificate thereof with the Securities and
Exchange Commission.
- Exception: cooperatives and corporation primarily
organized to hold equities in rural banks
Shares of capital stock issued without par
How about minors? 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:
- NO, because they must be of legal age Provided; That shares without par value may not be
issued for a consideration less than the value of five
May a corporation organized by incorporators consisting (P5.00) pesos per share: Provided, further, That the
solely of foreigners 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.
- Yes, there is no nationality requirement only residence,
as long as majority are residents of the Phil
A corporation may, furthermore, classify its
Define incorporators <sec.5> shares for the purpose of insuring compliance with
constitutional or legal requirements.
2. Adoption and amendment of by-laws; - The disqualifications provided for is absolute and may
not be done away with. Corporate by-laws may,
3. Sale, lease, exchange, mortgage, pledge or other however, provide for additional qualifications and
disposition of all or substantially all of the corporate disqualifications.
property;
Section 27. Disqualification of directors,
4. Incurring, creating or increasing bonded trustees or officers. - No person convicted by final
indebtedness; 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
5. Increase or decrease of capital stock; his election or appointment, shall qualify as a director,
trustee or officer of any corporation. (n)
6. Merger or consolidation of the corporation with
another corporation or other corporations; Section 27 and 23 minimum disqualifications and
qualifications
7. Investment of corporate funds in another corporation
or business in accordance with this Code; and Lee vs. CA
Except as provided in the immediately Gov’t vs. El hogar Filipino, Gokongwei vs. SMC
preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall Capital structure
be deemed to refer only to stocks with voting rights. (5a)
Foundation- minimum paid-up capital 3M
How many directors should there be?
Authorized capital 1 M No. of shares 1M shares
- General rule: Not less than 5 not more than 15 par value 1.00
- Exceptions:
1. Educational corporations registered as non stock Amount of shares subscribed
corporation whose number of trustees, though not less
than five and not more than [15] should be divisible by 50 K A
five [5], meaning they must have either five, ten, or
fifteen trustees and no other; 50 K B
2. In close corporations where all the stockholders are
considered as members of the board of directors thereby C 250K
effectively allowing twenty members in the board.
3. The by-laws of a corporation may provide for additional D
qualifications and disqualifications of its members of the
board of directors or trustees. However it may not do E
away with the minimum disqualifications lay down by
the Code. PAID UP =62,500
Qualifications of the governing board Corporation cannot exceed more than 1 M it is the maximum
amount it cannot issue more unless amended
- Requires mere residency <sec. 23>
Maximum shares it can issue is 1M shares unless amended
Section 23. The board of directors or trustees.
- Unless otherwise provided in this Code, the corporate How much shares should be subscribed?
powers of all corporations formed under this Code shall
be exercised, all business conducted and all property of - Must be at least 25% of the authorized capital stock
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 Paid- up must be at least 25%-minimum
among the members of the corporation, who shall hold
office for one (1) year until their successors are elected Section 30
and qualified. (28a)
- Total subscription compliance with minimum 25% total
Every director must own at least one (1) share - Any combination would comply with the minimum
of the capital stock of the corporation of which he is a required by section 30
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 Section 30. Compensation of directors. - In
the corporation of which he is a director shall thereby the absence of any provision in the by-laws fixing their
cease to be a director. Trustees of non-stock compensation, the directors shall not receive any
corporations must be members thereof. A majority of the compensation, as such directors, except for reasonable
directors or trustees of all corporations organized under per diems: Provided, however, That any such
this Code must be residents of the Philippines. 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
May a domestic corporation have a governing board regular or special stockholders' meeting. In no case shall
consisting solely of foreigners? the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income
- YES, section 23 majority of them must be residents of before income tax of the corporation during the
preceding year. (n)
the Philippines, no nationality requirement
- If the business undertaking or activity is only partially - In no case shall the paid- up capital be less than 5k
nationalized, aliens can be elected as such directors,
[unless the law provides otherwise] but their number Is there a minimum authorized capital imposed by the
shall only be in proportion to their equity or code?
participation in the capital stock of the corporation.
- If there is minimum paid-up logically there should also
Disqualifications <sec.27> be a minimum capital =5000
Minimum paid-up capital for a financing company - YOU MUST STATE THE PREFERENCE BECAUSE IF
metro manila 10 M if located in MM NOT THEY ARE PRESUMED TO BE EQUAL
- It may include such other preferences not inconsistent
Shares of stock with the Code. This is so because Section 6 of the said
law allows a stock corporation to issue preferred shares
Purpose of classification subject only to the limitations imposed therein which
are:
- To specify and define the rights and privileges of the a. They can be issued only with sated par value; and,
stockholders; b. The preferences must be stated in the articles of
incorporation and in the certificate of stock, otherwise,
- For regulation and control of the issuance of sale of each share shall be, in all respect, equal to every other
corporate securities for the protection of purchasers and share.
stockholders.
Participating
- As a management control device.
- Must be stated because the presumption is that it is
- To comply with statutory requirements particularly participating
those which provide for certain limitations on foreign
ownership and shares like overseas employment Cumulative
agencies requiring to own at least 75% of the shares of
stock thereof. - Irrespective of whether or not they where earned
preferred shares - stated par value; shall not be issued less than par
Corporations cannot use its capitals in declaring - Answer: commissioner vs. manning page 62 first par.
dividends; not all can issue no par value section 6
“Although authorities may differ on the exact
Voting legal and accounting status of so-called treasury shares,
they are more or less in agreement that treasury shares
- entitled to vote at any motion brought up in writing are stocks issued and fully paid for and reacquired by
the corporation either by purchase, donation, forfeiture
Non-voting or other means. Treasury shares are therefore issued
shares but being in the treasury they do not have the
- not entitled to vote status of outstanding shares. Consequently, although a
treasury share, not having been retired by the
What types of shares may be denied of the right to vote? corporation re-acquiring it, may be re-issued or sold
again, such shares, as long as it is held by the
corporation as a treasury share, participates neither in
- Preferred and redeemable shares
dividends, because dividends cannot be declared by the
corporation to itself, nor in meetings of the corporation
Is it correct to state that common shares can never be
as voting stock, for otherwise equal distribution of
denied the right to vote?
voting powers among stockholders will be effectively lost
and the directors will be able to perpetrate their control
- Only preferred and redeemable shares are denied unless
of the corporation, though it still represents a paid for
provided in this code
interest in the property of the corporation. The foregoing
essential features of a treasury stocks are lacking in the
- PWEDENG MA-DENY YUNG COMMON SHARES, KASI questioned shares.
YUNG FOUNDER’S SHARES MERON SILANG
EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO
In this case, and under the terms of the trust
PWEDE SILANG BUMOTO WITH REGARDS TO
agreement, the shares of stock of Reese participated
SOMETHING NA HINDI NA SAKOP NG COMMON
in dividends which the trustee received and the said
SHARE RIGHTS
shares were voted upon by the trustee in all corporation
meetings. They were not, therefore, treasury shares.”
- Example: founders shares- may be given certain rights
and privileges When the law speaks of outstanding rights it does not
include treasury shares
- Even common shares may be denied the right to vote of
founders’ shares issued <sec.7> Treasury shares may be reissued
Section 7. Founders' shares. - Founders' - They are actually assets of the corporation
shares classified as such in the articles of incorporation
may be given certain rights and privileges not enjoyed - Once re-issued they become outstanding stocks again
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 - The corporation may cancel them; in effect there will be
to exceed five (5) years subject to the approval of the a reduction in the outstanding capital stocks
Securities and Exchange Commission. The five-year
period shall commence from the date of the aforesaid - The code does not require ordinary corporations to
approval by the Securities and Exchange Commission.
provide for restrictions, but it does not likewise prohibit
(n)
restrictions
Do you include non-voting shares in passing a valid - Example: right of first refusal
corporate act?
- The restriction must be contained in the articles of
- Even non-voting shares are entitled to vote under incorporation
section 6
- If provided in by-laws but not in the articles of
Redeemable shares incorporation then it will not be binding
Section 57 treasury shares have no voting and dividend Grounds for disapproval
rights. Why not?
- Only substantial and not strict is required
Section 57. Voting right for treasury shares. -
Treasury shares shall have no voting right as long as May the SEC refuse or reject registration?
such shares remain in the Treasury. (n)
4. That the percentage of ownership of the capital stock - Corporations are created by law
to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the
Constitution. - Commence to exist upon issuance by the CONCERNED
government corporation or agency
No articles of incorporation or amendment to
articles of incorporation of banks, banking and quasi- - Prior there to it has no being
banking institutions, building and loan associations,
trust companies and other financial intermediaries, - The transfer of the property was not valid, it likewise did
insurance companies, public utilities, educational not have the right to transfer
institutions, and other corporations governed by special
laws shall be accepted or approved by the Commission
unless accompanied by a favorable recommendation of De jure
the appropriate government agency to the effect that
such articles or amendment is in accordance with law. - Strict or substantial compliance
(n)
De facto
- But the grounds in section 17 are not exclusive
- 4 requisites must go hand in hand take out anyone of
When will the corporation commence to exist? them there can be no de facto corporation
If the certificate of registration has not been issued, may International express travel and tours vs. CA
a corporation de facto exist?
- No fraud in this case
- NO!
- How come Kahn was made liable?
- Number 4 requirement, good faith in claiming to be and
doing business as a corporation - Doctrine of incorporation
Hall vs. Piccio - Applies only if that person is trying to escape from a
contract where he is benefited
- Missing link is good faith
- In this case petitioner is not trying to escape liability,
- The certificate was not yet issued by the SEC, the but rather the one claiming from the contract
members knew and therefore they were not acting in
good faith, therefore anybody can question its existence Would this apply to foreign corporation?
- So defectively formed so that they are not to be - Georg Grotjahn vs. Isnami
considered a de jure or de facto
A foreign corporation cannot gain access to our courts
- General partners- liable even beyond his promise even unless they attain a license to engage in business in the
his personal properties are prone to attachment Philippines but applying corporation by estoppels, the
court allowed
Lozano vs. Delos Santos
Municipality of Malabang case
- Founded on principle of equity
- No law, hence may be questioned by any person
- Exercise corporate powers
- An unconstitutional act is not a law, t confers no rights,
- Enters with business with 3rd parties it imposes no duties, it affords no protections, it crates o
office, it is in legal contemplation, as inoperative as
- When there is no 3rd persons involved and the problem though it had never been passes
arises between there members, therefore they
themselves know that there is no corporation by Hall vs. Piccio
estoppel
- No good faith
Salvatierra vs. Garlitos What do you understand by the word charter? Is it the
same as articles of incorporation?
- As a general rule a person who has contracted it a
corporation lacking personality - Corporate charter is broader
- Secondary franchise is the right or privilege that the - Mere ownership of all or substantially all of the shares
corporation may exercise of stock of a corporation is not, in itself, insufficient
ground for disregarding the separate corporate
You cannot issue investment contracts without a personality. And for the separate personality of the
secondary franchise, kailangan primary muna hindi corporation to be disregarded, the wrong doing must be
pwede mauna secondary kasi sa section 19 it does not clearly and convincingly established
exist until issued with a certificate of registration or
incorporation - Fraud must be proven by clear and convincingly
evidence amounting to more than preponderance. It
Corporate entity cannot be justified by speculation and can never be
presumed. And only if it sought to hold the stockholders
- Corporation exist separately and independently from the liable directly for corporate debt
stockholders
Palacio vs. Fely
- Stockholders cannot bring an action, to bring back the
properties of a corporation - Piercing the veil of corporate fiction
- Corporation has no interest in the individual properties - Fely trans and the other corporation is one and the
of its members same
- Corporation cannot bring an action for the recovery of - There must be facts before the court will be justified in
the properties of its members piercing the veil of corporate fiction
- Final judgment against a corporation cannot be - Subscribed capital where all advanced by Yutivo, the
enforced against stockholders board where the same as Yutivo
- They are not personally liable - Two corporations managed by the same family, workers
were made interchangeably
- They where signed for and in behalf of the corporation
Emilio Cano vs. CIR
Palay inc. vs. Clave
- Sued in there official capacity
- Liabilities incurred by the corporation cannot be
enforced against stockholders, etc., even if stockholders, - Reverse of Soriano vs. CA (signed in their official
etc. happens to own a substantial interest in the capacity)
corporation, mere ownership does not disregard the
corporate entity theory Tesco vs. WCC
Corporate entity for legal or legitimate purposes only - The two corporations where located in the same office
2. Such control must have been used by the defendant to PNB vs. Ritratto Group
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and - Control test
unjust act in contravention of plaintiff’s legal rights;
and,
- Not mere majority but rather complete
- “while the mere ownership of all or nearly all of the 1. In case any amendment to the articles of
capital stock of a corporation does not necessary mean incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of
that it is a mere business conduit of the stockholder,
authorizing preferences in any respect superior to those
that conclusion is amply justified where it is shown, as of outstanding shares of any class, or of extending or
in the case before us, that the operations of the shortening the term of corporate existence;
corporation were so merged with the stockholders as to
be practically indistinguishable from them. To hold the
2. In case of sale, lease, exchange, transfer, mortgage,
latter liable for the corporation’s obligations is not to pledge or other disposition of all or substantially all of
ignore the corporation’s separate entity, but merely to the corporate property and assets as provided in the
apple the established principle that such entity cannot Code; and
be invoked or used for purposes that could not have
been intended by the law that created that separate
3. In case of merger or consolidation. (n)
personality.”
3 & 4= objected
Indophil Textile Mill vs. CALICA 3&4=objected
- How do you distinguish this ruling to La Campana, 5 & 6= approved the amendment 5&6=approved
having the same issues:
Would there be a valid amendment
- La campana, one payroll, employees were made
interchangeable. Acrylic had its own standards
Special amendments 37 & 38 shortening that would the certificate of filing may declare: Provided, That the
result to dissolution require prior approval by the SEC Securities and Exchange Commission shall not accept
for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the
Section 37. Power to extend or shorten treasurer of the corporation lawfully holding office at the
corporate term. - A private corporation may extend or time of the filing of the certificate, showing that at least
shorten its term as stated in the articles of incorporation twenty-five (25%) percent of such increased capital
when approved by a majority vote of the board of stock has been subscribed and that at least twenty-five
directors or trustees and ratified at a meeting by the (25%) percent of the amount subscribed has been paid
stockholders representing at least two-thirds (2/3) of the either in actual cash to the corporation or that there has
outstanding capital stock or by at least two-thirds (2/3) been transferred to the corporation property the
of the members in case of non-stock corporations. valuation of which is equal to twenty-five (25%) percent
Written notice of the proposed action and of the time of the subscription: Provided, further, That no decrease
and place of the meeting shall be addressed to each of the capital stock shall be approved by the
stockholder or member at his place of residence as Commission if its effect shall prejudice the rights of
shown on the books of the corporation and deposited to corporate creditors.
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 Non-stock corporations may incur or create
his appraisal right under the conditions provided in this bonded indebtedness, or increase the same, with the
code. (n) 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.
Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or Bonds issued by a corporation shall be
decrease its capital stock or incur, create or increase registered with the Securities and Exchange
any bonded indebtedness unless approved by a majority Commission, which shall have the authority to
vote of the board of directors and, at a stockholder's determine the sufficiency of the terms thereof. (17a)
meeting duly called for the purpose, two-thirds (2/3) of
the outstanding capital stock shall favor the increase or The vote must be cast at the meeting called for that
diminution of the capital stock, or the incurring,
purpose
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 Written assent would not suffice
increasing of any bonded indebtedness and of the time
and place of the stockholder's meeting at which the When do amendments become valid and effective?
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 - Only upon the approval of the SEC TRUE OR FALSE?
stockholder at his place of residence as shown on the
books of the corporation and deposited to the addressee - FALSE because it can be valid upon the date of filing if
in the post office with postage prepaid, or served not acted upon within 6 months without fault
personally. attributable to the corporation
(4) Any bonded indebtedness to be incurred, created or - The number of shares and amount originally subscribed
increased; and paid out of the original authorized capital stock of
the corporation,
(5) The actual indebtedness of the corporation on the
day of the meeting; - The date and place of execution of the articles of
incorporation,
(6) The amount of stock represented at the meeting; and
- The signatories and acknowledgment thereof.
- Section 96, otherwise it will not be a close corporation 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.
Section 96. Definition and applicability of
Title. - A close corporation, within the meaning of this
Code, is one whose articles of incorporation provide - Controlled by the board of directors
that: (1) All the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of record by - Authority are however restricted to the day to day
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 - Stockholders may have all the profit but will turn over
restrictions on transfer permitted by this Title; and (3) the management to the governing board
The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class. - But unless the law provides the power may be delegated
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 General rule
controlled by another corporation which is not a close
corporation within the meaning of this Code. - Corporations must sit and act as a body
Any corporation may be incorporated as a - Will be bound by corporate officers if they acted within
close corporation, except mining or oil companies, stock the 5 classification page 150
exchanges, banks, insurance companies, public
utilities, educational institutions and corporations
Ramirez vs. Orientalist co.
declared to be vested with public interest in accordance
with the provisions of this Code.
- What was the position of Fernandez in this case?
TREASURER
The provisions of this Title shall primarily
govern close corporations: Provided, That the provisions
of other Titles of this Code shall apply suppletorily - Why did the court rule that actions of Fernandez bound
except insofar as this Title otherwise provides. the corporation when he is not even a board of director?
Amendment of a corporate term - Contracts must be made by the director and not the
stockholders
- Extending the same can never be made 7 years prior?
TRUE or FALSE - Actions of the stockholders in such matters is only
advisory and not in any way binding in the corporation
- FALSE. It can be if there are justifiable reasons for
earlier extension as may be determined by the SEC Barreto vs. La previsora Filipina
Section 23
- Anti-dummy act
Section 23. The board of directors or trustees. - Utilization development of natural resources 60% must
- Unless otherwise provided in this Code, the corporate be owned by Filipino citizens, therefore they only own
powers of all corporations formed under this Code shall
40%---10 members they can only have 4 seats, but not
be exercised, all business conducted and all property of
such corporations controlled and held by the board of entirely correct because the law may provide otherwise;
directors or trustees to be elected from among the educational institutions restricted to Filipinos, but there
holders of stocks, or where there is no stock, from are exceptions when created by religious and charitable
among the members of the corporation, who shall hold institutions.
office for one (1) year until their successors are elected
and qualified. (28a) - By-laws may provide additional qualifications and
disqualifications
Every director must own at least one (1) share
of the capital stock of the corporation of which he is a - To qualify as a director he must own at least 1 share
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 Should the stockholder be the equitable or beneficial
the corporation of which he is a director shall thereby owner in order to qualify as a director?
cease to be a director. Trustees of non-stock
- Under the old law he must be the beneficial owner and 10-5k
legal owner thereof but in the new law it is not required
as long as it stands in his name he is qualifies =1MS
1 A-100t/S B (own in the trust of X) is B qualified to be a 1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10,
director? tumakbo and ninominate nila yung sarili nila and cast all their
shares on themselves
2
Who wins? Or who gets elected?
3-10
- No vote requirement, the one who gets the most number
2– transferring there voting rights in favor of VT of votes gets elected, section24.
Other rights will accrue in favor of them, but not the voting rights What is cumulative voting?
voting rights must be recorder in the books of the corporation that - Process of multiplying the number of shares to the
it is transferred number of director to be elected
PNB-IFL- wholly owned subsidiary of PNB - Matter of right granted to stockholders in a stock
corporation
PNB will assign to PNB-IFL nominal shares and PNB-IFL now will
be able to be nominated 1 to 5 has 200k/s and members of the same family- majority 800k
they have 4M votes they are guaranteed 4 seats
Gen. Rule:
6 to 10 are not related- 1 seat 1M votes
- Term of one year who will serve as such until there
successors are elected and qualified Cumulative to allow the minority to have a rightful
representation in the board
Exception:
Is it allowed in a non-stock corporation?
- Non-stock corporation can serve for a term of 3 years
- Not generally available
- Educational non-stock- term of the governing board can
be 5 years - Section 89 unless the articles or by-laws allow
cumulative voting
May this term exceed one year?
Section 89. Right to vote. - The right of the
- Yes, they may serve in a hold over capacity until their members of any class or classes to vote may be limited,
successors have been duly elected and qualified 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
Detective and protective bureau vs. Cloribel of class, shall be entitled to one vote.
3-100T/S
Directors or trustees cannot attend or vote by - Neumark as president and also stockholder
proxy at board meetings. (33a)
What would constitute a quorum if 5 then 3 must be - Only 15 months later that the corporation said there
present was a mistake
May the vote of 2 members past a 5 man governing - The silence coupled with the unconditional acceptance
board pass a valid corporate act? of the other subsequent remittances is binding to the
corporation
- YES. Voting requirement is majority of directors present
at which there where a quorum Board of liquidators vs. Kalaw
- Otherwise it will not bind the corporation - Kalaw signed alone and said contracts were submitted
to the board of directors after its consummation and not
Yao ka sin trading case “already asked in the bar” before
- Only bind the corporation to the extent of authority Buenaseda vs. Bowen
confined to him or virtue of customs, usage and policy
- Express ratification is made through a formal board
- Must pass first the controller and counsel action
What if the notice requirement is not complied with? - Implied ratification is through: silence or acquiescence,
acceptance benefits and lastly recognition or adoption
Lopez realty vs. Fotencha
An unauthorized act may nevertheless be binding either
- Notice requirement must be complied with hence it by express or implied by estoppels
should have been with force and effect, but according to
the SC, it may be ratified expressly if there is a By virtue of silence the board had impliedly accepted the
subsequent meeting called for that purpose act
- Asuncion was aware of the corporations obligation By virtue of payment of obligations arising therefore-
Lopez realty
- There was implied ratification or she was estopped
May directors or trustees be disqualified to act as such?
Pua casim vs. Neumark and Co.
6-100 6 to 10 not - Must not exceed net income of 10% tax of the preceding
related year
Meetings called by the president or the secretary 3. If the director renders extra-ordinary or unsual service
ordered by the president
Central cooperative exchange vs. Tibe
It depends if the removal is without cause they cannot
do so because removal without cause shall not deprive
- By-laws may allow, stockholders may also allow such
the minority stockholders or members of the right of
representative
What do you understand by the phrase “as such
directors”
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 Western institute vs. Salas
Who will fill up the vacancy created due to the ouster of - Compensation was granted without by-laws authority
a member of the board of directors <section 29>
- Prohibition is not a sweeping rule
Any directorship or trusteeship to be filled by - The SC ruled that the 10% ceiling will not likewise apply
reason of an increase in the number of directors or if they acted in a capacity other than “as such directors”
trustees shall be filled only by an election at a regular or
at a special meeting of stockholders or members duly
Government vs. El Hogar
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) - Judicial intervention is not proper
Other than by removal or expiration of term they do not - The appropriates remedy is to those who can make or
have the power unmake the by-laws
Is notice required, to fill up vacancies due to removal? - Obligations incurred by those acting for and in behalf of
the corporations are not there’s BUT there are
What if the vacancy is due to an increase, can it be filled exceptions even if they are acting for and in behalf of the
up in the same meeting where in the number is corporation
increased?
Tramat vs. CA
Election due to removal-in the same meeting notice is
not required - General rule was applied in the case
Election due to increase in number- it must be so stated - Ong acted as officers and acted within the scope of his
in the meeting authority
- Court laid down 4 instances when even if acting within opportunity and/or developing it at the expense and
the scope of his authority he is held solidarily liable with the facilities of the corporation. He cannot
appropriate to himself a business opportunity which in
1. He assents (a) to a patently unlawful act of the fairness should belong to the corporation.
corporation, or (b) for bad faith, or gross negligence in
directing its affairs, or (c) for conflict of interest, Last paragraph of section 31 and the provision of
resulting in damages to the corporation, its stockholders section 34 make reference to recovery of “forbidden
or other persons; profits”
2. He consents to the issuance of watered stocks or who, Distinction between section 31 and 34 relative to the
having knowledge thereof, does not forthwith file with ratification by the stockholders
the corporate secretary his written objection thereto;
- The second paragraph of section 31 which makes a
3. He agrees to hold himself personally and solidarily liable director liable to account for profits if he attempts to
with the corporation; acquire or acquires any interest adverse to the
corporation in respect to any matter reposed in him in
4. He is made, by a specific provision of law, to personally confidence as to which equity imposes a disability upon
answer for his corporate action. him to deal in his own behalf is not subject to
ratification by the stockholders. Whereas, in section 34
- Watered stocks- issued, fully paid up when in fact they if a director acquires for himself a business opportunity
have not been fully paid or promised as such 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
Llamado vs. CA
outstanding capital stock.
- Labor case corporate directors and officers are solidarily Director x co.
liable with the corporation for the termination of
employment of corporate employee done with malice and A-REALTY
bad faith
B
3 fold duty of directors
C Z owns property and is going
- obedient abroad never to Return, he wants
to sell for 25M the fair market
- diligent value is 30M
- loyal D
- Questions of policy and management are left solely to E goes to Z and offers to pay the property for 26 M and later he
the honest decision of the board of directors and the sells it for 30M making 4M profit, one of the stockholders learned
courts are without authority to substitute its judgment and complains that he should submit the profits. E said that he
as against the former. The directors are the business will move for ratification of his actuation. Can it be ratified?
managers of the corporation and as long as they act in
good faith, its actuations are not subject to judicial - It can be ratified he merely acquired a business owning
review. Montelibano vs. Bacolod Murcia Milling to the corporation
- questions of policy and management are left solely to - It would be different if it was entrusted in his confidence
the board of directors
Another scenario:
- BOD, business manager of the corporation and as long
as they act in good faith, its actuations are not subject Had A not attended the meeting he would not have known of the
to judicial review sale it is then a matter reposed in him in confidence
- They are not insurer of the property of the company, A corporation cannot reaquire its share if it has no
they were guarantors that the enterprise undertaken by restricted unretained earnings
the corporation shall be successful
Strong vs. Rapide
Montelibano vs. Bacolod Murcia Milling Co.
- What duty did he violate?
- Directors are not liable due to imprudence or honest
error of judgment - He violated his duty of loyalty
- Duty of loyalty of corporate directors - The law would be impotent if the sale were not
invalidated
- 31,32,33,34
Self-dealing director and interlocking director
- 31,32,33- specific instances when corporate officers may
violate loyalty What is a self-dealing director?
- 32,33 self-dealing and interlocking director - Director of a corporation dealing or transacting business
with his corporation
Corporate opportunity doctrine
Are the contracts and dealing of a self0dealing director
- It places a director of a corporation in the position of a valid?
fiduciary and prohibits him form seizing a business
General rule: voidable - in case of conflict between himself and that of the
corporation, he cannot sacrifice the interest of the
May the contracts of a self-dealing director be valid per corporation to his own advantage
se.
- as a director he should have acted in a manner as not to
- YES. If all the 4 conditions are present they will be valid unduly prejudice the corporation
per se
- he cannot be allowed to enrich himself
1. That the presence of such director or trustee in the
board meeting in which the contract was approved was May corporate directors purchase the corporate
not necessary to constitute a quorum for such meeting; property?
2. That the vote of such director or trustee was not Mead vs. Mccullogh
necessary for the approval of the contract;
- interlocking director- a director of one corporation who
3. That the contract is fair and reasonable under the deals and transacts business with another corporation
circumstances; and who is himself a director
4. That in case of an officer, the contract has been A- director of X company also a director of Y corporation
previously authorized by the board of directors.
B-
When do they become voidable?
C-
- When any of the two requisites are absent it is voidable,
but subject to ratification by 2/3 of the outstanding
D-
capital stock or 2/3 of the member
E-
Requisites for ratification (subject to ratification by the
stockholders holding or representing at least 2/3 of the
Both companies enter into a contract and A sits, is the
outstanding capital stock or 2/3 of the members.)
contract valid?
X Co.
Problem if self-dealing director involved owns all or
Y Co.
substantially all of the shares of stock of the corporation
thereby making it easily possible to have the contract
A owe 20%
ratified
A owe 20%
Where any of the first two conditions set forth - An action based on injury to the corporation-to enforce
in the preceding paragraph is absent, in the case of a a corporate right- wherein the corporation itself is joined
contract with a director or trustee, such contract may as a necessary party, and recovery is in favor of and for
be ratified by the vote of the stockholders representing the corporation.
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 - Remedy granted by law to stockholders to institute a
disclosure of the adverse interest of the directors or case to remedy a wrong done directly to the corporation
trustees involved is made at such meeting: Provided, and indirectly to the stockholders, if the board refuses
however, That the contract is fair and reasonable under to do so. Otherwise if not they would be left without any
the circumstances. (n) recourse
Non-joinder is a ground for dismissal - Assuming the case prospered in the U.S. would not
estoppels apply as against him? NO for estoppels to step
Any benefit should inure to the corporation in it must be a case by the corporation
- It is not the corporate interest to shield one from 2. He has tried to exhaust intra-corporate remedies, he has
criminal prosecution which is personal interest made a demand on the board of directors for the
appropriate relief but the latter had failed or refused to
- Perez is not suing in his behalf, but in behalf of the heed his plea. Demand, however, is not required if the
corporation 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
Western institute vs. Salas
futile and useless) since the law does not require a
litigant to perform useless acts;
- Assuming it was filed in the proper forum would there
argument that it is a derivative suit prosper? NO. it is
3. The stockholder bringing the suit must allege in his
people of the Philippines vs. individual director, it must
complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other Purpose clauses necessary because it confers and also
stockholders similarly situated, otherwise, the case is limits the actual authority of the corporation
dismissible. This is because the cause of action actually
devolves on the corporation and not to a particular CORPORATE POWERS AND AUTHORITY
stockholder.
Corporate authority may be classified into three classes
4. The corporation should be made a party, either as namely:
party-plaintiff or defendant, in order to make the court’s
judgment binding upon it, and thus, bar future 1. Those expressly granted or authorized by law inclusive
litigation of the same issues. On what side the of the corporate charter or articles of incorporation;
corporation appears loses importance when it is
considered that it lay within the power of the court to 2. Those impliedly granted as are essential or reasonably
direct the making of amendment of the pleading, by necessary to the carrying out of the express powers;
adding or dropping parties, as may be required in the
interest of justice. Misjoinder of parties is not a ground 3. Those that are incidental to its existence.
to dismiss action; and,
Section 36 to 45- POWER GRANTED BY LAW
5. 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 Section 36. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power and
corporation and not for the protection or vindication of a
capacity:
right or rights of a particular stockholder, otherwise, the
aggrieved stockholder should institute, instead, an
individual or personal suit to vindicate his personal or 1. To sue and be sued in its corporate name;
individual right. Or, for that matter, representative or
class suit for all other stockholders whose rights are 2. Of succession by its corporate name for the period of
similarly situated, injured or violated, personally or time stated in the articles of incorporation and the
individually. certificate of incorporation;
- Said committee may act and bind the corporation by the 8. To enter into merger or consolidation with other
majority vote of all its members except with respect to corporations as provided in this Code;
those matters provided for in sec. 35 these are:
9. To make reasonable donations, including those for
1. Approval of any action for which shareholders’ approval the public welfare or for hospital, charitable, cultural,
is also required 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
2. The filing of vacancies in the board;
partisan political activity;
May the board alone create an executive committee Section 37. Power to extend or shorten corporate term. -
without any authority provided for the by-laws? 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
- NO board of directors must sit and act as a body to have stockholders representing at least two-thirds (2/3) of the
a valid transaction outstanding capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice of the
May a non-member of the board of directors be a proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence
member of the executive committee?
as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
- NO, all of them must be members of the board of personally: Provided, That in case of extension of corporate term,
directors any dissenting stockholder may exercise his appraisal right under
the conditions provided in this code. (n)
- BOD cannot act by proxy it would be abdication of
powers 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 minimum stock ownership by the public; or to shares to be issued
vote of the board of directors and, at a stockholder's meeting duly in good faith with the approval of the stockholders representing
called for the purpose, two-thirds (2/3) of the outstanding capital two-thirds (2/3) of the outstanding capital stock, in exchange for
stock shall favor the increase or diminution of the capital stock, or property needed for corporate purposes or in payment of a
the incurring, creating or increasing of any bonded indebtedness. previously contracted debt.
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 Section 40. Sale or other disposition of assets. - Subject
meeting at which the proposed increase or diminution of the to the provisions of existing laws on illegal combinations and
capital stock or the incurring or increasing of any bonded monopolies, a corporation may, by a majority vote of its board of
indebtedness is to be considered, must be addressed to each directors or trustees, sell, lease, exchange, mortgage, pledge or
stockholder at his place of residence as shown on the books of the otherwise dispose of all or substantially all of its property and
corporation and deposited to the addressee in the post office with assets, including its goodwill, upon such terms and conditions and
postage prepaid, or served personally. 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
A certificate in duplicate must be signed by a majority of the expedient, when authorized by the vote of the stockholders
directors of the corporation and countersigned by the chairman representing at least two-thirds (2/3) of the outstanding capital
and the secretary of the stockholders' meeting, setting forth: 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
(1) That the requirements of this section have been action and of the time and place of the meeting shall be addressed
complied with; to each stockholder or member at his place of residence as shown
on the books of the corporation and deposited to the addressee in
(2) The amount of the increase or diminution of the the post office with postage prepaid, or served personally:
capital stock; Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.
property, or in stock to all stockholders on the basis of - should be served to those named in the statute
outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the
- secretary of a dep’t are not those included in the statute
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 E.B. Villarosa vs. Benito
no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the
- decision En Banc repeals all other pronouncement
outstanding capital stock at a regular or special meeting duly
called for the purpose. (16a)
- section 13 Rule 14 was repealed
- Importance of the purpose clause - Examined the articles of incorporation to arrive at its
decision
- Cannot have the power to acquire
National Power vs. Vera
- Cannot engage in land transportation
- For purpose of prohibiting the NAPOCOR
- Doctrine of limited capacity
- The court must decide whether or not a logical and
Gov’t vs. El Hogar necessary relation exists between the act questioned
and the corporate purpose expressed in the NPC
- As the lawful transaction of its business may charter
reasonably represent
Importance of PLACE of registration
Director of Lands vs. CA
- Residence
- Exception to the rule in the constitution
- Venue
- Alienable public land
- Place of meetings
- Converts the property to a private land automatically
- Place or registration of chattel mortgage
once converted it can now be registered
- Limitation section 36 par.9 - Once its term expires, already dissolved automatically,
thus can no longer ask for extension
- These are circumstances, however, under which a
- After dissolution, it has 3 years to windup
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 What are the modes of increasing capital stock?
authorizes a corporation to make donations. The only
limitations imposed are the following: 1. Increasing the par value of the existing number of
shares without increasing the number of shares;
1. The donation must be “reasonable”;
2. Increasing the number of existing shares without
2. It must be for public welfare, or for hospital, charitable, increasing the par value thereof; and,
scientific, cultural or similar purpose; and,
3. Increasing the number of existing shares and at the
3. It shall not be in aid of political party or candidate, or same time increasing the par value of the shares.
for purposes of partisan political activity.
Why a corporation increases it capital stock?
Power to establish pension
- Generate funds, business expansion, or payment of
- Include any act to promote and improve the liabilities, purposes of acquiring other business.
convenience, welfare and benefit of the employees or (example: to buy cars for the officers, purpose of
offices acquiring other business, expansion, other valid
reasons)
2. Acts to protect debts owing to the corporation; 3. To write down the value of its fixed assets to reflect
there present actual value in case where there is a
3. Embarking in a different business; decline in the value of the fixed assets of the
corporation.
4. Acts in part or wholly to protect or aid employees; and,
- Examples: Php 10M capital for grocery business, mayor
5. Acts to increase business 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
Teresa Electric and Power Co. vs. P.S.C.
will not sleep in bank
- Example: car rental agencies-Php 10M capital for 20 - Yes, if provided by articles of incorporation or by an
taxi’s, after some time each taxi is only 250K, nagmura amendment
ang taxi, to reduce capital is to show actual assets
- However, pre-emptive rights is unavailable to shares in
Limitation imposed by law trading in stock exchange otherwise stockholders must
waive first their right before they may sell such.
- Decrease shall not in any way affect the rights of the
creditors Exceptions
Philippine Trust Company vs. Rivera 1. When the shares to be issued is in compliance with
laws requiring stock offerings or minimum stock
- Without the appraisal of SEC, a decrease in capital ownership by the public
stocks has no effect
2. Shares to be issued in good faith with the approval
TRUST FUND DOCTRINE: of the stockholders representing 2/3 of the
outstanding capital stock either
- Subscription to capital stock of a corporation constitute
a fund to which the creditors have a right to look upon a. In exchange for property needed for corporate
for satisfaction of their claims and that the assignee in purpose or,
insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the b. In payment of a previously contracted debt
payment of its debts.
- The exceptions, however will not apply to stockholders
Madrigal vs. Zamora of a close corporation by virtue of a subsequent and
specific provision of the Code which provides that the
- Decrease in capital has a subterfuge to evade payment “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
- Thus not valid and effective
money, property or personal services or in payment of a
corporate debt, unless the articles of incorporation
- Must not prejudice creditors which includes the
provide otherwise, if not entirely absolute, in that it
employees
extends to all issuance and disposition of shares
Bond
- Such right of pre-emption may be lost by waiver of the
stockholder, expressly or impliedly by his inability or
- Commonly understood as an obligation of a state, its failure to exercise it after having been notified of the
subdivision or a private corporation, represented by a proposed issuance or disposition of shares
certificate or an instrument for the principal and by
detachable coupons for the payment of interests. In its
When is it unavailable?
simplest term, it is one where an obligor obliges himself
to pay a certain sum of money to another at a day
- In shares traded openly in stock exchange/market
named.
money, property or personal services, or in payment of - YES, it’s an internationally recognized right because it
corporate debts, unless the articles of incorporation includes “all issues and disposition of shares of any
provide otherwise. class” and all kinds of shares new or old
Denial will not apply to a close corporation, ABSOLUTE - If the remaining unsubscribed shares are issued, it’s an
issuance of any class
- section 96
May a corporation sell/dispose all or substantially all of
May a stock holder in a close corporation insist in the its corporate assets and liabilities?
exercise of his pre-emptive rights?
- YES
- Yes, section 102
- 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION
What type or shares are covered by pre-emptive rights? 4) PRIOR WRITTEN NOTICE 5) SALE SUBJECT TO
PROVISIONS OF EXITING LAWS 6) DISSENTING
Does it include those originally unsubscribed? STOCKHOLDERS HAVE THE RIGHT TO EXERCISE
THEIR APPRAISAL RIGHT
- NO. Benito vs. SEC
If a corporation sells substantially all of it assets and
Will the stockholders be able to exercise their pre- properties, will the buyer assume liability?
emptive right with respect to the old unissued shares?
- NO, EXCEPT
- Pre-emptive rights is applicable only to new issued
shares and not to the old unissued shares because it is 1) Express or implied agreement to the purchase
presumed that the original subscribers is deemed to
have taken his shares knowing that they form a definite 2) Where the transaction amounts to consolidation or
proportionate part of the whole number of authorized merger of the corporations
shares
3) When purchasing corporation is merely a continuation
- When the shares, left unsubscribed are re-offered, he of the selling corporation
cannot therefore claim. DILUTION OF INTEREST
4) Where the transaction is entered into fraudulently in
Will the acquiring purchaser be liable for debts of the order to escape liability for such debt
former corporation?
Legitimate purpose: for a corporation to reacquire its
- Generally no, corporate entity theory because there may own shares
be instances when purchasing corporation may be held
liable - Limitation: it must have surplus/unrestricted retained
earnings
May a corporation acquire its own shares?
- Exception: may redeem irrespective of unrestricted
- Yes retained earnings
Is there any restriction provided for by law in 1) Exercise of stockholders’ right to compel “close
reacquiring its own shares? corporation” to purchase his shares
- Yes, it must have been unrestricted retained earnings 2) Where corporation has sufficient assets in its books to
appearing in the books of corporation cover its debts and liabilities exclusive of capital stock
ACS 2M 1M PROFITS
PAID UP 1M ____________________
TO X – REALTY CORPORATION
If X is a manufacturing company, then it can sell its - Creditors of a corporation have the right to assume that
only property upon approval of the stockholders so long as there are outstanding debts and liabilities,
because it will render itself capable of continuing its the board of directors will not use the assets of the
business, BUT if the proceeds will be used to purchase a corporation to purchase its own stock, and that it will
better one for the continuance of its business, then it not declare dividends to stockholders when the
does not need the approval of the stockholders corporation is insolvent.
Conditions for the valid exercise of this power are the Power to invest funds <sec.42>
following
Edward Nell Co. vs. Pacific Farms - Thus, if it’s for the secondary purpose, it is necessary
- Generally where one corporation sells or otherwise - If it’s in connection with the primary purpose, only
transfers all of its assets to another corporation, the board resolution is necessary
latter is not liable for the debts and liabilities of the
transferor, except: Requirements and steps to be followed for a valid
investment of corporate funds are:
1. Where the purchaser expressly or impliedly agrees
to assume such debts; 1. Resolution by the majority of the board of directors or
trustees;
2. Where the transaction amounts to a consolidation
or merger of the corporations; 2. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the
3. Where the purchasing corporation is merely a members in case of non-stock corporations;
continuation of the selling corporation;
3. The ratification must be made at a meeting duly called
4. Where the transaction is entered into fraudulently for that purpose;
in order to escape liability for such debts.
4. Prior written notice of the proposed investment and the
Power to acquire own shares time and place of the meeting shall be made, addressed
to each stockholder or member by mail or by personal
service, and;
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 5. Any dissenting stockholder shall have the option to
purpose or purposes, including but not limited to the exercise his appraisal right
following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the
Dela rama vs. Ma-ao Sugar
shares to be purchased or acquired:
2. To collect or compromise an indebtedness to the - A private corporation, in order to accomplish its purpose
corporation, arising out of unpaid subscription, in a as stated in its articles of incorporation, and imposed by
delinquency sale, and to purchase delinquent shares the Corporation Law, has the power to acquire, hold,
sold during said sale; and
mortgage, pledge, or dispose of shares bonds, securities
and other evidences of indebtedness of any domestic or
3. To pay dissenting or withdrawing stockholders foreign corporation. Such an act, if done in pursuance of
entitled to payment for their shares under the provisions the corporate purpose, does not need the approval of the
of this Code. (a)
stockholders; but when the purchase of shares of
another corporation is done solely for investment and
The corporation must at all times have “unrestricted not to accomplish the purpose of its incorporation, the
retained earnings” to exercise this corporate power vote of approval of the stockholders is necessary.
Steinberg vs. Velasco
Gokongwei vs. SEC
- For as long as there are debts and liabilities, a
corporation may not reacquire its shares (subject to - Investments made by SMC is necessarily connected with
exceptions) its primary purpose and this was ratified in a meeting
- Submission of previous action is a sound corporate Where should dividends come from?
practice
- Stock dividends are declared as stocks coming from
Redeemable shares corporation
Closed corporation (see section 105) Who declares dividends to be declared? Do stockholders
have any say?
- For any reason, compel the value of shares “withdrawal
shares” provided corporation has sufficient funds to - Board of Directors, if stock approval of 2/3 outstanding
cover its debts and liabilities capital stock
Stockholder’s consent/ approval is not necessary and - The corporation may increase its capital
mere board action is sufficient if in accordance with
primary purpose Z co. 1M to X Co. is 2/3 of Xco. Stockholders
reacquired?
The logical relation of act done and primary purpose of
corporation and between the board of directors to - No, because in property 2/3 is not required
undertake submission of acts is a sound corporate
practice What is the effect of declaration of dividends with
regards to the assets of a company?
Dividends
- As compared to stock dividends, the declaration of cash
or property dividends have the effect of reducing
Section 43. Power to declare dividends. - The
board of directors of a stock corporation may declare corporate assets to the extent of dividends declared.
dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock - Neither would stock dividends increase the
to all stockholders on the basis of outstanding stock proportionate interest of the stockholders of the
held by them: Provided, That any cash dividends due on corporation although it will have the effect of increasing
delinquent stock shall first be applied to the unpaid
the subscribed and paid-up capital of the corporation. It
balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the gives the stockholders nothing in the way of distribution
delinquent stockholder until his unpaid subscription is of assets but merely divides his existing shares into
fully paid: Provided, further, That no stock dividend smaller units.
shall be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the Earnings belong to the corporation until declared or
outstanding capital stock at a regular or special meeting
given
duly called for the purpose. (16a)
Revocation
Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
- No revocation of dividend may be has unless it has not
(100%) percent of their paid-in capital stock, except: (1)
when justified by definite corporate expansion projects been officially communicated to the stockholders or is in
or programs approved by the board of directors; or (2) the form of stock dividends which is revocable at any
when the corporation is prohibited under any loan time prior to distribution.
agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends Stock dividends- no reduction, you capitalize your
without its/his consent, and such consent has not yet
restricted retained earnings, what is issued is a piece of
been secured; or (3) when it can be clearly shown that
such retention is necessary under special circumstances paper. The restricted earnings remain in the corporation
obtaining in the corporation, such as when there is need
for special reserve for probable contingencies. (n) Cash and property- reduces corporate assets
What are dividends? Stock dividends increase corporate assets? No, it will
only have the effect of increasing the subscribed and
- Corporate profits set aside, declared and ordered by the paid-up capital of the corporation
Board of Directors to be paid to the stockholders.
Will there be a corresponding increase in their
What are property dividends? proportionate interest?
Like tables and chairs? Can tables and chairs make - Exception: when stock dividends will result in a
surplus profits? fractional share
- No, they do not make surplus, bonds, etc. ACS-2M 1-100K 200 (10%) *VOTING AND
DIVIDEND RIGHTS STILL THE SAME
PU-1M 10-100K PU 1M
1 100K 10 100K
2 100K 1M
- NO. You cannot declare if it does not come from TRUST FUND DOCTRINE
unrestricted retained earnings.
- The power to declare it if paid-up capital is not
1. 1M-U.R.E. (is it true there is no way to compel?) maintained or is impaired
- if exceeds 100% of the paid-up capital the boards may Basis is the paid-up capital
be compelled
Entitled to dividends
ACS 2M 1M U.R.E.
Irrespective of whether the subscription is full
SUB 1M
Illegally declared
PU 800K
- Declare dividend with the belief that it formed part of
1-100K 50K PU the U.R.E., but yun pala sa capital
2-100K 50K Directors are not liable, unless sec31 acted in bad faith
or gross negligence in the conduct of corporate affairs
TO
Directors even if acting in behalf of the corporation, may
10-100K still be held solidarily liable
- YES. They are entitled however if they are declared Section 44. Power to enter into management
delinquent, the amount due them shall first be applied contract. - No corporation shall conclude a management
to his delinquency plus expenses. contract with another corporation unless such contract
shall have been approved by the board of directors and
Delinquency occurs, you are called to pay, but you by stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the
failed to pay. In case of stock dividend, the delinquent
members in the case of a non-stock corporation, of both
stock holder will not be entitled thereto until he has the managing and the managed corporation, at a
paid his subscription in full. meeting duly called for the purpose: Provided, That (1)
where a stockholder or stockholders representing the
Are non-stockholders entitled to receive dividends? 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
- No, tock dividends are civil fruits of the original
managing corporation; or (2) where a majority of the
investment, and to the owners of the shares belong the members of the board of directors of the managing
civil fruits. corporation also constitute a majority of the members of
the board of directors of the managed corporation, then
How did the court decide dividends in the case of the management contract must be approved by the
Neilsen 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
- Stock dividends cannot be issued to a person who is not members in the case of a non-stock corporation. No
a stockholder in payment of services rendered. management contract shall be entered into for a period
longer than five years for any one term.
- Whether cash, property or stock, only stockholders may
receive dividends. Dividends are fruits of investments. The provisions of the next preceding
They come from the U.R.E. or surplus profits of the paragraph shall apply to any contract whereby a
corporation. corporation undertakes to manage or operate all or
substantially all of the business of another corporation,
whether such contracts are called service contracts,
ACS 2M 1M U.R.E.
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operating agreements or otherwise: Provided, however, - The proper forum, in accordance with the provisions of
That such service contracts or operating agreements PD 902-A, as amended and R.A. No. 8799 may suspend
which relate to the exploration, development, or revoke, after proper notice and hearing, the franchise
exploitation or utilization of natural resources may be
or certificate of registration of the corporation for serious
entered into for such periods as may be provided by the
pertinent laws or regulations. (n) misrepresentation as to what the corporation can do or
is doing to the great damage or prejudice of the general
public
The requirement for a valid management contract are as
follows:
2. On the rights of the stockholders
4. The contract shall not be for a period longer than 5 - The courts have not agreed as to the legal effect of a
years for any one term, except those which relate to corporate contract outside of its authorized business
exploration, development or utilization of natural but Ballatine gives the following summary of the
resources which may be entered into for such periods as doctrines evolved:
may be provided by pertinent laws and regulations
a. If the contract is fully executed on both sides, the
Every corporate act emanates from the BOARD contract is effective and the courts will no interfere
to deprive either party of what has been acquired
Is the voting requirements of a majority stockholder under it
ABSOLUTE?
b. If the contract is executory on both sides, as a rule,
- Not only a majority but 2/3 of the outstanding capital neither party can maintain an action for its non-
stock or 2/3 of the members in a non-stock corporation performance
would be required for the approval of a management
contract in the following instances: c. Where the contract is executor on one side only,
and has been fully performed on the other, the
1. Where the stockholders representing the same interest courts differ as to whether an action will lie on the
of both the managing and managed corporation own or contract against the party who has received
control more than 1/3 of the total outstanding capital benefits of performance under it. Majority of the
stock of the managing corporation; and courts, however, hold that the party who has
received benefits from the performance is estopped
2. Where a majority of the members of the board of to set up that the contract is ultra-vires to defeat
directors of the managing corporation also constitute a an action on the contract. This is more in
majority of the directors of the managed corporation conformity with the doctrine that no person shall
be allowed to enrich himself at the expense of
3. Where the contract would constitute the management or another
operation of all or substantially all of the business of
another corporation, whether such contracts are called Privano vs. Dela Rama
service contracts. If it will not constitute the
management of all or substantially all of the business of - Court looked into the purpose clause
another corporation the first paragraph of section 44
will apply and not that of the second, that is, only the - The purpose clause empowers and limits
vote of the stockholders holding or representing at least
a majority of the outstanding capital stock or majority of
- Articles likewise provide that it may deal with any of its
the members in the case of non-stock corporation will
money
be required.
- If not illegal per se merely voidable. Can be ratified Japanese war notes vs. SEC
expressly or impliedly or even stopped as equitable
grounds - Non-stock corporations cannot make profits and
distribute profits to its shareholders
- Ultra-vires acts which are not illegal per se may become
binding and enforceable either by satisfaction, estoppels - Ultra-vires because Japanese war notes is a non-stock
or equitable grounds corporation
holder for value, although such holder at the time of Elements of a valid by-law
taking the instrument knew him to be only an
accommodation party, does not include nor apply to 1. It must not be contrary to law, public policy or morals;
corporations which are accommodation parties. This is
because the issue or indorsement of negotiable paper by 2. It must not be inconsistent with the articles of
a corporation without consideration and for the incorporation;
accommodation of another is ultra-vires
3. It must be general and uniform in its effect or applicable
- Corporate officers may guarantee or endorse an to all alike or those similarly situated;
accommodation only if specifically authorized
4. It must not impair obligations and contracts or vested
Section 36 paragraph 11 rights; and’
- It may sell and it may guarantee, contract not - None filing would not affect the status of the
necessarily illegal, it will in the absence of proof to the corporation, Loyola grand villas case
contrary presumed within its power. Corporations are
presumed to contract with in its powers- CARLOS CASE - The word “must” is not always imperative
- Purpose clause may be stretched to cover PLDT internet. - Stockholders are conlusively presumed to know the
It may be within its business. provisions of the by-laws
- May it sell computers? NO! other line of business. Its How about 3rd persons?
trading!
- NO. unless there is actual knowledge of the same they
BY-LAWS are not presumed to know of the provisions of the by-
laws
By-Laws
Fleischer vs. Botika Nolasco
- Rule adopted by the corporation for its internal
governance
- Shares of stock are personal properties
Articles of incorporation
- After incorporation- within 1 month (emanates from the
BOARD)
- May provide reasonable restriction
- Prior-more convenient (signed by the incorporators)
- By-laws merely internal laws
Who will sign the adoption clause?
- Articles is the contract between and among the parties
and corporation
- Majority of the stockholders or members attested to by
the corporate secretary
Gov’t vs. El Hogar
What happens if the corporation fails to adopt the by-
laws from the tie provided by the law? Would there be - Did the court categorically ruled here that the provision
an automatic revocation or suspension? in the 5th cause of action is valid?
- Proper notice and hearing, must first be complied with - Rules governing equity, considering the fact that there
was always lack of quorum
Loyola grand villas vs. CA
- Section 29 BOD if still constituting a quorum may fill up
a vacancy other than by removal, etc.
- Not the SEC, but the HIGC
- Empowered by SEC - Section 47 of the code, the by-laws may provide for the
qualification and disqualification
- Merely a ground, there must be proper notice and
hearing - It cannot be said Gokongwei has a vested rights
- Not affect the status of the corporation as a juridical - Prevent directors from taking advantage of position to
person promote his individual interest to the damage of others
- Subject the corporation to a fine, as may be issued by - The validity or reasonableness of a by-laws is a question
the SEC of law
When do by-laws become effective? - Subject to the limitations that reasonableness of a by-
law is a mere matter of judgment
- Until and unless the SEC gives it stamped of approval
- Rule of the majority and not the tyranny of the minority
- Suspension of any government agency. The permission
must first be secured- section 46 May the by-laws be amended altered or appealed?
Section 48. Amendments to by-laws. - The What if in the date specified in the by-laws or by the law
board of directors or trustees, by a majority vote thereof, itself the meeting was not convened, for instance lack of
and the owners of at least a majority of the outstanding quorum or force majeure?
capital stock, or at least a majority of the members of a
non-stock corporation, at a regular or special meeting - It may be postponed on a reasonable date
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) Notice requirement?
of the members in a non-stock corporation may delegate
to the board of directors or trustees the power to amend - Regular- 2 weeks prior notice
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 - Special- 1 week
by-laws shall be considered as revoked whenever
stockholders owning or representing a majority of the May the notice requirement be lessened?
outstanding capital stock or a majority of the members
in non-stock corporations, shall so vote at a regular or - By-laws may provide a longer or a shorter duration
special meeting.
- Any corporate act emanates from the board Where should it be held?
- Directors themselves cannot amend the by-laws if they - Apparent from the foregoing provision is that meetings
were not granted the same of stockholders must, at all times, be held in the city or
municipality where the principal office of the
Section 48 corporation is located and, as far as practicable, in the
principal office of the corporation.
The power granted is not subject to revocation T or F?
May the by-laws of a corporation provide that meetings
- FALSE be held anywhere in the Philippines?
If the by-laws are amended when will they become - While there is no provision authorizing a stock
valid? corporation to hold stockholders’ meetings outside of
the City of Municipality where the principal office is
- Upon issuance of the SEC that they are not inconsistent located, the law allows a non-stock corporation to
provide in its by-laws any place of members’ meeting
What if the SEC failed to act within 10 months without provided that proper notice is sent to all members
fault attributable to the corporation? indicating the date, time and place of the meeting which
shall be within the Philippines.
T or F any amendment of the by-laws will never become
valid until it gives its stamp of approval even after 1 year T or F the by-laws of a stock corporation may validly
provide that meetings shall be held anywhere in the
- TRUE. Articles of incorporation and by-laws are different Philippines?
- Meetings of stockholders 1. Date fixed Corporation can do only such things as the law allows it
in the by-laws or by-law to do, DOCTRINE OF LIMITED CAPACITY
San Miguel office located in Ortigas Center. May 1. It must be held on the date fixed in the by-laws or in
stockholders meeting be held in PICC center? accordance with law
- YES. Metro Manila, one single city 2. Prior notice must be given
- President until and unless there is a provision , 5. Quorum and voting requirements must be met
secretary on order of the president
Date not complied with, notice, place, not complied with
What if there is nobody who can call? and the person who called not authorized, what
happens to any resolution called?
- The petitioner, stockholder may petition the court
- Section 51, any meeting shall be valid provided all the
What if there is a person who can call, but he fails or stockholders are present or duly represented and
neglects to call the meeting? May a stockholder petition provided it is within the power of the corporation. 3 RD
to authorize a meeting? paragraph of 324
- Ponce case only applies when there is NO person - If the voting requirement is met, any resolution passed
authorized to call the meeting. If there is a person, but in the meeting, even if improperly held or called will be
neglects his duty. Ponce will not apply. valid if all the stockholders or members are present or
duly represented thereat. The last paragraph of section
Writ of injunction may never be issued ex parte 51 is clear on the matter when it provides:
Do you include non-voting shares in arriving at the - YES. Expressly and impliedly
voting requirement to have a valid corporate act?
- SEC ruling
- It depends.
A special meeting is valid without notice
- Section 6 last par. If it falls within the penultimate par. where the directors are all present or where
Of section 6 they consent to the meeting. Presence at the
meeting waives the want of notice. Moreover,
Five requisites of a valid meeting it has been ruled that the meeting of the
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Vote required to pass a valid corporate act? - Valid for the meeting in which it is intended
- Section 59
- NO
Only non-stock may be denied proxy voting (may be Section 59. Voting trusts. - One or more
broaden, limited or denied) 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
Proxy voting is a matter of right granted by law
the shares for a period not exceeding five (5) years at
any time: Provided, That in the case of a voting trust
Requirements of a valid proxy? specifically required as a condition in a loan agreement,
said voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full payment
of the loan. A voting trust agreement must be in writing - The beneficial owner of the shares in a voting trust is
and notarized, and shall specify the terms and disqualified to be a director in a voting trust whereas in
conditions thereof. A certified copy of such agreement a proxy, the owner of the shares may be elected as such
shall be filed with the corporation and with the
since legal title thereof remains with him
Securities and Exchange Commission; otherwise, said
agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting - YES he remains to be the owner
trust agreement shall be cancelled and new ones shall
be issued in the name of the trustee or trustees stating Is the stockholder executing in a voting trust agreement,
that they are issued pursuant to said agreement. In the is he qualified to act as a director?
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. - NO. ceases to be stockholder of record, no longer the
legal owner of shares
Being still the beneficial owner they may transfer these 1. By a contract of subscription with the corporation;
rights
2. By purchase of treasury shares from the corporation;
Is the right granted to a voting trust agreement and,
absolute? (to inspect)
3. By purchase or acquisition of shares from existing
- NO. stockholders.
- The voting trust agreement filed with the corporation Section 60 subscription
shall be subject to examination by any stockholder of
the corporation in the same manner as any other - Any contract
corporate book or record. Provided, that both the
transfer and the trustee or trustees may exercise the - Whether existing or still to be formed
right of inspection of all corporate books and records in
accordance with the provisions of this Code.
Section 60. Subscription contract. - Any contract for the
acquisition of unissued stock in an existing corporation or a
Legal title is transferred to the voting trustee corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that
May the voting trustee vote by proxy? the parties refer to it as a purchase or some other contract.
(n)
- Yes, legal owner may vote by proxy
Under the old law the 4th mode is PURCHASE
May the proxy holder vote by proxy?
Purchase
- NO, (AGENT) an agent can have no other agent unless
specifically allowed by the principal - Reciprocal in nature
Stockholder executing as a proxy, is he qualified to be - Purchaser can neither require the issuance
voted as a director?
Xco. Inc.
Why is he qualified to act as a director if the stockholder
executes as a director?
P
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Entered in June 50% shall be down payment remainder December 3. Labor performed for or services actually rendered to
08 the corporation;
August 08 property is ravaged by fire all are turned into shares 5. Amounts transferred from unrestricted retained
earnings to stated capital; and
IT WAS AGREED THAT IT WAS A PURCHASE AND WILL “Amounts transferred from unrestricted retained
BE A STOCKHOLDER ONLY IF PAID IN FULL IS HE earnings to stated capital” what does it mean?
LIABLE?
- Stock dividends will in effect capitalize the unrestricted
- NO, because that was a purchase retained earnings
- First example galing sa unissued stock After 5 years the founders shares may be converted into
common shares or other kinds of shares
- 2nd example galling sa treasury shares hindi sa
unissued share May shares of stocks be issued without consideration?
Why?
NO such thing as purchase of unissued stocks
- NO, two reasons by the SC, discriminatory against other
A subscription contract can be conditional provided stockholders and second unlawful, it prejudices the
there is nothing in the charter or statute prohibiting it right of the creditors “Trust Fund Doctrine”
and not against public order, law, etc.
If issued without a consideration
Must it be in writing?
- Section 65, they will be considered as watered stocks
- NO, it may be oral
Section 65. Liability of directors for watered
5M should it be in writing to be valid and binding as a stocks. - Any director or officer of a corporation
subscription? consenting to the issuance of stocks for a consideration
less than its par or issued value or for a consideration in
- NO, statutes of frauds only applies to SALES 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
Trillana vs. Quezon College same with the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the corporation
- Counter proposal, therefore there was a need for an and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par
acceptance or issued value of the same. (n)
- Section 62 provides: What are the requisites for the issuance of a valid
certificate of stock?
Section 62. Consideration for stocks. - Stocks 1. It must be signed by the president or vice-president and
shall not be issued for a consideration less than the par countersigned by the secretary or assistant secretary;
or issued price thereof. Consideration for the issuance of
2. It must be sealed with the corporate seal; and the entire affect the validity thereof at least in so far as the
value thereof (together with interest or expenses, if any) contracting parties are concerned.
should have been paid.
Is the issuance of a certificate of stock necessary to No shares of stock against which the
corporation holds any unpaid claim shall be
consider the subscriber a stockholder?
transferable in the books of the corporation. (35)
Are certificate of stocks considered negotiable? Thus, it was also ruled by the High Court in
Nautica Canning Corp. vs. Yumul that “A
- Quasi-negotiable transfer of shares not recorded in the stock
and transfer book of the corporation is non-
Why are they considered quasi-negotiable when it may existent in so far as the corporation is
be transferred through endorsement and delivery? concerned.” This is so because “the
corporation looks only through its books for
the purpose of determining who its
100t/s 001 10/s stockholders are.”
What if A endorsed it? 2. 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
- He is estopped, unless there are other available defenses
from unpaid subscription and not to any indebtedness
which a stockholder may owe the corporation such as
Transfer is required to be recorded in the books of the
monthly dues;
corporation, however even if not recorded, it will be valid
between the parties. Non-registration will not however,
Notes on Corporation Law
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3. Restrictions required to be indicated in the articles of - By endorsement and delivery of the stock certificate to
incorporation, by-laws and stock certificates of a close the transferee
corporation;
In order to be valid, must be registered in the books. If
4. Restrictions imposed by special law, such as the Public not, will only be binding among parties
Service Act requiring the approval of the government
agency concerned if it will vest unto the transferee 40% How may shares of stock be transferred?
of the capital of the public service company;
- Endorsement of stock certificate by owner or attorney-
5. Sale to aliens in violation of maximum ownership of in-fact with delivery
shares under the Nationalization Laws;
Embassy farms vs. CA
6. Those covered by reasonable agreement of the parties.
- Must be endorsed by owner or attorney-in-fact coupled
Monserat vs. Ceron with delivery
- NO, it is not an absolute transfer - Proper mode and manner must be complied with
- Register of deeds where the corporation resides and if Rural bank of Salinas vs. CA
different in the register of deeds of owner’s domicile
- If denied or refused without good cause, mandamus will
Unson vs. Dinamito lie
- All transferred not register will not have a valid force Tay vs. CA
and effect
- Mandamus may issue if petition has a clear legal right
Right to transfer may be regulated
- Never issued in doubtful cases
May not be unreasonably restricted
- Petitioner failed to establish a clear legal right and
Violation of nationalization law- Central Bank alleged ownership is without merit
Lambert vs. Fox - Did not acquire ownership by virtue of the contract of
pledge
- Valid , may be reasonably regulated, restricted by
agreement of parties - In a contract of pledge there must be foreclosure
- Reasonable agreement by the parties - In the case there was no attempt to foreclose
- Any attempt to restrain transfer - A stock subscription is a subsisting liability from the
time the subscription is made
- SC, in the absence of a valid lien upon its shares
- The subscriber is as much bound to pay his
- Valid restrictions shares are applicable subscription as he would be to pay any other debt
- Any restriction on a stockholder’s right to dispose of his - No stock certificate was issued. Without stock
shares must be construed strictly; and any attempt to certificate, which is the evidence of ownership of
restrain a transfer of shares is regarded as being in corporate stock, the assignment of corporate shares is
restraint of trade, in the absence of a valid lien upon its effective only between the parties to the transaction
shares, and except to the extent that valid restrictive
regulations and agreements exist and are applicable. Exception to the general rule
Subject only to such restrictions, a stockholder cannot
be controlled in or restrained from exercising his right to Rural Bank of Lipa vs. CA
transfer by the corporation or its officers or by other
stockholders, even though the sale is to a competitor of
- By notarized deed
the company, or to an insolvent person, or even though
a controlling interest is sold to one purchaser.
- Certificate of stocks already issued must be coupled
with delivery, exception (TAN vs. SEC)
Certificate of stocks are transferrable
Endorsement and delivery is not necessary (TAN vs. C armed with the endorsement form certificate, sold to D
SEC) (innocent purchaser for value), will D acquire title?
Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED) - NO, subject to such rights and defenses as the true and
lawful owner may have
- Persons sought to be stockholder is officer and has
custody of the book (estopped) What if C now goes to the corporation and presents the
form?
General Rule for valid transfer
- Then the corporation shall cancel the old certificate and
- Certificate of stock must be endorsed by owner or issues a new one, now in the name of C, now registered
attorney-in-fact coupled with delivery in the name of C, will C acquire title?
Won vs. Wack Wack - D will acquire title took the shares not by virtue of a forged
or unauthorized transfer, but on the reliance that the
- Valid between contracting parties even if not recorded in stock certificate is valid and owned by C
corporation books
Stock certificate now in possession of D. A knew of what
- Right accrues only if refused happened and went to the corporation and complains.
Who will have a better title?
- Statute of limitations does not apply in registration of
shares of stock - the corporation may be compelled to recognize both, A as
stockholder (non-negotiable) D, reliance that the stock
- Must determined from the time of refusal certificate is valid and existing and owned by C
- only A citing citizens national bank vs. state (but if Section 62 states that stocks shall not be issued for a
recognition of both stockholders would result in an over consideration less than par or issued price thereof,
issue of shares, then only the original and true owner while section 13 states that in no case shall be paid-up
can be recognized as a stockholder) capital be less than five thousand [P5000] pesos.
If issued below par, issued value considered as water
- by virtue of the doctrine of non-negotiability of certificate How may watered stocks be issued?
of stocks 1. For a monetary consideration less than its par or issued
value;
The true and lawful owner will never be deprived of his 2. For a consideration in property, tangible or intangible,
rights valued in excess of its fair market value;
What happens to D? 3. Gratuitously or under an agreement that nothing shall
be paid at all; or
- D will have a cause of action against the corporation for 4. In the guise of stock dividends when there are no
the value of his acquisition cost inclusive of damages, surplus profits of the corporation.
attorney’s fees and cost of suit Why is stock watering illegal?
1. The corporation is deprived of its capital thereby hurting
its business prospects, financial capability and
D sues the corporation for the value of his acquisition
responsibility;
cost, inclusive of damages, attorney’s fees and cost of
2. Stockholders who paid their subscriptions in full, or
suit. What may the corporation do?
promised to pay the same, are injured and prejudiced by
the reduction of their proportionate interest in the
- NO defense, no valid defense, because it was represented
corporation; and,
to other parties that the certificate of stocks is valid,
3. Present and future creditors are deprived of the
subsisting, etc.
corporate assets for the protection of their interest.
- Corporation is prejudiced
2nd situation, what cause of action may the corporation
- Stockholders, dilution of interest
have? Remedy?
- Creditors are prejudiced, virtue of right to look upon
corporations properties for the satisfaction of their
- Third party complaint against C, but what if he is a
claims
purchaser for value? 4th party claim against B
What is the effect of issuance of watered stocks
1. As to the corporation - when a corporation is guilty of
When may certificate of stocks be issued?
ultra-vires or illegal acts which constitute an injury to or
fraud upon the public, or which will tend to injure or
- Section 64 provides: defraud the public, the State may institute a quo-
warranto proceeding to forfeit its charter for the misuse
Section 64. Issuance of stock certificates. - or abuse of its franchise.
No certificate of stock shall be issued to a subscriber 2. As between the corporation and the subscriber- The
until the full amount of his subscription together with subscription is void. Such being the case, the subscriber
interest and expenses (in case of delinquent shares), if
is liable to pay the full par or issued value thereof, to
any is due, has been paid. (37)
render it valid and effective.
3. As to the consenting stockholders - They are stopped
A certificate of stock cannot be issued unless he fully from raising any objection thereto;
paid the amount subscribed 4. As to dissenting stockholders - In view of the dilution of
Subscription to the capital stocks of the corporation are their proportionate interest in the corporation, they may
indivisible compel the payment of the “water” in the stock solidarily
Clear mandate of section 148 of the code is that the against the responsible and consenting directors and
ruling of the court in Baltazar vs. Lingayen Gulf, no officers inclusive of the holder of the watered stocks;
longer holds true 5. As to creditors - They may enforce payment of the
difference in the price, or the water in the stock,
Section 148. Applicability to existing solidarily against the responsible directors/officers and
corporations. - All corporations lawfully existing and the stockholders concerned; and’
doing business in the Philippines on the date of the 6. As against transferees of the watered stock – His right is
effectivity of this Code and heretofore authorized, the same as that of his transferor. If, however, a
licensed or registered by the Securities and Exchange certificate of stock has been issued and duly indorsed to
Commission, shall be deemed to have been authorized, a bona fide purchaser, without knowledge, actual or
licensed or registered under the provisions of this Code,
constructive, the latter cannot be held liable, at least as
subject to the terms and conditions of its license, and
shall be governed by the provisions hereof: Provided, against the corporation, since he took the shares on
That if any such corporation is affected by the new reliance of the misrepresentation made by the
requirements of this Code, said corporation shall, unless corporation that the stock certificate is valid and
otherwise herein provided, be given a period of not more subsisting. This is because a corporation is prohibited
than two (2) years from the effectivity of this Code within from issuing certificates of stock until the full value of
which to comply with the same. (n) the subscriptions have been paid and could not,
therefore, deny the validity of the stock certificate it
Subscription to shares of stocks are indivisible issued as against a purchaser in good faith. Thus,
Also apparent is that once a subscriber has paid his Ballentine states that whether there is any liability on
subscription in full, he becomes entitled to be issued a the part of the transferee of watered stock is made to
stock certificate and in the event that the corporation depend upon whether he acquired the same without
refuses to do so, the stockholder my institute a case for notice, either as purchaser or donee. If he had
mandamus with damages. Thus, it has been said that knowledge thereof, he is subject to the same liability as
the duty of the corporate officers to issue stock his transferor.
certificates to those entitled thereto is a ministerial duty What is the nature of the liability of the corporate
enforceable by mandamus. directors consenting to the issuance of watered stocks
Fua Cun vs. Summers and China Banking Corp. and the extent of their liabilities?
- The court erred in holding the plaintiff as the owner of - Solidarily liable with the holder of the watered stocks to
250 shares of stock; “the plaintiff’s rights consist in the extent of the water from said shares of stocks
equity in 500 shares and upon payment of the unpaid Will all the directors be liable? What if you objected will
portion of the subscription price he becomes entitled to you also be liable?
the issuance of certificate for said 500 shares in his - If you do not issue a written objection, you are still
favor.” liable
- No certificate of stock until the full amount has been - Even passive directors may be liable
paid. - Those having knowledge thereof, but did not interpose
Watered stock their objection shall be liable
- One which is issued by the corporation as fully paid-up
shares, when in fact the whole amount of the value - Section 65 provides:
thereof has not been paid.
- Basis is par value and not the fair market value
Section 65. Liability of directors for watered - General rule is they are not liable to pay interest
stocks. - Any director or officer of a corporation because the code says unless requires in the by-laws
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 - Aside from the mandate of the law that subscribers to
value, or who, having knowledge thereof, does not shares of stock must pay the full value of their
forthwith express his objection in writing and file the subscription, they may likewise be required to pay
same with the corporate secretary, shall be solidarily, interest on all unpaid subscriptions if so imposed in the
liable with the stockholder concerned to the corporation contract or in the corporate by-laws at such rate as may
and its creditors for the difference between the fair value be indicated thereat or the legal rate if not so fixed.
received at the time of issuance of the stock and the par Unless so required or provided, however, subscribers to
or issued value of the same. (n) shares of stock, not fully paid, are not liable to pay
interest on their unpaid subscriptions. The code thus
provides:
ACS-100M 100M/S PAR VALUE-
1.00
Section 66. Interest on unpaid subscriptions.
SUBSCRIBED-50M FAIR MARKET VALUE-
- Subscribers for stock shall pay to the corporation
12.00/S interest on all unpaid subscriptions from the date of
UNSUBSCRIBED-50M subscription, if so required by, and at the rate of
A interest fixed in the by-laws. If no rate of interest is fixed
B in the by-laws, such rate shall be deemed to be the legal
C rate. (37)
D
E Until a call is made, they are not due and payable, but
still subject to the provisions of the contracts
There is a denial of pre-emptive rights and directors Procedures in case of sale of delinquent stocks
A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share. - Section 68. Delinquency sale. - The board of directors
may, by resolution, order the sale of delinquent stock
Is there stock watering if the fair market value is 12.00? and shall specifically state the amount due on each
- No stock watering subscription plus all accrued interest, and the date,
time and place of the sale which shall not be less than
- The basis is the par value
thirty (30) days nor more than sixty (60) days from the
- The shares where in fact paid more than the par value date the stocks become delinquent.
indicated in the articles of incorporation
1. By board action in accordance with the procedure laid X Co. has 1M authorized capital stock
down in sections 67 to 69 of the code
delinquent and decides to sell his share at a public the amount due on any unpaid subscription, with
auction accrued interest, costs and expenses. (49a)
Y-55K FOR 99,500 shares - 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
Z-55K FOR 99,000 shares (winning bidder) for the account of the delinquent subscriber. The other
remedy is by action in court.
What if the shares of A were sold without compliance of PNB vs. Bitulak
the requirements? May A question the sale?
- Where it not for the promise, the defendants would have
- The law prescribes two conditions before an action to not subscribed
recover delinquent stocks irregularly sold may be
allowed. These are:
- Trust Fund Doctrine, it is established doctrine that
subscriptions to the capital of a corporation constitute a
1. The party seeking to maintain such action first pays or fund to which creditors have a right to look for
tenders to the party holding the stock the sum for which satisfaction of their claims and that the assignee in
the same was sold, with interest from the date of the insolvency can maintain an action upon any unpaid
sale at the legal rate; and, stock subscription in order to realize assets for the
payment of its debts.
- Section 70. Court action to recover unpaid subscription. - May the stockholder be held liable for the debts of the
- Nothing in this Code shall prevent the corporation corporation? YES. To the extent of their unpaid
from collecting by action in a court of proper jurisdiction subscription
- As to the liability of the stockholders, it is settled that a fully paid: Provided, further, That no stock dividend
stockholder is personally liable for the financial shall be issued without the approval of stockholders
obligations of a corporation to the extent of his unpaid representing not less than two-thirds (2/3) of the
subscriptions outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)
- Prescription should be determined from the time When a certificate of stock is loss or destroyed, what
demand has been made and not from the time of must be done by the owner thereof?
subscription
- Section 73. Lost or destroyed certificates. - The
If declared delinquent, what would be the effect as to the following procedure shall be followed for the issuance by
owner of said shares? a corporation of new certificates of stock in lieu of those
which have been lost, stolen or destroyed:
certificate of stock which has been lost, stolen or 4. To transfer shares of stock subject only to reasonable
destroyed and issue in lieu thereof new certificate of restrictions such as options and preferences as may be
stock, 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;
Could it be issued earlier than 1 year?
unless the registered owner files a bond or 6. To exercise pre-emptive rights as provided for in section
other security in lieu thereof as may be required, 39;
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 7. To exercise their appraisal right in accordance with the
new certificate may be issued even before the provision of section 81 and in those instance allowed by
expiration of the one (1) year period provided herein: law such as section 42 and 105;
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 8. To institute and file a derivative suit;
lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended 9. To recover shares of stock unlawfully sold for
until the final decision by the court regarding the delinquency as may be allowed under section 69;
ownership of said certificate of stock which has been
lost, stolen or destroyed.
10. To inspect the books of the corporation subject only to
the limitations imposed by section 73;
May corporate officers be held liable for the
unauthorized issuance?
11. To be furnished by the most recent financial statement
of the corporation as by section 75;
- YES, the code provides that:
Assuming the last paragraph is not there; would it be 14. To participate in the distribution of the assets of the
not the same, that they should be held liable due to corporation upon dissolution under section 122;
fraud, bad faith or negligence?
- RIGHTS
Any officer or agent of the corporation who At the regular meeting of stockholders or members, the
shall refuse to allow any director, trustees, stockholder board of directors or trustees shall present to such
or member of the corporation to examine and copy stockholders or members a financial report of the
excerpts from its records or minutes, in accordance with operations of the corporation for the preceding year,
the provisions of this Code, shall be liable to such which shall include financial statements, duly signed
director, trustee, stockholder or member for damages, and certified by an independent certified public
and in addition, shall be guilty of an offense which shall accountant.
be punishable under Section 144 of this Code: Provided,
That if such refusal is made pursuant to a resolution or
However, if the paid-up capital of the corporation is less
order of the board of directors or trustees, the liability
than P50,000.00, the financial statements may be
under this section for such action shall be imposed
certified under oath by the treasurer or any responsible
upon the directors or trustees who voted for such
officer of the corporation. (n)
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 May books and records be examined? Who may
corporation's records and minutes has improperly used examine? Can they copy them? In whose expense?
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 - Yes, according to the code:
a legitimate purpose in making his demand.
“The records of all business transactions of
Stock corporations must also keep a book to the corporation and the minutes of any meetings
be known as the "stock and transfer book", in which shall be open to inspection by any director, trustee,
must be kept a record of all stocks in the names of the stockholder or member of the corporation at
stockholders alphabetically arranged; the installments reasonable hours on business days and he may
paid and unpaid on all stock for which subscription has demand, in writing, for a copy of excerpts from said
been made, and the date of payment of any installment; records or minutes, at his expense. “
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 Is there any defense available that could be raised? By
stock and transfer book shall be kept in the principal the corporate officers to justify the refusal?
office of the corporation or in the office of its stock
- Yes, the code provides that: “The right of the shareholders to ascertain
how the affairs of his company are being
conducted by its directors and officers is
“and Provided, further, That it shall be a founded by his beneficial interest through
defense to any action under this section that the person ownership of shares and the necessity of self-
demanding to examine and copy excerpts from the protection. Managers of some corporations
corporation's records and minutes has improperly deliberately keep the shareholders in
used any information secured through any prior ignorance or under misapprehension as to
examination of the records or minutes of such the true condition of its affairs. Business
corporation or of any other corporation, or was not prudence demands that the investor keep a
acting in good faith or for a legitimate purpose in watchful eye on the management and the
making his demand.” condition of the business. Those in charge of
the company may be guilty of gross
incompetence or dishonesty for years and
What is the stock and transfer? Where should stock and
escape liability if the shareholders cannot
transfer be kept? Can it be kept elsewhere?
inspect the records and obtain information.”
- Non-stock corporation- stock and transfer books b. Budget for expansion and diversification;
2. That he was not acting in good faith or for a legitimate Gokongwei vs. SEC
purpose in making his demand;
- It is wholly-owned
W.G. Philpotts vs. Philippine Manufacturing Co.
- The right may be regarded as personal, in the sense that If being operated as separate and distinct corporations,
only a stockholder may enjoy it; but the inspection and there is no such right
examination may be made by another. Otherwise it
would be unavailing in many instances.
Telecommunications- special franchise, it is a legislative
grant
o Note: Usually hires an auditor or accountant to
safeguard his interest
Gonzales vs. PNB
- A by-law unduly restricting the right of inspection is - Bank was created by a special law, it has its own
undoubtedly invalid charter and primarily governed by the law creating them
Vegaruth vs. Isabela Sugar Co. - 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
- Directors of a corporation have the unqualified right to other than the President of the Philippines, the
inspect the books and records of the corporation at all Secretary of Finance and the Board of Directors, nor
reasonable hours. shall any information relative to the funds in its
custody, its current accounts or deposits belonging to
private individuals, corporations or other entities except
- We do not conceive, however, that a director or by order of a Court of Competent Jurisdiction, hence
stockholder has any absolute right to secure certified inspection sought to by the petitioner is violative of the
copies of the minutes of the corporation until these provisions of its charter and is even subject to penal
minutes have been written up and approved by the sanctions
directors.
- The right of the stockholders to examine corporate 3 stages in the life of a corporation
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 - Formation or birth
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 - We now discuss the union of the corporation
the parent company.
- The last would be its death or dissolution
AYALA- HOLDING COMPANY/PARENT COMPANY
MERGER AND CONSOLIDATION
SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not wholly-
owned subsidiary)
Merger and consolidation
o purchase and sale of corporate assets is another 2. Approval of the plan by the stockholders representing
form of corporate reorganization 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
How do you value the assets of the merging corporation, the purpose;
do you consider goodwill?
- In merger there is a surviving corporation, the others Is there a liquidation process in case of merger or
are dissolved, while in consolidation, all constituent are consolidation?
dissolved and a new one organized
The surviving or the consolidated corporation May it be exercised by a stockholder who dissents to the
shall thereupon and thereafter possess all the rights, act of a business other than a primary purpose?
privileges, immunities and franchises of each of the
constituent corporations; and all property, real or
personal, and all receivables due on whatever account, X Co. inc
including subscriptions to shares and other choses in
action, and all and every other interest of, or belonging Principal office is in Quezon city, it was changed to
to, or due to each constituent corporation, shall be Paranaque
deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed;
and A objects and makes a written demand. May he exercise
his right of appraisal?
- It will never take effect until the SEC gives its approval
and issues the articles of merger - According to section 82 of the code:
o Granted 3 years to wing up unless there is a Section 82. How right is exercised. - The
trustee to wing up its affairs 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
Could there be liquidators and winding up with respect within thirty (30) days after the date on which the vote
to the corporation in consolidation and merger? 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
- No, there is none
the proposed corporate action is implemented or
affected, the corporation shall pay to such stockholder,
- No assets properties or rights to collect, they are upon surrender of the certificate or certificates of stock
transferred 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
- No debts and liabilities to pay because they become the anticipation of such corporate action.
liabilities of the surviving corporations
If within a period of sixty (60) days from the
- No properties transferred because they will be the date the corporate action was approved by the
properties of the surviving corporations 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)
o Hardest part is the financial act, regarding how disinterested persons, one of whom shall be named by
many shares would be issued, probability of the stockholder, another by the corporation, and the
collection and the like 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
o In merger and consolidation, there is due diligence
after such award is made: Provided, That no payment
and an economist is usually hired shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its
APPRAISAL RIGHT 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
Define appraisal his shares to the corporation. (n)
What property? When may this right be exercises? A objects and makes a written demand for payment of
fair value of shares. Can he make a demand of payment
of shares?
- Section 81 provides:
True or False, no stockholder in a stock corporation can
Section 81. Instances of appraisal right. - ever demand if the principal office is amended, changing
Any stockholder of a corporation shall have the right to it from QC to Manila
dissent and demand payment of the fair value of his
shares in the following instances:
- False, a stockholder in a close corporation may for any o Exception: section 105 “close corporation”
reason compel the close corporation that he be paid the
fair value of his shares
The procedure and requirements for the valid exercise of
this rights are:
Can he exercise his appraisal rights in the first place?
He hasn’t even paid his subscription in full.
1. The stockholder must have voted against the proposed
corporate action in any of the instances allowed by law
May a stockholder who hasn’t paid his subscription in for the exercise of the right of appraisal;
full exercise his appraisal rights?
Instances when the right of a dissenting stockholder to corporations, except as may be covered by specific
be paid the fair value of his shares ceases. provisions of this Title. (n)
1. When he withdraws his demand for payment and the How is the right to vote exercised in a non-stock
corporation consents thereto; corporation compared to a stock corporation
May a member in a non-stock corporation vote
cumulatively?
2. When the proposed action is abandoned or rescinded by
the corporation;
- General rule is NO
3. When the proposed action is disapproved by the SEC
where such approval is necessary; May it be granted or allowed by the by-laws?
a. The price offered by the corporation is lower than May the right to vote by proxy be validly denied in a
the fair value of the shares of the dissenting stock corporation?
stockholder as determined by the appraisers;
- Dissenting stockholder will be liable for the cost and - Yes, subject to the approval and terms and conditions of
expenses of appraisal when the SEC <sec. 89>
a. When the price offered by the corporation is “Voting by mail or other similar means by
approximately the same as the fair value members of non-stock corporations may be authorized
ascertained by the appraisers; 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
b. Where the action filed by the dissenting Commission. “
stockholder and his refusal to accept payment is
found by the court to be unjustified.
How about in stock?
Unless otherwise provided in the articles of The provision that stock corporations cannot validly
incorporation or the by-laws, officers of a non-stock provide that members cannot be voted by stockholders
corporation may be directly elected by the members. (n) is only a general rule because there is an exception
section 97 of the code states that:
Qualifications?
The articles of incorporation of a close
corporation may provide that the business of the
1. He is a member of the association; corporation shall be managed by the stockholders of
the corporation rather than by a board of directors.
2. Majority thereof must be residents of the Philippines; So long as this provision continues in effect:
and,
1. No meeting of stockholders need be called to elect
3. Other qualifications as may be provided for in the by- directors;
laws.
2. Unless the context clearly requires otherwise, the
Governing board in a non-stock stockholders of the corporation shall be deemed to be
directors for the purpose of applying the provisions of
this Code; and
- Board of Trustees, however section 138 provides that:
3. The stockholders of the corporation shall be subject
Section 138. Designation of governing to all liabilities of directors.
boards. - The provisions of specific provisions of this
Code to the contrary notwithstanding, non-stock or
The articles of incorporation may likewise
special corporations may, through their articles of
provide that all officers or employees or that specified
incorporation or their by-laws, designate their
officers or employees shall be elected or appointed by
governing boards by any name other than as board of
the stockholders, instead of by the board of
trustees. (n)
directors.
Disqualifications
Nature of membership is non-transferrable and personal
in nature unless the articles of incorporation or by-laws
- Section 27 also applies to a non-stock corporation, same provide otherwise
holds true to the manner of removal <sec. 29 ad 30>
Section 90. Non-transferability of
Section 27. Disqualification of directors, membership. - Membership in a non-stock corporation
trustees or officers. - No person convicted by final and all rights arising there from are personal and non-
judgment of an offense punishable by imprisonment for transferable, unless the articles of incorporation or the
a period exceeding six (6) years, or a violation of this by-laws otherwise provide. (n)
Code committed within five (5) years prior to the date of
his election or appointment, shall qualify as a director,
How is a membership requirement in a non-stock
trustee or officer of any corporation. (n)
corporation
1. When an offense is committed which, although it 2. Assets held by the corporation upon a condition
has no immediate relation to a member’s duty as requiring return, transfer or conveyance, and
such, it is so infamous as to render him unfit for which condition occurs by reason of the
society of honest men, which is indictable at dissolution, shall be returned, transferred or
common law; conveyed in accordance with such requirements;
2. When the offense is a violation of his duty as 3. Assets received and held by the corporation
member of the corporation; and, subject to limitations permitting their use only for
charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition
3. When the offense is of a mixed nature, being both requiring return, transfer or conveyance by reason
against his duty as a member of the corporation, of the dissolution, shall be transferred or conveyed
and also indictable at common law. to one or more corporations, societies or
organizations engaged in activities in the
If the conduct of the member comes within any of this Philippines substantially similar to those of the
cases, it is a ground for valid expulsion although it may dissolving corporation according to a plan of
not be expressly made so by the by-laws distribution adopted pursuant to this Chapter;
- General rule is that the courts will not interfere with the 3. Assets received and held by the corporation
internal affairs of an unincorporated association so as to subject to limitations permitting their use only for
settle disputes between the members, or questions of charitable, religious, benevolent, educational or similar
policy, discipline, or internal government, so long as the purposes, but not held upon a condition requiring
government of the society is fairly and honestly return, transfer or conveyance by reason of the
administered in conformity with its by-laws and the law dissolution, shall be transferred or conveyed to one or
of the land, and no property or civil rights are involved. more corporations, societies or organizations engaged in
activities in the Philippines substantially similar to
those of the dissolving corporation according to a plan of
- Exceptions are the following: distribution adopted pursuant to this Chapter;
a. Where law and justice so require, and the - If there is no distributive agreement then they may do so
proceedings of the association are subject to
through a plan of distribution under section 95
judicial review where there is fraud, oppression, or
bad faith, or where the action complained of is
capricious, arbitrary, or unjustly discriminatory 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
b. To grant relief in case property or civil rights are
adopted by a non-stock corporation in the process of
invaded, although it has also been held that the
dissolution in the following manner:
involvement of property rights does not necessarily
authorize judicial intervention, in the absence of
arbitrariness, fraud or collusion. 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
c. Are violative of the laws of the society, or the law of
regular or special meeting of members having voting
the land, as by depriving the person of due process
rights. Written notice setting forth the proposed plan of
of law
distribution or a summary thereof and the date, time
and place of such meeting shall be given to each
d. There is lack of jurisdiction on the part of the member entitled to vote, within the time and in the
tribunal conducting the proceedings, where the manner provided in this Code for the giving of notice of
organization exceeds its powers, or where the meetings to members. Such plan of distribution shall be
proceedings are otherwise illegal 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)
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
CLOSE CORPORATIONS
in accordance with law and established jurisprudence.
or controlled by another corporation which is not a close Section 97. Articles of incorporation. - The
corporation within the meaning of this Code. articles of incorporation of a close corporation may
provide:
- Identity of stockholders, specified persons 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
- Active management either as directors or partners in the veto power of minority stockholders, unlike in a
management stock corporation wherein only directors meetings may
provide for greater quorum requirement and in
stockholders meeting which may not be altered or
- Combination of the corporation and partnership type of
increased, as provide for in section 25, following the
business
doctrine of limited capacity
transferring stockholder with such reasonable terms, - Ordinary stock corporations- sit and act as a body at a
conditions or period stated therein. If upon the duly constituted meeting, they may do so by virtue of
expiration of said period, the existing stockholders the E-Commerce Act through teleconference or video
or the corporation fails to exercise the option to conference
purchase, the transferring stockholder may sell his
shares to any third person.
Exception to the rule: other officers may be directly
appointed and hired by the stockholders
o ordinary stock corporations are liable only if
acted in Bad faith, fraud or negligence in
performance of duty Close corporations may validly act even without a
meeting provided the conditions are obtained
- In close corporations, may not be compelled to admit 1. Before or after such action is taken, written consent
because it breaches the qualifying conditions thereto is signed by all the directors; or
Since they cannot be compelled, may they admit? 2. All the stockholders have actual or implied knowledge
of the action and make no prompt objection thereto in
writing; or
- Yes, provided all the stockholders consented or instead
of consenting they decide to amend their articles of
incorporation 3. The directors are accustomed to take informal action
with the express or implied acquiescence of all the
stockholders; or
- Will have to amend the articles of incorporation to
accommodate other purchasers of share
4. All the directors have express or implied knowledge of
the action in question and none of them makes prompt
- Will cease to be a close corporation if it amends and objection thereto in writing.
becomes in excess of 20
Agreements may also be entered in a close corporation Are treasury shares covered in the exercise of pre-
<sec.100> emptive rights in ordinary stock corporations?
As regards amendments
- Requiring the purchase, irrespective of unrestricted 8. Agreements between Not valid and binding since
retained earnings stockholders regarding the stockholders’ agreement
operations of the business cannot limit the discretion of
can validly be made the Board to manage
- The provision of the law above-quoted gives the SEC a corporate affairs
very wide discretion in respect to management of a close
corporation in the event of a deadlock. It may:
9. To the extent that directors Ordinarily, no such
may be classified into one classification and no
1. Cancel or alter any provision in the articles of
or more classes and to be restrictions on cumulative
incorporation, by-laws or any stockholders
voted solely by a particular voting
agreement
class of stock, cumulative
voting may, in effect, be
2. Cancel, alter or enjoin any resolution or other act restricted
of the corporation or its board of directors,
stockholders or officers
10. The articles of Officers are elected by the
incorporation may provide Board of Directors
3. Prohibit any act of the corporation or its board of that all officers shall be
directors, stockholders or officers or other persons elected or appointed by the
party to the action; stockholders
4. Requiring the purchase of the par value of the 11. It may provide for greater Although the articles of
shares of any stockholders, either by the quorum and voting incorporation or by-laws may
corporation regardless of availability of requirements in meetings provide for greater quorum
unrestricted earnings, or by the other of stockholders and and voting requirements in
shareholders, directors directors’ meeting under
section 25, those for
stockholders’ meeting cannot
5. Appointment of a provisional director generally be altered
- Cannot act both as president and treasurer at the same Can they consist of 7 or 9 members?
time
- Yes, if stock
- 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 Can they be incorporated also as non-stock?
business, and every decision of at least a majority of the denomination, sect or church, a corporation sole may be
directors or trustees present at a meeting at which there formed by the chief archbishop, bishop, priest, minister,
is a quorum shall be valid as a corporate act, except for rabbi or other presiding elder of such religious
the election of officers which shall require the vote of a denomination, sect or church. (154a)
majority of all the members of the board.
- Yes
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 What should be contained in the articles of
a violation of this Code committed within five (5) years prior to the incorporation?
date of his election or appointment, shall qualify as a director,
trustee or officer of any corporation. (n)
- Section 111 and section 112 provides for the contents
and procedures
Article 14 section 4 par. 2 of the Constitutions
Section 111. Articles of incorporation. - In
Educational institutions, other than those order to become a corporation sole, the chief
established by religious groups and mission boards, archbishop, bishop, priest, minister, rabbi or presiding
shall be owned solely by citizens of the Philippines or elder of any religious denomination, sect or church
corporations or associations at least sixty per centum of must file with the Securities and Exchange Commission
the capital of which is owned by such citizens. The articles of incorporation setting forth the following:
Congress may, however, require increased Filipino
equity participation in all educational institutions. The
1. That he is the chief archbishop, bishop, priest,
control and administration of educational institutions
minister, rabbi or presiding elder of his religious
shall be vested in citizens of the Philippines.
denomination, sect or church and that he desires to
become a corporation sole;
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 2. That the rules, regulations and discipline of his
school. The provisions of this sub section shall not apply religious denomination, sect or church are not
to schools established for foreign diplomatic personnel inconsistent with his becoming a corporation sole and
and their dependents and, unless otherwise provided by do not forbid it;
law, for other foreign temporary residents.
May any person form or organize a corporation sole? Is it required to indicate its terms of execution? Why
not?
continuous existence during a particular period until exclusively in possession of the property as concept of
dissolved in accordance with law an owner for 30 years, automatically that is
When will it acquire judicial personality? How do you Republic of the Philippines vs. IAC
compare this to other types of corporation?
- No, it will not vest unto the head, the head is acting
4. The names and addresses of the persons who are to
merely as a guardian
supervise the winding up of the affairs of the
corporation.
Roman Catholic Apostolic Adm. Of Davao, inc. vs. Land
Reg. Comm, et al. Upon approval of such declaration of
dissolution by the Securities and Exchange
Commission, the corporation shall cease to carry on its
- Act only as a guardian
operations except for the purpose of winding up its
affairs. (n)
- Ownership devolves upon the congregation or religious
denomination
- While section 115 of the code provides for the process
and procedure for the dissolution of a corporate sole,
- A corporation consists of one person only and his there is nothing in the law itself which would prohibit it
successors (who will always be one at a time, in some from amending its articles of incorporation
particular station), who are incorporated by law in order - It is believed that authorization for the dissolution by
to give them some legal capacities and advantages, the particular religious denomination, sect or church, as
particularly that of perpetuity, which in their natural required in sub-paragraph 3 of section 115 would still
persons they could not have had be necessary in the case of amending the articles of
incorporation to affect dissolution.
Director of Lands vs. CA - General rule: No, because a corporation sole, is by its
very nature ecclesiastical and religious (doctrine of
separation of church and state)
- Alienable public land is converted into private land
when the same has been openly, continuously and
- Exception: police power of the state, if its purpose is COOPERATIVES which register, home
being carried out and is instead being used for illegal insurance guaranty corporation- HOME
purpose, it may be so dissolved OWNERS
- Under common law, a religious society is a body of - Go to the general rules governing dissolution, because
persons associated together for the purpose of the rules under special corporations do not provide for
maintaining religious worship. such rule
3. That the incorporation of the religious society or - The rights of the lessor and the lessee over the
religious order, or diocese, synod, or district improvements which the latter constructed on the
organization desiring to incorporate is not forbidden by leased premises are governed by Article 1678 of the Civil
competent authority or by the constitution, rules, Code. The provision gives the lessee the right to remove
regulations or discipline of the religious denomination, the improvements if the lessor chooses not to pay one
sect, or church of which it forms a part; 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
4. That the religious society or religious order, or
conditions concerning the improvements before the
diocese, synod, or district organization desires to
termination of the lease. Petitioner PNB as assignee of
incorporate for the administration of its affairs,
PBM succeeded to the obligation of the latter under the
properties and estate;
contract of lease. It could not possess rights more than
what PBM had as lessee under the contract. Hence,
5. The place where the principal office of the corporation petitioner was duly bound to remove the improvements
is to be established and located, which place must be before the expiration of the period of lease. Its failure to
within the Philippines; and do so when the lease was terminated was tantamount to
a waiver of its rights and interest over the improvements
on the leased premise.
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 o 3 modes of dissolution, 3 modes of voluntary
serve for the first year or such other period as may be dissolution and 3 modes of liquidation and
prescribed by the laws of the religious society or winding up- FREQUENTLY ASKED IN THE
religious order, or of the diocese, synod, or district FINALS
organization, the board of trustees to be not less than
five (5) nor more than fifteen (15). (160a)
What are the 3 modes of voluntary dissolution?
1. Majority vote of the board of directors or trustees; o The foregoing are also mandatory
requirements
2. Sending of notice of each stockholders or member either
by registered mail or personal delivery at least thirty (30)
Is the appointment of a receiver mandatory?
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 - No, it is merely permissive or discretionary on the part
members.); of the court. The code uses the word “may”; the law
intended to let the shareholders have the control of the
3. Publication of the notice of time, place and subject of assets of the corporation upon dissolution and winding
the meeting for three (3) consecutive weeks in a up.
newspaper published in the place where the principal
office of said corporation is located or in a newspaper of - The directors may also undertake liquidation and
general circulation in the Philippines; winding up of its corporate affairs, and sound business
judgment, on how they will wind up
4. 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 Dissolution by shortening of corporate term <sec.120>
called for the purpose;
- Will be valid upon approval of the SEC, unlike general
5. A copy of the resolution authorizing the dissolution amendments, which will be deemed approved if not
must be certified by a majority of the board of directors acted upon by the SEC within 6 months from the date of
or trustees and countersigned by the corporate filing for a cause not attributable to the corporation.
secretary;
- Shortening of the corporate term partakes the nature of
6. Issuance of a certificate of dissolution by the SEC. an amendment of the articles of incorporation. Section
16 under general amendments allows “written assent”
Should this be strictly complied with? section 37 mandates that the vote must be cast at a
duly constituted meeting.
- Since it is the State which grants its right to exist, it is o Intra-corporate- special commercial courts
only through the State which can allow the termination
of its existence; without consent of the State, it will not Another way of dissolving a corporation is through
be dissolved. involuntary dissolution
Voluntary dissolution where creditors are affected Section 121. Involuntary dissolution. - A
<sec.119> corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified
- By virtue of a petition, when there are creditors affected complaint and after proper notice and hearing on the
grounds provided by existing laws, rules and
regulations. (n)
- The following formalities would thus be required:
4. Before such date, a copy of the order must be published - Section 6 of PD 902-A provides for the grounds for
once a week for three (3) consecutive weeks in a involuntary dissolution as follows:
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. 1. Fraud in procuring its certificate of registration;
5. Posting of the same order for three (3) consecutive weeks 2. Serious misrepresentation as to what the corporation
in three (3) public places in such city or municipality. can do or is doing to the great prejudice of or damage to
the general public;
6. Upon five (5) days’ notice, given after the date on which
the right to file objections has expired, the SEC shall 3. Refusal to comply or defiance of any lawful order of the
hear the petition and try any issue made by the Commission restraining commission of acts which
objections filed. would amount to a grave violation of its franchise;
7. Judgment dissolving the corporation and directing of its 4. Continuous inoperation for a period of at least five (5)
assets as justice requires and the appointment of a years;
receiver (if necessary in its discretion) to collect such
assets and pay the debts of the corporation. 5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as - Defendant corporation threatens substantial injury to
determined by the Commission within the prescribed the general public, dissolution is warrant
period.
- If there is a bank run kawawa naman yung depositors
- Other grounds are provided for in the corporation code
itself: among them are:
Republic vs. Bisaya Land Transportation Co. Inc
Government vs. Philippine Sugar Estate - Can even be dissolved by petition of only one
stockholder on the grounds stated in the code < sec.
- It is necessary in order to secure judicial foreclosure of 105>
respondent’s charter to show a mis-user of its franchise
justifying such a forfeiture
Financing Corporation of the Philippines vs. Teodoro
- Object is to protect the public, and not to redress
private grievances, the mis-user must be such as to - Minority stockholders may not ask for the dissolution of
work or threaten a substantial injury to the public, or a corporation in private suits and that such actions
such as to amount to a violation of the fundamental should be brought by the Government through its legal
condition of the contract by which the franchise was officers, except in cases where the intervention of
granted and thus defeat the purpose of the grant the State, for one reason or another, cannot be
obtained, as when the State is not interested
- Courts proceed with extreme caution which has for their because the complaint is strictly a matter between
object the forfeiture of corporate franchise, and the stockholders and does not involve, in the
forfeiture will not be allowed, except under express opinion of the legal officer of the Government, any
limitation, or for plain abuse of power by which the of the acts or omissions warranting quo warranto
corporation fails to fulfill the design and purpose of its proceeding , in which minority stockholders are
organization. But when the abuse or violation entitled to have such dissolution. It should be
constitutes or threatens a substantial injury to the exercised if necessary in order not to entirely ignore and
public or such as to amount to a violation of the disregard the rights of said minority stockholders,
fundamental conditions of its charter, or its conduct is especially when said minority stockholders are unable
characterized by obduracy or pertinacity in contempt of to obtain redress and protection of their rights within
law, dissolution will be granted the corporation itself. Stockholders should not be left
without recourse
- Did the court dissolve the corporation? No, it did not, it
granted the corporation 6 months to cease and desist Present set up
the performance of the questioned act otherwise it will
be dissolved
- Any stockholder or member of a corporation can
institute a dissolution proceeding against his own
Government vs. El Hogar corporation before the proper forum
Section 145. Amendment or repeal. - No right subscription must so indicate lest they are placed on
or remedy in favor of or against any corporation, its equal footing with common shareholders
stockholders, members, directors, trustees, or officers,
nor any liability incurred by any such corporation, - Preference may be participating or non-participating
stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent Dissolved corporations are granted a period of 3 years to
amendment or repeal of this Code or of any part thereof. liquidate
(n)
Section 122. Corporate liquidation. - Every
Buenaflor vs. Camarines Sur Industry Corp. 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
- From that time on Camarines Sur was plying in an any other manner, shall nevertheless be continued as a
activity that was illegal 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
- A corporation where the corporate life has expired it enabling it to settle and close its affairs, to dispose of
cannot lawfully pursue the business for which it was and convey its property and to distribute its assets, but
organized. not for the purpose of continuing the business for which
it was established.
- the Supreme Court held that a corporation, whose
corporate life expired, cannot lawfully pursue the At any time during said three (3) years, the
business for which it was organized. It cannot apply for corporation is authorized and empowered to convey all
a new certificate or a secondary franchise for it is of its property to trustees for the benefit of stockholders,
incapable of receiving a grant. 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,
- Awarding it to Camarines Sur is tantamount to a medal members, creditors and others in interest, all interest
for its illegal acts which the corporation had in the property terminates,
the legal interest vests in the trustees, and the beneficial
- It cannot apply for a new certificate or a secondary interest in the stockholders, members, creditors or other
franchise for it is incapable of receiving a grant. It was persons in interest.
not even a corporation de facto. And then, there is no
application subscribed by the new corporation Upon the winding up of the corporate affairs,
any asset distributable to any creditor or stockholder or
- And yet as stated, the new corporation has not filed any member who is unknown or cannot be found shall be
application for certificate of public convenience in escheated to the city or municipality where such assets
Sabang, and has not published such application. are located.
Gonzales vs. Sugar Regulatory Administration 1. By the corporation itself through the BOD
- Instead of applying the corporation code, the court - Usual method or procedure of liquidating a corporation
applied the constitutional provision and although there is no law authorizing it, neither is
there anything that prohibits the BOD from undertaking
the same
- Cannot be read as permitting to destroy the substantive
rights
- If this method is resorted to, the board will only have a
period of 3 years to finish its task of liquidation
- Such would collide with the non-impairment of
contracts clause of the constitution
- Claims for or against the corporate entity not filed
within the period will become unenforceable as there
- Complainants will have the right to follow the assets of exist no corporate entity against which they can be
the corporation in the hands of SRA or any other agency enforced
for that matter
3. By appointment of a receiver
Preference upon liquidation
occasion for the appointment of a receiver except under May a corporation that is already dissolved, transfer and
special circumstances and upon proper showing assign its assets and properties to a new corporation
which will continue the business of the dissolved one?
- Should the corporation, therefore, finds it difficult to - Winding up is the sole activity of a dissolved corporation
finish its liquidation, it may, at any time during the that does not intend to incorporate anew. If it does,
three year period, convey all its assets and receivables to however, it is not unlawful for the old board of directors
a trustee to prosecute and defend suits by or against the to negotiate and transfer the assets of the dissolved
corporation begun before the expiration of said period corporation to the new corporation intended to be
created as long as the stockholders have given their
consent (Chung Ka Bio vs. IAC)
- 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 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
Sumera vs. Valencia result of which the 3 year period has elapsed
- Thus it was held that when a corporation is dissolved - If the three year extended life has expired without a
and the liquidation of the assets is placed in the hands trustee or receiver having been expressly designated by
of receiver or assignee, the period of 3 years prescribed the corporation within that period, the board of directors
by law is not applicable and the assignee may institute o trustees itself, following the rationale of the Supreme
all actions leading to the liquidation of the corporation Court’s decision in Gelano vs. CA may be permitted to
even after the expiration of 3 years. 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
- If the corporation carries out the liquidation of its assets assets, including not only the shareholders but likewise
through its own officers and continues and defends the the creditors of the corporation, acting for and in its
actions brought by or against it, its existence shall behalf, might make proper representations with the
terminate at the end of three years from the time of SEC, which has primary and sufficiently broad
dissolution; but if a receiver or assignee is appointed, jurisdiction in matters of this nature, for working out a
with or without a transfer of its properties within 3 final settlement of the corporate concerns (Clemente vs.
years, the legal interest passes to the assignee, the CA)
beneficial interest remaining in the members,
stockholders, creditors and other interested persons and
said assignee may bring an action, prosecute that which o According to atty. Ladia the ruling of the
has already been commenced for the benefit of the Supreme Court in the case of Clemente vs.
corporation, or defend the latter against any other CA is wrong, opinion is further discussed
action already instituted or which may be instituted after the Clemente Case
even outside of the period of three years fixed for the
offices of the corporation.
Clemente vs. CA
- If there is a trustee, assignee or liquidator, it can - The termination of the life of a juridical entity does not
continue prosecuting suit even beyond the 3 year period by itself cause the extinction or diminution of the rights
fixed by law because he becomes the legal owner of the and liabilities of such entity or those of its owners and
rights, assets and properties conveyed to him 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
Gelano vs. CA 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
- “Trustee” as used in the corporation statute must be
legal implication to complete the liquidation. Still in the
understood in its general concept which could include
absence of a BOD or BOT, those having any pecuniary
the counsel to whom was entrusted in the instant case,
interest in the assets, including not only the
the prosecution of the suit filed by the corporation. The
shareholders but likewise the creditors of the
purpose in the transfer of the assets of the corporation
corporation, acting for and in its behalf, might make
to a trustee upon its dissolution is more for the
proper representations with the SEC, which has primary
protection of its creditors and stockholders. Debtors like
and sufficiently broad jurisdiction in matters of this
the petitioners herein may not take advantage of the
nature, for working out a final settlement of the
failure of the corporation to transfer its assets to a
corporate concerns
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 o the ruling is wrong according to atty. Ladia
themselves at the expense of another, which all
enlightened legal systems condemn.
According to atty Ladia: What happens to a corporation
- The counsel who prosecuted and defended the interest that is already dissolved, that has not been able to
of the corporation may be considered as a “trustee” at appoint a trustee with in the 3 year period?
least with respect to the matter in litigation only
- 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 If a foreign corporation wants to transact business in
can no longer sue or be sued the Philippines, what must it do?
Except by decrease of capital stock and as 5. The specific purpose or purposes which the
otherwise allowed by this Code, no corporation shall corporation intends to pursue in the transaction of its
distribute any of its assets or property except upon business in the Philippines: Provided, That said purpose
lawful dissolution and after payment of all its debts and or purposes are those specifically stated in the
liabilities. (77a, 89a, 16a) certificate of authority issued by the appropriate
government agency;
FOREIGN CORPORATIONS
6. The names and addresses of the present directors
Definition and officers of the corporation;
- Section 123. Definition and rights of foreign 7. A statement of its authorized capital stock and the
corporations. - For the purposes of this Code, a foreign aggregate number of shares which the corporation has
corporation is one formed, organized or existing under authority to issue, itemized by classes, par value of
any laws other than those of the Philippines and whose shares, shares without par value, and series, if any;
laws allow Filipino citizens and corporations to do
business in its own country or state. It shall have the 8. A statement of its outstanding capital stock and the
right to transact business in the Philippines after it shall aggregate number of shares which the corporation has
have obtained a license to transact business in this issued, itemized by classes, par value of shares, shares
country in accordance with this Code and a certificate of without par value, and series, if any;
authority from the appropriate government agency. (n)
Foreign banking, financial and insurance Other than section 125 and 126. What other
corporations shall, in addition to the above requirements are set under Philippine Law before a
requirements, comply with the provisions of existing foreign corporation may transact business in the
laws applicable to them. In the case of all other foreign Philippines
corporations, no application for license to transact
business in the Philippines shall be accepted by the
Securities and Exchange Commission without previous - Yes. A Resident agent is required. As a condition
authority from the appropriate government agency, precedent to the grant of a license to do or transact
whenever required by law. (68a) 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
Is there any deposit or security requirement? actions or legal proceedings against such corporation
- Yes, within 60 days after the issuance of the license, a - Section 128 provides:
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 Section 128. Resident agent; service of
other evidence of indebtedness of the Philippine process. - The Securities and Exchange Commission
government or its political subdivision, or of government shall require as a condition precedent to the issuance of
owned or controlled corporation, shares of stock in the license to transact business in the Philippines by
“registered enterprises” as this term is defined in R.A. any foreign corporation that such corporation file with
5186, shares of stock in domestic insurance companies the Securities and Exchange Commission a written
and banks or any combination thereof with an actual power of attorney designating some person who must be
market value of 100,000 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
- Additional securities may be required by the SEC if the consenting that service upon such resident agent shall
actual market value of the securities on deposit has be admitted and held as valid as if served upon the duly
decreased by at least 10%. Section 126 of the code authorized officers of the foreign corporation at its home
provides: office. Any such foreign corporation shall likewise
execute and file with the Securities and Exchange
Commission an agreement or stipulation, executed by
Section 126. Issuance of a license. - If the the proper authorities of said corporation, in form and
Securities and Exchange Commission is satisfied that substance as follows:
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 "The (name of foreign corporation) does
transact business in the Philippines for the purpose or hereby stipulate and agree, in consideration of its being
purposes specified in such license. Upon issuance of the granted by the Securities and Exchange Commission a
license, such foreign corporation may commence to license to transact business in the Philippines, that if at
transact business in the Philippines and continue to do any time said corporation shall cease to transact
so for as long as it retains its authority to act as a business in the Philippines, or shall be without any
corporation under the laws of the country or state of its resident agent in the Philippines on whom any
incorporation, unless such license is sooner summons or other legal processes may be served, then
surrendered, revoked, suspended or annulled in in any action or proceeding arising out of any business
accordance with this Code or other special laws. 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
Within sixty (60) days after the issuance of such service shall have the same force and effect as if
the license to transact business in the Philippines, the made upon the duly-authorized officers of the
license, except foreign banking or insurance corporation at its home office."
corporation, shall deposit with the Securities and
Exchange Commission for the benefit of present and
future creditors of the licensee in the Philippines, Whenever such service of summons or other
securities satisfactory to the Securities and Exchange process shall be made upon the Securities and
Commission, consisting of bonds or other evidence of Exchange Commission, the Commission shall, within
indebtedness of the Government of the Philippines, its ten (10) days thereafter, transmit by mail a copy of such
political subdivisions and instrumentalities, or of summons or other legal process to the corporation at its
government-owned or controlled corporations and home or principal office. The sending of such copy by
entities, shares of stock in "registered enterprises" as the Commission shall be necessary part of and shall
this term is defined in Republic Act No. 5186, shares of complete such service. All expenses incurred by the
stock in domestic corporations registered in the stock Commission for such service shall be paid in advance by
exchange, or shares of stock in domestic insurance the party at whose instance the service is made.
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; In case of a change of address of the resident
Provided, however, That within six (6) months after each agent, it shall be his or its duty to immediately notify in
fiscal year of the licensee, the Securities and Exchange writing the Securities and Exchange Commission of the
Commission shall require the licensee to deposit new address. (72a; and n)
additional securities equivalent in actual market value
to two (2%) percent of the amount by which the
- The necessity of the appointment of a resident agent is
licensee's gross income for that fiscal year exceeds five
only for the purpose of receiving summons and other
million (P5,000,000.00) pesos. The Securities and
legal processes in any legal action or proceeding against
Exchange Commission shall also require deposit of
the foreign corporation
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 Who may be appointed as a resident agent?
were deposited. The Securities and Exchange
Commission may at its discretion release part of the
additional securities deposited with it if the gross - Section 127 provides that:
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 Section 127. Who may be a resident agent. -
market value of the securities at the time they were A resident agent may be either an individual residing in
deposited. The Securities and Exchange Commission the Philippines or a domestic corporation lawfully
may, from time to time, allow the licensee to substitute transacting business in the Philippines: Provided, That
other securities for those already on deposit as long as in the case of an individual, he must be of good moral
the licensee is solvent. Such licensee shall be entitled to character and of sound financial standing. (n)
collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do May a partnership be appointed as a resident agent?
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 - Yes, domestic corporation taken in its general sense not
the Securities and Exchange Commission that the legal sense
licensee has no liability to Philippine residents,
including the Government of the Republic of the
Philippines. (n) If there is a resident agent appointed. May summons be
served to any officers of the corporation?
The general rule is that “it is not the lack of required - The true test, however, seems to be whether the foreign
license but doing business without a license which bars corporation is continuing the body or substance of the
a foreign corporation form access to our courts.” 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
Exception:
commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
1. Foreign corporations can sue before the Philippine works or the exercise of some of the functions normally
Courts if the act or transaction involved is an incident to, and in progressive prosecution of, the
“isolated transaction” or the corporation is not purpose and object of its organization
seeking to enforce any legal or contractual rights
arising from, or growing out of, any business which
- Whatever transaction the Philippine-American Drug Co.
it has transacted in the Philippines
had executed in view of the law, the Mentholatum Co.
did it itself. And the Mentholatum Co. being a foreign
2. Neither is a license required before a foreign corporation doing business in the Philippines without
corporation may sue before the forum if the the license required by section 68 of the Corporation
purpose of the suit is to protect its trademark, Law, it may not prosecute this action for violation of
trade name, corporate name, reputation or trade mark and unfair competition
goodwill;
Why is foreign corporations barred access from our
3. Or where it is based on a violation of the Revised courts if they do business without a license?
Penal Code;
- Marshall-Wells Co. vs. Henry W. Elser and Co.
4. Or merely defending a suit filed against it
Bulakhidas vs. Navarro - In the instant case, the testimony of Atty. Pablo
Ocampo, that appellant was doing business in the
Philippines corroborated by no less than Nabuo
- It is settled that if a foreign corporation is not engaged Toshida, one of appellant’s officers, that he was sent to
in business in the Philippines, it may not be denied the the Philippines to look into the operation of mines,
right to file an action in Philippine courts for isolated thereby revealing the defendant’s desire to continue
transactions engaging in business here, after receiving the shipment
of the scrap iron under consideration, making the
Philippines a base thereof.
- The object of section 68 and 69 of the Corporation law
was not to prevent the foreign corporation from
- In such a case, the single act of transaction is not
performing single acts, but to prevent it from acquiring
merely incidental or casual, but is of such character as
a domicile for the purpose of business without taking
distinctly to indicate a purpose on the part of the
the steps necessary to render it amenable to suit in the
operations for the conduct of a part of corporation’s
local courts. It was never the purpose of the Legislature
ordinary business
to exclude a foreign corporation which happens to
obtain an isolated order for business from the
Philippines, from securing redress in the Philippine If a corporation appoints a distributor or a
courts representative, will it necessarily imply doing business
in the country?
The Swedish East Asia Co., Ltd. Vs. Manila Port Service
- If the foreign corporation maintained an independent
status during the existence of the disputed contract.
- It must stated that the section is not applicable to a
foreign corporation performing single acts or “isolated
- Appointment of a distributor or representative in the
transactions.” There is nothing to show that the
Philippines, unless it has an independent status
petitioner has been in the Philippines engaged in
(transacts and does business in its own name and for its
continuing business or enterprise for which it was
account and not of the foreign corporation)
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 - if that be the case the mere appointment of a distributor
the bundles, the value of which is sought to be will not constitute doing business
recovered, were landed not as a result of a business
transaction, isolated or otherwise, but due to a
How do you know if it has an independent status?
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 - Communications Materials and Design vs. CA
invoking the section
- 3 contracts, but according to the court was not doing - And it contends that its rights to the use of its corporate
business in the Philippines 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
Far East Int’l import vs. Nankai Kogyo Co. Ltd. where it does not transact business just the same as it
may protect its tangible property, real or personal,
against trespass, or conversion
- Only one contract , but according to the Supreme Court
was doing business in the Philippines
- Since it is the trade and not the mark that is to be
protected a trademark acknowledges no territorial
- Every case shall be judged in the light of its peculiar boundaries or municipalities or states or nations, but
circumstances, where a single act or transaction extends to every market where the trader’s goods have
however, is not merely incidental or casual but indicates become known and identified by the use of the mark
the foreign corporation’s intention to do other business
in the Philippines, said single act or transaction
constitutes “doing” or “engaging in” or “transacting” General Garments Corporation vs. Director of Patents
business in the Philippines
- A foreign corporation which has never done business in - The law denies to a foreign corporation the right to
the Philippine Islands and which is unlicensed and maintain suit unless it has previously complied with a
unregistered to do business here, but is widely and certain requirement, then such compliance, or the fact
favorably known in the Islands through the use therein that the suing corporation is exempt there from,
of its products bearing its corporate and trade name has becomes a necessary averment in the complaint
a legal right to maintain an action in the Islands
- These are matters peculiarly within the knowledge of
- Mentholatum case was subsequently derogated when appellants alone, and it would be unfair to impose upon
Congress, purposely to “counteract the effects” of said appellee the burden of asserting and proving the
case, enacted R.A. 638, inserting Section 21-A in the contrary. It is enough that foreign corporations are
Trademark Law, which allows a foreign corporation or allowed by law to seek redress in our courts under
juristic person to bring an action in Philippine Courts certain conditions: the interpretation of the law should
for infringement of a mark or trade-name, for unfair not go so far as to include, in effect, an inference than
competition, or false designation of origin and false those conditions have been met from the mere fact that
description, “whether or not it has been licensed to do the party suing is a foreign corporation
business in the Philippines under Act Numbered
Fourteen hundred and fifty-nine, as amended, otherwise
known as Corporation Law, at the time it brings Olympia Business Machines Co. vs. E. Razon
complaint.
Assuming Rustans had no independent status would Will the pre-emptive rights of a foreign corporation be
the SC grant Lacoste access to our courts? 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
- Even if Lacoste did business in the Philippines it can a foreign corporation.
bring action because the case involves a violation of our
penal code
- No
- Such was a violation of article 189 of the RPC, if
prosecution follows after the completion of the M.E. Grey vs. Insular Lumber Company
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 - PNB vs. Gonzales, will this apply to a foreign
which is only an aggrieved party since a criminal offense corporation? How do you distinguish this case from a
is essentially an act against the State. It is the latter Philippine law?
which is principally the injured party although there is a
private right violated - Since it concerns the rights of stockholders it is the law
of New York that should govern
- 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 Is the license to do business of a foreign corporation
apparels were forst marketed in the Philippines. To subject to suspension or revocation? What are the
allow Hemandas to continue using the trademark grounds?
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 - Section 134 provides:
him is to render nugatory the very essence of the law on
trademarks and trade names Section 134. Revocation of license. - Without
prejudice to other grounds provided by special laws, the
license of a foreign corporation to transact business in
Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co. 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 P.D. 902-A
required by this Code;
P.D. 902-A was amended by R.A. 8799 or the
2. Failure to appoint and maintain a resident agent in SECURITIES REGULATION CODE in the year 2000
the Philippines as required by this Title; 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
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange special commercial courts, the only exceptions were
Commission a statement of such change as required by revocation of corporate franchise and calling of elections
this Title; However the SEC retained receivership or suspension
payments within June 20,2000
Jurisdiction of special commercial courts are exclusive
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any amendment and original, jurisdiction is conferred by law; 1 Special
to its articles of incorporation or by-laws or of any Commercial Court per region except MAKATI and
articles of merger or consolidation within the time QUEZON CITY which has two
prescribed by this Title; Devices or Schemes
- Pyramid scheme (misrepresentation)-Special
5. A misrepresentation of any material matter in any Commercial Courts
application, report, affidavit or other document - Syndicated estafa- not bailable
submitted by such corporation pursuant to this Title; Alleje case
- Falls squarely under sec. 5 (a) Special Commercial
6. Failure to pay any and all taxes, imposts, Courts
assessments or penalties, if any, lawfully due to the - Allegation corporate officers employing schemes in
Philippine Government or any of its agencies or political diverting
subdivisions; - Not only detrimental to corporation, but general
membership
7. Transacting business in the Philippines outside of the - Fraud must be stated with particularity
purpose or purposes for which such corporation is Abad vs. CFI of Pangasinan
authorized under its license;
- Fraud must be stated with particularity otherwise it
may be filed to any court
8. Transacting business in the Philippines as agent of or Intra-corporate
acting for and in behalf of any foreign corporation or - Exclusive and original jurisdiction of special commercial
entity not duly licensed to do business in the
courts
Philippines; or
- Sole criteria is there must be an intra-corporate
relationship
9. Any other ground as would render it unfit to transact - Pertaining to a controversy (speaks also of intra-
business in the Philippines. (n) partnership controversy, that partnership must be
registered with the SEC)
SEC does not have the sole authority to suspend or Rule now
revoke the license of a foreign corporation doing 1. Necessarily be an intra-corporate relationship; and,
business in the Philippines, other government agencies 2. The controversy must arise out of said relationship
like the Central Bank , the Insurance Commission may Intra-corporate relationship alone will not suffice to put
also do so within their respective dominion, despite the
it in the ambit of special commercial courts and courts
provision of section 134
If the SEC believes that revocation is warranted, section of general jurisdiction may take cognizance
135 provides that: 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
Section 135. Issuance of certificate of
revocation. - Upon the revocation of any such license to paid
transact business in the Philippines, the Securities and - When the transferee has done all he can be required to
Exchange Commission shall issue a corresponding do to render the transfer effectual and the corporation
certificate of revocation, furnishing a copy thereof to the refuses to register the transfer, the requirement of the
appropriate government agency in the proper cases. registration is waived and the transferee is considered
technically a stockholder who may sue to enforce the
The Securities and Exchange Commission right to have the transfer registered
shall also mail to the corporation at its registered office Florendo vs. rivera, Embassy Farms
in the Philippines a notice of such revocation - The transferor withheld the delivery, they are not yet
accompanied by a copy of the certificate of revocation. prima facie; it will not be considered intra-corporate
(n)
Controversies in the appointment (asked in the bar)
- Cases involving election, appointment and removal
Voluntary withdrawal of license In Andaya the court said that a corporate officer elected
or appointed by the BOD is always a corporate act
- All 3 conditions must be complied with - 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
Section 136. Withdrawal of foreign operate to prevent the SEC from exercising its
corporations. - Subject to existing laws and regulations,
jurisdiction under P.D. 902-A. The jurisdiction will not
a foreign corporation licensed to transact business in
the Philippines may be allowed to withdraw from the wrest on the NLRC just because of that
Philippines by filing a petition for withdrawal of license. Tabang vs. NLRC
No certificate of withdrawal shall be issued by the - Jurisdiction lies originally and exclusively to special
Securities and Exchange Commission unless all the
commercial courts and not in the NLRC
following requirements are met;
- SEC has jurisdiction over cases of removal from
employment of corporate officers
1. All claims which have accrued in the Philippines have - The relationship of a person to a corporation, whether
been paid, compromised or settled; as officer or as agent or employee or not determined by
the nature of the servides performed, but by the
2. All taxes, imposts, assessments, and penalties, if any, incidents of the relationship on they actually exist
lawfully due to the Philippine Government or any of its - Corporate officers dismissal is always a corporate act or
agencies or political subdivisions have been paid; and intra-corporate controversy
Midland construction vs. Movilla
3. The petition for withdrawal of license has been - NLRC will be possessed of jurisdiction exception will not
published once a week for three (3) consecutive weeks in apply to mere recovery
a newspaper of general circulation in the Philippines.
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
- Right to payment, whether or not it is reduced to of the Office of the Insurance Commission, Housing and
judgment, liquidated or unliquidated, fixed or Land Use Regulatory Board, or the Bureau of Internal
contingent, matured or unmatured, disputed or Revenue.
e) Any security issued by a bank except its own shares of
undisputed, legal or equitable and secured or unsecured
stock.
Investment contracts
- A contract, transaction or scheme whereby a person AND Exempt Transactions under Sec 10
invests his money in a common enterprise and is led to a) A judicial sale, or sale by an executor, administrator,
expect profits primarily from the effects of others guardian or receiver or trustee in insolvency or
The management committee and rehabilitation receiver bankruptcy.
are empowered to: b) By or for the account of a pledge holder, or mortgagee or
any other similar lien holder selling or offering for sale or
1. Take custody and control of all assets of the corporation
delivery in the ordinary course of business and not for
2. Evaluate assets and liabilities, earnings operations of the purpose of avoiding the provisions of this Code, to
the corporation liquidate a bona fide debt, a security pledged in good
3. Determine the best way to protect the investors and faith as security for such debt.
creditors c) An isolated transaction in which any security is sold,
4. Study, review evaluate the feasibility of continuing offered for sale, subscription or delivery by the owner
thereof, or by his representative for the owner’s account,
operation and structures
such sale or offer for sale, subscription or delivery not
5. Submit recommendations to the RTC regarding being made in the course of repeated and successive
rehabilitation plan transactions of a like character by such owner, or on his
6. Rehabilitate the corporation if determined to be feasible account by such representative and such owner or
by the RTC representative not being the underwriter of such
7. Report to the RTC until the corporation is dissolved security.
d) Distribution by a corporation, actively engaged in the
business authorized by its AOI, of securities to its
THE SECURITIES REGULATION CODE (RA8799)
stockholders or other security holders as a stock
dividend or other distribution out of surplus.
- Also known as the Blue Sky Law since it was enacted to protect
e) Sale of capital stock of a corporation to its own
the public from unscrupulous promoters who stake business
stockholders exclusively, where no commission or other
which have no basis and sell shares and interest therein to
remuneration is paid or given directly or indirectly in
investors, who are then left holding certificates representing
connection with the sale of such capital stock.
nothing more than a claim to a square of the blue sky.
f) Issuance of bonds or notes secured by mortgage upon
real estate or tangible personal property, where the
-SEC. 2. Declaration of State Policy. – The State shall establish a
entire mortgage together with all the bonds or notes
socially conscious, free market that regulates itself, encourage the
secured thereby are sold to a single purchaser at a
widest participation of ownership in enterprises, enhance the
single sale.
democratization of wealth, promote the development of the capital
g) Issue and delivery of any security in exchange for any
market, protect investors, ensure full and fair disclosure about
other security of the same issuer pursuant to a right of
securities, minimize if not totally eliminate insider trading and
conversion entitling the holder of the security
other fraudulent or manipulative devices and practices which
surrendered in exchange to make such conversion:
create distortions in the free market.
Provided, That the security so surrendered has been
registered under this Code or was, when sold, exempt
BROKER - person who buys and sells securities for the account of
from the provisions of this Code, and that the security
others.
issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion
DEALER - person who buys and sells securities for his/her own
fall within the class of securities entitled to registration
account in the ordinary course of business.
under this Code. Upon such conversion the par value of
the security surrendered in such exchange shall be
NOTE: No person shall engage in the business
deemed the price at which the securities issued and
of buying or selling securities in the Philippines as a
delivered in such exchange are sold.
broker or dealer, or act as a salesman, or an
h) Broker’s transactions, executed upon customer’s orders,
associated person of any broker or dealer unless
on any registered Exchange or other trading market.
registered as such with the Commission. (Sec 28)
i) Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in
SECURITES - shares, participation or interests in a corporation or
pursuance of an increase in its authorized capital stock
in a commercial enterprise or profit-making venture and evidenced
under the Corporation Code, when no expense is
by a certificate, contract, instrument, whether written or electronic
incurred, or no commission, compensation or
in character. It includes:
remuneration is paid or given in connection with the
CODE: COFDIPS
sale or disposition of such securities, and only when the
a) Certificates of assignments, certificates of participation,
purpose for soliciting, giving or taking of such
trust certificates, voting trust certificates or similar
subscriptions is to comply with the requirements of such
instruments;
law as to the percentage of the capital stock of a
b) Other instruments as may in the future be determined
corporation which should be subscribed before it can be
by the Commission;
registered and duly incorporated, or its authorized
c) Fractional undivided interests in oil, gas or other
capital increased.
mineral rights;
j) The exchange of securities by the issuer with its existing
d) Derivatives like option and warrants;
security holders exclusively, where no commission or
e) Investment contracts, certificates of interest or
other remuneration is paid or given directly or indirectly
participation in a profit sharing agreement, certificates
for soliciting such exchange.
of deposit for a future subscription;
k) The sale of securities by an issuer to fewer than twenty
f) Proprietary or non proprietary membership certificates
(20) persons in the Philippines during any twelve-month
incorporations; and
period.
g) Shares of stock, bonds, debentures, notes, evidences of
l) The sale of securities to any number of the following
indebtedness, asset-backed securities;
qualified buyers: (i) Bank; (ii) Registered investment
house; (iii)insurance company; (iv) Pension fund or
GR: Securities shall not be sold or offered for sale or distribution
retirement plan maintained by the Government of the
within the PH, without a registration statement filed with and
Philippines or any political subdivision thereof or
approved by SEC. Prior to such sale, information on the securities,
managed by a bank or other persons authorized by the
in such form and with such substance as the Commission may
Bangko Sentral to engage in trust functions; (v)
prescribe, shall be made available to each prospective purchaser.
investment company or; (vi) Such other person as the
(Sec 8)
Commission may by rule determine as qualified buyers,
on the basis of such factors as financial sophistication,
EXCEPT: Exempt Securities under Sec 9
net worth, knowledge, and experience in financial and
a) Any security issued or guaranteed by the Government of
business matters, or amount of assets under
the PH, or by any political subdivision or agency thereof,
management.
or by any person controlled or supervised by, and acting
as an instrumentality of said Government.
PROTECTION OF SHAREHOLDERS INTEREST
b) Any security issued or guaranteed by the government of
any country with diplomatic relations with the PH, or by
1. Tender Offers (Sec 19)
any state, province or political subdivision thereof on the
2. Proxy solicitation (Sec 20)
basis of reciprocity: Provided, that the SEC may require
3. Internal record keeping and accounting (Sec 22)
compliance with the form and content of disclosures the
Commission may prescribe.
TENDER OFFER – A publicly announced intention acting alone or
c) Certificates issued by a receiver or by a trustee in
in concert with others to acquire equity securities of a company.
bankruptcy duly approved by the proper adjudicatory
(2002 Bar Exams)
body.
d) Any security or its derivatives the sale or transfer of
Instances when Tender Offer is Required
which, by law, is under the supervision and regulation
1. When the person intends to acquire 15% or more of the 12. Insider Trading – the act of an insider to buy or sell
equity share of a public company pursuant to an security of the issuer while in possession of material
agreement made between or among the person and one information with respect to such security that is not
or more sellers; generally made known to the public unless (a) The
2. When the person intends to acquire 30% or more of the insider proves that the information was not gained from
equity share of a public company within a period of 12 such relationship; or (b) If the other party selling to or
months; buying from the insider (or his agent) is identified, the
3. When the person intends to acquire shares that would insider proves: (i) that he disclosed the information to
result in an ownership of more than 50% of the equity the other party, or (ii) that he had reason to believe that
shares of a public company. the other party otherwise is also in possession of the
information.
PROXY SOLICITATION
Note: When is information “material non-public”? -
NOTE: A broker or dealer who holds or acquires the proxy for at if: (a) It has not been generally disclosed to the public and
least ten per centum (10%) or such percentage as the Commission would likely affect the market price of the security after
may prescribe of the outstanding share of the issuer, shall submit a being disseminated to the public and the lapse of a
report identifying the beneficial owner within ten (10) days after reasonable time for the market to absorb the information;
such acquisition, for its own account or customer, to the issuer of the or (b) would be considered by a reasonable person
security, to the Exchange where the security is traded and to the important under the circumstances in determining his
Commission. (Sec 20.5) course of action whether to buy, sell or hold a security.
FRAUDULENT TRANSACTIONS AND OTHER MARKET Note: Who is an “insider”? - “Insider” means: (a) the
MANIPULATIONS issuer; (b) a director or officer (or person performing
similar functions) of, or a person controlling the issuer; (c)
1. Wash Sale (Sec 24.1(a)(i)) – any transaction in a a person whose relationship or former relationship to the
security which involves no change in the beneficial issuer gives or gave him access to material information
ownership thereof. about the issuer or the security that is not generally
2. Matched Order (Sec 24.1(a)(ii)) – order or orders for the available to the public; (d) a government employee, or
purchase or sale of security with the knowledge that a director, or officer of an exchange, clearing agency and/or
simultaneous order or orders of substantially the same self-regulatory organization who has access to material
size, time and price for the sale or purchase of such information about an issuer or a security that is not
security has, or will be entered by or for the same or generally available to the public; or (e) a person who
different parties. learns such information by a communication from any of
the foregoing insiders.
Note: Wash sale and matched orders become illegal
when they are used as a means to create false INDEPENDENT DIRECTOR
appearance of active trading in the security concerned. Person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other individual
3. Marking the close – placing the purchase order, at or having a relationship with the corporation, which would interfere
near the close of the trading period. The price that was with the exercise of independent judgment in carrying out the
closed will then be the price that will be posted on the responsibilities of a director.
following trading day.
4. Painting the tape – involves a series of transactions Corporations which require an Independent Director
that are reported publicly to give the impression of an 1. An exchange; or
activity in a security. 2. Any corporation with a class of equity securities listed
5. Squeezing the float – the part of an outstanding for trading on an Exchange or with assets in excess of
security intentionally held by dealers or other persons P50M and having 200 or more holders, at least 200 of
with a view of reselling them later for profit. which are holding at least 100 shares of a class of its
6. Hype and dump – Act employed by a person or group of equity securities or which has sold a class of equity
persons of purchasing the outstanding capital stock of a securities to the public pursuant to an effective
dormant public shell company for a nominal amount registration statement shall have at least two (2)
and merge it with their privately held company. They independent directors or such independent directors
would then gain control of the majority stocks of the shall constitute at least 20% of the members of such
merged entity. Stock certificates are often re-issued in board, whichever is the lesser.
the name of the merged entity to relatives and associates
who act as nominees of the person or persons employing OPTION TRADING
the device. They would then look for a broker-dealer Put – a transferrable option or offer to deliver a given
who would be willing to make a “hype” of the securities. number of shares of stock at a stated price on any given
The broker-dealer then generates volume and advance time during the stated period.
bid price. When the market reaches a high price, they Call – a transferrable option to buy a specified number
would “dump” their shareholdings and bail out. of share at a stated price
7. Boiler Room Operations – involves an intensive selling Straddle – a combination of put and call.
campaign through numerous salesmen by telephone or
through direct mail offerings for securities of either a SETTLEMENT OFFERS
certain type or from a specific issuer. Investors are At any time, during an investigation or proceeding under
induced to purchase through hard-sell based on this Code, parties being investigated and/or charged may propose
unfounded predictions and mailing of misleading market in writing an offer of settlement with the Commission. The
letters. Commission may only agree to a settlement offer based on its
findings that such settlement is in the public interest. Any
Note: Marking the close, Painting the tape, Squeezing the agreement to settle shall have no legal effect until publicly
float, Hype and dump, Boiler Room Operations become disclosed. Such decision may be made without a determination of
unlawful if it is effected to either raise the price or induce guilt on the part of the person making the offer.
the purchase of a security or of a controlling, controlled, or
commonly controlled company by others or to depress the DAMAGES
price to induce the sale of a security, whether of the same All suits to recover damages shall be brought before the
or of a different class, of the same issuer or of a Regional Trial Court, which shall have exclusive jurisdiction to
controlling, controlled company or common controlled hear and decide such suits. The Court is authorized to award
company by others or to create active trading to induce damages in an amount not exceeding triple the amount of the
the purchase through said devices or schemes. transaction plus actual damages.