Atty. Raymund Christian S.

Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law

TITLE II persons who are licensed to practice a profession, and partnerships or
INCORPORATION AND ORGANIZATION OF PRIVATE associations organized for the purpose of practicing a profession, shall
CORPORATIONS not be allowed to organize as a corporation unless otherwise provided
under special laws. Incorporators who are natural persons must be of
INCORPORATORS legal age.

Each incorporator of a stock corporation must own or be a subscriber to

BP BLG. 68 REVISED CORPORATION
at least one (1) share of the capital stock.
CODE
A corporation with a single stockholder is considered a One Person
Section 10. Number and Corporation as described in Title XIII, Chapter III of this Code.
qualifications of
incorporators. –

Any person, partnership, Please take note that when you study, you study this provision, but
Any number of natural please take note its history. That is why from time to time we compare—
association or corporation, singly
persons what is the revision and what are the changes.
or jointly with other but

not less than five (5) but
not more than fifteen (15)
all of legal age and a
majority of whom are
residents of the
Philippines
may form a private
corporation for any lawful
purpose or purposes.
not more than fifteen (15) in
number,
may organize a corporation for
any lawful purpose or purposes;
First, from the first sentence pa lang. Before, you can only incorporate if
you are a natural person. ‘Yong living body lang ang maka incorporate.
Pero ngayon ano na ang pwede? Any person, partnership, association
or corporation may incorporate. That is a major major change.
Before kailangan mo nang tao para maka incorporate, kaya ang
ginagawa nila before—what if ako company gusto ko mag create nang
corporation, eh kailangan nang limang tao before—look at now, there is
no more minimum. It is only maximum. Before, gusto nang company
mag create nag corporation but ang nakalagay sa Corporation Code
kailangan individuals. So, mag hire ako nang dummy— lima plus ako as
corporation pero hindi ako incorporator, but I will just contain after it will
be incorporated already. That is one of the significant changes.

Each of the incorporators
of stock corporation must
own or be a subscriber to
at least one (1) share of
the capital stock of the
corporation.
Section 10 has been revised.
Provided, That natural persons
who are licensed to practice a
profession, and partnerships or
associations organized for the
purpose of practicing a Person Corporation. You will not be considered as ordinary private
profession, shall not be allowed
to organize as a corporation
unless otherwise provided under
special laws. Incorporators who
are natural persons must be of
legal age.
Each incorporator of a stock
corporation must own or be a
subscriber to at least one (1)
share of the capital stock.
A corporation with a single
stockholder is considered a One
Person Corporation as
described in Title XIII, Chapter III
of this Code.
Now, the corporation can actually become incorporator. The minimum
has been deleted. Before, it is 5-15, but now one (1).
But for private corporation the minimum is Two (2). Bakit? Wala naman
sinabi na 2. Pwede naman isa, but you will be considered as Sole
corporation.
There is a difference between ordinary corporation and one-person
corporation. The One-person Corporation is governed specifically by
specific section. In other words, this specific section that we will discuss
is only applicable if you are an ordinary private corporation. In ordinary
private corporation, you have at least two (2) but not more than 15
incorporators.
Provided, That natural persons who are licensed to practice a
profession, and partnerships or associations organized for the purpose
of practicing a profession, shall not be allowed to organize as a
corporation… if professional, as you can see walang law firm na
corporation. Walang dental clinic na corporation. These are partnership.
Now, incorporators who are natural persons must be of legal age,
again—18.
Each incorporator of a stock corporation must own or be a subscriber to
at least one (1) share of the capital stock.

Before the amendment: Foreign and domestic companies are not A corporation with a single stockholder is considered a One Person
allowed to donate for political reasons or campaigns. Corporation as described in Title XIII, Chapter III of this Code.

Revised: Only foreign corporation are prohibited.
That is very dangerous. What would prevent a person to lobby for the
interest of a corporation. Let’s say mining. Ito charismatic na person,
patakbuhin natin as senator, I will finance his campaign provided that in
return when you become a congressman or senator, you approved this
law which would be in my best interest. That is precisely the reason why
it was originally prohibited.
60:00-1:18:56 January 10, 2020 by Mary Caroline Castro
Section 10. Number and Qualifications of Incorporators. – Any
person, partnership, association or corporation, singly or jointly with
others but not more than fifteen (15) in number, may organize a
corporation for any lawful purpose or purposes: Provided, That natural
That is governed by a separate title. Please read SEC Memorandum
Circular number 16-19, issued July 30, 2019 which is actually a
guideline on the number and qualifications of incorporators under the
Revised Corporation Code.
WHEREAS, Section 10 of Republic Act No. 11232,
otherwise known as the Revised Corporation Code of the Philippines,
allows any person, partnership, association or corporation, singly or
jointly with others but not more than fifteen (15) in number, to
organize a corporation for any lawful purpose or purposes;
Xxx xxx xxx
Section 1. Number of Incorporators

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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
For the purpose of forming a new domestic corporation
under the Revised Corporation Code, two (2) or more
persons, but not more than fifteen (15), may organize
themselves and form a corporation.
Only a One Person Corporation (OPC) may have a single
stockholder, as well as a sole director. Accordingly, its
registration must comply with the corresponding separate
guidelines on the establishment of an OPC.
Xxx xxx xxx
Please take note, dito ini specify ang minimum. Sa Revised Corporation
Code, hindi nilagay ang minimum pero ang nakalagay sa SEC
Memorandum Circular nila—for the purpose of forming a new domestic
corporation under the Revised Corporation Code, two (2) or more
persons, but not more than fifteen (15), may organize themselves and
form a corporation.
Again, bakit hindi pwede yong isa? Kasi if isa, it will be considered as
One-person Corporation.
Incorporators are those stockholders mentioned in the articles of
incorporation as originally forming and composing the corporation, and
who are signatories thereof.
When you try to look at the Articles of Incorporation, sila yong
nakapirma.
Question: If maggamit ako nang Articles of Incorpation, can I amend the
incorporators? Answer: NO. Because this is one of those historical facts
that is there forever. If nakahanap kayo ang articles, try to read the
incorporation of a corporation. Minsan yong nakalagay na incorporator
hindi na stockholder ngayon. Kasi nag transfer transfer na. When naging
incorporators sila, laging nandoon ang kanilang pangalan sa Articles of
Incorporation.
Again, it may compose of natural, juridical entity or a combination
thereof. Even foreign corporation. Foreign corporation can be an
incorporator in an ordinary private corporation.
What are the requirements when a partnership is an incorporator?
In the event that an SEC-recorded partnership is made an incorporator,
the application for registration must be accompanies by a Partners’
Affidavit, duly executed by all of the partners, to the effect that they
formed and that they have designated one of the partners to become a
signatory to the incorporation documents. (Sec. 4, SEC Memorandum
Circular 16-19)
Why is it necessary? Even if the partnership becomes an incorporator—
sino yong pipirma? Wala naman kamay yong partnership. So, they
should designate someone who will sign in the name of the partnership.
What if the incorporator is a Corporation or association, what are
the requirements?
In the event that an SEC-registered domestic corporation or association
is made an incorporator, its investment in the new corporation must be
approved by a majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two thirds (2/3) of the members
in the case of nonstock corporations, at a meeting duly called for the
purpose
A directors’/trustees’ Certificate or a Secretary’s Certificate, indicating
the necessary approvals. As well as the authorized signatory to the
incorporation documents, shall be executed under oath and submitted
by the applicant.
Domestic corporations under “delinquent”, “suspended”, “revoked” or
“expired” status with the SEC shall not be authorized to become an
incorporator. (Sec. 5, SEC Memorandum Circular 16-19)
What if the incorporator is a Foreign Corporation?
In the event that a foreign corporation is made an incorporator, the
application for registration must be accompanied by a copy of a
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document (e.i. Board Resolution, Directors’ Certificate, Secretary’s
Certificate, or its equivalent), duly authenticated by a Philippine
Consulate or with an apostille affixed thereto, authorizing the foreign
corporation to invest in the corporation being formed and specifically
naming the designated on behalf of the foreign corporation. (Sec. 6, SEC
Memorandum Circular 16-19)
Apostille—is simply the name for a specialized certificate, issued by the
Secretary of State. The Apostille is attached to your original document
to verify it is legitimate and authenticate so it will be accepted in one of
the other countries who are members of the Hague Apotille Convention.
(it is the document na gina attach at hindi mo na kailangan ipa notary sa
embassy but it is subject to an agreement na reciprocal between parties,
it eases the necessity of having the document consularized)
Please take note that for the signatories, it has to be a TIN number. Hindi
na sila tumatanggap nang ibang ID. Kasi there is an exchange of
information—like BIR. So, pwede sila mag exchange nang information—
kung ang tao na ito may marami ba syang company, etc.
Please read the Circular. Now, lets go to the Corporate terms. Again,
this is a revision. Parang magka iba sya sa before. Before, when you put
up a corporation, the default life is fifty (50) years. After 50 years, can
you still extend? Now, because of the revision, ang nangyari lumagpas
na pala sa 50 year at hindi nila namalayan. Pag lumagpas kasi sa
corporate term mo, it is automatically dissolved. What will happen if you
are automatically dissolved? Mawawalan ka nang personality. So
lumagpas kami at nawalan nang personality. So, sumobra at ang mga
boarders nila—ineffective and unenforceable na yon lahat (contracts).
So wala na ang personality nakaligtaan lang.
Anong nangyari? So pumunta sila nang SEC and asked for indulgence.
And sabi nang SEC: you are actually dissolved. But what we can do for
you is you incorporate a new one but we can reserve the same name.
kasi yon nalang mabigay nang SEC sa kanila, Kasi ang sabi nila, kung
iba ang pangalan paano nalang ang aming marketing. Yon na ang naka
publish na documents.
Section 11. SEC. 11. Corporate Term. – A corporation shall have
perpetual existence unless its articles of incorporation provides
otherwise.
Corporations with certificates of incorporation issued prior to the
effectivity of this Code, and which continue to exist, shall have perpetual
existence, unless the corporation, upon a vote of its stockholders
representing a majority of its outstanding capital stock, notifies the
Commission that it elects to retain its specific corporate term pursuant
to its articles of incorporation: Provided, That any change in the
corporate term under this section is without prejudice to the appraisal
right of dissenting stockholders in accordance with the provisions of this
Code.
A corporate term for a specific period may be extended or shortened by
amending the articles of incorporation: Provided, That no extension may
be made earlier than three (3) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Commission: Provided, further,
That such extension of the corporate term shall take effect only on the
day following the original or subsequent expiry date(s).
A corporation whose term has expired may apply for a revival of its
corporate existence, together with all the rights and privileges under its
certificate of incorporation and subject to all of its duties, debts and
liabilities existing prior to its revival. Upon approval by the Commission,
the corporation shall be deemed revived and a certificate of revival of
corporate existence shall be issued, giving it perpetual existence, unless
its application for revival provides otherwise.
No application for revival of certificate of incorporation of banks, banking
and quasi-banking institutions, preneed, insurance and trust companies,
non-stock savings and loan associations (NSSLAs), pawnshops,
corporations engaged in money service business, and other financial
intermediaries shall be approved by the Commission unless
accompanied by a favorable recommendation of the appropriate
government agency.
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
What is the implication if mag create sila nang new company?
Mag liquidate sila nang Old. If i-liquidate mo yan—magsasara. So, you
have to pay the liquidating dividends. It required them to pay 60 Million
with the BIR. In actuality wala naman nag liquidate, nakalimutan lang
nila. Just imagine the problem. That is why one of the proposed revisions
is ito. The corporation shall be perpetually existence. Perpetual na, wala
nang limitation, unless its articles of incorporation provides otherwise.
The default now is forever, unless otherwise provided.
Corporations with certificates of incorporation issued prior to the
effectivity—what happens to the current corporation? Is it perpetual or
yon pa rin ang terms na nakalagay sa Articles of Incorporation? and
which continue to exist, shall have perpetual existence.
Please take note that a corporation shall have perpetual existence,
unless the corporation, upon a vote of its stockholders representing a
majority of its outstanding capital stock, notifies the Commission that it
elects to retain its specific corporate term pursuant to its articles of
incorporation. By default, perpetual, unless I no-notify mo na I re-retain
yong specific corporate term.
Provided, That any change in the corporate term under this section is
without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code. So, very very important kasi
nag revise ka na nang Corporation Code. Let’s say my company ka na
ang term lang ay 25 years, but by default—forever na. Because mayroon
nang forever, mayroon ngayong karapatan ang mga stockholders to
exercise the appraisal. But as a general—ayaw ko na sa company, can
you please buy my shares—buy me out, that is appraisal.
A corporate term for a specific period may be extended or shortened by
amending the articles of incorporation: Provided, That no extension may
be made earlier than three (3) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Commission… So, let’s say ini
specify na 50 years lang and you want to extend, meron kang 3 years
to extend. Before, ang 3 years na ito is for shortening. Kasi ito yong
ginagawa nang mga company in reality.
If mag co-close kasi ang company, you have two options: 1. You have
the right to file a dissolution which is very tedious. So, ang ginagawa
nang iba, they shorten. Let’s say, I dissolve natin ito—March 2020 tapos
kapoy man file ug petition kay hearing, etc. So, I amend nila ang ilahang
Articles kutob lang March para pag abot March—automatic dissolve.
That’s one na ginagawa nila. Actually, ganyan din ina-advance ko. Kasi
naman madali. So, ngayon extension kasi nga ang default— perpetual.
A corporation whose term has expired may apply for a revival of its
corporate existence… this is also very significant. For one, forever na
nga ang term meron pang revival. So, kung nawala ka, pwede pang I
revive.
A corporation whose term has expired may apply for a revival of its
corporate existence, together with all the rights and privileges under its
certificate of incorporation and subject to all of its duties, debts and
liabilities existing prior to its revival. So, you can apply for revival. Please
take not of that. If na dissolved ka na, pwede ka mag apply for revival.
For one, this would address that problem I earlier stated. Na kung
makaligtaan mo, ang gawin mo nalang mag file ka for REVIVAL.
Because all your duties and obligations are deemed to be continued.
Please take note of this remedy.
Upon approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall be issued,
giving it perpetual existence, unless its application for revival provides
otherwise. But, please take note of those industries with public interest.
The application for revival shall be made with recommendation. So, you
have banking and quasi-banking institutions, preneed, insurance and
trust companies, non-stock savings and loan associations (NSSLAs),
pawnshops, corporations engaged in money service business, and
other financial intermediaries.
There is a case, an Apo View Hotel case. This is a previous Corporation
Code, so don’t confuse yourselves. Highlight ko ang approach nang
SEC which is liberal approach. Di ba, yong nangyari kay rappler—kasi
sinabi nila na di-donate nila, they asked SEC’s opinion and ang
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construction naman talaga nang SEC is to construe liberally to enable
the existence of the corporation.
IN THE MATTER OF AMENDMENT OF THE ARTICLES OF
INCORPORATION AND BY-LAWS OF PAMINTUAN
ENTERPRISES (DAVAO), INC, V. COMPANY REGISTRATION
AND MONITORING DEPARTMENT (OCTOBER 19, 2017(
SEC En Banc Case No. 02-17-422
Facts: Appellant is a domestic corporation duly registered with the
Commission on 23 February 1966. It manages the Apo View Hotel,
which is the second oldest hotel in the country, next to Manila Hotel.
On June 17, 2004, appellant’s stockholders, representing at least2/3
of the outstanding capital stock, ratified the BOD’s resolution
extending the life of the corporation.
Sometime in October 2014, appellant filed with the Commission’s
Davao Extension Office (SEC-DEO) its application for the
amendment of its Articles of Incorporation (AOI) for extension of its
corporate term. However, the SEC-DEO refused to accept
appellant’s application on the ground that the latter could not provide
a Certificate of No-Intra-Corporate Dispute because of the presence
of the intra-corporate case involving its delinquent stockholders.
Since then, appellant made several attempts to file its amendments,
however the same was denied by SEC-DEO.
Issue: Whether or not the appellant’s application for extension of
corporate term should be allowed.
Held: Yes. The appellant’s application for extension of corporate
term should be allowed.
Section 11 of the Code provides that a corporation shall exist for a
period not exceeding fifty (50) years from the date of incorporation
unless sooner dissolved or unless said period is extended. The
corporate term as originally stated in the articles of incorporation may
be extended for periods not exceeding fifty (50) years in any single
instance by an amendment of the articles of incorporation, in
accordance with this Code; Provided, That no extension can be
made earlier than five (5) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and Exchange
Commission.
In the instant case, the Appellant was incorporated on February 22,
1966. Before the expiration of its corporate term, Appellant’s BOD
approved the extension during a special meeting held on May 27,
2014. This was thereafter ratified by the appellant’s stockholders,
representing at least 2/3 of the outstanding capital stock, in a special
stockholders’ meeting on June 17, 2014.
However, when appellant filed its application for extension of its
corporation term, SEC DEO denied the same on the ground that it
failed to submit a Certificate of No Intra-Corporate Dispute.
Recently, the Commission En Banc passed SEC RES. No. 222, s.
of 2017, which states that:
“xxx in cases for extensions of corporate term, the liberal approach
adopted by the Supreme Court in its latest decisions in the cases of:
CRMD and SEC versus Ching Bee Trading Corporation (G.R. No.
205921, 12 November 2014) and 3-D Industries versus Northern
Islands Company, Inc. (GR No. 194891, 9 January 2017). The En
Banc is aware that the very recent 2017 decision is not yet final.
However, considering that the legal principle enunciated therein is
consistent with the current Commission’s thrust to adopt policies that
‘promote ease of doing business’ (i.e. the Corporation Code
amendment on perpetual corporate term pending in Congress), the
En Banc similarly espouses the liberal approach adopted y the
Supreme Court. All previous pronouncements, policies or rules
inconsistent with this latest policy shall be deemed repealed, revoked
or amended.
Xxx all corporations similarly situated in relations to the matter of the
expiration of its term of existence shall be ALLOWED to file their
applications to amend their Articles of Incorporation to extend their
3
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
corporate term before the Company Registration and Monitoring
Department, which shall present it for approval of the Commission
En Banc so as to continue as a going concern, provided that (1) The
intent to continue operations is supported by approvals given by the
Bard and Stockholders prior to the expiration of the term, as certified
in a written document; (2) the application is filed before the CRMD
and all the requirements of the latter are satisfied; and (3) all
appropriate filing fees are paid for.”
In the light of liberal approach, appellant should now be allowed to
file its application for extension of corporate term before the CRMD.
An outright denial of such application will result in the closure of a
going concern, which is the second oldest hotel in the country. As
similarly ruled by the Court of Appeals in the HEPI case, there would
be economic implication if we would deny appellants application for
extension of corporate term. Also, the State or the general public will
not be prejudiced if we would allow the application for the extension
of appellant’s corporate term.
SEC. 12. Minimum Capital Stock Not Required of Stock
Corporations. – Stock corporations shall not be required to have a
minimum capital stock, except as otherwise specifically provided by
special law.
Before, when the Revised Corporation Code is issued, there is a
comparative whatever being circulated online na may minimum na daw
na 1 Million ang capital stock. Hindi ko alam kung sino gumawa nun but
it confused the people if meron na bang minimum. Sabi ko: wala.
Walang nakalagay na minimum.
Kasi kung maglagay ka nang minimum—di ba, ang purpose nang
Revised Corporation Code is to ease doing business in the Philippines.
Which is actually, yon din ang ginagawa nang mga karatig-bansa. Like
Malaysia. Yon ang ginagawa. So, if you are providing a minimum then
you are not providing a bigger door for the entrance of businesses.
Again, section 12— Stock corporations shall not be required to have
a minimum capital stock except as otherwise specifically provided by
special law. So, walang minimum stock, kahit I00 lang, pwede.
But please take note that because of different laws, we have industries
that has minimum paid-up capital. But this is not based on the Revised
Corporation Code but by Other Laws. Kung Cargo Consolidator kay
100,000.00. kung financing company kay 10 Million. Based on
industries. If banking and quasi-banking institutions ka, preneed,
insurance, recruitment, retail trade— may minimum paid-up capital ka.
SEC. 13. Contents of the Articles of Incorporation. – All corporations
shall file with the Commission articles of incorporation in any of the
official languages, duly signed and acknowledged or authenticated, in
such form and manner as may be allowed by the Commission,
containing substantially the following matters, except as otherwise
prescribed by this Code or by special law:
(a) The name of the corporation;
(b) The specific purpose or purposes for which the corporation is being
formed. Where a corporation has more than one stated purpose, the
articles of incorporation shall indicate the primary purpose and the
secondary purpose or purposes: Provided, That a nonstock corporation
may not include a purpose which would change or contradict its nature
as such;
(c) The place where the principal office of the corporation is to be
located, which must be within the Philippines;
(d) The term for which the corporation is to exist, if the corporation has
not elected perpetual existence;
(e) The names, nationalities, and residence addresses of the
incorporators;
(f) The number of directors, which shall not be more than fifteen (15) or
the number of trustees which may be more than fifteen (15);
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(g) The names, nationalities, and residence addresses of persons who
shall act as directors or trustees until the first regular directors or trustees
are duly elected and qualified in accordance with this Code;
(h) If it be a stock corporation, the amount of its authorized capital stock,
number of shares into which it is divided, the par value of each, names,
nationalities, and residence addresses of the original subscribers,
amount subscribed and paid by each on the subscription, and a
statement that some or all of the shares are without par value, if
applicable;
(i) If it be a nonstock corporation, the amount of its capital, the names,
nationalities, and residence addresses of the contributors, and amount
contributed by each; and
(j)Such other matters consistent with law and which the incorporators
may deem necessary and convenient.
An arbitration agreement may be provided in the articles of
incorporation pursuant to Section 181 of this Code.
This has been amended also. Mas ni trimmed line lang. before kasi the
treasurer’s certificate, treasurer’s affidavit is a different form but ngayon
it is put simple.
SEC. 18. Registration, Incorporation and Commencement of
Corporate Existence. – A person or group of persons desiring to
incorporate shall submit the intended corporate name to the
Commission for verification. If the Commission finds that the name is
distinguishable from a name already reserved or registered for the use
of another corporation, not protected by law and is not contrary to law,
rules and regulations, the name shall be reserved in favor of the
incorporators. The incorporators shall then submit their articles of
incorporation and bylaws to the Commission.
If the Commission finds that the submitted documents and information
are fully compliant with the requirements of this Code, other relevant
laws, rules and regulations, the Commission shall issue the certificate of
incorporation.
A private corporation organized under this Code commences its
corporate existence and juridical personality from the date the
Commission issues the certificate of incorporation under its official seal
and thereupon the incorporators, stockholders/members and their
successors shall constitute a body corporate under the name stated in
the articles of incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner dissolved in
accordance with law.
Section 18 is very important provision— Registration, Incorporation and
Commencement of Corporate Existence. A person or group of persons
desiring to incorporate shall submit the intended corporate name to the
Commission for verification. This is the process. Ang pinaka process
talaga n’yan is magpa verify ka muna. Because they will not allow you if
your name is similar (based on your Intellectual Property Law) to the
existing one.
But now, the problem lang kasi right now is when the SEC tries it to be
online the application for the registration is lumabas din itong revision.
Yong online is sobrang problema na talaga. Sobrang nagwawala nang
yong mga tao doon sa SEC. Sobrang bagal. Buti pa yong manual 2
weeks lang may certificate of incorporation ka na. Itong sa online nila—
yong certificate of partnership ko hindi pa inilalabas. Kailan pa ako
nagtayo nag law firm. Hanggang ngayon wala pa. Ayaw ko na syang
kunin.
Ang pangit talaga nang kanilang system. Ang sabi, di naman daw sila
dapat mag o-online but yong na upo kasi si President Duterte parang it
was a mandate to streamline everything. Na pressure silang gumawa
nang system but hindi naman sufficient. So, yon maraming reklamo. Eh
ngayon na revised pa. yong nakalagay sa kanila is yong dating
Corporation Code, eh ngayon bago. Wala, samot!
A private corporation organized under this Code commences its
corporate existence and juridical personality—please take note, from
the date the Commission issues the certificate of incorporation
under its official seal and thereupon the incorporators,
4
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
stockholders/members and their successors shall constitute a
body corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said
period is extended or the corporation is sooner dissolved in accordance
with law.
SEC. 17. Corporate Name. – No corporate name shall be allowed by
the Commission if it is not distinguishable from that already reserved or
registered for the use of another corporation, or if such name is already
protected by law, or when its use is contrary to existing law, rules and
regulations.
A name is not distinguishable even if it contains one or more of the
following:
(a) The word “corporation”, “company”, “incorporated”, “limited”, “limited
liability”, or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions,
abbreviations, different tenses, spacing, or number of the same word or
phrase.
The Commission, upon determination that the corporate name is: (1) not
distinguishable from a name already reserved or registered for the use
of another corporation; (2) already protected by law; or (3) contrary to
law, rules and regulations, may summarily order the corporation to
immediately cease and desist from using such name and require the
corporation to register a new one. The Commission shall also cause the
removal of all visible signages, marks, advertisements, labels, prints and
other effects bearing such corporate name. Upon the approval of the
new corporate name, the Commission shall issue a certificate of
incorporation under the amended name.
Please take note of Corporate Name. This is—we’ve discussed this in
partnership. It must have a name. The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability”, etc. etc.
January 11 by April Latorza
E. ARTICLE OF INCORPORATION
II. Contents of Articles of Incorporation
1. NAME
INDUSTRIAL REFRACTORIES CORPORATION v CA
G.R. No. 122174, October 3, 2002
FACTS: Respondent Refractories Corporation of the Philippines (RCP)
is a corporation duly organized on October 13, 1976 for the purpose of
engaging in the business of manufacturing, producing, selling, exporting
and otherwise dealing in any and all refractory bricks, its by-products
and derivatives. On June 22, 1977, it registered its corporate and
business name with the Bureau of Domestic Trade.
Petitioner IRCP on the other hand, was incorporated on August 23, 1979
originally under the name Synclaire Manufacturing Corporation. It
amended its Articles of Incorporation on August 23, 1985 to change its
corporate name to Industrial Refractories Corp. of the Philippines. It is
engaged in the business of manufacturing all kinds of ceramics and
other products, except paints and zincs.
Discovering that petitioner was using such corporate name, respondent
RCP filed with (SEC) a petition to compel petitioner to change its
corporate name on the ground that its corporate name is confusingly
similar with that of petitioners such that the public may be confused or
deceived into believing that they are one and the same corporation. The
SEC decided in favor of respondent RCP.
Petitioner appealed to the SEC En Banc, arguing that it does not have
any jurisdiction over the case, and that respondent RCP has no right to
the exclusive use of its corporate name as it is composed of generic or
common words.
SEC En Banc modified the appealed decision in that petitioner was
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
ordered to delete or drop from its corporate name only the word
Refractories.
ISSUE: Whether RCP is not entitled to use the generic name
refractories; NO.
Whether there is no confusing similarity between their corporate names.
NO.
HELD: SEC. 18. Corporate name. -- No corporate name may be
allowed by the Securities and Exchange Commission if the proposed
name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall issue
an amended certificate of incorporation under the amended name.
It is the SECs duty to prevent confusion in the use of corporate names
not only for the protection of the corporations involved but more so for
the protection of the public, and it has authority to de-register at all times
and under all circumstances corporate names which in its estimation are
likely to generate confusion. Clearly therefore, the present case falls
within the ambit of the SECs regulatory powers.
Likewise, untenable is petitioners argument that there is no confusing or
deceptive similarity between petitioner and respondent RCPs corporate
names. Section 18 of the Corporation Code expressly prohibits the use
of a corporate name which is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to
existing laws. The policy behind the foregoing prohibition is to avoid
fraud upon the public that will have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction
of difficulties of administration and supervision over corporation.
Pursuant thereto, the Revised Guidelines in the Approval of Corporate
and Partnership Names specifically requires that:
[1] a corporate name shall not be identical, misleading or confusingly
similar to one already registered by another corporation with the
Commission; and 

[2] if the proposed name is similar to the name of a registered firm,
the proposed name must contain at least one distinctive word different
from the name of the company already registered. 
To fall within the
prohibition of the law, two requisites 

must be proven, to wit:
[1] that the complainant corporation acquired a prior right over
the use of such corporate name; and 

[2] the proposed name is either:
[a] identical, or 

[b] deceptively or confusingly similar to that of 
any
existing corporation or to any other name 
already protected by law; or
[c] patently deceptive, confusing or contrary to

existing law. 

As regards the first requisite, it has been held that the right to the
exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption. In this case, RCP was
incorporated on October 13, 1976 and since then has been using the
corporate name Refractories Corp. of the Philippines. Meanwhile,
petitioner was incorporated on August 23, 1979 originally under the
name Synclaire Manufacturing Corporation. It only started using the
name Industrial Refractories Corp. of the Philippines when it amended
its Articles of Incorporation on August 23, 1985, or nine (9) years after
respondent RCP started using its name. Thus, being the prior registrant,
respondent RCP has acquired the right to use the word Refractories as
part of its corporate name.
Anent the second requisite, in determining the existence of confusing
similarity in corporate names, the test is whether the similarity is such as
to mislead a person using ordinary care and discrimination and the Court
must look to the record as well as the names themselves. Petitioners
corporate name is Industrial Refractories Corp. of the Phils., while
respondents is Refractories Corp. of the Phils. Obviously, both names
contain the identical words Refractories, Corporation and Philippines.
The only word that distinguishes petitioner from respondent RCP is the
word Industrial which merely identifies a corporation’s general field of
5
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
activities or operations. It must be noted that both cater to the same
clientele, i.e. the steel industry. In fact, the SEC found that there were
instances when different steel companies were actually confused
between the two, especially since they also have similar product
packaging. Even without such proof of actual confusion between the two
corporate names, it suffices that confusion is probable or likely to occur.
Refractories are structural materials used at high temperatures to [sic]
industrial furnaces. They are supplied mainly in the form of brick of
standard sizes and of special shapes. Refractories also include
refractory cements, bonding mortars, plastic firebrick, castables,
ramming mixtures, and other bulk materials such as dead-burned grain
magneside, chrome or ground ganister and special clay.
While the word refractories is a generic term, its usage is not widespread
and is limited merely to the industry/trade in which it is used, and its
continuous use by respondent RCP for a considerable period has made
the term so closely identified with it.
Discussion:
Q: What is the name of the company?
A: How did the court ruled regarding the similarity of the
name?
Amended Guidelines and Procedures on the Use of Corporate
and Partnership Names, SEC Memorandum No. 13-19
Please take note of SEC Memorandum, which is the latest guidelines
for the use of corporate name, this take into the account the existence
of one-person corporation.
The following are the important provisions:
NO. 4. Business or trade name which is different from the corporate or
partnership name shall be indicated in the articles of incorpororation or
partnership. A company may have more than one business or
tradename.
EXAMPLE: Mcdonalds, the registered corporate name of Mcdonald is
Golden Arches, even if you are corporation you may have several
tradenames or business names. But you have to have that register, you
still to have undergo the same checking if whether it is confusingly or
deceptively similar to an existing registered name.
PURPOSE OF TRADENAME
The purpose is actually just to segregate their business and for
marketing because, sometimes, the corporate name isn’t good for
marketing. Because in the corporate name you have to have the word
corporation, incorporation (Inc.), while in the tradename, it is not
necessary to have that. Kaya pansin nyo Mcdonalds, imagine if that is
the corporate name “Mcdonalds Corporation or Mcdonalds Inc”, not
good for marketing purposes.
Of course, in relation to your Intellectual Property, take note that you are
protected by your IP Laws
NO. 6. A The full name or surname of a person may be used in a
corporate or partnership name if he or she is a stockholder, member or
partner of the said entity and has consented to such use; if the person
is already deceased, the consent shall be given by his or her estate.
Now the SEC actually requires an affidavit of consent of the person who
owns the name before one of the names may be included in the
corporate name.
If the person is patay na, the affidavit of the estate, executor or
administrator.
NO.6.D The meaning of initials used in a name shall be stated
by the registrant in the Articles of Incorporation, Articles of Partnership
or in a separate document signed by an incorporator, director or partner,
as the case may be.
Some if they applied for a corporate name, especially if this is an
acronym or mga letters, they will be asked what does that mean. Is it a
name of person, abbreviated lang or wala lang, gusto mo lang ganyan.
Because if that is a name of a person you are required to have an
affidavit of consent of the person na gagamitin ang pangalan. The rest
are just similar to the Bus Org 1.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
Let us go to purpose clause.
PURPOSE CLAUSE
You may have primary or secondary purpose. In the current system of
the SEC, it only provides for the primary purpose. So if you use the 3-
printed format, chances are your corporation will have only one purpose.
The problem with that purpose is that your business authority or
business power is actually very limited. Now your purpose, in good
purpose clause for a corporation must not be too restricted that prevents
the business of the corporation for having such power which are implied
or incidental to the express one. But it must not be too broad na you
would not know kung ano talaga ang purpose ng existence ng
corporation.
SEC OPINION NO. 08-24 issued on October 22, 2008
Now, you may have primary or secondary, in the SEC OPINION NO. 08-
24 issued on October 22, 2008,
It is well settled that a corporation has only such powers as are expressly
granted in its charter or in the statutes under which it is created or such
powers as are necessary for the purpose of carrying out its express
powers.
So, you have to determine what are the corporation being the creature
created by law has limited powers. Ano ba yung mga powers nya? First,
that are those indicated the Revised Corporation Code, that is deemed
included as part of the powers of the corporation by the fact of the
issuance of certificate of registration. The another one, are those
indicated in the Articles of Incorporation, this where the purpose clause
becomes relevant kasi the power of the corporation should be in line
with the purpose, hindi ang purpose mo let’s say trading tapos nag buy
and sell ka ng lots, that power is ultra vires, in excess of your authority.
Only such powers as are reasonably necessary to enable corporations
to carry out the express powers granted and the purposes of the creation
are to be implied as are to be deemed incidental. Powers merely
convenient or useful are not implied if they are not essential having in
view the nature and object of incorporation.
PRINCIPLE OF STRECHING THE PURPOSE CLAUSE
We have the PRINCIPLE OF STRECHING THE PURPOSE CLAUSE,
some do stretch the purpose clause that is reason why the purpose
should not be very narrowed and not very broad, such that let’s say
meron ka gustong e divesture pwede mo parin e subsume doon sa
purpose mo. Otherwise, you have to amend your purpose.
"It is settled that it is only in the business/es, for which it was lawfully
organized and which is stated in the articles of incorporation, that a
corporation should engage in. But if the business is necessary for the
accomplishment of the purpose of the corporation or incident to it, the
corporation may also engage in such business. As a matter of fact, it is
even legal to "stretch" the meaning of the purpose clause to cover new
and unexpected situations.
Again, magdedepend talaga sa purpose clause mo. The reason why
kung gagagawa ka, you will go to SEC, madali ang paggawa ng Articles
of Incorporation, online ka lang at mag fufurnish lang ng format, the
problem of that, one, it only allows 1 purpose. Two, wala kang secondary
purpose, the powers of your corporation is very limited. I suggest that
you create your own Articles of Incorporation, just follow the format,
gagawa ka ng sarili mong purpose tapos sa secondary mo lagay mo
lahat, whatever you can contemplate with your business of its operation.
So if it’s a real estate development, ano pa yung related to that na pwede
mo pang iveventure when the corporation exists. Dapat include yan sa
purpose clause mo. Otherwise, that’s specific power will be considered
as ultra vires, walang power ang corporation. That’s is the importance
of the purpose clause. You can stretch it but the stretch is not too
outrageous, that is no longer incidental whis is no longer in nature on
the purpose of the corporation.
PRINCIPAL PLACE OF BUSINESS
Let’s go to place of business, in the articles of incorporation you have to
have your principal place of business. There is SEC Memo No. 06-16
which provides for the Omnibus Guidelines of Place of Business. Now,
ano dapat ang nakalagay sa address?
6
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
SEC MEMORANDUM NO. 06-16
RE:OMNIBUS GUIDELINES ON PRINCIPAL OFFICE ADDRESS;
ADDRESS OF EACH INCORPORATOR, DIRECTOR, TRUSTEE OR
PARTNER
xxx
Whereas, Section 14 of the Corporation Code of the Philippines requires
corporation to reflect in its Articles of Incorporation the place where the
principal office of the corporation is to be located, which must be within
the Philippines;
Whereas, Section 125 of the Corporation Code of the Philippines
requires a foreign corporation applying for a license to transact business
in the Philippines to indicate ¡n its application the specific principal office
address, address of the resident agent, place ¡n the Philippines where
the corporation intends to operate and addresses of the present
directors and officers of the corporation;
Whereas, corporations and partnerships shall be deemed to have been
duly notified or validly served where the Commission has sent its
subpoenas, summons, notices, show cause letters and other
communications to the address indicated in the Articles of Incorporation
or Articles of Partnership, and/or General Information Sheet (GIS), as
the case may be; and
Whereas, the Commission has issued the following circulars pertaining
to principal office address:
(a) SEC Circular No. 3, series of 2006;
(b)
Memorandum Circular No. 6, series of 2014; (c) Memorandum Circular
No. 16, series of 2014;
(d) Memorandum Circular No. 1, series of 2015;
and
(e) Memorandum Circular No. 9, series of 2015.
IN VIEW OF THE FOREGOING, the Commission directs all affected
corporations and partnerships to comply with the following guidelines
relative to their principal office address and addresses of incorporators,
directors, trustees or partners:
SECTION 1. All corporations and partnerships applying for registration
with the SEC should state in their Articles of Incorporation or Articles of
Partnership the following: unexpected situations. But in those cases
where it cannot, a proper amendment thereof would be necessary.
PRINCIPAL PLACE OF BUSINESS
Before, it is already sufficient if you write the city. Now, it has to be
specific for the purposes of serving summons and legal documents. It
has to be very specific. Before kasi pwede lang na 2F or 4F. Ngayon,
dapat Door 1, 2F.
[i] specific address of their principal office, which shall include, if
feasible, the street number, street name, barangay, city or municipality,
and if applicable, the name of the building, number of the building, and
name or number of the room or unit; and 
 compensation of P85,000 and an additional compensation equal to 5%
[ii] specific residence address of each incorporator, stockholder,
director, trustee or partner. 
 date, First Dominion Prime Holdings, Inc., Nauticas parent company,
COMMENTS: Now ang problema nito kapag di ka sure na diyan ang
principal and you move out for some reason, you have to amend again
your Article of Incorpooration. So make sure pag magpili ka ng principal
place of business, doon ka na talaga magstay. Pwede naman mag
amend but very tedious, kasi you have to amend your business permit,
certificate of registration, certificate with the BIR, all these administrative
requirements.
SECTION 2. All foreign corporations applying for license to do business
in the country should indicate in their applications the following:
[i] specific address of the principal office address of the corporation
in the country or state of incorporation; 

[ii] specific address of the resident agent; 

[iii] specific location where the corporation shall hold office and place
in the Philippines where the corporation intends to operate; and 
 the corresponding certificate of shares in his name should Dee refuse to
[iv] specific addresses of the present directors and officers of the
corporation, 
 corporate secretary, denied the request claiming that Yumul was not a
SECTION 3. AIl corporations are required to state in their GIS the
specific principal office address and the specific residence address of
each stockholder, officer, director or trustee.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
SECTION 4. Pursuant to Memorandum Circular No. 9, series of 2015
Final Extension for Amendment of the Principal Office Address, all
existing corporations and partnerships whose Articles of Incorporation
or Articles of Partnership indicate a general address as their principal
office address, such that ¡t refers only to a city, town or municipality or
―Metro Manila‖ were given until 31 December 2015 to file an Amended
Articles of Incorporation or Amended Articles of Partnership n order
tospecify their complete address.
COMMENTS: magtransfer kami, yun nga very tedious. But the SEC
found it very difficult when it comes to issuance of compliance order,
mas madali pag specific address.
SECTION 5. Affected corporations which fail to effect a change in their
principal office address within the deadline set (i.e., 31 December 2015)
shall be imposed a ―one-time‖ penalty under SEC Office Order No.
298, series of 2010 InternaI Guidelines on the Monitoring of
Corporations and Verification of Annual Reports in relation to Articles
144 and 16 of the Corporation Code of the Philippines, amounting to
Five Thousand Pesos (P5,000.00) for stock corporations and Two
Thousand Five Hundred Pesos (P2,500.00) for non-stock corporations.
SECTION 6. In case an affected corporation or partnership has an
application for amendment of its Articles of Incorporation or Articles of
Partnership pertaining to other provisions thereof, the corporation or
partnership shall be required to include in the proposed amendments
the change in the principal officeaddress.
SECTION 7. For foreign corporations, a ―Notification Update Form‖
signed under oath by the president or resident agent of the concerned
foreign corporation
must be submitted within thirty (30) days from the occurrence of change
in its principal office address ¡n relation to SEC Memorandum Circular
No. 22, series of 2014 Guidelines for the Use of Notification Update
Form for Foreign Corporations.
NAMES, NATIONALITIES AND RESIDENCE OF THE
INCORPORATORS
NAUTICA CANNING CORPORATION V. YUMUL
GR 164588 October 19, 2005
FACTS: Nautica Canning Corporation (Nautica) was organized and
incorporated on May 11, 1994 with an authorized capital stock of
P40,000,000 divided into 400,000 shares with a par value of P100.00
per share.
On December 19, 1994, respondent Roberto C. Yumul was appointed
Chief Operating Officer/General Manager of Nautica with a monthly
of the companys operating profit for the calendar year. On the same
through its Chairman Alvin Y. Dee, granted Yumul an Option to
Purchase up to 15% of the total stocks it subscribed from Nautica.
On June 22, 1995, a Deed of Trust and Assignment was executed
between First Dominion Prime Holdings, Inc. and Yumul whereby the
former assigned 14,999 of its subscribed shares in Nautica to the latter.
The deed stated that the 14,999 shares were acquired and paid for in
the name of the ASSIGNOR only for convenience, but actually executed
in behalf of and in trust for the ASSIGNEE.
In March 1996, Nautica declared a P35,000,000 cash dividend,
P8,250,000 of which was paid to Yumul representing his 15% share.
After Yumuls resignation from Nautica, he wrote a letter to Dee
requesting the latter to formalize his offer to buy Yumuls 15% share in
Nautica on or before August 20, 1996; and demanding the issuance of
buy the same. Dee, through Atty. Fernando R. Arguelles, Jr., Nauticas
stockholder of Nautica.
Yumul requested that the Deed of Trust and Assignment be recorded in
the Stock and Transfer Book of Nautica, and that he, as a stockholder,
be allowed to inspect its books and records.
7
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Yumuls requests were denied allegedly because he neither exercised
the option to purchase the shares nor paid for the acquisition price of the
14,999 shares. Atty. Arguelles maintained that the cash dividend
received by Yumul is held by him only in trust for First Dominion Prime
Holdings, Inc.
Thus, Yumul filed before the SEC a petition for mandamus with
damages, with prayer that the Deed of Trust and Assignment be
recorded in the Stock and Transfer Book of Nautica and that the
certificate of stocks corresponding thereto be issued in his name.
Petitioners contend that Yumul was not a stockholder of Nautica; that he
was just a nominal owner of one share as the beneficial ownership
belonged to Dee who paid for said share when Nautica was
incorporated. They presented China Banking Corporation Check No.
A2620636 and Citibank Check No. B82642 as proof of payment by Dee;
a letter by Dee dated July 15, 1994 requesting the corporate secretary
of Nautica to issue a certificate of stock in Yumuls name but in trust for
Dee; and Stock Certificate No. 6 with annotation ITF Alvin Y. Dee which
means that respondent held said stock In Trust for Alvin Y. Dee.
ISSUE: Whether Yumul is a stockholder. YES
HELD: Indeed, it is possible for a business to be wholly owned by one
individual. The validity of its incorporation is not affected when such
individual gives nominal ownership of only one share of stock to each of
the other four incorporators. This is not necessarily illegal. But, this is
valid only between or among the incorporators privy to the agreement.
It does bind the corporation which, at the time the agreement is made,
was non-existent. Thus, incorporators continue to be stockholders of a
corporation unless, subsequent to the incorporation, they have validly
transferred their subscriptions to the real parties in interest. As between
the corporation on the one hand, and its shareholders and third persons
on the other, the corporation looks only to its books for the purpose of
determining who its shareholders are.
In the case at bar, the SEC and the Court of Appeals correctly found
Yumul to be a stockholder of Nautica, of one share of stock recorded in
Yumuls name, although allegedly held in trust for Dee. Nauticas Articles
of Incorporation and By-laws, as well as the General Information Sheet
filed with the SEC indicated that Yumul was an incorporator and
subscriber of one share. Even granting that there was an agreement
between Yumul and Dee whereby the former is holding the share in trust
for Dee, the same is binding only as between them. From the
corporations vantage point, Yumul is its stockholder with one share,
considering that there is no showing that Yumul transferred his
subscription to Dee, the alleged real owner of the share, after Nauticas
incorporation.
Besides, other than petitioners self-serving assertion that the beneficial
ownership belongs to Dee, they failed to show that the subscription was
transferred to Dee after Nauticas incorporation. The conduct of the
parties also constitute sufficient proof of Yumuls status as a stockholder.
On April 4, 1995, Yumul was elected during the regular annual
stockholders meeting as a Director of Nauticas Board of Directors.
Thereafter, he was elected as president of Nautica. Thus, Nautica and
its stockholders knowingly held respondent out to the public as an officer
and a stockholder of the corporation.
ection 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of
the Philippines requires that every director must own at least one share
of the capital stock of the corporation of which he is a director. Before
one may be elected president of the corporation, he must be a director.
Since Yumul was elected as Nauticas Director and as President thereof,
it follows that he must have owned at least one share of the corporations
capital stock.
Thus, from the point of view of the corporation, Yumul was the owner of
one share of stock. As such, the SEC correctly ruled that he has the right
to inspect the books and records of Nautica, pursuant to Section 74 of
BP Blg. 68 which states that the records of all business transactions of
the corporation and the minutes of any meetings shall be open to
inspection by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand,
in writing, for a copy of excerpts from said records or minutes, at his
expense
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
COMMENTS: How do you know the present stockholders of the
corporation? General Information Sheet (GIS). But if you want to know
the present stockholders and current structure of the company, request
a General Information Sheet. Why? Because the GIS, is an obligation
for corporation to submit a GIS yearly to update what is their current
structure and stock ownership. There is situation you must submit a GIS
more than once a year if there are changes in capital structure. Every
change in the capital structure you have 30 days from that change to
submit the GIS.
So again in Article of Incorporation ang nakalagay doon ay yung
incorporators. Hindi nakalagay doon yung current stockholders kasi ang
incorporators may be changed. Now, pag binenta, what is the
procedure? Of course, execute a deed of sale. After DOS, magbabayad
ng tax ang BIR mag iisue ng Certificate Authorizing Registration (CAR).
Then dadalhin ang DOS and CAR sa corporate secretary who holds the
corporate stock and transfer book. Tapos ang gawin ng secretary
iaattach nya yung DOS and CAR sa may book and ikacancel nya yun
previous owner and itatransfer sayo. Now, there are instances na
walang laman ang corporate stock and transfer book because tinamad
ang corporate secretary. Now, between the GIS and the corporate stock
and transfer book, the latter is more reliable. Now in practice, ito yung
na mimislook ng mga company kasi walang alam yung mga secretary
but in big companies usually lawyers yang mga corporate secretary.
Why? Because for one, it is not allowed to have erasures, kung may
erasure yan liable ang corporate secretary. After, narecord na ni
corporate secretary yung transfer of shares sa book, sa corporation
kung sino yung incharge will file an updated GIS.
Amendment of Articles of Incorporation
SEC. 15. Amendment of Articles of Incorporation. – Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes,
any provision or matter stated in the articles of incorporation may be
amended by a majority vote of the board of directors or trustees and
the vote or written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, without prejudice to
the power of a non-stock corporation to limit or deny the right to vote of
any of its members. To include these members without voting rights in
the total number of members for purposes of quorum would be
superfluous for although they may attend a particular meeting, they
cannot cast their vote on any matter discussed therein.
Similarly, Section 6 of Condocor’s By-Laws provides that the attendance
of a simple majority of the members who are in good standing shall
constitute a quorum.
It must be emphasized that insofar as Condocor is concerned, quorum
is different from voting rights. Applying the law and Condocor's By-Laws,
if there are 100 members in a non-stock corporation, 60 of which are
members in good standing, then the presence of 50% plus 1 of those
members in good standing will constitute a quorum. Thus, 31 members
in good standing will suffice in order to consider a meeting valid as
regards the presence of quorum. The 31 members will naturally have to
exercise their voting rights. It is in this instance when the number of
voting rights each member is entitled to becomes significant. If 29 out of
the 31 members are entitled to 1 vote each, another member (known as
A) is entitled to 20 votes and the remaining member (known as B) is
entitled to 15 votes, then the total number of voting rights of all 31
members is 64. Thus, majority of the 64 total voting rights, which is 33
(50% plus 1), is necessary to pass a valid act. Assuming that only A and
B concurred in approving a specific undertaking, then their 35 combined
votes are more than sufficient to authorize such act.
The By-Laws of Condocor has no rule different from that provided in the
Corporation Code with respect the determination of the existence of a
quorum. The quorum during the July 21, 2012 meeting should have
been majority of Condocor's members in good standing. Accordingly,
there was no quorum during the July 21, 2012 meeting considering that
only 29 of the 108 unit buyers were present.
As there was no quorum, any resolution passed during the July 21, 2012
annual membership meeting was null and void and, therefore, not
binding upon the corporation or its members. The meeting being null and
void, the resolution and disposition of other legal issues emanating from
the null and void July 21, 2012 membership meeting has been rendered
unnecessary.
8
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
January 11, 2020 33:01 – 1:06:00 • The Treasurer will just confirm that there is an existing
amount. That there is money.
• The SEC shall not require a bank statement.
AMENDMENT TO THE PROVISIONS OF THE ARTICLES OF
• The SEC shall only require a bank statement if the capital
INCORPORATION
stock is increased, because there are changes. But, as to
incorporation there is no need for a bank statement.
The following provisions of the Article of Incorporation cannot be
• Except of course—If you are one of those entities governed
amended—It is because such provisions refers to facts that are existing
by the Bangko Sentral , the Insurance Commission, and etc.
as of the date of incorporation and hence are beyond the power of the
stockholder or member to alter or change. It is because such are
Q: What is the Effect of the Non-use of the Corporate Charter and
considered as historical facts or accomplished facts:
Continuous Inoperation?
1. Name of the Incorporators;
A: Section 21 of the Revised Corporation Code
2. Name of the Incorporating Directors/Trustees;
Section 21—Effects of Non-use of Corporate Charter and
Continuous Inoperation
3. Names of the original subscribers to the capital stock of
the corporation and their subscribed and paid-up capital;
If a corporation does not formally organized and commence its
4. The treasurer-in-trust elected by the original subscribers; business within five (5) years from the date of its incorporation, its
certificate of incorporation shall be deemed revoked as of the
day following the end of the five-year period.
5. Members who contributed to the initial capital of a non-
stock corporation; and
However, if a corporation has commenced its business but
6. Witnesses and the acknowledgment thereof—For subsequently becomes inoperative for a period of at least five (5)
example, the directors or stockholders cannot decide to consecutive years, the Commission may, after due notice and
hearing, place the corporation under delinquent status.
change the notary public who acknowledge or notarized the
certificate of incorporation
A delinquent corporation shall have a period of two (2) years to
Q: What are the grounds for an Amendment to the Articles of resume operations and comply with all requirements that the
Incorporation? Commission shall prescribe. Upon compliance by the
corporation, the Commission shall issue an order lifting the
delinquent status.
A: Section 16 of the Revised Corporation Code
Failure to comply with the requirements and resume operations
Section 16—Grounds When Articles of Incorporation or
within the period given by the Commission shall cause the
Amendment may be disapproved
revocation of the corporation’s certificate of incorporation.
The Commission may disapprove the articles of incorporation or any
The Commission shall give reasonable notice to, and coordinate
amendment thereto if the same is not compliant with the
with the appropriate regulatory agency prior to the suspension
requirements of this Code: Provided, That the Commission shall give
or revocation of the certificate of incorporation of companies
the incorporators, directors, trustees, or officers a reasonable time
under their special regulatory jurisdiction.
from receipts of the disapproval within which to modify the
Discussion:
objectionable portions of the articles or amendment. The following
are grounds for such disapproval:
So, let’s say that you were granted as certificate of incorporation, if you
don’t use it or if you operated the corporation but at some point in time
(a) The articles of incorporation or any amendment thereto is
you stopped your operations and didn’t continue.
not substantially in accordance with the form prescribed
herein;
What is the effect on your corporation? Section 21 of the RCC.
(b) The purpose or purposes of the corporation are patently
As you can see it is very easy to suggest to another to incorporate a
unconstitutional, illegal, immoral or contrary to government
corporation, but there is a lot of administrative obligations that you have
rules and regulations;
to consider.
(c) The certificate concerning the amount of capital stock
subscribed and/or paid is false; and So a corporation that doesn’t formally organize and commence its
business within five (5) years from the date of incorporation—certificate
of incorporation shall be deemed revoked as of the day following the
(d) The required percentage of Filipino ownership of the
end of the five-year period. There is no other action.
capital stock under existing laws or the Constitution has
not been complied with.
However, if a corporation has commenced its business but subsequently
No articles of incorporation or amendment to articles of incorporation becomes inoperative for a period of at least five (5) consecutive years,
the Commission may, after due notice and hearing, place the
of banks, banking and quasi-banking institutions, preneed, insurance
corporation under delinquent status.
and trust companies, NSSLAS, pawnshops, and other financial
intermediaries shall be approved by the Commission unless
accompanied by a favorable recommendation of the appropriate Summary:
government agency to the effect that such articles or amendment is • If the corporation doesn’t operate within five (5) years from the
in accordance with law. issuance of the certificate of incorporation—the Certificate of
Incorporation shall be deemed revoked;
Frequent Question: Sir, If we are to incorporate a corporation do we • If the corporation has operated but has stopped for five (5)
have to give a bank statement—proving that there is in fact money? consecutive years—after due Notice and Hearing, the
corporation shall be given a delinquent status
It has to be money, because let’s say that if we claim that our available
capital is P500,000, we (incorporators) will have to prove that there is an A delinquent corporation shall have a period of two (2) years to resume
existing P500,000. operations and comply with all requirements that the Commission shall
prescribe. Upon compliance by the corporation, the Commission shall
Short Answer: The short answer is that it is actually the Affidavit of issue an order lifting the delinquent status.
the Treasurer that is required.

Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019 9
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Failure to comply with the requirements and resume operations within
the period given by the Commission shall cause the revocation of the
corporation’s certificate of incorporation.
BY-LAWS
Now Section 45 of the Revised Corporation Code, adoption of by-laws.
Section 45—Adoption of By-Laws
For the adoption of by-laws by the corporation, the affirmative vote of
the stockholders representing at least a majority of the outstanding
capital stock, or of at least a majority of the members in case of
nonstock corporations, shall be necessary.
The by laws shall be signed by the stockholders or members voting
for them and shall be kept in the principal office of the corporation,
subject to the inspection of the stockholders or member during office
hours. A copy thereof, duly certified by a majority of the directors or
trustees and countersigned by the Secretary of the corporation, shall
be signed with the Commission and attached to the original articles
of incorporation.
Notwithstanding the provisions of the preceding paragraph, bylaws
may be adopted and filed prior to incorporation; in such case, such
by-laws shall be approved and signed by all the incorporators and
submitted to the Commission, together with the articles of
incorporation.
In cases, bylaws shall be effective only upon the issuance by the
Commission of a certification that the bylaws are in accordance with
this Code.
The Commission shall not accept for filing the bylaws or any
amendment thereto of any bank, banking institution, building and
loan association, trust company, insurance company, public utility,
educational institution, or other special corporations governed by
special laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such bylaws or amendments
are in accordance with law.
Discussion:
Q: What is the nature of by-laws?
A: Well, essentially the nature of by-laws is the same as that of the
internal rules of a corporation. It provides for the following:
• Who are the officers of the corporation?
• How do they conduct their meeting;
• If there is a contest with regards on how the meeting was
executed, then you always go to the by-laws. This is the
procedure given, because you can actually invalidate a
meeting if such is not in accordance with the by-laws.
• Also the position. You would know that a person is not an
employee of the corporation if his position is not found in the
by-laws
GOKONGWEI vs. SEC
89 SCRA 336
John Gokongwei, as stockholder of respondent San Miguel
Corporation, filed with the Securities and Exchange Commission
(SEC) a petition for "declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by- laws ..." against the
majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner.
As a fourth cause of action, it was claimed that prior to the questioned
amendment, petitioner had all the qualifications to be a director of
respondent corporation, being a Substantial stockholder thereof; that
as a stockholder, petitioner had acquired rights inherent in stock
ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents
purposely provided for petitioner's disqualification and deprived him
of his vested right as afore-mentioned hence the amended by- laws
are null and void.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
Petitioner claims that the amended by-laws are invalid and
unreasonable because they were tailored to suppress the minority
and prevent them from having representation in the Board", at the
same time depriving petitioner of his "vested right" to be voted for
and to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M.
Soriano and San Miguel Corporation content that ex. conclusion of a
competitor from the Board is legitimate corporate purpose,
considering that being a competitor, petitioner cannot devote an
unselfish and undivided Loyalty to the corporation; that it is
essentially a preventive measure to assure stockholders of San
Miguel Corporation of reasonable protective from the unrestrained
self-interest of those charged with the promotion of the corporate
enterprise; that access to confidential information by a competitor
may result either in the promotion of the interest of the competitor at
the expense of the San Miguel Corporation, or the promotion of both
the interests of petitioner and respondent San Miguel Corporation,
which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further
argued that there is not vested right of any stockholder under
Philippine Law to be voted as director of a corporation.
It was, therefore, prayed that the amended by-laws be declared null
and void and the certificate of filing thereof be cancelled, and that
individual respondents be made to pay damages, in specified
amounts, to petitioner.
ISSUE: Whether or not the provisions of the amended by- laws of
respondent corporation, disqualifying a competitor from nomination
or election to the Board of Directors are valid and reasonable;
HELD: YES
RATIONALE:
AUTHORITY OF CORPORATION TO PRESCRIBE
QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED
BY LAW
It is recognized by an authorities that 'every corporation has the
inherent power to adopt by-laws 'for its internal government, and to
regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the
management of its affairs. At common law, the rule was "that the
power to make and adopt by-laws was inherent in every corporation
as one of its necessary and inseparable legal incidents. And it is
settled throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has this
inherent power as one of its necessary and inseparable legal
incidents, independent of any specific enabling provision in its charter
or in general law, such power of self- government being essential to
enable the corporation to accomplish the purposes of its creation.
In this jurisdiction, under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws "the qualifications, duties
and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every director
must own in his right at least one share of the capital stock of the
stock corporation of which he is a director ... " In Government v. El
Hogar, the Court sustained the validity of a provision in the corporate
by-law requiring that persons elected to the Board of Directors must
be holders of shares of the paid up value of P5,000.00, which shall
be held as security for their action, on the ground that section 21 of
the Corporation Law expressly gives the power to the corporation to
provide in its by-laws for the qualifications of directors and is "highly
prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED
DIRECTOR
Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of
incorporation and lawfully enacted by-laws and not forbidden by law."
15 To this extent, therefore, the stockholder may be considered to
have "parted with his personal right or privilege to regulate the
10
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
disposition of his property which he has invested in the capital stock
of the corporation, and surrendered it to the will of the majority of his
fellow incorporators.
... It cannot therefore be justly said that the contract, express or
implied, between the corporation and the stockholders is infringed ...
by any act of the former which is authorized by a majority ... ."
Pursuant to section 18 of the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital
stock of the corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the disenting
minority has only one right, viz.: "to object thereto in writing and
demand payment for his share." Under section 22 of the same law,
the owners of the majority of the subscribed capital stock may amend
or repeal any by-law or adopt new by-laws. It cannot be said,
therefore, that petitioner has a vested right to be elected director, in
the face of the fact that the law at the time such right as stockholder
was acquired contained the prescription that the corporate charter
and the by-law shall be subject to amendment, alteration and
modification.
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be
considered is whether the disqualification of a competitor from being
elected to the Board of Directors is a reasonable exercise of
corporate authority.
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH
RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF
HE BE ALSO DIRECTOR IN A CORPORATION WHOSE
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER
CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher,
that corporations have the power to make by- laws declaring a person
employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders
ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24This is based upon
the principle that where the director is so employed in the service of
a rival company, he cannot serve both, but must betray one or the
other.
Such an amendment "advances the benefit of the corporation and is
good." An exception exists in New Jersey, where the Supreme Court
held that the Corporation Law in New Jersey prescribed the only
qualification, and therefore the corporation was not empowered to
add additional qualifications. 25 This is the exact opposite of the
situation in the Philippines because as stated heretofore, section 21
of the Corporation Law expressly provides that a corporation may
make by-laws for the qualifications of directors. Thus, it has been
held that an officer of a corporation cannot engage in a business in
direct competition with that of the corporation where he is a director
by utilizing information he has received as such officer, under "the
established law that a director or officer of a corporation may not
enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director.
It is also well established that corporate officers "are not permitted to
use their position of trust and confidence to further their private
interests." In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors
entered into a new contract themselves with the foreign firm for
exclusive sale of its products, the court held that equity would regard
the new contract as an offshoot of the old contract and, therefore, for
the benefit of the corporation, as a "faultless fiduciary may not reap
the fruits of his misconduct to the exclusion of his principal.
Discussion:
Atty. Ong: Okay, so this case held that the corporation has the power
of self-governance. Therefore, they can provide in their by-laws the
qualifications of the directors of the corporation. Provided, that such is
not against the Rules and Regulations of the Philippines.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
Now the reason for the amendment was because the director was
holding a position in their Competitor Corporation. So, that is the reason
why they amended their by-laws.
Discussion on meetings: As future lawyers you should follow the laws
and rules regarding the conduct of meetings, because any irregularity in
the conduct of the meetings may be a ground to void the meeting.
Q: What are the implications if a meeting is voided?
A: All those things, which have been voted during that meeting, shall be
deemed void or not voted. It’s costly for some to set-up a meeting
especially if it is a big company/corporation.
• Sometimes the corporation rents out a big function hall;
• It is usually in meeting where the corporation shall distribute
the dividends
SAN MIGUEL CORP. vs. MANDAUE PACKING PRODUCTS
PLANTS UNION-FFW
G.R. No. 152356. August 16, 2005
FACTS: Respondent, identifying itself as an affiliate of Federation of
Free Workers (FFW), filed a petition for certification election.
Petitioner filed a motion to dismiss the petition for certification
election on the sole ground that herein respondent is not listed or
included in the roster of legitimate labor organizations based on the
certification issued.
Later on, respondent submitted to the Bureau of Labor Relations the
same documents earlier attached to its petition for certification. The
accompanying letter, signed by respondents president Sagun, stated
that such documents were submitted in compliance with the
requirements for the creation of a local/chapter pursuant to the Labor
Code and its Implementing Rules; and it was hoped that the
submissions would facilitate the listing of respondent under the roster
of legitimate labor organizations.
However, it was noted that it failed to submit a copy of its by-laws,
which is a documentary requisite for the grant of the petition.
ISSUE: WON failure to submit the by-laws is fatal to its application
for petition for certification.
HELD: No. It may be noted though that respondent never submitted
a separate by-laws, nor does it appear that respondent ever intended
to prepare a set thereof. Section 1(c), Rule VI, Book V of Department
Order No. 9 provides that the submission of both a constitution and
a set of by-laws is required, or at least an indication that the
local/chapter is adopting the constitution and by- laws of the
federation or national union. A literal reading of the provision might
indicate that the failure to submit a specific set of by-laws is fatal to
the recognition of the local/chapter.
By-laws has traditionally been defined as regulations, ordinances,
rules or laws adopted by an association or corporation or the like for
its internal governance, including rules for routine matters such as
calling meetings and the like. The importance of by-laws to a labor
organization cannot be gainsaid. Without such provisions governing
the internal governance of the organization, such as rules on
meetings and quorum requirements, there would be no apparent
basis on how the union could operate. Without a set of by-laws, which
provides how the local/chapter arrives at its decisions or otherwise
wields its attributes of legal personality, then every action of the
local/chapter may be put into legal controversy.
However, if key by-law provisions on matters such as quorum
requirements, meetings, or on the internal governance of the
local/chapter are themselves already provided for in the constitution,
then it would be feasible to overlook the requirement for by-laws.
Indeed in such an event, to insist on the submission of a separate
document denominated as By-Laws would be an undue technicality,
as well as a redundancy.
An examination of respondents constitution reveals it sufficiently
comprehensive in establishing the necessary rules for its operation.
11
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Indeed, it is difficult to see in this case what a set of by- laws separate
from the constitution for respondent could provide that is not already
provided for by the Constitution. These premises considered, there
is clearly no need for a separate set of by-laws to be submitted by
respondent.
Discussion:
Atty. Ong: In this particular case, the Petitioner held that the
Respondent didn’t provide for any by-laws. However the Court held, that
there is no need for a separate set of by-laws, when the provisions of
the Constitution are sufficient. Likewise, if the Articles of Incorporation
already contains the by-laws, the latter integrated to the former.
CHINA BANKING CORPORATION vs. CA
G.R. No. 117604, March 26, 1997
FACTS: Galicano Calapatia, Jr. a stockholder of private respondent
Valley Golf & Country Club Inc., pledged his Stock Certificate No.
1219 to petitioner China Banking Corporation. petitioner wrote
VGCCI requesting that the aforementioned pledge agreement be
recorded in its books.
In a letter dated 27 September 1974, VGCCI replied that the deed of
pledge executed by Calapatia in petitioner's favor was duly noted in
its corporate books. Calapatia obtained a loan of P20,000.00 from
petitioner, payment of which was secured by the aforestated pledge
agreement still existing between Calapatia and petitioner.
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April
1985, filed a petition for extrajudicial foreclosure on the pledged
stock. Petitioner advised VGCCI that it is the new owner of
Calapatia's Stock Certificate No. 1219 by virtue of being the highest
bidder in the 17 September 1985 auction and requested that a new
certificate of stock be issued in its name.
On 2 March 1990, VGCCI replied that "for reason of delinquency"
Calapatia's stock was sold at the public auction.
Petitioner filed a complaint with the Securities and Exchange
Commission (SEC) for the nullification of the sale of Calapatia's stock
by VGCCI.
VGCCI claims a prior right over the subject share anchored mainly
on Sec. 3, Art VIII of its by-laws which provides that "after a member
shall have been posted as delinquent, the Board may order his/her/its
share sold to satisfy the claims of the Club . . ." It is pursuant to this
provision that VGCCI also sold the subject share at public auction, of
which it was the highest bidder. VGCCI caps its argument by
asserting that its corporate by-laws should prevail.
ISSUE: WON the by-laws bind China Bank which is a third person
HELD: No.
In order to be bound, the third party must have acquired knowledge
of the pertinent by-laws at the time the transaction or agreement
between said third party and the shareholder was entered into, in this
case, at the time the pledge agreement was executed. VGCCI could
have easily informed petitioner of its by-laws when it sent notice
formally recognizing petitioner as pledgee of one of its shares
registered in Calapatia's name. Petitioner's belated notice of said by-
laws at the time of foreclosure will not suffice.
The purpose of a by-law is to regulate the conduct and define the
duties of the members towards the corporation and among
themselves. They are self- imposed and, although adopted pursuant
to statutory authority, have no status as public law.It is the generally
accepted rule that third persons are not bound by by-laws, except
when they have knowledge of the provisions either actually or
constructively. Similarly, VGCCI's contention that petitioner is duty-
bound to know its by-laws because of Art. 2099 of the Civil Code,
which stipulates that the creditor must take care of the thing pledged
with the diligence of a good father of a family, fails to convince.
A membership share is quite different in character from a pawn ticket
and to reiterate, petitioner was never informed of Calapatia' s unpaid
accounts and the restrictive provisions in VGCCI's by-laws.
Discussion:
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
Atty. Ong: So, a third person cannot be bound by the by-laws, because
the third person has no knowledge of the provisions of the by-laws.
This case speaks of who are bound by the by-laws.
GR: Generally, it is only the stockholders and the directors who are
bound by the by-laws.
XPN: However, third persons can be bound by the by-laws. Provided,
that such third persons have knowledge of the by-laws. Especially, in
situations wherein the shares are pledged.
BERNAS vs. CINCO
G.R. Nos. 163356-57 July 10, 2015
FACTS: Makati Sports Club (MSC) is a domestic corporation duly
organized and existing under Philippine laws for the primary purpose
of establishing, maintaining, and providing social, cultural,
recreational and athletic . activities among its members.
Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile
H. Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio
T. Macrohon and Paulino T. Lim (Bernas Group) were among the
Members of the Board of Directors and Officers of the corporation
whose terms were to expire either in 1998 or 1999.
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea ·
and Alex Y. Pardo (Cinco Group) are the members and stockholders
of the corporation who were elected Members of the Board of
Directors and Officers of the club during the 17 December 1997
Special Stockholders Meeting.
Alarmed with the rumored anomalies in handling the corporate funds,
the MSC Oversight Committee (MSCOC), composed of the past
presidents of the club, demanded from the Bernas Group, who were
then incumbent officers of the corporation, to resign from their
respective positions to pave the way for the election of new set of
officers. MSCOC called a Special Stockholders' Meeting and sent out
notices6 to all stockholders and members stating therein the time,
place and purpose of the meeting. Thereafter, the Bernas group was
subsequently removed and new officers were elected.
Bernas Group initiated an action before the SEC seeking for the
nullification of the 17 December 1997 Special Stockholders Meeting
on the ground that it was improperly called. Citing Section 28 of the
Corporation Code, the Bernas Group argued that the authority to call
a meeting lies with the Corporate Secretary and not with the MSCOC
which functions merely as an oversight body and is not vested with
the power to call corporate meetings.
Cinco Group insisted that the 17 December 1997 Special
Stockholders' Meeting is sanctioned by the Corporation Code and
the MSC by-laws. In justifying the call effected by the MSCOC, they
reasoned that Section 258 of the MSC by-laws merely authorized the
Corporate Secretary to issue notices of meetings and nowhere does
it state that such authority solely belongs to him. Further, it would be
useless to course the request to call a meeting thru the Corporate
Secretary because he repeatedly refused to call a special
stockholders' meeting despite demands and even "filed a suit to
restrain the holding of a special meeting.
ISSUE: WON the meeting was properly called for pursuant to the by
laws
HELD:
Only the President and the Board of Directors are authorized by the
by-laws to call a special meeting. In cases where the person
authorized to call a meeting refuses, fails or neglects to call a
meeting, then the stockholders representing at least 100 shares,
upon written request, may file a petition to call a special stockholder's
meeting.
The 17 December 1997 Special Stockholders' Meeting was called
neither by the President nor by the Board of Directors but by the
MSCOC. While the MSCOC, as its name suggests, is created for the
purpose of overseeing the affairs of the corporation, nowhere in the
by-laws does it state that it is authorized to exercise corporate
powers, such as the power to call a special meeting, solely vested by
law and the MSC by-laws on the President or the Board of Directors.
12
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Relative to the powers of the Board of Directors, nowhere in the
Corporation Code or in the MSC by- laws can it be gathered that the
Oversight Committee is authorized to step in wherever there is
breach of fiduciary duty and call a special meeting for the purpose of
removing the existing officers and electing their replacements even if
such call was made upon the request of shareholders. Needless to
say, the MSCOC is neither empowered by law nor the MSC by- laws
to call a meeting and the subsequent ratification made by the
stockholders did not cure the substantive infirmity, the defect having
set in at the time the void act was done. The defect goes into the very
authority of the persons who made the call for the meeting. It is apt
to recall that illegal acts of a corporation which contemplate the doing
of an act which is contrary to law, morals or public order, or
contravenes some rules of public policy or public duty, are, like
similar transactions between individuals, void. They cannot serve as
basis for a court action, nor acquire validity by performance,
ratification or estoppel. The same principle can apply in the present
case. The void election of 17 December 1997 cannot be ratified by
the subsequent Annual Stockholders' Meeting.
Consequently, such Special Stockholders' Meeting called by the
Oversight Committee cannot have any legal effect. The removal of
the Bernas Group, as well as the election of the Cinco Group,
effected by the assembly in that improperly called meeting is void.
Every corporation has the inherent power to adopt by- laws for its
internal government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among
themselves in reference to the management of its affairs.
The by- laws of a corporation are its own private laws which
substantially have the same effect as the laws of the corporation.
They are in effect written into the charter. In this sense they become
part of the fundamental law of the corporation with which the
corporation and its directors and officers must comply. The general
rule is that a corporation, through its board of directors, should act in
the manner and within the formalities, if any, prescribed in its charter
or by the general law. Thus, directors must act as a body in a meeting
called pursuant to the law or the corporation's by-laws, otherwise,
any action taken therein may be questioned by the objecting director
or shareholder.
Certainly, the rules set in the by-laws are mandatory for every
member of the corporation to respect. They are the fundamental law
of the corporation with which the corporation and its officers and
members must comply. It is on this score that we cannot upon the
other hand sustain the Bernas Group's stance that the subsequent
annual stockholders' meetings were invalid.
Discussion:
Atty. Ong: This case is a classic example of schism within the
directorship and stockholders.
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH)
ASSOCIATION, INC. vs. CA
G.R. No. 117188, August 7, 1997
FACTS: LGVHAI was organized on February 8, 1983 as the
association of homeowners and residents of the Loyola Grand Villas.
It was registered with the Home Financing Corporation, the
predecessor of herein respondent HIGC, as the sole homeowners
organization in the said subdivision under Certificate of Registration
No. 04-197.It was organized by the developer of the subdivision and
its first president was Victorio V. Soliven, himself the owner of the
developer.For unknown reasons, however, LGVHAI did not file its
corporate by- laws.
In July, 1989, when Soliven inquired about the status of LGVHAI,
Atty. Joaquin A. Bautista, the head of the legal department of the
HIGC, informed him that LGVHAI had been automatically dissolved
for two reasons.First, it did not submit its by-laws within the period
required by the Corporation Code and, second, there was non- user
of corporate charter because HIGC had not received any report on
the associations activities.
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These developments prompted the officers of the LGVHAI to lodge a
complaint with the HIGC. They questioned the revocation of
LGVHAIs certificate of registration without due notice and hearing.
ISSUE: WON LGVHAIs failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code resulted in the
automatic dissolution of LGVHA.
HELD: No. Section 46 aforequoted reveals the legislative intent to
attach a directory, and not mandatory, meaning for the word must in
the first sentence thereof. Note should be taken of the second
paragraph of the law which allows the filing of the by- laws even prior
to incorporation. This provision in the same section of the Code rules
out mandatory compliance with the requirement of filing the by-laws
within one (1) month after receipt of official notice of the issuance of
its certificate of incorporation by the Securities and Exchange
Commission. It necessarily follows that failure to file the by-laws
within that period does not imply the demise of the corporation. By-
laws may be necessary for the government of the corporation but
these are subordinate to the articles of incorporation as well as to the
Corporation Code and related statutes. There are in fact cases where
by- laws are unnecessary to corporate existence or to the valid
exercise of corporate powers.
It has been said that the by-laws of a corporation are the rule of its
life, and that until by-laws have been adopted the corporation may
not be able to act for the purposes of its creation, and that the first
and most important duty of the members is to adopt them. This would
seem to follow as a matter of principle from the office and functions
of by-laws. Viewed in this light, the adoption of by-laws is a matter of
practical, if not one of legal, necessity. Moreover, the peculiar
circumstances attending the formation of a corporation may impose
the obligation to adopt certain by-laws, as in the case of a close
corporation organized for specific purposes.And the statute or
general laws from which the corporation derives its corporate
existence may expressly require it to make and adopt by-laws and
specify to some extent what they shall contain and the manner of
their adoption. The mere fact, however, of the existence of power in
the corporation to adopt by-laws does not ordinarily and of necessity
make the exercise of such power essential to its corporate life, or to
the validity of any of its acts.
Although the Corporation Code requires the filing of by-laws, it does
not expressly provide for the consequences of the non-filing of the
same within the period provided for in Section 46.
There can be no automatic corporate dissolution simply because the
incorporators failed to abide by the required filing of by-laws
embodied in Section 46 of the Corporation Code. There is no outright
demise of corporate existence. Proper notice and hearing are
cardinal components of due process in any democratic institution,
agency or society. In other words, the incorporators must be given
the chance to explain their neglect or omission and remedy the same.
Discussion:
Atty. Ong: This is applicable to the _____ rule (56:15), because in the
Old Corporation Code, you can actually submit the by-laws within thirty
(30) days from incorporation.
So the question in this case is that, is the failure to file the by-laws after
articles of incorporation are issued, shall automatically dissolve the
corporation?
A: No, the corporation is at least a de facto corporation.
SAWADJAAN vs. CA
FACTS: Sawadjaan was assigned to inspect the properties offered
as collaterals by Compressed Air Machineries and Equipment
Corporation (CAMEC) for a credit line of Five Million Pesos. When
CAMEC failed to pay despite the given extension, the bank, now
referred to as the AIIBP, discovered that TCT No. N- 130671 was
spurious, the property described therein non-existent, and that the
property covered by TCT No. C-52576 had a prior existing mortgage.
Sawadjaan received a memorandum from Islamic Bank [AIIBP]
Chairman Roberto F. De Ocampo charging him with Dishonesty in
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
the Performance of Official Duties and/or Conduct Prejudicial to the
Best Interest of the Service and preventively suspending him.
He now argues that at the time his employment was terminated, the
AIIBP had not yet adopted its corporate by-laws. He attached a
Certificationby the Securities and Exchange Commission (SEC) that
it was only on 27 May 1992 that the AIIBP submitted its draft by-laws
to the SEC, and that its registration was being held in abeyance
pending certain corrections being made thereon.
Sawadjaan argued that since the AIIBP failed to file its by-laws within
60 days from the passage of Rep. Act No. 6848, as required by Sec.
51 of the said law, the bank and its stockholders had already forfeited
its franchise or charter, including its license to exist and operate as a
corporation, and thus no longer have the legal standing and
personality to initiate an administrative case.
ISSUE: WON AIIBP has legal personality
HELD: Yes. A corporation which has failed to file its by- laws within
the prescribed period does notipso factolose its powers as such. The
SEC Rules on Suspension/Revocation of the Certificate of
Registration of Corporations, details the procedures and remedies
that may be availed of before an order of revocation can be issued.
There is no showing that such a procedure has been initiated in this
case.
At the very least, by its failure to submit its by-laws on time, the AIIBP
may be considered a de facto corporation whose right to exercise
corporate powers may not be inquired into collaterally in any private
suit to which such corporations may be a party.
Contents of the By-laws:
Section 46—Contents of the Bylaws.
A private corporation may provide the following in its bylaws:
(a) The time, place and manner of calling and conducing
regular or special meetings of the directors or trustees;
(b) The time and manner of calling and conducting regular or
special meetings and mode of notifying the stockholders
or member thereof;
(c) The require quorum in meetings of stockholders or
members and the manner of voting therein;
(d) The modes by which a stockholder, member,
director, or trustee may attend meetings and cast
their votes;
(e) The form for proxies of stockholders and members and
the manner of voting them;
(f) The directors’ or trustees’ qualifications, duties and
responsibilities, the guidelines for setting the
compensation of directors or trustees and officers, and the
maximum number of other board representations that an
independent director or trustee may have which shall, in
no case, be more than the number prescribed by the
Commission;
(g) The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
(h) The manner of election or appointment and the term of
office of all officers other than directors or trustees;
(i) The penalties for violations of the bylaws;
(j) In the case of stock corporations, the manner of issuing
stock certificates; and
(k) Such other matters as may be necessary for the proper or
convenient transaction of its corporate affairs for the
promotion of good governance and anti-graft and
corruption measures
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An arbitration agreement may be provided in the bylaws
pursuant to Section 181 of this Code.
Discussion:
(b)The time and manner of calling and conducting regular or
special meetings and mode of notifying the stockholders or
member thereof;
We will discuss the time and manner of calling of meetings when we
discuss regular or special meetings.
(c)The require quorum in meetings of stockholders or members
and the manner of voting therein;
Very important. The by-laws of the corporation should provide for the
quorum. Now, the quorum that we know, which is majority and 2/3 that
can be increased. But, the quorum cannot be lowered.
(d)The modes by which a stockholder, member, director, or
trustee may attend meetings and cast their votes;
Now, before the Corporation Code was revised the stockholders can
only vote through:
• In person; or
• Through a proxy; or
• Voting Trust Agreement
But now in the Revised Corporation Code, there is voting in absentia.
Also, the meeting of the Board of Directors can be done through
teleconferencing. In fact, notices now can be sent through e-mail or text
messages. This is inline with the concept of the easing of doing business
in the Philippines.
What else are contained in the bylaws?
• The qualifications of the trustees/directors;
• Duties and/or responsibilities of the directors;
• The time of the annual voting of the directors/trustees;
• The manner of election or appointment of the officers of the
corporation;
• The manner of issuing stock certificates; or
• Any other matter or regulations, which the corporation wants
to be made applicable to them
Q: So, can you amend the by-laws?
A: Yes, Section 47 of the Revised Corporation Code.
AMENDMENT TO THE BY-LAWS OF THE CORPORATION
Section 47—Amendment of By-laws
A majority of the board of Directors or Trustees, and the owners of at
least a majority of the outstanding capital stock, or at least a majority
of the members of a nonstock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal the bylaws
or adopt new bylaws.
The owners of two-thirds (2/3) of the outstanding capital stock or two-
thirds (2/3) of the members in a non-stock corporation may delegate
to the board of directors or trustees the power to amend or repeal the
bylaws or adopt new bylaws: Provided, That any power delegated to
the board of directors or trustees to amend or repeal the bylaws or
adopt new bylaws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding
capital stock or majority of the members shall so vote at a regular or
special meeting.
Whenever the bylaws are amended or new bylaws are adopted, the
corporation shall file with the Commission such amended or new
bylaws and, if applicable, the stockholders’ or members’ resolution
authorizing the delegation of the power to amend and/or adopt new
bylaws, duly certified under oath by the corporate secretary and a
majority of the directors or trustees.
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
The amended or new bylaws shall only be effective upon the
issuance by the Commission of a certification that the same is in
accordance with this Code and other relevant laws.
Discussion:
Just take note of the required votes.
Q: Now, in the amendment of by-laws, is it one of those
transactions, wherein the holders of non-voting shares can
actually vote?
A: Look at again Section 6 of the Revised Corporation Code. Yes.
BOARD OF DIRECTORS, TRUSTEES, OFFICERS
Section 22—The Board of Directors or Trustees of a
Corporation; Qualification and Terms
Unless otherwise provided in this Code, the board of directors, or
trustees shall exercise the corporate powers, conduct all business,
and control all properties of the corporation.
Directors shall be elected for a term of one (1) year from among the
holders of stocks registered in the corporation’s books, while trustees
shall be elected for a term not exceeding three (3) years from among
the members of the corporation. Each director and trustee shall hold
office until the successor is elected and qualified. A director who
ceases to own at least one (1) share of stock or trustee who ceases
to be a member of the corporation shall cease to be such.
The board of the following corporation vested with public interest
shall have independent directors constituting at least twenty percent
(20%) of such board:
a) Corporations covered by Section 17.2 of Republic Act No.
8799, otherwise known as “The Securities Regulation
Code”, namely those whose securities are registered with
the Commission, corporation listed with an exchange or
with assets of at least Fifty million pesos (P50,000,000.00)
and having two hundred (200) or more holders of shares,
each holding at least one hundred (100) shares of a class
of its equity shares;
b) Banks and quasi-banks, NSSLAs, pawnshops,
corporations engaged in money service business, pre-
need, trust and insurance companies, and other financial
intermediaries; and
c) Other corporations engaged in business vested with public
interest similar to the above, as may be determined by the
Commission, after taking into account relevant factors
which are germane to the objective and purpose of
requiring the election of an independent director, such as
the extent of minority ownership, type of financial products
or securities issued or offered to investors, public interest
involved in the nature of business operations, and other
analogous factors.
An independent director is a person who, apart from shareholdings
and fees received from the corporation, is independent of
management and free from any business or other relationship, which
could, or could reasonably be perceived to materially interfere with
the exercise of independent judgment in carrying out the
responsibilities as a director.
Independent directors must be elected by the shareholders present
or entitled to vote in absentia during the election of directors.
Independent directors shall be subject to rules and regulations
governing their qualifications, disqualifications, voting requirements,
duration of term and term limit, maximum number of board
memberships and other requirements that the Commission will
prescribe to strengthen their independence and align with
international best practices.
Discussion:
Stock Corporation—Board of Directors;
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Non-stock Corporation—Board of Trustees
Directors shall be elected for a term of one (1) year from among the
holders of stocks registered in the corporation’s books,
Again, it is only those stockholders listed in the stock transaction book
that are qualified of being directors/director position.
While trustees shall be elected for a term not exceeding three (3)
years from among the members of the corporation.
Please take note of the term.
Each director and trustee shall hold office until the successor is
elected and qualified.
A director who ceases to own at least one (1) share of stock or
trustee who ceases to be a member of the corporation shall cease
to be such.
So, therefore, a director must have at least one (1) share of stock in
the corporation. If he has no shares he is no longer a director, because
he no longer has an interest.
(a)Corporations covered by Section 17.2 of Republic Act No. 8799,
otherwise known as “The Securities Regulation Code”, namely
those whose securities are registered with the Commission,
corporation listed with an exchange or with assets of at least Fifty
million pesos (P50,000,000.00) and having two hundred (200) or
more holders of shares, each holding at least one hundred (100)
shares of a class of its equity shares;
This is what we call public companies. Now if we talk about public
companies it is very wrong to say that public companies are only those
companies that are listed.
Public companies is different from listed companies.
Q: Can you be a public company without being listed in the stock
exchange?
A: Public companies are those whose securities are listed with the
Commission or having assets of at least fifty million and 200 or more
shareholders, each holding at least one hundred (100) shares of a class
of its equity shares. This is the 50-200-100 rule. So, if you fall under
the 50-200-100 rule, even if you are listed or registered in the SEC, then
you are a public company—governed by the Securities and Regulations
Code.
(b)Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, pre-need, trust and insurance
companies, and other financial intermediaries; and
Q: What requirement pertains to the above provisions?
A: The requirement of an independent director. The concept of the
independent director is based on the global move of the mode of
corporate governance. It is in relation to the enhancing corporate
governance of companies.
It is a concept regarding the determination of the primordial concern of
the Board of Directors. The BOD is a business, the main purpose of such
is profit. You have to consider that because of their purpose profit,
sometimes, there are other social obligations that are forgotten.
So there must be checks and balances—one of which is the
independent director.
Sometimes, to gain more profit the directors shall do some actions that
are detrimental to society. That is why there is a requirement of
independent directors.
Q: Who is an Independent Director?
A: An Independent director is a person who, apart from his fees and
shareholdings received from the corporation, is independent of
15
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
management and free from any business or other relationship, which
could, or could reasonably be perceived to, materially interfere with his
exercise of independent judgment in carrying out his responsibilities as
a director.
Independent directors must be elected by a majority of the shareholders
present or entitled to vote in absentia during the election of directors.
Independent directors shall be subject to rules and regulations
governing their qualifications, disqualifications, voting requirements,
duration of term and term limit, maximum number of board memberships
and other requirements that the Commission will prescribe to strengthen
their independence and align with international best practices.
So, again one of the incorporated provisions under the Revised
Corporation Code is the provision of the Code of Corporate Governance.
The Code of Corporate Governance is the same as the Code of Ethics.
Public companies are those listed. The officers in the companies are
required to attend in seminars on the Code corporate governance. To
ensure that these officers know how to conduct the governance over the
corporation in a proper way.
DOCTRINE OF CENTRALIZED MANAGEMENT
Under Section 22 we have the Doctrine of Centralized Management,
which provides that the management power is concentrated in the Board
of Directors. So, the BOD is the one running the corporation.
HORNILLA vs. SALUNAT
A.C. No. 5804, July 1, 2003
Facts:
The Petitioners Benedicto Hornilla and Federico D. Ricafort filed an
administrative complaint1 with the Integrated Bar of the Philippines
(IBP) Commission on Bar Discipline, against respondent Atty.
Ernesto S. Salunat for illegal and unethical practice and conflict of
interest.
The Petitioners alleged that Respondent Salunat is a member of the
ASSA Law and Associates, which was the retained counsel of the
Philippine Public School Teachers Association (PPSTA).
Consequently, the complainants (Plaintiff), who are members of the
PPSTA, filed an intra-corporate case against its members of the
Board of Directors (Defendants) for the terms 1992-1995 and 1995-
1997 before the Securities and Exchange Commission and the
Office of the Ombudsman, for unlawful spending and the
undervalued sale of real property of the PPSTA.
Respondent Salunat entered his appearance as counsel for the
PPSTA Board members (Defendants) in the said cases.
The complainants (Plaintiff), namely the members of the PPSTA,
contend that respondent was guilty of conflict of interest because he
was engaged by the PPSTA, of which complainants were members,
and was being paid out of its corporate funds where complainants
have contributed.
Despite being told by PPSTA members of the said conflict of
interest, respondent refused to withdraw his appearance in the said
cases.
Issue: W/N a lawyer engaged by a corporation (plaintiff) defend the
members of the Board of Directors (defendant) of the same
corporation in a derivative suit? No, There is conflict of interest.
Held:
GR: In relation to the Doctrine of Centralized Management.
In this jurisdiction, , a corporation’s board of directors is understood
to be that body which
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
(1) Exercises all powers provided for under the Corporation Code;
(2) Conducts all business of the corporation; and
(3) Controls and holds all property of the corporation. Its members
have been characterized as trustees or directors clothed with a
fiduciary character. It is clearly separate and distinct from the
corporate entity itself.
XPN: Derivative Suit— Where corporate directors have committed
a breach of trust either by their frauds, ultra vires acts, or negligence,
and the corporation is unable or unwilling to institute suit to remedy
the wrong, a stockholder may sue on behalf of himself and other
stockholders and for the benefit of the corporation, to bring
about a redress of the wrong done directly to the corporation
and indirectly to the stockholders.
Real-party in interest in a derivative suit is a corporation: This is
what is known as a derivative suit, and settled is the doctrine that in
a derivative suit, the corporation is the real party in interest while
the stockholder filing suit for the corporation’s behalf is only nominal
party. The corporation should be included as a party in the suit.
Conflict of Interest in representing both the Corporation and the
BOD: In other jurisdictions, the prevailing rule is that a situation
wherein a lawyer represents both the corporation and its assailed
directors unavoidably gives rise to a conflict of interest. The interest
of the corporate client is paramount and should not be influenced by
any interest of the individual corporate officials.
The rulings in these cases have persuasive effect upon us. After due
deliberation on the wisdom of this doctrine, we are sufficiently
convinced that a lawyer engaged as counsel for a corporation cannot
represent members of the same corporation’s board of directors in a
derivative suit brought against them.
To do so would be tantamount to representing conflicting interests,
which is prohibited by the Code of Professional Responsibility.
In the case at bar, the records show that SEC Case No. 05-97-5657,
entitled "Philippine Public School Teacher’s Assn., Inc., et al. v. 1992-
1995 Board of Directors of the Philippine Public School Teacher’s
Assn. (PPSTA), et al.," was filed by the PPSTA against its own Board
of Directors.
Respondent admits that the ASSA Law Firm, of which he is the
Managing Partner, was the retained counsel of PPSTA. Yet, he
appeared as counsel of record for the respondent Board of Directors
in the said case.
Clearly, respondent was guilty of conflict of interest when he
represented the parties against whom his other client, the PPSTA,
filed suit.
January 11, 2020 by Belle Fabe 1:06-End
THE BOARD OF TRUSTEES IS IN CHARGE OF WHAT?
(1) exercises all powers provided for under the Corporation Code;
(2) conducts all business of the corporation; and
(3) controls and holds all property of the corporation.
But what if the BOD conducts themselves not in the interest of the
corporation, so you have your remedy which is called what?
Derivative suit – in that particular case, the stockholder can actually sue
the BOD. That’s an example of a remedy provided for by law.
TOM vs. RODRIGUEZ
G.R. No. 215764 , July 6, 2015
FACTS:
16
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Golden Dragon International Terminals, Inc. (GDITI) is the exclusive
Shore Reception Facility (SRF) Service Provider of the Philippine
Ports Authority (PPA) tasked to collect, treat, and dispose of all ship-
generated oil wastes in all bases and private ports under the PPA’s
jurisdiction.
On September 11, 2009, the following were elected as officers of
GDITI: Lim as President and Chairman of the Board, Basalo as Vice
President for Visayas and Mindanao, Ong as Treasurer and Vice
President for Luzon, and Gunnacao as Director, among others.
However, a group led by Ramos composed of individuals who were
not elected as officers of GDITI – which included Tom – forcibly took
over the GDITI offices and performed the functions of its officers. This
prompted GDITI, through its duly-elected Chairman and President,
Lim, to file an action for injunction and damages against Ramos.
Samuel N. Rodriguez (Rodriguez) filed a Complaint-in-Intervention,
alleging that in a Memorandum of Agreement (MOA) dated May 2,
2012, Basalo authorized him to take over, manage, and control the
operations of GDITI in the Luzon area, and, in such regard,
effectively revoked whatever powers Basalo had previously given to
Mancao. In the said MOA, Basalo and Rodriguez agreed to divide
between them the monthly net profit of GDITI equally. However, as
Basalo purportedly refused to honor the terms and conditions of the
MOA despite demand, Rodriguez sought to intervene in the specific
performance case to compel Basalo to faithfully comply with his
undertaking.
The RTC-Nabunturan ordered Basalo to: (a) place the management
and control of GDITI in Luzon to Rodriguez as representative of
Basalo; (b)allocate the power to administer and manage the Visayas
and Mindanao regions of GDITI to Rodriguez in the concept of a
partner of Basalo; (c) allow Rodriguez to provide the manpower
services for the operations of GDITI; and (d) give to Rodriguez his
share in the monthly net proceeds from GDITI’s operations, subject
to the rules of the corporation on fees relative to the management
contracts.
The original parties, plaintiffs Basalo and Mancao, and defendant
Tom, separately filed motions for reconsideration thereof, which were
denied in an Order dated December 11, 2013. Aggrieved, Tom
elevated the matter before the CA via petition for certiorari with
prayer for the issuance of a TRO and/or writ of preliminary injunction
ISSUE: Whether or not the management of the corporation may be
transferred by a mere MOA.
HELD: No.
The issuance of an injunctive writ is warranted to enjoin the RTC-
Nabunturan from implementing its November 13, 2013 and
December 11, 2013 Orders in the specific performance case placing
the management and control of GDITI to Rodriguez, among other
directives.
This pronouncement follows the well-entrenched rule that a
corporation exercises its powers through its board of directors and/or
its duly authorized officers and agents, except in instances where the
Corporation Code requires stockholders’ approval for certain specific
acts.
The management and control of GDITI, being a stock corporation,
are vested in its duly elected Board of Directors, the body that:
[1] exercises all powers provided for under the Corporation Code;
[2] conducts all business of the corporation; and
[3] controls and holds all property of the corporation. Its members
have been characterized as trustees or directors clothed with a
fiduciary character.
Thus, by denying Tom's prayer for the issuance of a TRO and/or writ
of preliminary injunction, the CA effectively affirmed the RTC's Order
placing the management and control of GDITI to Rodriguez, a mere
intervenor, on the basis of a MOA between the latter and Basalo, in
violation of the foregoing provision of the Corporation Code.
The BOD controls and runs the business. It can also authorize the
signatories of the designated representatives.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
INDEPENDENT DIRECTORS
Please read MEMORANDUM CIRCULAR NO. 16-02 which is the
guidelines for the nomination and election of independent directors. It
specifies (it’s easier to read because it’s specified) which companies
need independent directors.
This Circular shall be applicable to public companies and those
subject to secondary licenses from the Commission, as follows:
[a] Issuers of registered securities to the public whether or not listed
in the Philippine Stock Exchange (PSE); 

[b] Public companies or those with assets of at least Fifty Million
Pesos (P50,000,000.00) or such other amount as the Commission
shall prescribe, and having Two hundred (200) or more holders each
holding at least One hundred (100) shares of a class of its equity
securities;
[c] Finance companies; 

[d] Investment houses; 

[e] Brokers and dealers of securities;
[f] Investment companies;
[g] Pre-need companies; 

[h] Subsidiaries or branches of foreign corporations which operate in
the Philippines and are listed in the PSE; 

[i] Stock and other securities exchange/s. 

An independent director is again, independent – the only thing that he
receives from the corporation is his share and some fees. Mind you,
these independent directors have large salaries because it’s their
reputation— actually more than their contribution to the company, it’s
their reputation that allows them to be paid that much because usually,
these independent directors have a proven track record, they don’t
commit anomalies.
[A] Independent director means a person who, apart from his fees
and shareholdings, is independent of management and free from
any business or other relationship which could, or could
reasonably be perceived to, materially interfere with his exercise
of independent judgment in carrying out his responsibilities as a
director in any corporation that meets the requirements of
Section 17.2 of the Securities Regulation Code and includes,
among others, any person who:
[i] Is not a director or officer or substantial stockholder of the
corporation or of its related companies or any of its
substantial shareholders (other than as an independent
director of any of the foregoing);

[ii] Is not a relative of any director, officer or substantial
shareholder of the corporation, any of its related companies
or any of its substantial shareholders.
For this purpose, relatives includes spouse, parent, child, brother,
sister, and the spouse of such child, brother or sister;
[iii] Is not acting as a nominee or representative of a substantial
shareholder of the corporation, any of its related companies
or any of its substantial shareholders;

In other words, it is really independent – independent of the
corporations, independent of its directors, independent of its
shareholder.
[iv] Has not been employed in any executive capacity by that
public company, any of its related companies or by any of its
substantial shareholders within the last five (5) years;
[v] Is not retained as professional adviser by that public
company, any of its related companies or any of its
substantial shareholders within the last five (5) years,
either personally of through his firm;

This is what you call cooling-off – because sometimes the independent
director that is admitted, is a previous retained lawyer of the company.
If he resigns from being a retainer, he cannot be made an independent
director automatically. There must be 5 years of cooling off.
[vi] Has not engaged and does not engage in any
transaction with the corporation or with any of its related
companies or with any of its substantial shareholders,
whether by himself or with other persons or through a firm
17
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
of which he is a partner or a company of which he is a
director or substantial shareholder, other than transactions
which are conducted at arms length and are immaterial or
insignificant.
[B] When used in relation to a company subject to the
requirements above:
[i] Related company means another company which is:
[a] its holding company,
[b] its subsidiary, or
[c] a subsidiary of its holding company; and

If this one has an independent director, he is not supposed to be
placed in the subsidiary or of the subsidiary of the other company.
[ii] Substantial shareholder means any person who is directly or
indirectly the beneficial owner of more than ten percent (10%) of
any class of its equity security.
[C] An independent director shall have the following
qualifications:
[i] He shall have at least one (1) share of stock of the
corporation;
 provided for in Section 38 of the SRC was further amplified by
[ii] He shall be at least a college graduate or he shall have been
engaged or exposed to the business of the corporation for at least
five (5) years;
[iii] He shall possess integrity/probity; and
 B. does not own more than 2% of the shares of the covered company
[iv] He shall be assiduous.
What does assiduous mean? showing great care
[D] No person enumerated under Section II (5) of the Code of
Corporate Governance shall qualify as an independent
director. He shall likewise be disqualified during his tenure
under the following instances or causes:
[i] He becomes an officer or employee of the corporation
where he is such member of the board of
directors/trustees, or becomes any of the persons
enumerated under letter (A) hereof;
[ii] His beneficial security ownership exceeds 10% of the
outstanding capital stock of the company where he is
such director; 
 reckoning point. December 30, 2003 – it’s 2%. From 10 it becomes
[iii] Fails, without any justifiable cause, to attend at least
50% of the total number of Board meetings during his
incumbency unless such absences are due to grave
illness or death of an immediate family.
 shareholdings in the company do not exceed 2% of the outstanding
[iv] Such other disqualifications which the company's
Manual on Corporate Governance provides. 
 CAN THE DIRECTOR BE DISQUALIFIED? YES.
In SEC Memorandum Circular 4-17 which provides for the term limit
of independent directors—
To promote and reinforce board independence and to be consistent
with recognized best practice, the Commission resolved to amend its
rules on the term limit of independent directors as follows:
[1] A company’s independent director shall serve for a
maximum cumulative term of nine years;
[2] After which, the independent director shall be perpetually
barred from re-election as such in the same company, but
may continue to qualify as non-independent director;
Because you know, after 9 years that’s cumulative, you already have
familiarity (and familiarity breeds contempt).
[3] In the instance that a company wants to retain an
independent director who has served for nine years, the
Board should provide meritorious justifications and seek
shareholder’s approval during the annual shareholder’s
meeting.
Please take note of this.
We said independent directors should have at least one share. the
concept is at least – there is a problem, would a director be
considered independent if he has many shareholdings in the
company? Because again, what an independent director does, is he
checks and balances those decisions of the director[s].
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What now, is the limit of the independent director’s shareholding
in the company?
Let’s say his shareholding is 80%, is that still independent? What is the
limit? That’s actually been asked – there’s an inquiry for SEC Opinion
issued by Negosyong Pinoy Finance Corporation. This is in SEC-
OGC 13-04 issued in April 18, 2013.
SEC OPINION No. 13-04
Limit on Shareholdings of Independent Directors
To be qualified, as an independent director, he should among others,
not be a director or officer of a substantial stockholder of the corporation.
A substantial stockholder is any person who is directly or indirectly the
beneficial owner of more than 10% of any class of its equity security.
Thus, an independent director must not be a director or officer or a
beneficial owner of more than 10% of an equity security of corporation
or of its related companies. This 10% limit was also reiterated in Section
11(D) of MC No. 16.
Thereafter, on December 30, 2003, the Commission amended the IRR
of the SRC. As a result, the definition of an independent director as
paragraphs 2 and 6, Rule 38 of the Amended IRR which provide for the
qualification and disqualification of independent director, thus:
and/or its related companies or any of its substantial shareholders;
Please take note – it can also be not directly, it can be beneficial owner
because the maximum is 10%.
B. does not own more than 2% of the shares of the covered
company and/or its related companies or any of its substantial
shareholders;
What’s the implication? If the shareholder owns before December 30,
2003, 10% is only required but after that it’s already 2% direct
ownership – the 2% is the maximum. Please take note of the
2%.
In lieu of the foregoing, the Commission here adopts the policy of
allowing the independent director to participate provided the
shares in the corporation.
WHAT ARE THE DISQUALIFICATIONS OF A DIRECTOR?
SEC MEMORANDUM CIRCULAR NO. 2-02
[SERIES OF 2002: CODE OF CORPORATE GOVERNANCE]
The following shall be grounds for the disqualification of a director:
[a] Any person who has been finally convicted by a competent
judicial or administrative body of the following:
[i] any crime involving the purchase or sale of securities, e.g.,
proprietary or non-proprietary membership certificate,
commodity futures contract, or interest in a common trust
fund, pre-need plan, pension plan or life plan;
[ii] any crime arising out of the persons conduct as an
underwriter, broker, dealer, investment company,
investment adviser, principal distributor, mutual fund
dealer, futures commission merchant, commodity
trading advisor, floor broker; and
[iii] any crime arising out of his relationship with a bank,
quasi-bank, trust company, investment house or as an
affiliated person of any of them.
[b] Any person who, by reason of any misconduct, after hearing
or trial, is permanently or temporarily enjoined by order,
18
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
judgment or decree of the Commission or any court or other
administrative body of competent jurisdiction from:
[i] acting as an underwriter, broker, dealer, investment
adviser, principal distributor, mutual fund dealer, futures
commission merchant, commodity trading advisor, or a
floor broker;
[ii] acting as a director or officer of a bank, quasi-bank, trust
company, investment house, investment company or an
affiliated person of any of them;
[iii] engaging in or continuing any conduct or practice in
connection with any such activity or willfully violating
laws governing securities, and banking activities. Such
disqualification shall also apply when such person is
currently subject to an effective order of the Commission
or any court or other administrative body refusing,
revoking or suspending any registration, license or
permit issued under the Corporation Code, Securities
Regulation Code, or any other law administered by the
Commission or Bangko Sentral ng Pilipinas, or under
any rule or regulation promulgated by the Commission
or Bangko Sentral ng Pilipinas, or otherwise restrained
to engage in any activity involving securities and
banking. Such person is also disqualified when he is
currently subject to an effective order of a self-regulatory
organization suspending or expelling him from
membership or participation or from associating with a
member or participant of the organization.
[c] Any person finally convicted judicially or administratively of
an offense involving moral turpitude, fraud, embezzlement,
theft, estafa, counterfeiting, misappropriation, forgery,
bribery, false oath, perjury or other fraudulent act or
transgressions.
[d] Any person finally found by the Commission or a court or
other administrative body to have willfully violated, or willfully
aided, abetted, counseled, induced or procured the violation
of, any provision of the Securities Regulation Code, the
Corporation Code, or any other law administered by the
Commission or Bangko Sentral ng Pilipinas, or any rule,
regulation or order of the Commission or Bangko Sentral ng
Pilipinas, or who has filed a materially false or misleading
application, report or registration statement required by the
Commission, or any rule, regulation or order of the
Commission.
[e] Any person judicially declared to be insolvent.
[f] Any person finally found guilty by a foreign court or equivalent
financial regulatory authority of acts, violations or misconduct
similar to any of the acts, violations or misconduct listed in
paragraphs (a) to (e) hereof.
[g] Any affiliated person who is ineligible, by reason of
paragraphs (a) to (e) hereof to serve or act in the capacities
listed in those paragraphs.
Conviction by final judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of the Corporation
Code, committed within five (5) years prior to the date of his election or
appointment.
The Board may also provide for the TEMPORARY
DISQUALIFICATION of a director for the following reasons:
[a] Refusal to fully disclose the extent of his business interest
as required under the Securities Regulation Code and its
Implementing Rules and Regulations. This disqualification
shall be in effect as long as his refusal persists.
[b] Absence or non-participation for whatever reason/s for more
than fifty percent (50%) of all meetings, both regular and
special, of the Board of directors during his incumbency, or
any twelve (12) month period during said incumbency. This
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disqualification applies for purposes of the succeeding
election.
[c] Dismissal/termination from directorship in another listed
corporation for cause. This disqualification shall be in effect
until he has cleared himself of any involvement in the
alleged irregularity.
[d] Being under preventive suspension by the corporation.
[e] If the independent director becomes an officer or employee
of the same corporation he shall be automatically
disqualified from being an independent director.
[f] If the beneficial security ownership of an independent
director in the company or in its related companies shall
exceed the 10% limit.
[g] Conviction that has not yet become final referred to in the
grounds for the disqualification of directors.
Just read that one.
DOCTRINE OF ESTOPPEL OR RATIFICATION
LIPAT vs. PACIFIC BANKING
402 SCRA 339
FACTS: Petitioners, the spouses Alfredo Lipat and Estelita Burgos
Lipat, owned Belas Export Trading.
In order to facilitate the convenient operation of BET, Estelita Lipat
executed on December 14, 1978, a special power of attorney
appointing Teresita Lipat as her attorney-in-fact to obtain loans and
other credit accommodations from respondent Pacific Banking
Corporation (Pacific Bank).
Lipat’s properties were mortgaged to secure the loan.
Subsequently, BET was incorporated into a family corporation named
Belas Export Corporation (BEC). Using the same SPA, Teresita
obtained another loan from Pacific Bank and mortgaged the same
property. BEC was unable to pay and Lipat’s properties were
foreclosed. Sps. Lipat are contending that the transaction between
Teresita and Pacific Bank was void because there was no board
resolution allowing to Teresita to transact.
ISSUE: Whether the transaction is valid.
RULING: YES.
By the principle of estoppel precludes petitioners from denying the
validity of the transactions entered into by Teresita Lipat with Pacific
Bank, who in good faith, relied on the authority of the former as
manager to act on behalf of petitioner Estelita Lipat and both BET
and BEC.
While the power and responsibility to decide whether the
corporation should enter into a contract that will bind the
corporation is lodged in its board of directors, subject to the
articles of incorporation, by-laws, or relevant provisions of law,
yet, just as a natural person may authorize another to do certain
acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers,
committees, or agents. The authority of such individuals to bind
the corporation is generally derived from law, corporate by-laws,
or authorization from the board, either expressly or impliedly by
habit, custom, or acquiescence in the general course of
business.
Apparent authority, is derived not merely from practice. Its existence
may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or,
in other words, the apparent authority to act in general, with which it
clothes him; or (2) the acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.
19
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage
contract by virtue of a special power of attorney executed by Estelita
Lipat. Recall that Teresita Lipat acted as the manager of both BEC
and BET and had been deciding business matters in the absence of
Estelita Lipat. Further, the export bills secured by BEC were for the
benefit of Mystical Fashion owned by Estelita Lipat.
Hence, Pacific Bank cannot be faulted for relying on the same
authority granted to Teresita Lipat by Estelita Lipat by virtue of a
special power of attorney. It is a familiar doctrine that if a
corporation knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, it holds
him out to the public as possessing the power to do those acts;
thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying
the agents authority.
What are the instances appreciated by the court – in this
particular case wherein it held that – ?
(1) Estelita and Alfredo Lipat are the owners and majority shareholders
of BET and BEC, respectively; (2) both firms were managed by their
daughter, Teresita; (3) both firms were engaged in the garment
business, supplying products to "Mystical Fashion," a U.S. firm
established by Estelita Lipat; (4) both firms held office in the same
building owned by the Lipats; (5) BEC is a family corporation with the
Lipats as its majority stockholders; (6) the business operations of the
BEC were so merged with those of Mrs. Lipat such that they were
practically indistinguishable; (7) the corporate funds were held by
Estelita Lipat and the corporation itself had no visible assets; (8) the
board of directors of BEC was composed of the Burgos and Lipat family
members; (9) Estelita had full control over the activities of and decided
business matters of the corporation; and that (10) Estelita Lipat had
benefited from the loans secured from Pacific Bank to finance her
business abroad and from the export bills secured by BEC for the
account of "Mystical Fashion.
KWOK V. PHIL. CARPET MANUFACTURING
457 SCRA 465
FACTS
Donald Kwok is the general manager, executive vice-president and
chief operations officer of the respondent Philippine Carpet
Manufacturing Corporation (PCMC).
The petitioner filed a complaint against the respondent corporation for
the payment of his accumulated vacation and sick leave credits before
the NLRC. He claimed that Lim made a verbal promise to give him
unlimited sick leave and vacation leave benefits and its cash
conversion upon his retirement or resignation without the need for any
application therefor.
ISSUE: Whether the said verbal promise made by the president of the
corporation is binding upon the corporation.
RULING: NO. Contracts entered into by a corporate officer or
obligations or prestations assumed by such officer for and in behalf of
such corporation are binding on the said corporation only if:
[1] such officer acted within the scope of his authority; or
[2] if such officer exceeded the limits of his authority, the corporation
has ratified such contracts or obligations.
In the present case, the petitioner relied principally on his testimony to
prove that Lim made a verbal promise to give him vacation and sick
leave credits, as well as the privilege of converting the same into cash
upon retirement. The Court agrees that those who belong to the upper
corporate echelons would have more privileges. However, the Court
cannot presume the existence of such privileges or benefits. The
petitioner was burdened to prove not only the existence of such
benefits but also that he is entitled to the same, especially considering
that such privileges are not inherent to the positions occupied by the
petitioner in the respondent corporation, son-in-law of its president or
not.
Who signed— what kind of officer signed? The president.
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Is the fact that he is the president, should that be sufficient
authority to bind the corporation? What will happen if he doesn’t
have authority— every action he asks for a board resolution, every
action I attend every meeting, just to make sure that he is
authorized to do these acts? Where do we put the limit, where do
we delineate the powers subsumed under the president – that
these powers have no need for a board resolution and the powers
outside of this delineation, we need a board resolution? It’s a very
dangerous idea that a board resolution is required every time the
president acts because exactly, he’s the president so do all the
signatures, contracts signed by the president, there has to be a
board resolution authorizing that president to sign that document?
The president of a corporation possesses the power to enter into a
contract for the corporation when "the conduct on the part of both the
president and corporation [shows] that he had been in the habit of acting
in similar matters on behalf of the company and that the company had
authorized him so to act and had recognized, approved and ratified his
former and similar actions.
Please take note of that basis.
If there is a basis that it has been ratified, a similar action, then the
company could be estopped from questioning the authority of the
president.
YASUMA vs. HEIRS OF CECILIO DE VILLA
and EAST CORDILLERA MINING CORPORATION
FACTS
Respondent de Villa is the president of respondent corporation. He
obtained 3 loans from petitioner Yasuma and these loans were secured
by mortgages over properties that are under the name of the
corporation.
De Villa failed to pay his obligation, which eld Yasuma to file a collection
suit against de Villa and the Corporation.
During the pendency of the case, de Villa died (that’s why the case
involved the heirs). According to the CA, the corporation cannot be
made liable since the loans are actually the personal loans of de Villa
due to lack of authority in his part.
Yasuma contended that the corporation can still be held liable because,
allegedly, there was an implied ratification on its part.
ISSUE: Whether there was an implied ratification.
RULING: NO.
A corporation is a juridical person, separate and distinct from its
stockholders. Being a juridical entity, a corporation may act through its
board of directors, as provided in Section 23 of the Corporation Code
of the Philippines:
Sec. 23. The Board of Directors or Trustees. – Unless otherwise
provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of
directors or trustees …
xxx
The corporation can also act through its corporate officers who may be
authorized either expressly by the by-laws or board resolutions or
impliedly such as by general practice or policy or as are implied from
express powers. The general principles of agency govern the relation
between the corporation and its officers or agents. When authorized,
their acts can bind the corporation. Conversely, when
unauthorized, their acts cannot bind it.
However, the corporation may ratify the unauthorized act of its
corporate officer. Ratification means that the principal voluntarily
adopts, confirms and gives sanction to some unauthorized act of
its agent on its behalf. It is this voluntary choice, knowingly made,
which amounts to a ratification of what was theretofore
unauthorized and becomes the authorized act of the party so
making the ratification. The substance of the doctrine is confirmation
after conduct, amounting to a substitute for a prior authority.
20
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Ratification can be made either expressly or impliedly. Implied
ratification may take various forms — like silence or acquiescence, acts
showing approval or adoption of the act, or acceptance and retention
of benefits flowing therefrom.
The power to borrow money is one of those cases where corporate
officers as agents of the corporation need a special power of attorney.
In the case at bar, no special power of attorney conferring authority on
de Villa was ever presented. The promissory notes evidencing the
loans were signed by de Villa (who was the president of respondent
corporation) as borrower without indicating in what capacity he was
signing them. In fact, there was no mention at all of respondent
corporation. On their face, they appeared to be personal loans of de
Villa.
The fact that the corporation admitted receiving the proceeds of the
loan did not amount to ratification of the loan. It accepted the amount
from de Villa, its president at that time, in good faith. Good faith is
always presumed. Petitioner did not show that the corporation acted in
bad faith.
Respondent corporation could not have ratified the act of de Villa
because there was no proof that it knew that he took out a loan on its
behalf. As stated earlier, ratification is a voluntary choice that is
knowingly made. The corporation could not have ratified an act it had
no knowledge of.
DOCTRINE OF APPARENT AUTHORITY
UNIVERSIY OF MINDANAO vs. BSP
778 SCRA 458
FACTS:
University of Mindanao is an educational institution. For the year 1982,
its Board of Trustees was chaired by Guillermo B. Torres. His wife,
Dolores P. Torres, sat as University of Mindanao's Assistant Treasurer.
Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated
and operated two (2) thrift banks: (1) First Iligan Savings & Loan
Association, Inc. (FISLAI); and (2) Davao Savings and Loan
Association, Inc. (DSLAI). Guillermo B. Torres chaired both thrift banks.
He... acted as FISLAI's President, while his wife, Dolores P. Torres,
acted as DSLAI's President and FISLAI's Treasurer.
Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas issued
a P1.9 million standby emergency credit to FISLAI.
All these promissory notes were signed by Guillermo B. Torres, and
were co-signed by either his wife, Dolores P. Torres, or FISLAI's
Special Assistant to the President, Edmundo G. Ramos, Jr.
On May 25, 1982, University of Mindanao's Vice President for Finance,
Saturnino Petalcorin, executed a deed of real estate mortgage over
University of Mindanao's property in Cagayan de Oro City. It was
allegedly executed on University of Mindanao's behalf.
As proof of his authority to execute a real estate mortgage for University
of Mindanao, Saturnino Petalcorin showed a Secretary's Certificate
signed on April 13, 1982 by University of Mindanao's Corporate
Secretary, Aurora de Leon.
The Secretary's Certificate stated:
Resolved that the University of Mindanao, Inc. be and is hereby
authorized, to mortgage real estate properties with the Central Bank of
the Philippines to serve as security for the credit facility of First Iligan
Savings and Loan Association, hereby authorizing the President and/or
Vice-president for Finance, Saturnino R. Petalcorin of the University of
Mindanao,- Inc. to sign, execute and deliver the covering mortgage
document or any other documents which may be proper[l]y required."
On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an
additional loan of P620,700.00. Guillermo B. Torres and Edmundo
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Ramos executed a promissory note on October 21, 1982 to cover that
amount.
On November 5, 1982, Saturnino Petalcorin executed another deed of
real estate mortgage, allegedly on behalf of University of Mindanao,
over its two properties in Iligan City. This mortgage served as additional
security for FISLAI's loans.
On January 17, 1983, Bangko Sentral ng Pilipinas' mortgage lien over
the Iligan City properties and Aurora de Leon's certification were
annotated. Bangko Sentral ng Pilipinas also granted emergency
advances to DSLAI
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines
entered into a Memorandum of Agreement intended to rehabilitate the
thrift banks, which had been suffering from their depositors' heavy
withdrawals. Among the terms of the agreement was the merger of
FISLAI and DSLAI, with DSLAI as the surviving corporation. DSLAI
later became known as Mindanao Savings and Loan Association, Inc.
(MSLAI).
Guillermo B. Torres died on March 2, 1989. MSLAI failed to recover
from its losses and was liquidated on May 24, 1991.
Bangko Sentral ng Pilipinas sent a letter to University of Mindanao,
informing it that the bank would foreclose its properties if MSLAI's total
outstanding obligation of P12,534,907.73 remained unpaid.
In its reply to Bangko Sentral ng Pilipinas' June 18, 1999 letter,
University of Mindanao, through its Vice President for Accounting,
Gloria E. Detoya, denied that University of Mindanao's properties were
mortgaged. It also denied having received any loan proceeds from
Bangko Sentral ng Pilipinas. University of Mindanao alleged in its
Complaints that it did not obtain any loan from Bangko Sentral ng
Pilipinas. It also did not receive any loan proceeds from the bank.
University of Mindanao also alleged that Aurora de Leon's certification
was anomalous. It never authorized Saturnino Petalcorin to execute
real estate mortgage contracts involving its properties to secure
FISLAI's debts. It never ratified the execution of the mortgage
contracts.
ISSUE: Whether petitioner University of Mindanao is bound by the real
estate mortgage contracts executed by Saturnino Petalcorin.
RULING: NO.
Acts of an officer that are not authorized by the board of
directors/trustees do not bind the corporation unless the
corporation ratifies the acts or holds the officer out as a person
with authority to transact on its behalf.
Petitioner does not have the power to mortgage its properties in order
to secure loans of other persons. As an educational institution, it is
limited to developing human capital through formal instruction. It is not
a corporation engaged in the business of securing loans of others.
Securing FISLAI's loans by mortgaging petitioner's properties does not
appear to have even the remotest connection to the operations of
petitioner as an educational institution. Securing loans is not an adjunct
of the educational institution's conduct of business.81 It does not
appear that securing third-party loans was necessary to maintain
petitioner's business of providing instruction to individuals.
DOCTRINE OF APPARENT AUTHORITY
This court has recognized presumed or apparent authority or capacity
to bind corporate representatives in instances when the corporation,
through its silence or other acts of recognition, allowed others to
believe that persons, through their usual exercise of corporate powers,
were conferred with authority to deal on the corporation's behalf.
The doctrine of apparent authority does not go into the question of the
corporation's competence or power to do a particular act. It involves
the question of whether the officer has the power or is clothed with the
appearance of having the power to act for the corporation. A finding
that there is apparent authority is not the same as a finding that the
corporate act in question is within the corporation's limited powers.
21
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
The rule on apparent authority is based on the principle of estoppel.
The Civil Code provides:
ART. 1431. Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon.
ART, 1869. Agency may be express, or implied from the acts of the
principal, from his silence or lack of action, or his failure to repudiate
the agency, knowing that another person is acting on his behalf without
authority.
Agency may be oral, unless the law requires a specific form.
A corporation is estopped by its silence and acts of recognition
because we recognize that there is information asymmetry between
third persons who have little to no information as to what happens
during corporate meetings, and the corporate officers, directors, and
representatives who are insiders to corporate affairs.
What was the document presented by Saturnino? Saturnino
Petalcorin showed a Secretary's Certificate.
January 23, 2020 by Chen Lee T. Apura
If we try to survey the bar exams, before kasi puro hypothetical. But now,
in the recent bar exams, they tried to ask again the objective type of
exams. So it’s good for you to analyze and memorize or get the key
words.
Discussion on exam answers
FRANCISCO VS. GSIS
7 SCRA 577
FACTS:Trinidad obtained a loan from GSIS and mortgaged a parcel of
land. She failed to satisfy the payment of her obligation. Hence, GSIS
foreclosed the mortgage on her property.
Francisco, Trinidad‘s father, offered to GSIS to nullify the previous
extrajudicial foreclosure, offering that he will pay the down payment and
GSIS shall now collect the proceeds from the said property.
GSIS, allegedly, through the secretary, but carrying the name of the
general manager alone, accepted the said offer via telegram:
VICENTE FRANCISCO
SAMANILLO BLDG. ESCOLTA.
GSIS BOARD APPROVED YOUR REQUEST
RE REDEMPTION OF FORECLOSED
PROPERTY OF YOUR DAUGHTER
ANDAL"
Andal is the general manager of GSIS.
Upon knowing this, Francisco paid the down payment and gave GSIS a
letter informing GSIS that eh ahs received such letter, reiterating that
part where GSIS approved his request.
For almost a year, GSIS collected the proceeds from the property.
However, after 1 year, GSIS sent a letter to Francisco telling him to pay
the entire amount.
Accordingly, the acceptance was erroneous because according to the
board resolution of GSIS, there should be other provisions, ie: payment
of legal fees.
ISSUE: Whether the transaction is void.
RULING: NO.
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Applying the Doctrine of Apparent Authority, GSIS already validly
accepted the offer of Francisco.
There was nothing in the telegram that hinted at any anomaly, or gave
ground to suspect its veracity, and the plaintiff, therefore, cannot be
blamed for relying upon it. There is no denying that the telegram was
within Andal‘s apparent authority. Hence, even if it were the board
secretary who sent the telegram, the corporation could not evade the
binding effect produced by the telegram. Knowledge of facts acquired or
possessed by an officer or agent of a corporation in the course of his
employment, and in relation to matters within the scope of his authority,
is notice to the corporation, whether he communicates such knowledge
or not. Yet, notwithstanding this notice, the defendant System pocketed
the amount, and kept silent about the telegram not being in accordance
with the true facts, as it now alleges. This silence, taken together with
the unconditional acceptance of three other subsequent remittances
from plaintiff, constitutes a binding ratification of the original agreement.
WOODCHILD HOLDINGS V. ROXAS ELECTRIC
436 SCRA 235
FACTS:
Roxas owned a parcel of land. The respondents Board of Directors
approved a resolution authorizing the corporation, through its president,
Roberto B. Roxas, to sell Lot No. 491-A-3-B-2 covered by TCT No.
78086, with an area of 7,213 square meters, at a price and under such
terms and conditions which he deemed most reasonable and
advantageous to the corporation; and to execute, sign and deliver the
pertinent sales documents and receive the proceeds of the sale for and
on behalf of the company.
In the Deed of Sale, a right of way was also granted to Woodchild.
According to Woodchild, there was an apparent authority when board of
Roxas executed the resolution authorizing Roberto Roxas to render a
resolution to sell the property.
ISSUE: Whether the Doctrine of Apparent Authority is applicable.
RULING: NO.
Generally, the acts of the corporate officers within the scope of their
authority are binding on the corporation. However, under Article 1910 of
the New Civil Code, acts done by such officers beyond the scope of their
authority cannot bind the corporation unless it has ratified such acts
expressly or tacitly, or is estopped from denying them:
Art. 1910. The principal must comply with all the obligations which the
agent may have contracted within the scope of his authority. As for any
obligation wherein the agent has exceeded his power, the principal is
not bound except when he ratifies it expressly or tacitly.
For the principle of apparent authority to apply, the petitioner was
burdened to prove the following:
a) the acts of the respondent justifying belief in the agency by
the petitioner;
b) knowledge thereof by the respondent which is sought to be
held; and
c) reliance thereon by the petitioner consistent with ordinary
care and prudence.
In this case, there is no evidence on record of specific acts made by the
respondent showing or indicating that it had full knowledge of any
representations made by Roxas to the petitioner that the respondent had
authorized him to grant to the respondent an option to buy a portion of
Lot No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden
or lien thereon, or that the respondent allowed him to do so.
INTERASIA INVESTMENTS VS. CA
G.R. No. 125778. June 10, 2003
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
FACTS: Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase
Agreement (the Agreement), sold to Asia Industries, Inc. (private
respondent) for and in consideration of the sum of P19,500,000.00 all
its right, title and interest in and to all the outstanding shares of stock of
FARMACOR, INC. (FARMACOR). The Agreement was signed by
Leonides P. Gonzales and Jesus J. Vergara, presidents of petitioner and
private respondent, respectively.
Petitioner as seller made warranties and representations among others
is the Minimum Guaranteed Net Worth of FARMACOR as of September
30, 1978 shall be Twelve Million Pesos (P12,000,000.00).
Since the stockholders equity amounted to P10,000,000.00,
FARMACOR had a net worth deficiency of P1,244,225.00. The
guaranteed net worth shortfall thus amounted to P13,244,225.00 after
adding the net worth deficiency of P1,244,225.00 to the Minimum
Guaranteed Net Worth of P12,000,000.00.
The adjusted contract price, therefore, amounted to P6,225,775.00
which is the difference between the contract price of P19,500,000.00
and the shortfall in the guaranteed net worth of P13,224,225.00. Private
respondent having already paid petitioner P12,000,000.00, it was
entitled to a refund of P5,744,225.00.
Petitioner thereafter proposed, by letter of January 24, 1980, signed by
its president, that private respondents claim for refund be reduced to
P4,093,993.00, it promising to pay the cost of the Northern Cotabato
Industries, Inc. (NOCOSII) superstructures in the amount of
P759,570.00. To the proposal respondent agreed. Petitioner, however,
weighed on its promise. Petitioners total liability thus stood at
P4,853,503.00 (P4,093,993.00 plus P759,570.00) exclusive of interest.
Petitioner argues that the January 24, 1980 letter-proposal (for the
reduction of private respondents claim for refund upon petitioners
promise to pay the cost of NOCOSII superstructures in the amount of
P759,570.00) which was signed by its president has no legal force and
effect against it as it was not authorized by its board of directors, it citing
the Corporation Law which provides that unless the act of the president
is authorized by the board of directors, the same is not binding on it.
ISSUE: Whether or not the Doctrine of Apparent Authority applies.
RULING: YES
The general rule is that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a corporation.
A corporation is a juridical person, separate and distinct from its
stockholders and members, having x x x powers, attributes and
properties expressly authorized by law or incident to its existence.
Being a juridical entity, a corporation may act through its board of
directors, which exercises almost all corporate powers, lays down all
corporate business policies and is responsible for the efficiency of
management, as provided in Section 23 of the Corporation Code of the
Philippines:
SEC. 23. The Board of Directors or Trustees. - Unless otherwise
provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of
directors or trustees x x x.
Under this provision, the power and responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is
lodged in the board, subject to the articles of incorporation, bylaws, or
relevant provisions of law. However, just as a natural person may
authorize another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and powers to
officers, committees or agents. The authority of such individuals to bind
the corporation is generally derived from law, corporate bylaws or
authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business, viz: A
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corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that [the] authority to do so
has been conferred upon him, and this includes powers as, in the usual
course of the particular business, are incidental to, or may be implied
from, the powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused person dealing with the
officer or agent to believe that it has conferred. x x x
Hence, an officer of a corporation who is authorized to purchase the
stock of another corporation has the implied power to perform all other
obligations arising therefrom, such as payment of the shares of stock.
By allowing its president to sign the Agreement on its behalf, petitioner
clothed him with apparent capacity to perform all acts which are
expressly, impliedly and inherently stated therein.
January 23, 2020 by Cavin Jhon Cabarlo
WESTMONT BANK V. INLAND CONSTRUCTION
G.R. No. 123822, March 23, 2009
Facts: Inland Construction & Development Corp. obtained loans and
other credit accommodations from Westmont Bank secured by real
estate mortgages. Inland defaulted in its payments. Later, Felix Aranda
as the President of Inland assigned all his rights and interests at Hanil-
Gonzales Construction & Development in favor Horacio Abrantes,
Executive Vice-President and General Manager of Hanil-Gonzales
Corporation. Under such Deed of Assignment, Horacio Abrantes also
assumed the obligations of Inland and Aranda with Westmont Bank. The
bank’s account officer Lionel Calo, Jr. signed its conformity to the deed
of assignment.
The bank disputed Calo’s authority to sign the Deed. However, when the
case reached the Court of Appeals, the court found that Calo signed the
subject deed of assignment which covered a principal obligation of
P880,000.00. Despite the enormity of the amount involved, Westmont
Bank never made any attempt to repudiate the act of Calo until almost
seven (7) years later as evidenced by the Inter-Office Memorandum.
Such memorandum was addressed internally and not even addressed
to Inland or any outsider.
Issue: Whether or not Calo was acting in authority to bind the bank. –
YES.
Held: The general rule remains that, in the absence of authority from the
board of directors, no person, not even its officers, can validly bind a
corporation. If a corporation, however, consciously lets one of its
officers, or any other agent, to act within the scope of an apparent
authority, it will be estopped from denying such officer’s authority.
The records show that Calo was the one assigned to transact on
petitioner’s behalf respecting the loan transactions and arrangements of
Inland as well as those of Hanil-Gonzales and Abrantes. Since it
conducted business through Calo, who is an Account Officer, it is
presumed that he had authority to sign for the bank in the Deed of
Assignment.
Westmont Bank even sent a reply-letter to Abrantes approving the
request for loan restructuring with specific mention of the Inland’s
assumed obligations.
Finally, the bank failed to discharge its primary burden of proving that
Calo was not authorized to bind it, as it did not present proof that Calo
was unauthorized.
PRIME WHITE CEMENT V. IAC
G.R. No. L-68555, March 19, 1993
Facts: Alejandro Te, member of the Board and Auditor of Prime White,
entered into a dealership agreement with Prime White whereby Te was
obligated to act as the exclusive dealer and/or distributor of Prime White
of its cement products in the entire Mindanao.
Several demands to comply with the dealership agreement were made
by Te to Prime White, however, the latter refused to comply with the
same, and Te, by force of circumstances, was constrained to cancel his
23
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
agreement for the supply of white cement with third parties, which were
concluded in anticipation of, and pursuant to the said dealership
agreement.
Notwithstanding the existing dealership agreement between Te and
Prime White, Prime White, in violation of, and with evident intention not
to be bound by the terms and conditions thereof, entered into an
exclusive dealership agreement with a certain Napoleon Co for the
marketing of white cement in Mindanao. This prompted Alejandro Te to
file a claim for damages. Prime White pleaded the nullity of the
agreement being entered into with a member of the Board.
Issue: Whether or not the agreement entered into between Te and
Prime White is valid and enforceable – NO.
Held: All corporate powers shall be exercised by the Board of Directors,
except as otherwise provided by law. Although it cannot completely
abdicate its power and responsibility to act for the juridical entity, the
Board may expressly delegate specific powers to its President or any of
its officers. In the absence of such express delegation, a contract
entered into by its President, on behalf of the corporation, may still bind
the corporation if the board should ratify the same expressly or impliedly.
Implied ratification may take various forms - like silence or
acquiescence; by acts showing approval or adoption of the contract; or
by acceptance and retention of benefits flowing therefrom. Furthermore,
even in the absence of express or implied authority by ratification, the
President as such may, as a general rule, bind the corporation by a
contract in the ordinary course of business, provided the same is
reasonable under the circumstances. They apply where the President or
other officer, purportedly acting for the corporation, is dealing with a third
person or a person outside of the corporation.
The situation is quite different where a director or officer is dealing with
his own corporation. In the instant case respondent Te was not an
ordinary stockholder; he was a member of the Board of Directors and
Auditor of the corporation as well. He was what is often referred to as a
"self-dealing" director.
A director of a corporation holds a position of trust and as such, he owes
a duty of loyalty to his corporation. In case his interests conflict with
those of the corporation, he cannot sacrifice the corporation to his own
advantage and benefit. As corporate managers, directors are committed
to seek the maximum amount of profits for the corporation. This trust
relationship "is not a matter of statutory or technical law. It springs from
the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders."
A director's contract with his corporation is not in all instances void or
voidable. If the contract is fair and reasonable under the circumstances,
it may be ratified by the stockholders provided a full disclosure of his
adverse interest is made. The contract was neither fair nor reasonable.
Prime White was obligated to sell and supply to Te bags of white cement
at a fixed price of 9.70 per month. Te, as a businessman, would have
known or is presumed to know that the prices of cement were expected
to rise. The contract was also entered into when there is no production
of white cement yet and delivery commenced 14 months later.
BUSINESS JUDGMENT RULE
The corporate principle recognizing corporate power and competence
to be lodged primarily with the Board of Directors is embodied in the
“Business Judgment Rule”. Thus, a resolution or transaction pursued
within the corporate powers and business operations of the corporation,
and passed in good faith by the Board of Directors, is valid and binding.
Generally, the courts have no authority to review the same or substitute
their own judgment, even when it can be proven that the exercise of
such power may cause losses to the corporation or decrease its profits.
(Villanueva, 2018)
Imagine if you are a director and you are called to decide on a certain
matter or enter into a venture, you may be hesitant to make a decision
if there is no business judgment rule. This is because not all your
decisions are accurate or successful and you may be held liable for it.
From 2018 TSN:
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Questions of policy or management are left solely to the honest decision
of officers and directors of a corporation and the courts are without
authority to substitute their judgment for the judgment of the board of
directors; the board is the business manager of the corporation and so
long as it acts in good faith, its orders are not reviewable by the courts
or the SEC. The directors are also not liable to the stockholders in
performing such acts.
This rule creates a strong presumption in favor of the board of directors
of a corporation freeing its member from possible liability for decisions
that would result in harm to the corporation. It insists that the board will
not suffer from a legal action simply from a bad decision.
The court recognizes that in the inherently risky environment of
business, the BOD needs to be free to take risk without a constant fear
of loss affecting their judgment.
Major rationale of the rule:
1. Inculcate business. That they should be encouraged to
assume directorships without fear of failure;
2. The directors need wide discretion in setting policies and
making decisions;
3. Courts should be kept out of board rooms where they have
little expertise.
Conditions for the Business Judgment Rule to Prosper
The board of directors must:
1. act in good faith;
2. on an informed basis; and
3. in a disinterested manner.
Therefore, self-dealing directors are not allowed.
Example of self-dealing directors:
• Director owns a property and encourages the corporation to
buy his own property;
• When a director receives a commission;
This Business Judgment Rule dates back in the English Common Law
and first enunciated in the Supreme Court of Louisiana where said court
refused in reversing the decision of the directors for as long as the
decisions are made in good faith and based on informed facts and not
on the arbitrary or capriciousness of the directors.
This Business Judgment Rule is always a defense of directors in
escaping liability in that not all their decisions are correct. That’s why
you put people in the directorship with experience or wisdom.
INGERSOLL V. MALABON SUGAR
G.R. No. L- 27770, December 31, 1927
Facts: Ingersoll and Malabon Sugar entered into contracts by which
Ingersoll was retained as counsel for the corporation and his fees fixed
in such contract. Subsequently, Ingersoll rendered legal services to
Malabon Sugar. When his fees remained unpaid, Ingersoll filed a
complaint against Malabon for the recovery of such attorney’s fees.
Malabon argued that the legal advice given by Ingersoll to its certain
stockholders and directors throughout the litigation with Smith Bell &
Co., Ltd. was unsound, erroneous and contrary to the interest of the
corporation and that the fees were exorbitant and unconscionable.
Issue: Can the court interfere with the contracts entered into by
Malabon with Ingersoll? – NO.
Held: The general rule is that in corporate affairs the will of the majority
controls, and that contracts intra vires entered into by the board of
directors are binding upon the corporation and that the court will not
interfere unless such contracts are unconscionable and oppressive as
to amount to a wanton destruction of the rights of the minority.
24
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
There is no doubt whatever that actions of said stockholders and their
counsel were taken in entire good faith and that they, in view of the large
amount of work done by Ingersoll, considered his fees reasonable. From
a practical point of view, some of his efforts were no doubt misdirected,
but it is not at all certain that the advice given by him, as it appears from
the record, was unsound from a purely legal standpoint.
There is a presumption that when Board of Directors make decisions, it
is within their business judgment.
Q: In instances when the corporation incurs losses, can the owners or
stockholders of a corporation sue the directors based on their decisions?
A: No. There is a presumption on Business Judgment but this is
premised on the fact that the directors were independent and there is no
conflict of interest and the decisions were reasonable and made in good
faith. Thus, if you want to sue or hold the directors liable, you must prove
these three elements:
1. There is conflict of interest
2. The decision is not reasonable
3. The decision is not made in good faith.
It is only with these that one can rebut the presumption. It is the only
time when the stockholders can reverse the decisions of the BOD.
If the rule is rebutted, the burden shifts to the directors, officers or the
proponents of the challenged transactions to prove to the trier of fact that
the transaction was fair and reasonable. However, burden-shifting does
not create liability on the part of the director. It is only when the
transactions involved a conflict of interest or breach of fiduciary duty that
the burden shifts to the defendants to prove the entire fairness of the
transaction. If that is shown, the burden then shifts to the defendant to
demonstrate that the challenged act of transaction is entirely fair to the
corporation and its shareholders. It should also to be noted that the
plaintiff who fails to rebut the Business Judgment Rule is not entitled to
any remedy unless the transaction constitutes waste – that is the
exchange was so one-sided that no business person of ordinary, sound
judgment could conclude that the corporation has received adequate
consideration. A claim of waste will arise only in the rare,
"unconscionable case where directors irrationally squander or give away
corporate assets.
Two Aspects of Business Judgment Rule:
1. Resolutions and transactions entered into by the BOD within
the powers of the corporation cannot be reversed by the
courts, not even at the behest of the stockholders of the
corporation; and
This shields the good faith management decisions by
the BOD from later court intervention. This aspect of the
rule recognized the flexibility of the BOD in their
decisions. Hence, even if the decision turns out to have
less than ideal consequences, the court will not replace
the BOD’s judgment or decisions if the director’s
business, judgment or process was sound.
2. Directors and officers acting within such business judgment
rule cannot be held personally liable for the consequences of
such acts.
MONTELIBANO V. BACOLOD-MURCIA MILLING
G.R. No. L- 15092, May 18, 1962
Facts: Alfredo Montelibano, Alejandro Montelibano, and the Limited co-
partnership Gonzaga and Company, are sugar planters who adhered to
the Bacolod-Murcia Milling sugar central mill under identical milling
contracts. Originally executed in 1919, said contracts were stipulated to
be in force for 30 years starting with the 1920-21 crop, and provided that
the resulting product should be divided in the ratio of 45% for the mill
and 55% for the planters.
In 1936, it was proposed to execute amended milling contracts,
increasing the planters‘ share to 60% of the manufactured sugar and
resulting molasses, besides other concessions, but extending the
operation of the milling contract from the original 30 years to 45 years.
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The Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc.,
adopted a resolution granting further concessions to the planters over
and above those contained in the printed Amended Milling Contract.
The appellants initiated the present action, contending that three Negros
sugar centrals with a total annual production exceeding one-third of the
production of all the sugar central mills in the province, had already
granted increased participation (of 62.5%) to their planters, and that
under the resolution the appellee had become obligated to grant similar
concessions to the plaintiffs.
The appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and
defended by urging that the stipulations contained in the resolution were
made without consideration; that the resolution in question was,
therefore, null and void ab initio, being in effect a donation that was ultra
vires and beyond the powers of the corporate directors to adopt.
Issue: Whether the act of the BOD was ultra vires? – NO.
Held: The business judgment rule is applicable. As the resolution in
question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the
profits of the central, the court has no authority to review them.
There can be no doubt that the directors of the appellee company had
authority to modify the proposed terms of the Amended Milling Contract
for the purpose of making its terms more acceptable to the other
contracting parties. The test to be applied is whether the act in question
is in direct and immediate furtherance of the corporation's business,
fairly incident to the express powers and reasonably necessary to their
exercise. As the resolution in question was passed in good faith by the
board of directors, it is valid and binding, and whether or not it will cause
losses or decrease the profits of the central, the court has no authority
to review them.
It is a well-known rule of law that questions of policy or of management
are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment
of the board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are not
reviewable by the courts.
TRAMAT MERCANTILE V. CA
G.R. No. 111008, November 7, 1994
Facts: Melchor de la Cuesta, doing business under the name and style
of “Farmers Machineries” sold to Tramat Mercantile, Inc. one unit of
Hinomoto Tractor. In payment, David Ong, Tramat’s president and
manager, issued a check for P33,500 in favor of Farmers Machineries.
Later on, David Ong issued a stop payment order when its customer
refused to pay the purchase price of the sale of tractor it earlier
purchased from Farmers Machineries.
As a result, de la Cuesta filed an action for the recovery of P33,500.
Ong, in his answer, averred the questioned transaction was between de
la Cuesta and Tramat and not with Ong in his personal capacity.
However, the trial court held that Ong and Tramat is jointly and severally
liable for the sum of P33,500.
Issue: Whether or not David Ong should be held liable with TRAMAT?
– NO.
Held: Ong acted, not in his personal capacity, but as an officer of a
corporation, TRAMAT, with a distinct and separate personality. As such,
it should only be the corporation, not the person acting for and on its
behalf, that properly could be made liable thereon.
Personal liability of a corporate director, trustee or officer along, although
not necessarily, with the corporation may so validly attach, as a rule,
only when:
1. He assents
a. to a patently unlawful act of the corporation, or
b. for bad faith, or gross negligence in directing its affairs, or
c. for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons
25
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
2. He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by a specific provision of law, to personally answer for
his corporate action.
In the case at bench, there is no indication that David Ong could be held
personally accountable under any of the abovementioned cases.
January 23, 2020 by Carla Louise Bayquen
LOPEZ REALTY INC. v. SPOUSES TANJANGCO
739 SCRA 644
Facts: Lopez Realty, Inc. and Sps. Tanjanco are co-owners of a parcel
of land and the building erected thereon known as the "Trade Center
Building". There was, allegedly, a board resolution authorizing Arturo to
sell the ½ share of the corporation. There was allegedly a special
meeting held for the ratification of the board resolution.
Issue: Whether the ratification is valid, thus validating the contract of
sale entered into—YES.
Held: The general rule is that a corporation, through its board of
directors, should act in the manner and within the formalities, if any,
prescribed by its charter or by the general law. Thus, directors must act
as a body in a meeting called pursuant to the law or the corporation‘s
bylaws, otherwise, any action taken therein may be questioned by any
objecting director or shareholder.
However, the actions taken in such a meeting by the directors or trustees
may be ratified expressly or impliedly.
"Ratification means that the principal voluntarily adopts, confirms and
gives sanction to some unauthorized act of its agent on its behalf. It is
this voluntary choice, knowingly made, which amounts to ratification of
what was theretofore unauthorized and becomes the authorized act of
the party so making the ratification.
In the present case, there’s express ratification through the resolution.
The Court takes into account that majority of the board of directors
except for Asuncion, had already approved of the sale to the spouses
Tanjangco prior to this meeting. As a consequence, the power to ratify
the previous resolutions and actions of the board of directors in this case
lies in the stockholders, not in the board of directors.
It would be absurd to require the board of directors to ratify their own
acts—acts which the same directors already approved of beforehand.
Hence, Juanito, as the administrator of Teresita‘s estate even though
not a director, is entitled to vote on behalf of Teresita‘s estate as the
administrator thereof.
The contract of sale is thus valid.
Let’s discuss the case of:
VIRATA v. WESTMONT (July 05, 2017)
The Court actually imputed liability on the director because of bad faith,
there’s a breach of duty. The director invoked the business judgment
rule. The Court said in the midst of exemption of which is bad faith, it
follows every contract entered into is one sided.
The board of directors is expected to be more than mere rubber stamps
of the corporation and its subordinate departments. It wields all
corporate powers bestowed by the Corporation Code, including the
control over its properties and the conduct of its business. Being
stewards of the company, the board is primarily charged with protecting
the assets of the corporation in behalf of its stakeholders.
Under such circumstances, it becomes immaterial whether or not they
approved of the Side Agreements or authorized Reyes to sign the same
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since this could have all been avoided if they were vigilant enough to
disapprove the Power Merge credit application. Neither can the
business judgment apply herein for it is elementary in corporation law
that the doctrine admits of exceptions: bad faith being one of them,
gross negligence, another.
YOU LOOK AT 3
• Conflict of interest
• Not done in good faith—bad faith
• If it is not reasonable
Those are the only times when liability can be imputed to the directors.
Otherwise, we have the presumption of business judgement that will
govern.
ELECTION OF DIRECTORS OR TRUSTEES
This is a problem for big companies struggling for power.
Section 23. Election of Directors or Trustees. – Except when the
exclusive right is reserved for holders of founders’ shares under Section
7 of this Code, each stockholder or member shall have the right to
nominate any director or trustee who possesses all of the qualifications
and none of the disqualifications set forth in this Code.
At all elections of directors or trustees, there must be present, either in
person or through a representative authorized to act by written proxy,
the owners of majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote. When so
authorized in the bylaws or by a majority of the board of directors, the
stockholders or members may also vote through remote communication
or in absentia: Provided, That the right to vote through such modes may
be exercised in corporations vested with public interest, notwithstanding
the absence of a provision in the bylaws of such corporations.
The addition here is remote communication or absentia. Before the
revision, you can just proxy. If the stockholders cannot attend, they can
send a proxy. Otherwise, their share will not be counted for the purpose
of determining won there is quorum
Now, they can vote by remote communication or in absentia. We have
a bill now, we still do not have guidelines on how will they do remote
communication or in absentia. It is still pending with the SEC
promulgating the guidelines on remote communication or in absentia.
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for purposes of
quorum.
The election must be by ballot if requested by any voting stockholder or
member.
Conduct of election by default is viva voces. It is only when one
stockholder requests that it would be done by ballot.
In stock corporations, stockholders entitled to vote shall have the right
to vote the number of shares of stock standing in their own names in the
stock books of the corporation at the time fixed in the bylaws or where
the bylaws are silent, at the time of the election. x x x
We have: Stockholders of record (recorded in transfer books)
Pwede kasing iclose yan, pwede kasing sabihin sa by laws “those
entitled to vote this meeting are only those recorded two weeks ago. It
has to be specified in the by-laws the cut off.
x x x The said stockholder may: (a) vote such number of shares for as
many persons as there are directors to be elected; (b) cumulate said
shares and give one (1) candidate as many votes as the number of
directors to be elected multiplied by the number of the shares owned; or
(c) distribute them on the same principle among as many candidates as
may be seen fit: Provided, That the total number of votes cast shall not
exceed the number of shares owned by the stockholders as shown in
the books of the corporation multiplied by the whole number of directors
to be elected: Provided, however, That no delinquent stock shall be
voted. Unless otherwise provided in the articles of incorporation or in the
26
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
bylaws, members of nonstock corporations may cast as many votes as
there are trustees to be elected but may not cast more than one (1) vote
for one (1) candidate. Nominees for directors or trustees receiving the
highest number of votes shall be declared elected.
If no election is held, or the owners of majority of the outstanding capital
stock or majority of the members entitled to vote are not present in
person, by proxy, or through remote communication or not voting in
absentia at the meeting, such meeting may be adjourned and the
corporation shall proceed in accordance with Section 25 of this Code.
The directors or trustees elected shall perform their duties as prescribed
by law, rules of good corporate governance, and bylaws of the
corporation.
Before, it is only prescribed by law or rules and regulation. Now, they
incorporated the rules of good corporate governance.
Two systems of electing board of directors or trustees
1. Voting System
2. Cumulative Voting
Let’s say there are 5 directors and there are 2 stockholders. There are
100 shares outstanding, A has 49 and B 51. When you talk about
straight voting, the basis in voting each director is the number of shares.
B has 51, there is no chance for minority to put in seat the one they want.
That’s why there is cumulative voting. This is actually borrowed from
America.
In cumulative voting, the stockholder has as many votes as his number
of shares multiplied by the number of directors. To ensure the minority
can vote at least one director, he can concentrate his votes to one.
Example:
Number of directors: 5
Stockholders:
A – 49 shares
B – 51 shares
Number of votes:
A – 245 votes
B – 255 votes
Sample distribution of votes:
D1 D2 D3 D4 D5
A 100 A100 A55 B45 B 100 B 100
Chances are if it is straight voting, wala talagang malalagay ang
minority.
If you try to read annotations, there are a lot of formula. There is the
question on whether how many shares do I need to acquire in order to
ensure a seat in the directors.
Formula:
• Jones Formula: x = (3x d / D + 1) +1
Of course, we don’t need to learn this. There’s a lot of evolution of this
formula but then again it is not our concern.
Election of trustees:
SEC OGC Opinion No. 14-09
June 2, 2014
Facts: Under the articles of incorporation, the number of trustees should
be 15. However during the election, only 11 nominees accepted.
Issue: Should the 11 nominees who accepted fall below the required
number of trustees to be elected (15) as provided by EPCC Articles of
Incorporation, are all 11 considered automatically elected regardless of
the number of votes received by each?
Held: The grant of corporate power is to the Board as a body, and not
to the individual members thereof, and that the corporation can be bound
only by the collective act of the Board. In relation to this, the Board can
only transact business if it reaches a quorum, which is at least a majority
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of the number of trustees fixed in the articles of incorporation or by-laws.
For the decisions of the Board to be valid as a corporate act, at least a
majority of such a majority or quorum has to concur.
However, for the election of the officers, the majority of all the members
of the board as fixed in the articles of incorporation, rather than the
majority of the quorum is required.
Here, the SEC opined that the stockholders can elect a number of
trustees less than what is required in the articles of incorporation and
this would only give rise to vacancy. Also, in case the number of
candidates does not exceed the number of seats of the board, said
candidates provided they receive votes can be said to have received the
highest number of votes as the law requires a plurality of votes casted
in the election.
Discussion: There must be quorum
ELECTION CONTEST
Covered by corporate dispute or controversies. We have separate law
son that:
RA 8799, A.M. No. 01-2-04-SC
What is an election contest?
Section 2. Definition. – An election contest refers to any controversy or
dispute involving title or claim to any elective office in a stock or non-
stock corporation, the validation of proxies, the manner and validity of
elections, and the qualifications of candidates, including the
proclamation of winners, to the office of director, trustee or other officer
directly elected by the stockholders in a close corporation or by
members of a non-stock corporation where the articles of incorporation
or by-laws so provide.
What you just have to determine is that this is actually summary in
nature. The purpose of that is to avoid the inoperation of the corporation
because the direction is free.
If hindi madaliin ang election, hindi makagalaw ang corporation.
TERM OF OFFICE
What is the term of office when it comes to a director? Determined by
the by laws. If there is none, then 1 year.
SEC OGC Opinion No. 18-06
March 20, 2006
It should be noted that the phrase, ―until their successors are elected
and qualified, simply establishes the rule on hold-over, but does not
prohibit an incumbent officer from seeking reelection.
A hold-over situation arises when no successor is elected due to valid
and justifiable reasons. Thus, the incumbent holds over and continues
to function until another officer is chosen and qualified.
Let’s say director ka, tapos walang naelect so nagcontinue ka (same in
election laws: hold-over capacity of election).
SEC OGC Opinion No. 18-06
March 20, 2006
It has to be emphasized however that a hold-over situation arises only
when no successors are elected due to valid and justifiable reasons. The
Commission considered the resolution of an election protest or political
upheavals which barred the holding of an election as valid and justifiable
reasons for the hold-over term of the incumbent directors. However, the
Commission ruled that to give the incumbent more time to learn and to
extent indefinitely the term of the incumbent were invalid reasons for
hold-over.
January 24, 2020 by Erven John Claros
We have started discussing elections (Board of Directors). So again,
please know the difference between Cummulative and Straight.
27
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Cummulative is actually one way of insuring that the minority of
shareholders are well represented. Atleast a seat in the board of
directors.
We've discussed the hold-over capacity. If there is no elected directors
then they can hold over positions until their replacement is selected.
In the case of GRACE CHRISTIAN HIGH SCHOOL VS. CA, it was
dicussed the non-permanency of seats.
GRACE CHRISTIAN HIGH SCHOOL VS. CA,
381 SCRA 133
FACTS: Petitioner Grace Christian High School is an educational
institution offering preparatory, kindergarten and secondary courses at
the Grace Village in Quezon City. Private respondent Grace Village
Association, Inc., is an organization of lot and/or building owners,
lessees and residents at Grace Village, while private respondents
Alejandro G. Beltran and Ernesto L. Go were its president and chairman
of the committee on election.
It appears that a committee of the board of directors prepared a draft of
an amendment to the by-laws which says that Grace Christian High
school will have a permanent director of the association. This draft was
never presented to the general membership for approval. Nevertheless,
the petitioner was given a permanent seat in the board of directors of
the association. The association committee on election informed that the
petitoner‘s permanent seat in board is invalid because it was never
approved by the majority of its members. Hence they will have an
election.
The petitioner school requested the cancellation of the election, the
association denied. So the petitioner school instituted an action to the
Home Insurance Guaranty Corporation but their action was denied. The
board adopted a resolution declaring the 1975 provision null and void
for lack of approval by members of the association and the 1968 by-laws
to be effective.
The petitioner school appealed to the CA but CA ruled that the amended
by laws in 1975 is null and void.
ISSUE: WON Grace Christian High school can have permanent seat in
board as director?
HELD: No.
The former and present corporation law leave no room for doubt as to
their meaning: the board of directors of corporations must be elected
from among the stockholders or members. There may be corporations
in which there are unelected members in the board but it is clear that in
the examples cited by petitioner the unelected members sit as ex officio
members, i.e., by virtue of and for as long as they hold a particular office.
Nor can petitioner claim a vested right to sit in the board on the basis of
―practice.‖ Practice, no matter how long continued, cannot give rise to
any vested right if it is contrary to law.
Even less tenable is petitioner‘s claim that its right is coterminus with the
existence of the association. It is probable that, in allowing petitioners
representative to sit on the board, the members of the association were
not aware that this was contrary to law. It should be noted that they did
not actually implement the provision in question except perhaps insofar
as it increased the number of directors from 11 to 15, but certainly not
the allowance of petitioners representative as an unelected member of
the board of directors. It is more accurate to say that the members
merely tolerated petitioner‘s representative and tolerance cannot be
considered ratification.
We have the principle that no matter how long there is permanent
seating in the board of directors.
How about if a director enjoying a hold-over capacity, exits the board of
directors, can the remaining board of directors select the replacement?
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VALLE VERDE COUNTRY CLUB VS. AFRICA,
598 SCRA 202
FACTS: The corporation involved here was the Valle Verde Country
Club, Inc. (VVCC). Its Board of Directors was composed of 9 members,
two of whom were Jaime Dinglasan and Eduardo Makalintal. They held
their positions from the year 1997 to 2001, since the requisite quorum
for the holding of the stockholders meeting could not be obtained.
Consequently, the same directors continued to serve in the VVCC Board
in a hold-over capacity. On September 1, 1998, Dinglasan resigned from
his position as member of the VVCC Board. In a meeting held on
October 6, 1998, the remaining directors, still constituting a quorum of
VVCCs nine-member board, elected Eric Roxas (Roxas) to fill in the
vacancy created by the resignation of Dinglasan.
A year later, or on November 10, 1998, Makalintal also resigned as
member of the VVCC Board. He was replaced by Jose Ramirez
(Ramirez), who was elected by the remaining members of the VVCC
Board on March 6, 2001. Victor Africa, a member of VVCC, questioned
the election of Roxas and Ramirez as members of the VVCC Board with
the Securities and Exchange Commission (SEC) and the Regional Trial
Court (RTC), respectively.
In his nullification complaint, he alleged that the election of Roxas and
Ramirez was contrary to Section 29, in relation to Section 23 of the
Corporation Code. Section 23, in part, declares that the board of
directors shall hold office for one (1) year until their successors are
elected and qualified; while Section 29 declares that vacancies must be
filled by the stockholders in a regular or special meeting called for that
purpose. Africa maintains that the resulting vacancy on account of the
resignation of Dinglasan and Makalintal should have been filled by the
stockholders in a regular or special meeting called for that purpose, and
not by the remaining members of the VVCC Board, as was done in this
case. Africa also contended that to fill in the vacancies in the Board,
there should be an unexpired term during which the successor-member
shall serve.
ISSUE: Whether the remaining directors of the corporation‘s Board, still
constituting a quorum, can elect another director to fill in a vacancy
caused by the resignation of a hold-over director. (NO)
HELD: The SC here first emphasized that the holdover period is not part
of the term of office of a member of the board of directors. It also
distinguished ―term from ―tenure. That the ―term is defined as the
time during which the officer may claim to hold office as a right, as it is
fixed by law, and it is not affected by the holdover. Whereas, ―tenure‖
represents the term during which the incumbent actually holds office;
and it may be shorter or longer (as in the case of a holdover).
SC here held that when an incumbent member of the board of directors
continues to serve in a holdover capacity, it implies that the office has a
fixed term, which has already expired, and the incumbent is holding the
succeeding term. The SC here also emphasized that the underlying
policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members
have stood for election, and who have actually been elected by the
stockholders, on an annual basis.
Only in that way can the directors' continued accountability to
shareholders, and the legitimacy of their decisions that bind the
corporation's stockholders, be assured. The shareholder vote is critical
to the theory that legitimizes the exercise of power by the directors or
officers over properties that they do not own.
Here, the SC ultimately upheld the mandatory requirement for an annual
election of the Board of Directors as an aspect of good governance, in
that it subjects the
directors to a periodic review of the performance of their duties and
responsibilities.
Q: Who elects the Board of Directors?
28
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
A: Stockholders. If there is an expiration of term or removal, its the
stockholders have the right to elect.
Q: How about if there is vacancy?
A: The BOD can actually select or elect, provided that they constitute a
quorum. Pag hindi na sila quorum, go back to the stockholders.
Corporate Officers
SEC. 24. Corporate Officers. – Immediately after their election, the
directors of a corporation must formally organize and elect: (a) a
president, who must be a director; (b) a treasurer, who must be a
resident; (c) a secretary, who must be a citizen and resident of the
Philippines; and (d) such other officers as may be provided in the
bylaws. If the corporation is vested with public interest, the board shall
also elect a compliance officer. The same person may hold two (2) or
more positions concurrently, except that no one shall act as president
and secretary or as president and treasurer at the same time, unless
otherwise allowed in this Code.
The officers shall manage the corporation and perform such duties as
may be provided in the bylaws and/or as resolved by the board of
directors.
Please take note of the qualifications. The bylaws can provide other
officers other than those mentioned in sec. 24.
"If the corporation is vested with public interest, the board shall
also elect a compliance officer." This provision is new. The
Compliance officer has the position similar to a vice president. Medyo
mataas to sya. If of course the company is vested with public interest,
specifically those listed in the stock exchange, they have a compliance
officer. They even have a compliance department.
“The same person may hold two (2) or more positions
concurrently, except that no one shall act as president and
secretary or as president and treasurer at the same time, unless
otherwise allowed in this Code.” -You could be a secretary and
treasurer.
"The officers shall manage the corporation and perform such
duties as may be provided in the bylaws and/or as resolved by the
board of directors." That is why when you read board resolutions, may
"whereas", "resolved" etc. etc. because that gives power.
SAN JUAN STRUCTURAL AND STEEL FABRICATORS VS. CA
296 SCRA 631
FACTS: San Juan Structural and Steel Fabricators entered into an
agreement with Motorich Sales Corporation through Nenita Gruenberg,
corporate treasurer of Motorich, for the transfer to the former a parcel of
land upon a P100,000earnest money, balance to be payable within
March 2, 1989. Upon payment of the earnest money, and on March 1,
1989, San Juan allegedly asked to be submitted a computation of the
balance due to Motorich. The latter, despite repeated demands, refused
to execute the Deed of Assignment of the land. San Juan discovered
that Motorich entered into a Deed of Absolute Sale of the land to ACL
Development Corporation.
Hence, San Juan filed a complaint with the RTC. On the other hand,
Motorich contends that since Nenita Gruenberg was only the treasurer
of said corporation, and that its president, Reynaldo Gruenberg, did not
sign the agreement entered into by San Juan and Motorich, the
treasurer‘s signature was inadequate to bind Motorich to the agreement.
Furthermore, Nenita contended that since San Juan was not able to pay
within the stipulated period, no deed of assignment could be made. The
deed was agreed to be executed only after receipt of the cash payment,
and since according to Nenita, no cash payment was made on the due
date, no deed could have been executed.
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RTC dismissed the case holding that Nenita Gruenberg was not
authorized by Motorich to enter into said contract with San Juan, and
that a majority vote of the BoD was necessary to sell assets of the
corporation in accordance with Sec. 40 of the Corporation Code. CA
affirmed this decision. Hence, this petition with SC.
ISSUE: Whether or not there was a valid contract existing between San
Juan and Motorich.
HELD: No.
The contract entered into between Nenita and San Juan cannot bind
Motorich, because the latter never authorized nor ratified such sale. A
corporation is a juridical person separate and distinct from its
stockholders or members.
Accordingly, the property of the corporation is not the property of its
stockholders and may not be sold by them without express authorization
from the corporation‘s BoD. This is in accordance with Sec. 23 of the
Corporation Code. Indubitably, a corporation can only act through its
BoD or, when authorized either by its by laws or by its board resolution,
through its officers or agents in the normal course of business. The
general principles of agency govern the relation between the corporation
and its officers or agents, subject to the Articles of Incorporation, by
laws, or relevant provisions of law.
A corporate officer or agent may represent and bind the corporation in
transactions with 3rd persons to the extent that the authority to do so
has been conferred upon him, and this includes powers which have
been intentionally conferred, and also such powers as, in the usual
course of the particular business, are incidental to, or may be implied
from, the powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused persons dealing with
the officer or agent to believe that it has conferred. Furthermore, persons
dealing with an assumed agent, whether the assumed agency be a
general or special one, are bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted, the
burden of proof is upon them to establish it.
Unless duly authorized, a treasurer, whose powers are limited, cannot
bind the corporation in a sale of its assets. In the case at bar, San Juan
had the responsibility of ascertaining the extent of Nenita‘s authority to
represent the corporation. Selling is obviously foreign to a corporate
treasurer‘s function. Neither was real estate sale shown to be a normal
business activity of Motorich. The primary purpose of said corporation is
marketing, distribution, import and export relating to a general
merchandising business. Unmistakably, its treasurer is not cloaked with
actual or apparent authority to buy or sell real property, an activity which
falls way beyond the scope of her general authority. Acts of corporate
officers within the scope of their authority are binding on the corporation.
But when these officers exceed their authority, their actions cannot bind
the corporation, unless it has ratified such acts or is estopped from
disclaiming them.
It's very important to know the position or office of the one transacting in
the corporation because their powers depend on such particular office.
It is also important to know who are the officers of the corporation
because this becomes relevant when it comes to labor issues. If you are
an officer iba yung consequences compared to an employee.
OKOL VS. SLIMMERS WORLD INTERNATIONAL,
608 SCRA 97
FACTS: Leslie Okol, a Vice President of Slimmers World, was
terminated from employment after an incident with the Bureau of
Customs regarding equipment belonging to/consigned to Slimmers
World. As such, Okol filed a complaint with the Arbitration branch of the
NLRC against Slimmers World for illegal suspension, illegal dismissal,
unpaid commissions, damages, and attorney‘s fees, with prayer for
29
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
reinstatement and payment of backwages. Slimmers World filed a
Motion to Dismiss the case, asserting that the NLRC had no jurisdiction
over the subject matter of the complaint.
Slimmers World‘s motion was sustained, with the labor arbiter ruling that
since Okol was the vice president at the time of her dismissal, being a
corporate officer, the dispute was an intra-corporate controversy falling
outside the jurisdiction of the arbitration branch. On appeal, the NLRC
reversed the LA decision and ordered Slimmers World to reinstate Okol.
The CA subsequently set aside the NLRC decision and ruled that the
case was an intra-corporate controversy, and falls within the jurisdiction
of the regular courts pursuant to RA 8799.
ISSUE: Whether Okol was a corporate officer of Slimmers World.
HELD: Yes. Okol was a corporate officer at the time of her dismissal.
According to the Amended By-Laws of Slimmers World which
enumerate the power of the board of directors as well as the officers of
the corporation, the general management of the corporation shall be
vested in a board of five directors who shall be stockholders and who
shall be elected annually by the stockholders and who shall serve until
the election and qualification of their successors and like the Chairman
of the Board and the President, the Vice President shall be elected by
the Board of Directors from its own members.
The Vice President shall be vested with all the powers and authority and
is required to perform all the duties of the President during the absence
of the latter for any cause. The Vice President will perform such duties
as the Board of Directors may impose upon him from time to time. This
clearly shows that Okol was a director and officer of Slimmers World.
An office is created by the charter of the corporation and the officer is
elected by the directors and stockholders. On the other hand, an
employee usually occupies no office and generally is employed not by
action of the directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to such
employee.
It's very important to know if a person is an officer because of the
different implications and consequences.
PHILIPINE SCHOOL OF BUSINESS AND
ADMINISTRATION VS LEANO
127 SCRA 778
Facts: This Petition for Certiorari questions the jurisdiction of
respondent Labor Arbiter over the present controversy (No. NCR-9-20-
81) involving private respondent-complainant, Rufino R. Tan (TAN), and
petitioners, the Philippine School of Business Administration (PSBA), a
domestic corporation, and majority of its Directors.
TAN is one of the principal stockholders of PSBA. Before September 5,
1981, he was a Director and the Executive Vice President enjoying
salaries and allowances.
On August 1, 1981, at the PSBA Board of Directors’ regular meeting,
three members were elected to fill vacancies in the seven-man body.
On September 5, 1981, also during a regular meeting, the Board
declared all corporate positions vacant except those of the Chairman
and President, and at the same time elected a new set of officers. TAN
was not re-elected as Executive Vice-President.
On September 16, 1981, TAN filed with the National Labor Relations
Commission (NLRC) (National Capital Region) a complaint for Illegal
Dismissal against petitioners alleging that he was "summarily, illegally,
irregularly and improperly removed from his position as Executive Vice-
President . . . without cause, investigation or notice"
On September 21, 1981, TAN also filed a one-million-peso damage suit
against petitioners before the then Court of First Instance of Rizal,
Quezon City, for illegal and oppressive removal.
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And, on September 28, 1981, TAN lodged before the Securities and
Exchange Commission (SEC) another complaint against petitioners
essentially questioning the validity of the PSBA elections of August 1,
1981 and September 5, 1981, and of his "ouster" as Executive Vice-
President.
Before the NLRC, petitioners moved for the dismissal of TAN’s
complaint, invoking the principle against split jurisdiction.
Issue: Which between SEC and NLRC has jurisdiction – SEC
Held: An intracorporate controversy would call for SEC jurisdiction. A
labor dispute, that of the NLRC.
Relevant and pertinent it is to note that the PSBA is a domestic
corporation duly organized and existing under our laws. General
management is vested in a Board of seven directors elected annually by
the stockholders entitled to vote, who serve until the election and
qualification of their successors.
Any vacancy in the Board of Directors is filled by a majority vote of the
subscribed capital stock entitled to vote at a meeting specially called for
the purpose, and the director or directors so chosen hold office for the
unexpired term. Corporate officers are provided for, among them, the
Executive Vice-President, who is elected by the Board of Directors from
their own number. The officers receive such salaries or compensation
as the Board of Directors may fix. The By-Laws likewise provide that
should the position of any officer of the corporation become vacant by
reason of death, resignation, disqualification, or otherwise, the Board of
Directors, by a majority vote, may choose a successor or successors
who shall hold office for the expired term of his predecessor.
It was at a board regular monthly meeting held on August 1, 1981, that
three directors were elected to fill vacancies. And, it was at the regular
Board Meeting of September 5, 1981 that all corporate positions were
declared vacant in order to effect a reorganization, and at the ensuing
election of officers, TAN was not re-elected as Executive Vice-President.
Basically, therefore, the question is whether the election of directors on
August 1, 1981 and the election of officers on September 5, 1981, which
resulted in TAN’s failure to be re-elected, were validly held. Tan
concludes, the Board meeting on September 5, 1981 was tainted with
irregularity on account of the presence of illegally elected directors
without whom the results could have been different.
TAN invoked the same allegations in his complaint filed with the SEC.
So much so, that on December 17, 1981, the SEC rendered a Partial
Decision annulling the election of the three directors and ordered the
convening of a stockholders’ meeting for the purpose of electing new
members of the Board. The correctness of said conclusion is not for us
to pass upon in this case. TAN was present at said meeting and again
sought the issuance of injunctive relief from the SEC.
The foregoing indubitably show that, fundamentally, the controversy is
intra-corporate in nature. It revolves around the election of directors,
officers or managers of the PSBA, the relation between and among its
stockholders, and between them and the corporation. Private
respondent also contends that his "ouster" was a scheme to intimidate
him into selling his shares and to deprive him of his just and fair return
on his investment as a stockholder received through his salary and
allowances as Executive Vice-President.
This is not a case of dismissal. The situation is that of a corporate office
having been declared vacant, and of TAN’s not having been elected
thereafter. The matter of whom to elect is a prerogative that belongs to
the Board, and involves the exercise of deliberate choice and the faculty
of discriminative selection. Generally speaking, the relationship of a
person to a corporation, whether as officer or as agent or employee, is
not determined by the nature of the services performed, but by the
incidents of the relationship as they actually exist.
30
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Please take note that under the Old Corporation Law, there are 3
specific officers provided --President, Treasure & Secretary. Now we
have a 4th, the compliance officer. So again, this does not limit the
corporation in giving other positions for as long as it is indicated in the
bylaws. So pwede magkaroon ng vice-president etc etc.
PAMPLONA PLANTATION COMPANY v. RAMON ACOSTA
G.R. No. 153193, December 6, 2006
FACTS: This stems from a case before the Labor Arbiter for
underpayment, overtime pay, premium pay for rest day and holiday,
service incentive leave pay, damages, attorney’s fees, and 13th month
pay. The complainants claimed that they were regular rank and file
employees of petitioner Pamplona Plantation Co., Inc. with different
hiring periods, work designations, and salary rates.
Petitioner, however, denied this, alleging that some of the complainants
are seasonal employees, some are contractors, others were hired under
the pakyaw system, while the rest were hired by the Pamplona
Plantation Leisure Corporation, which has a separate and distinct entity
from it.
The Labor Arbiter (LA) held petitioner and Pamplona Plantation’s
manager, Jose Luis Bondoc, liable for underpayment as complainants
were regular employees of petitioner. They were also held guilty of illegal
dismissal with regard to two complainants.
The NLRC reversed the LA’s decision, dismissing all the complaints,
finding that the complaint should have been directed against the
Pamplona Plantation Leisure Corporation since complainants’ individual
affidavits contained the allegations that their tasks pertained to their
work “in the golf course.”
The Court of Appeals (CA) set aside the NLRC’s dismissal and
reinstated the LA’s Decision with modification.
ISSUES
1) Whether or not Pamplona Plantation is liable for the wage differentials
of the worker-respondents who themselves admitted in their affidavits
that their employer was another entity – Pamplona Plantation Leisure
Corporation?
2) Whether or not Pamplona Plantation’s manager is personally liable
for the money claims awarded to the workers?
RULING: Petition PARTIALLY GRANTED.
For the purpose of resolving the workers’ claims, Pamplona Plantation
and Pamplona Leisure are hereby deemed one and the same entity. The
CA is MODIFIED in that the manager of Pamplona Plantation is
absolved of any personal liability as regards the money claims awarded
to respondents.
In all other respects, the Decision is AFFIRMED.
Petitioner is estopped from denying that respondents worked for it. It
never raised this defense in the proceedings before the Labor Arbiter.
Notably, the defense it raised pertained to the nature of respondents’
employment, i.e., whether they are seasonal employees, contractors, or
worked under the pakyaw system. Thus, in its Position Paper, petitioner
alleged that some of the respondents are coconut filers and copra
hookers or sakadors; some are seasonal employees who worked as
scoopers or lugiteros; some are contractors; and some worked under
the pakyaw system. In support of these allegations, petitioner even
presented the company’s payroll.
By setting forth these defenses, petitioner, in effect, admitted that
respondents worked for it, albeit in different capacities. Such allegations
are negative pregnants – denials pregnant with the admission of the
substantial facts in the pleading responded to which are not squarely
denied, and amounts to an acknowledgement that respondents were
indeed employed by petitioner.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
Reiterating Pamplona Plantation Company, Inc. v. Tinghil, the Court
holds that by piercing the veil of corporate fiction, the two corporations
– the Pamplona Plantation Corporation, Inc. and the Pamplona
Plantation Leisure Corporation – are one and the same. An examination
of the facts reveals that, for both the coconut plantation and the golf
course, there is only one management which the laborers deal with
regarding their work. A portion of the plantation (also called Hacienda
Pamplona) had actually been converted into a golf course and other
recreational facilities. The weekly payrolls issued by petitioner-company
bore the name “Pamplona Plantation Co., Inc.”
It is also a fact that respondents all received their pay from the same
person, Bondoc -- the managing director of the company. True,
Pamplona Plantation Co., Inc., and the Pamplona Plantation Leisure
Corporation appear to be separate corporate entities. But it is settled
that this fiction of law cannot be invoked to further an end subversive of
justice. The corporations have basically the same incorporators and
directors and are headed by the same official. Both use only one office
and one payroll and are under one management. The attempt to make
the two corporations appear as two separate entities, insofar as the
workers are concerned, should be viewed as a devious but obvious
means to defeat the ends of the law. Such a ploy should not be permitted
to cloud the truth and perpetrate an injustice. Also, just because they
worked at the golf course did not necessarily mean that they were not
employed to do other tasks, especially since the golf course was merely
a portion of the coconut plantation. Thus, petitioner cannot now deny
that respondents are its employees.
As to the issue on the dismissal of one particular worker, Joselito Tinghil,
it is well-settled that the employer has the burden of proving that the
dismissal was for a valid and just cause. Failure to discharge this burden
of proof substantially means that the dismissal was not justified and
therefore, illegal. Given petitioner’s failure to discharge this burden, the
Court sustains the finding of illegal dismissal vis-à-vis respondent
Joselito Tinghil.
Lastly, petitioner believes that its manager, Jose Luis Bondoc, should
not have been held solidarily liable with the company for the wage
differentials awarded to respondents. Petitioner argues that Bondoc is
merely an employee of the company and not a corporate director or
officer who can be held personally liable therefor.
The rule is that officers of a corporation are not personally liable for their
official acts unless it is shown that they have exceeded their authority.
However, the legal fiction that a corporation has a personality separate
and distinct from stockholders and members may be disregarded if it is
used as a means to perpetuate fraud or an illegal act or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, or to
confuse legitimate issues. Moreover, assuming Bondoc is a corporate
officer, a corporate officer is not personally liable for the money claims
of discharged corporate employees unless he acted with evident malice
and bad faith in terminating their employment.
MATLING INDUSTRIAL AND COMMERCIAL CORP. VS. COROS,
633 SCRA 12
FACTS: After his dismissal by Matling as its Vice President for Finance
and Administration, the respondent filed on August 10, 2000 a complaint
for illegal suspension and illegal dismissal against Matling and some of
its corporate officers (petitioners) in the NLRC, Sub-Regional Arbitration
Branch XII, Iligan City.
The petitioners moved to dismiss the complaint, raising the ground,
among others, that the complaint pertained to the jurisdiction of the
Securities and Exchange Commission (SEC) due to the controversy
being intracorporate inasmuch as the respondent was a member of
Matlings Board of Directors aside from being its Vice-President for
Finance and Administration prior to his termination.
The respondent opposed the petitioners motion to dismiss, insisting that
his status as a member of Matlings Board of Directors was doubtful,
31
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
considering that he had not been formally elected as such; that he did his appointment to office must be fully considered to determine whether
not own a single share of stock in Matling, considering that he had been the dismissal constituted an intra-corporate controversy or a labor
made to sign in blank an undated indorsement of the certificate of stock termination dispute. We must also consider whether his status as
he had been given in 1992; that Matling had taken back and retained the Director and stockholder had any relation at all to his appointment and
certificate of stock in its custody; and that even assuming that he had subsequent dismissal as Vice President for Finance and Administration.
been a Director of Matling, he had been removed as the Vice President Let's go to the Specific officers.
for Finance and Administration, not as a Director, a fact that the notice President
of his termination dated April 10, 2000 showed.
PEOPLE’S AIRCARGO AND WAREHOUSING CO. VS. CA
297 SCRA 170
On October 16, 2000, the LA granted the petitioners motion to dismiss,
ruling that the respondent was a corporate officer because he was
FACTS: People's Aircargo and Warehousing Co. Inc. (PAWCI) is a
occupying the position of Vice President for Finance and Administration
domestic corporation, which wasorganized in the middle of 1986 to
and at the same time was a Member of the Board of Directors of Matling;
operate a customs bonded warehouse at the old Manila International
and that, consequently, his removal was a corporate act of Matling and
Airport in Pasay City. To obtain a license for the corporation from the
the controversy resulting from such removal was under the jurisdiction
Bureau of Customs, Antonio Punsalan Jr., the corporation president,
of the SEC, pursuant to Section 5, paragraph (c) of Presidential Decree
solicited a proposal from Stefani Saño for the preparation of a feasibility
No. 902.
study. Saño submitted a letter-proposal dated 17 October 1986
("FirstContract") to Punsalan, for the project feasibility study (market,
ISSUE: Whether or not the respondent is a corporate officer within the
technical, and financial feasibility)and preparation of pertinent
jurisdiction of the regular courts.
documentation requirements for the application, worth
P350,000.Initially, Cheng Yong, the majority stockholder of PAWCI,
HELD: No.
objected to Saño's offer, as another company priced a similar proposal
at only P15,000.
As a rule, the illegal dismissal of an officer or other employee of a private
employer is properly cognizable by the LA. This is pursuant to Article
However, Punsalan preferred Saño's services because of the latter's
217 (a) 2 of the Labor Code. Where the complaint for illegal dismissal
membership in the task force, which was supervising the transition of
concerns a corporate officer, however, the controversy falls under the
the Bureau of Customs from the Marcos government to the Aquino
jurisdiction of the Securities and Exchange Commission (SEC), because
Administration. On 17 October 1986, PAWCI, through Punsalan, sent
the controversy arises out of intra-corporate or partnership relations
Saño a letter confirming their agreement. Accordingly, Saño prepared a
between and among stockholders, members, or associates, or between
feasibility study for PAWCI which eventually paid him the balance of the
any or all of them and the corporation, partnership, or association of
contract price, although not according to the schedule agreed upon. On
which they are stockholders, members, or associates, respectively; and
4 December 1986, upon Punsalan's request, Saño sent PAWCI another
between such corporation, partnership, or association and the State
letter-proposal ("Second Contract") formalizing its proposal for
insofar as the controversy concerns their individual franchise or right to
consultancy services in the amount of P400,000.
exist as such entity; or because the controversy involves the election or
appointment of a director, trustee, officer, or manager of such
On 10 January 1987, Andy Villaceren, vice president of PAWCI,
corporation, partnership, or association. Such controversy, among
received the operations manual prepared by Saño. PAWCI submitted
others, is known as an intra-corporate dispute. Effective on August 8,
said operations manual to the Bureau of Customs in connection with the
2000, upon the passage of Republic Act No. 8799, otherwise known as
former's application to operate a bonded warehouse; thereafter, in May
The Securities Regulation Code, the SECs jurisdiction over all intra-
1987, the Bureau issued to it a license to operate, enabling it to become
corporate disputes was transferred to the RTC, pursuant to Section 5.2
one of the three public customs bonded warehouses at the international
of RA No. 8799.
airport. Saño also conducted, in the third week of January 1987 in the
warehouse of PAWCI, a three-day training seminar for the latter's
Thus, pursuant to the above provision (Section 25 of the Corporation
employees.
Code), whoever are the corporate officers enumerated in the by-laws
are the exclusive Officers of the corporation and the Board has no power
On 25 March 1987, Saño joined the Bureau of Customs as special
to create other Offices without amending first the corporate By-laws.
assistant to then Commissioner Alex Padilla, a position he held until he
became technical assistant to then Commissioner Miriam Defensor-
However, the Board may create appointive positions other than the
Santiago on 7 March 1988. Meanwhile, Punsalan sold his shares in
positions of corporate Officers, but the persons occupying such
PAWCI and resigned as its president in 1987. On 9 February 1988, Saño
positions are not considered as corporate officers within the meaning of
filed a collection suit against PAWCI. He alleged that he had prepared
Section 25 of the Corporation Code and are not empowered to exercise
an operations manual for PAWCI, conducted a seminar-workshop for its
the functions of the corporate Officers, except those functions lawfully
employees and delivered to it a computer program; but that, despite
delegated to them. Their functions and duties are to be determined by
demand, PAWCI refused to pay him for his services. PAWCI, in its
the Board of Directors/Trustees. Moreover, the Board of Directors of
answer, denied that Saño had prepared an operations manual and a
Matling could not validly delegate the power to create a corporate office
computer program or conducted a seminar-workshop for its employees.
to the President, in light of Section 25 of the Corporation Code requiring
It further alleged that the letter-agreement was signed by Punsalan
the Board of Directors itself to elect the corporate officers. Verily, the
without authority, in collusion with Saño in order to unlawfully get some
power to elect the corporate officers was a discretionary power that the
money from PAWCI, and despite his knowledge that a group of
law exclusively vested in the Board of Directors, and could not be
employees of the company had been commissioned by the board of
delegated to subordinate officers or agents.
directors to prepare an operations manual.
The office of Vice President for Finance and Administration created by
The Regional Trial Court (RTC) of Pasay City, Branch110, rendered a
Matlings President pursuant to By Law No. V was an ordinary, not a
Decision dated 26 October 1990 declared the Second Contract
corporate, office. The criteria for distinguishing between corporate
unenforceable or simulated. However, since Saño had actually prepared
officers who may be ousted from office at will, on one hand, and ordinary
the operations manual and conducted a training seminar for PAWCI and
corporate employees who may only be terminated for just cause, on the
its employees, the trial court awarded P60,000 to the former, on the
other hand, do not depend on the nature of the services performed, but
ground that no one should be unjustly enriched at the expense of
on the manner of creation of the office.
another (Article 2142, Civil Code).The trial Court determined the amount
"in light of the evidence presented by defendant on the usual charges
In the respondent‘s case, he was supposedly at once an employee, a
made by a leading consultancy firm on similar services." Upon appeal,
stockholder, and a Director of Matling. The circumstances surrounding
and on 28 February1994, the appellate court modified the decision of

Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019 32
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
the trial court, and declared the Second Contract valid and binding on
PAWCI, which was held liable to Saño in the full amount of P400,000,
representing payment of Saño services in preparing the manual of
operations and in the conduct of a seminar for PAWCI.
As no new ground was raised by PAWCI, reconsideration of the decision
was denied in the Resolution promulgated on 28 October 1994. PAWCI
filed the Petition for Review.
ISSUE: Whether a single instance where the corporation had previously
allowed its president to enter into a contract with another without a board
resolution expressly authorizing him, has clothed its president with
apparent authority to execute the subject contract.
HELD: Apparent authority is derived not merely from practice. Its
existence may be ascertained through
[1] the general manner in which the corporation holds out an officer or
agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or
[2] the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of
his ordinary powers. It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other parties.
It is not the quantity of similar acts which establishes apparent authority,
but the vesting of a corporate officer with the power to bind the
corporation. Herein, PAWCI, through its president Antonio Punsalan Jr.,
entered into the First Contract without first securing board approval.
Despite such lack of board approval, PAWCI did not object to or
repudiate said contract, thus "clothing" its president with the power to
bind the corporation.
The grant of apparent authority to Punsalan is evident in the testimony
of Yong —senior vice president, treasurer and major stockholder of
PAWCI. The First Contract was consummated, implemented and paid
without a hitch. Hence, Sano should not be faulted for believing that
Punsalan's conformity to the contract in dispute was also binding on
petitioner. It is familiar doctrine that if a corporation knowingly permits
one of its officers, or any other agent, to act within the scope of an
apparent authority, it holds him out to the public as possessing the power
to do those acts; and thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be estopped from
denying the agent's authority.
Furthermore, Saño prepared an operations manual and conducted a
seminar for the employees of PAWCI in accordance with their contract.
PAWCI accepted the operations manual, submitted it to the Bureau of
Customs and allowed the seminar for its employees. As a result of its
aforementioned actions, PAWCI was given by the Bureau of Customs a
license to operate a bonded warehouse.
Granting arguendo then that the Second Contract was outside the usual
powers of the president, PAWCI's ratification of said contract and
acceptance of benefits have made it binding, nonetheless. The
enforceability of contracts under Article 1403(2) is ratified "by the
acceptance of benefits under them" under Article1405.
January 24, 2020 by Franklin Flores
CORPORATE OFFICERS
• PRESIDENT
PEOPLE’S AIRCARGO AND WAREHOUSING CO. VS. CA,
G.R. No. 117847 October 7, 1998
FACTS:
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
People's Aircargo and Warehousing Co. Inc. (PAWCI) is a domestic
corporation, which wasorganized in the middle of 1986 to operate
a customs bonded warehouse at the old Manila International
Airport in Pasay City. To obtain a license for the corporation
from the Bureau of Customs, Antonio Punsalan Jr., the corporation
president, solicited a proposal from Stefani Saño for the preparation of
a feasibility study. Saño submitted a letter-proposal dated 17 October
1986 ("FirstContract") to Punsalan, for the project feasibility study
(market, technical, and financial feasibility)and preparation of
pertinent documentation requirements for the application, worth
P350,000.Initially, Cheng Yong, the majority stockholder of
PAWCI, objected to Saño's offer, as another company priced a
similar proposal at only P15,000.
However, Punsalan preferred Saño's services because of the latter's
membership in the task force, which was supervising the transition of
the Bureau of Customs from the Marcos government to the Aquino
Administration. On 17 October 1986, PAWCI, through Punsalan, sent
Saño a letter confirming their agreement.
Accordingly, Saño prepared a feasibility study for PAWCI which
eventually paid him the balance of the contract price, although not
according to the schedule agreed upon. On 4 December 1986, upon
Punsalan's request, Saño sent PAWCI another letter-proposal ("Second
Contract") formalizing its proposal for consultancy services in the
amount of P400,000. On 10 January 1987, Andy Villaceren, vice
president of PAWCI, received the operations manual prepared by Saño.
PAWCI submitted said operations manual to the Bureau of Customs in
connection with the former's application to operate a bonded
warehouse; thereafter, in May 1987, the Bureau issued to it a license to
operate, enabling it to become one of the three public customs bonded
warehouses at the international airport. Saño also conducted, in the third
week of January 1987 in the warehouse of PAWCI, a three-day training
seminar for the latter's employees.
On 25 March 1987, Saño joined the Bureau of Customs as special
assistant to then Commissioner Alex Padilla, a position he held until he
became technical assistant to then Commissioner Miriam Defensor-
Santiago on 7 March 1988. Meanwhile, Punsalan sold his shares in
PAWCI and resigned as its president in 1987.
On 9 February 1988, Saño filed a collection suit against PAWCI. He
alleged that he had prepared an operations manual for PAWCI,
conducted a seminar-workshop for its employees and delivered to it a
computer program; but that, despite demand, PAWCI refused to pay him
for his services. PAWCI, in its answer, denied that Saño had prepared
an operations manual and a computer program or conducted a seminar-
workshop for its employees. It further alleged that the letter-agreement
was signed by Punsalan without authority, in collusion with Saño in
order to unlawfully get some money from PAWCI, and despite
his knowledge that a group of employees of the company had been
commissioned by the board of directors to prepare an operations
manual. The Regional Trial Court (RTC) of Pasay City, Branch110,
rendered a Decision dated 26 October 1990 declared the Second
Contract unenforceable or simulated.
However, since Saño had actually prepared the operations manual
and conducted a training seminar for PAWCI and its employees, the trial
court awarded P60,000 to the former, on the ground that no one should
be unjustly enriched at the expense of another (Article 2142, Civil
Code).The trial Court determined the amount "in light of the evidence
presented by defendant on the usual charges made by a leading
consultancy firm on similar services."
Upon appeal, and on 28 February1994, the appellate court modified the
decision of the trial court, and declared the Second Contract valid and
binding on PAWCI, which was held liable to Saño in the full
amount of P400,000, representing payment of Saño services in
preparing the manual of operations and in the conduct of a seminar for
PAWCI. As no new ground was raised by PAWCI, reconsideration of the
decision was denied in the Resolution promulgated on 28 October 1994.
PAWCI filed the Petition for Review.
ISSUE: Whether a single instance where the corporation had previously
allowed its president to enter into a contract with another without a board
resolution expressly authorizing him, has clothed its president with
apparent authority to execute the subject contract.
33
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
HELD:
Apparent authority is derived not merely from practice. Its existence
may be ascertained through
[1] the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or
[2] the acquiescence in his acts of a particular nature, with actual
or constructive knowledge thereof, whether within or beyond the scope
of his ordinary powers. It requires presentation of evidence of similar
act(s) executed either in its favor or in favor of other parties. It is not the
quantity of similar acts which establishes apparent authority, but the
vesting of a corporate officer with the power to bind the corporation.
Herein, PAWCI, through its president Antonio Punsalan Jr., entered into
the First Contract without first securing board approval. Despite such
lack of board approval, PAWCI did not object to or repudiate said
contract, thus "clothing" its president with the power to bind the
corporation. The grant of apparent authority to Punsalan is evident in
the testimony of Yong —senior vice president, treasurer and major
stockholder of PAWCI.
The First Contract was consummated, implemented and paid without
a hitch. Hence, Sano should not be faulted for believing that Punsalan's
conformity to the contract in dispute was also binding on petitioner. It is
familiar doctrine that if a corporation knowingly permits one of its officers,
or any other agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts;
and thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agent's
authority.
Furthermore, Saño prepared an operations manual and conducted a
seminar for the employees of PAWCI in accordance with their contract.
PAWCI accepted the operations manual, submitted it to the
Bureau of Customs and allowed the seminar for its employees. As a
result of its aforementioned actions, PAWCI was given by the Bureau of
Customs a license to operate a bonded warehouse. Granting arguendo
then that the Second Contract was outside the usual powers of the
president, PAWCI's ratification of said contract and acceptance of
benefits have made it binding, nonetheless. The enforceability
of contracts under Article 1403(2) is ratified "by the acceptance of
benefits under them" under Article1405.
Discussion:
Q: Would there be difference if it was the Secretary or the Treasurer that
is involved in this case?
A: Yes, there will be difference, because the secretary or the treasurer
does not have a general supervision unlike the president. So, it could
have been different.
From 2019 TSN:
So please distinguish this case to the earlier case of the treasurer – yung
walang Board Resolution.
In this case it’s the President, wala ring Board Resolution but the
Supreme Court actually allowed it because there was apparent
authority.
Take note here the words of the Supreme Court:
“Hence, it has been held in other jurisdictions that the
president of a corporation possesses the power to enter into a contract
for the corporation, when the conduct on the part of both the president
and the corporation [shows] that he had been in the habit of acting in
similar matters on behalf of the company and that the company had
authorized him so to act and had recognized, approved and ratified his
former and similar actions.
Furthermore, a party dealing with the PRESIDENT of a
corporation is entitled to assume that he has the authority to enter,
on behalf of the corporation, into contracts that are within the
scope of the powers of said corporation and that do not violate any
statute or rule on public policy.”
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
• CORPORATE SECRETATY (CorSec)
SEC Memorandum Circular No. 6, s. 2009
A CORPORATE SECRETARY shall be a
• Filipino citizen and
• a resident of the Philippines.
The Corporate Secretary, is mandated to have the following duties and
responsibilities:
[a] Be responsible for the safekeeping and preservation of the integrity
of the minutes of the meetings of the Board and its committees, as
well as the other official records of the corporation;
[b] Be loyal to the mission, vision and objectives of the corporation;
[c] Work fairly and objectively with the Board, Management and
stockholders;
[d] Have appropriate administrative and interpersonal skills;
[e] If he is not at the same time the corporation’s legal counsel, be
aware of the laws, rules and regulations necessary in the
performance of his duties and responsibilities;
(need not necessarily be a lawyer ,but in most cases, the CorSec
is a lawyer – one must know how to write minutes, resolutions and
be aware of the laws, rules and regulations necessary in the
performance of his duties and responsibilities )
[f] Have a working knowledge of the operations of the corporation;
[g] Inform the members of the Board, in accordance with the bylaws,
of the agenda of their meetings and ensure that the members have
before them accurate information that will enable them to arrive at
intelligent decisions on matters that require their approval;
[h] Attend all Board meetings, except when justifiable causes, such
as, illness, death in the immediate family and serious accidents,
prevent him from doing so;
[i] Ensure that all Board procedures, rules and regulations are strictly
followed by the members; and
[j] If he is also the Compliance Officer, perform all the duties and
responsibilities of the said officer as provided for in this Code.
In other words, a CorSec can also be a COMPLIANCE OFFICER. So
please take note of that.
Q: What does a compliance officer do?
A:
The Compliance Officer
The Board shall appoint a Compliance Officer who shall report directly
to the Chair of the Board. He shall perform the following duties:
(i) Monitor compliance by the corporation with this Code
and the rules and regulations of regulatory agencies and,
if any violations are found, report the matter to the Board
and recommend the imposition of appropriate
disciplinary action on the responsible parties and the
adoption of measures to prevent a repetition of the
violation;
(ii) Appear before the Commission when summoned in
relation to compliance with this Code; and
(iii) Issue a certification every January 30th of the year on
the extent of the corporation’s compliance with this Code
for the completed year and, if there are any deviations,
explain the reason for such deviation.
Atty. Ong: Basically, this is what a compliance officer do, if you are
engaged kasi in a business imbued with public interest, madami yang
34
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
regulations. For example “mining”- compliance officer ka, you are to
ensure that the corporation is compliant to its reportorial and
administrative requirements to different government entity.
• CORPORATE TREASURER
As discussed in the case of San Juan Structural and Steel
Fabricators vs. Court of Appeals,
-to receive and keep funds of the corporation, and to
disburse them in accordance with the authority given him by the
board or the properly authorized officers.
Report of Election of Directors, Trustees and Officers, Non-
Holding of Election and Cessation from Office
Section 25. Report of election of directors, trustees and officers,
NON- HOLDING OF ELECTION AND CESSATION FROM
OFFICE. – Within thirty (30) days after the election of the
directors, trustees and officers of the corporation, the secretary,
or any other officer of the corporation, shall submit to the
Securities and Exchange Commission, the names, nationalities,
SHAREHOLDINGS and residences of the directors, trustees, and
officers elected.
The non-holding of any election and the reasons therefor, shall be
reported to the commission within thirty (30) days from the date
of the scheduled election; the report shall specify a new date for
the election, which shall not be later than sixty (60) days from the
scheduled date.
If no new date has been designated, or if the newly- scheduled
election be likewise not held, the commission may, upon the
application of any stockholder, member, director or trustee and
after verification of the unjustified non-holding of election,
summarily order that an election be held. The commission shall
have the power to issue such orders as may be appropriate,
including orders directing the issuance of a notice stating the time
and place of the election, designated presiding officer, and the
record date or dates for the determination of stockholders or
members entitled to vote.
Notwithstanding any provision of the articles of incorporation or
by-laws to the contrary, the shares of stock or membership
represented at such meeting and entitled to vote shall constitute
a quorum for purposes of conducting an election under this
section.
Should a director, trustee or officer die, resign or in any manner
cease to hold office, the secretary, or the director, trustee or
officer of the corporation, or in case of death, the officer’s heirs
shall, within 7 days from knowledge thereof, report in writing such
fact to the Commission.
*No exhaustive discussion from Atty. Ong on this provision*
Discussion lifted from 2019 TSN:
“Within thirty (30) days after the election of the directors, trustees
and officers of the corporation, the secretary, or any other officer
of the corporation, shall submit to the Securities and Exchange
Commission, the names, nationalities, SHAREHOLDINGS and
residences of the directors, trustees, and officers elected.”
This is what we call the Submission of the General Information Sheet
(GIS). There is no way for the SEC to know what’s going on in your
company unless you submit the GIS. You have to submit if there is any
change in the officership, directorship and even the shareholdings of
your shareholders. You have to submit within 30 days of that change.
What if there is no election, when will you submit? So you have to submit
that within 30 days from the stockholder’s meeting. Every meeting
you have to submit. This is one of the reportorial requirements of a
corporation.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
The non-holding of any election and the reasons therefor,
shall be reported to the commission within thirty (30) days
from the date of the scheduled election; the report shall
specify a new date for the election, which shall not be later
than sixty (60) days from the scheduled date.
Now you have the proper Remedy for non-holding of any election.
If no new date has been designated, or if the newly- scheduled
election be likewise not held, the commission may, upon the
application of any stockholder, member, director or trustee
and after verification of the unjustified non-holding of election,
summarily order that an election be held.
In this particular case, the Commission may intervene in the
holding of the election. But that has to have a justifiable reason say
unjustified yung non-holding of election because they still want to just
remain directors.
The commission shall have the power to issue such orders as
may be appropriate, including orders directing the issuance of
a notice stating the time and place of the election, designated
presiding officer, and the record date or dates for the
determination of stockholders or members entitled to vote.
Notwithstanding any provision of the articles of incorporation
or by-laws to the contrary, the shares of stock or membership
represented at such meeting and entitled to vote shall
constitute a quorum for purposes of conducting an election
under this section.
Take note that even if they are not in quorum, for purposes of non-
holding, the election ordered by the SEC shall constitute as quorum.
Should a director, trustee or officer die, resign or in any
manner cease to hold office, the secretary, or the director,
trustee or officer of the corporation, or in case of death, the
officer’s heirs shall, within 7 days from knowledge thereof,
report in writing such fact to the Commission.
This is one of the reportorial requirement kung may namatay.
Please take note that it is only limited to the director, trustee or officer.
You don’t need to give SEC notice if the stockholder dies.
MONFORT HERMANOS AGRICULTURAL DEV CORP.
vs. MONFORT III
434 SCRA 27
FACTS:
This case involves complaints for forcible entry and replevin filed
by Monfort Hermanos Agricultural Corporation (Corporation)
against the the children, nephews, and nieces of its original
incorporators (collectively known as the group of Antonio Monfort
III).
The corporation here was represented by its President, Ma.
Antonia M. Salvatierra.
The group of Antonio Monfort III filed a motion to dismiss
contending, inter alia, that Ma. Antonia M. Salvatierra has no
capacity to sue on behalf of the Corporation because the March
31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra
and/or Ramon H. Monfort to represent the Corporation is void as
the purported Members of the Board who passed the same were
not validly elected officers of the Corporation.
It was alleged that the 6 signatories to the March 31, 1997 Board
Resolution authorizing Ma. Antonia M. Salvatierra to represent
the Corporation, were:
35
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Ma. Antonia M. Salvatierra, President; Ramon H. Monfort,
Executive Vice President; Directors Paul M. Monfort, Yvete M.
Benedicto and Jaqueline M. Yusay; and Ester S. Monfort,
Secretary.
However, the names of the last four (4) signatories to the said
Board Resolution do not appear in the 1996 General
Information Sheet submitted by the Corporation with the SEC,
as other names were rather listed.
ISSUE: Whether Salvatierra has the capacity to sue through a
valid Board Resolution?
RULING: No.
Corporations are required under Section 26 of the Corporation
Code to submit to the SEC within thirty (30) days after the election
the names, nationalities and residences of the elected directors,
trustees and officers of the Corporation. In order to keep
stockholders and the public transacting business with domestic
corporations properly informed of their organizational operational
status, the SEC issued the following rules:
xxx
[2] A General Information Sheet shall be filed
with this Commission within thirty (30) days
following the date of the annual stockholders
meeting. No extension of said period shall be
allowed, except for very justifiable reasons
stated in writing by the President, Secretary,
Treasurer or other officers, upon which the
Commission may grant an extension for not
more than ten (10) days.
[3] A. Should a director, trustee or officer die,
resign or in any manner, cease to hold office,
the corporation shall report such fact to the
Commission with fifteen (15) days after such
death, resignation or cessation of office.
[4] If for any justifiable reason, the annual
meeting has to be postponed, the company
should notify the Commission in writing of
such postponement.
---
In the case at bar, the fact that four of the six Members of the
Board listed in the 1996 General Information Sheet are already
dead at the time the March 31, 1997 Board Resolution was
issued, does not automatically make the four signatories (i.e.,
Paul M. Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and
Ester S. Monfort) to the said Board Resolution (whose name do
not appear in the 1996 General Information Sheet) as among the
incumbent Members of the Board.
In the case at bar, it was not duly established that the 4 signatories
in the 1997 Board Resolution were duly elected to replace the
previous Board members listed in the 1996 General Information
Sheet submitted by the Corporation to the SEC.
AS TO ALLEGED OVERSIGHT OF RETAINED ACCOUNTANT
AND NOT THE FAULT OF CORPORATION
To correct the alleged error in the General Information Sheet, the
retained accountant of the Corporation informed the SEC in
its November 11, 1998 letter that the non-inclusion of the lawfully
elected directors in the 1996 General Information Sheet was
attributable to its oversight and not the fault of the Corporation.
This belated attempt, however, did not erase the doubt as to
whether an election was indeed held.
As previously stated, a corporation is mandated to inform the SEC
of the names and the change in the composition of its officers and
board of directors within 30 days after election if one was held, or
15 days after the death, resignation or cessation of office of any
of its director, trustee or officer if any of them died, resigned or in
any manner, ceased to hold office. This, the Corporation failed to
do.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
The alleged election of the directors and officers who signed the
March 31, 1997 Board Resolution was held on October 16, 1996,
but the SEC was informed thereof more than two years later, or
on November 11, 1998.
This violates Section 26 of the Corporation Code which requires
a corporation to submit to the SEC within thirty (30) days after the
election the names, nationalities and residences of the elected
directors, trustees and officers of the Corporation.
The 4 Directors appearing in the 1996 General Information Sheet
died between the years 1984-1987, but the records do not show
if such demise was reported to the SEC.
What further militates against the purported election of those who
signed the March 31, 1997 Board Resolution was the belated
submission of the alleged Minutes of the October 16, 1996
meeting where the questioned officers were elected.
The issue of legal capacity of Ma. Antonia M. Salvatierra was
raised before the lower court by the group of Antonio Monfort III
as early as 1997, but the Minutes of said October 16, 1996
meeting was presented by the Corporation only in its September
29, 1999 Comment before the Court of Appeals.
Moreover, the Corporation failed to prove that the same October
16, 1996 Minutes was submitted to the SEC. In fact,
the 1997 General Information Sheet submitted by the
Corporation does not reflect the names of the 4 Directors claimed
to be elected on October 16, 1996.
Considering the foregoing, the SC held that Ma. Antonia M.
Salvatierra failed to prove that four of those who authorized her to
represent the Corporation were the lawfully elected Members of
the Board of the Corporation.
*no discussion on the case*
Note that in the Revised Corporation Code, there is a shortened
2019 TSN:
period – SEVEN (7) days.
Disqualification of Directors, Trustees or Officers
Section 26. Disqualification of Directors, Trustees or Officers. - A
person shall be disqualified from being a director, trustee or officer of
any corporation if, within five (5) years prior to the election or
appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period
exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known as
"The Securities Regulation Code";
(b) Found administratively liable for any offense involving fraudulent
acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts,
violations or misconduct similar to those enumerated in paragraphs (a)
and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the Commission, the primary regulatory agency,
or Philippine Competition Commission may impose in its promotion of
good corporate governance or as a sanction in its administrative
proceedings.
“(c) By a foreign court or equivalent foreign regulatory authority for
acts, violations or misconduct similar to those enumerated in
paragraphs (a) and (b) above.”
36
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Atty. Ong: Kung ma-convict US SEC for fraudulent acts, you are
disqualified for officership here in Philippines.
Removal of Director or Trustees
Section 27. Removal of Director or Trustees. –
Any director or trustee of a corporation may be removed fro
office by vote of the stockholders holding or representing at least two-
thirds (2/3) of the outstanding capital stock, or in a nonstock corporation,
by a vote of at least two-thirds (2/3) of the member entitled to vote:
Provided, That such removal shall take place either at a
regular meeting of the corporation or at a special meeting called for the
purpose, and in either case, after previous notice to stockholders or
members of the corporation of the intention to propose such removal at
the meeting.
A special meeting of the stockholders or members for the
purpose of removing any director or trustee must be called by the
secretary on order of the president, or upon written demand of
stockholders representing or holding at least a majority of the
outstanding capital stock, or a majority of the members entitled to vote.
If there is no secretary, or the secretary, despite demand, fails
or refuses to call the special meeting or to give notice thereof, the
stockholder or member of the corporation signing the demand may call
the special meeting or to give notice thereof, the stockholder or member
of the corporation signing the demand may call for the meeting by
directly addressing the stockholders or members.
Notice of the time and place of such meeting, as well as of the
intention to propose such removal, must be given by publication or by
written notice prescribed in this Code. Removal may be with or without
cause:
Provided, That removal without cause may not be used to
deprive minority stockholders or members of the right representation to
which they may be entitled under Section 23 of this Code.
The Commission shall, motu propio or upon verified complaint, and after
due notice and hearing, order the removal of a director or trustee elected
despite the disqualification, or whose disqualification arose or is
discovered subsequent to an election.
The removal of a disqualified director shall be without prejudice to other
sanctions that the Commission may impose on the board of directors or
trustees who, with knowledge of the disqualification, failed to remove
such director or trustee.
Discussion:
So you can actually remove a Director or a Trustee, but this
power is given to the stockholders holding or representing at least two-
thirds (2/3) of the outstanding capital stock, or in a nonstock corporation,
by a vote of at least two-thirds (2/3) of the member entitled to vote, pero
dapat kay ang removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting.
Removal may be:
• With cause; or
• Without cause
If it is WITHOUT CAUSE: removal without cause may not be used to
deprive minority stockholders or members of the right representation to
which they may be entitled under Section 23 of this Code.
Take note:
To ELECT- you only need majority.
To REMOVE- you need to have 2/3. Mas mahirap talaga mag-remove.
“The Commission shall, motu propio or upon verified complaint, and
after due notice and hearing, order the removal of a director or trustee
elected despite the disqualification, or whose disqualification arose or
is discovered subsequent to an election.”
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If the commission finds out that you are in fact disqualified it can motu
proprio remove you, or kung may kalaban ka pwede ka mag-file og
verified complaint.
___________________
Now, in a SEC OGC Opinion No. 6-9 dated March 16, 2009,
“The board of directors or trustees has no power to remove one of
its members as director or trustee. The reason is that as officers
deriving their title from the stockholders or members, directors or
trustees can be removed only by the power that appointed them.
Since the law expressly confers the authority to stockholders or
members, the board cannot indirectly usurp or disregard the
same.”
Atty. Ong: Dito nagkaka-problema, kung talagang may deviant, merong
hindi nakiki-ayon sa desisyon ng majority, tapos galit na yung majority-
gusto nyo na syang tanggalin para makagalaw na, again take note THE
BOARD OF DIRECTORS OR TRUSTEES HAS NO POWER TO
REMOVE ONE OF ITS MEMBERS AS DIRECTOR OR TRUSTEE,
because this power is only given to the stockholders.
The reason is that as officers deriving their title from the stockholders or
members, directors or trustees can be removed only by the power that
appointed them. Since the law expressly confers the authority to
stockholders or members, the board cannot indirectly usurp or disregard
the same.
Vacancies in the Office of Director or Trustee; Emergency Board
Section 28. Vacancies in the Office of Director or Trustee; Emergency
Board. - Any vacancy occurring in the board of directors or trustees other
that by removal or expiration of term may be filled by the vote of at least
a majority of the remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by the stockholders or
members in a regular or special meeting called for that purpose.
When the vacancy is due to term expiration, the election shall be held
no later that the day of such expiration at a meeting called for that
purpose.
When the vacancy arises as a result of removal by the stockholders or
members, the election may be held on the same day of the meeting
authorizing the removal and this fact must be so stated in the agenda
and notice of said meeting.
In all other cases, the election must be held no later than forty-five (45)
days from the time the vacancy arose. A director or trustee elected to fill
vacancy shall be referred to as replacement director or trustee elected
to fill a vacancy shall be referred to as replacement director or trustee
and shall serve only for the unexpired term of the predecessor in office.
However, when the vacancy prevents the remaining directors from
consituting a quorum and emergency action is required to prevent grave,
substantial, and irreparable loss or damage to the corporation, the
vacancy may be temporarily filled from among the officers of the
corporation by unanimous vote of the remaining directors or trustees.
The action by the designated director or trustee shall be limited to the
emergency action necessary, and the term shall cease within a
reasonable time form the termination of the emergency or upon election
of the replacement director or trustee, whichever comes earlier. The
corporation must notify the Commission within three (3) days from the
creation of the emergency board, stating therein the reason for its
creation.
Any directorship or trusteeship to be filled by a reason of an increase in
the number of directors or trustees shall be filled only by an election at
a regular or at a special meeting of stockholders or members duly called
for the purpose, or in the same meeting authorizing the increase of
directors or trustees if so stated in the notice of the meeting.
In all elections to fill vacancies under this section, the procedure set forth
in Section 23 and 25 of this Code shall apply.
Discussion:
37
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
On QUOROM
Let’s day hindi na- quorum, kasi kunyari 5 yung Directors, tapos
namatay yung 3 kasi sabay sila sumakay ng plane na sumabog.
*By the way, it is a practice na kapag may meeting abroad ang mga directors,
they do not board on the same plane, dapat iba-iba. The reason for that is
kunyari mag crash ang isa sa plane, at least may quorum pa. It is practical.
Even family-owned businesses, hindi sila sabay-sabay ng flight.*
Q: Going back, since 2 na lang silang directors, mag-call pa ba sila ng
meeting? What if they have a decision to make?
A: This is the time to set up an EMERGENCY BOARD
Q: Saan galing ang mga tao?
A: it would be from the other officers, by unanimous decision of the
remaining directors. So for example, the 2 directors will pick the VP for
Operations – but that power of the VP who rose to the directorship will
only be limited for that emergency situation.
Lifted from 2019 TSN:
Any directorship or trusteeship to be filled by a reason of an increase in
the number of directors or trustees shall be filled only by an election at
a regular or at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting authorizing the increase
of directors or trustees if so stated in the notice of the meeting.
In all elections to fill vacancies under this section, the procedure set
forth in Section 23 and 25 of this Code shall apply.
Pwede ba to? Remember that you can amend your Articles of
Incorporation and one of the amendments is if you increase your
directors. In this particular case if mag increase ka ng number of
directors, what will be the procedure. This provision provide such. It
can be filled only by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose.
TAN V. SYCIP
499 SCRA 216
G.R. NO. 153468; AUGUST 17, 2006
For stock corporations, the quorum referred to in Section 52 of the
Corporation Code is based on the number of outstanding voting stocks.
For nonstock corporations, only those who are actual, living members
with voting rights shall be counted in determining the existence of a
quorum during members meetings. Dead members shall not be
counted.
FACTS:
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit
educational corporation with fifteen (15) regular members, who also
constitute the board of trustees. During the annual members meeting
held on April 6, 1998, there were only eleven (11) living member-
trustees, as four (4) had already died. Out of the eleven, seven (7)
attended the meeting through their respective proxies. The meeting was
convened and chaired by Atty. Sabino Padilla Jr. over the objection of
Atty. Antonio C. Pacis, who argued that there was no quorum. In the
meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and
Judith Tan were voted to replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange
Commission (SEC), petitioners maintained that the deceased member-
trustees should not be counted in the computation of the quorum
because, upon their death, members automatically lost all their rights
(including the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998
meeting null and void for lack of quorum. She held that the basis for
determining the quorum in a meeting of members should be their
number as specified in the articles of incorporation, not simply the
number of living members.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
ISSUE: Whether or not in NON-STOCK corporations, dead members
should still be counted in determination of quorum for purpose of
conducting the Annual Members Meeting.
RULING: NO
THE RIGHT TO VOTE IN NONSTOCK CORPORATIONS
In nonstock corporations, the voting rights attach to membership.
Members vote as persons, in accordance with the law and the bylaws of
the corporation. Each member shall be entitled to one vote unless so
limited, broadened, or denied in the articles of incorporation or bylaws.
We hold that when the principle for determining the quorum for stock
corporations is applied by analogy to nonstock corporations, only those
who are actual members with voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the members
representing the actual number of voting rights, not the number or
numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum.
Section 25 of the Code specifically provides that a majority of the
directors or trustees, as fixed in the articles of incorporation, shall
constitute a quorum for the transaction of corporate business (unless the
articles of incorporation or the bylaws provide for a greater majority). If
the intention of the lawmakers was to base the quorum in the meetings
of stockholders or members on their absolute number as fixed in the
articles of incorporation, it would have expressly specified so.
Otherwise, the only logical conclusion is that the legislature did not have
that intention.
EFFECT OF THE DEATH OF A MEMBER OR SHAREHOLDER
In stock corporations, shareholders may generally transfer their shares.
Thus, on the death of a shareholder, the executor or administrator duly
appointed by the Court is vested with the legal title to the stock and
entitled to vote it. Until a settlement and division of the estate is effected,
the stocks of the decedent are held by the administrator or executor.
On the other hand, membership in and all rights arising from a nonstock
corporation are personal and non-transferable, unless the articles of
incorporation or the bylaws of the corporation provide otherwise. In other
words, the determination of whether or not dead members are entitled
to exercise their voting rights (through their executor or administrator),
depends on those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall,
among others, be terminated by the death of the member. Section 91 of
the Corporation Code further provides that termination extinguishes all
the rights of a member of the corporation, unless otherwise provided in
the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members
who are dropped from the membership roster in the manner and for the
cause provided for in the By-Laws of GCHS are not to be counted in
determining the requisite vote in corporate matters or the requisite
quorum for the annual members meeting. With 11 remaining members,
the quorum in the present case should be 6. Therefore, there being a
quorum, the annual members meeting, conducted with six members
present, was valid.
Compensation of Directors or Trustees
Section 29. Compensation of Directors or Trustees. - In the absence of
any provision in the bylaws fixing their compensation, the directors or
trustees shall not receive any compensation in their capacity as such,
except for reasonable per diems:
Provided, however, That the stockholders representing at
least a majority of the outstanding capital stock or majority of the
members may grant directors or trustees with compensation and
approve the amount thereof at a regular or special meeting.
In no case shall the total yearly compensation of directors exceed ten
percent (10%) of the net income before income tax of the corporation
during the preceding year.
Directors or trustees shall not participate in the determination of their
own per diems or compensation.
38
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Corporations vested with public interest shall submit to their
shareholders and the Commission, an annual report of the total
compensation of each of their directors or trustees.
Atty. Ong: If you have an opportunity, please get a copy of a
Stockholder’s Report. It is required to be submitted.
WESTERN INSTITUTE OF TECHNOLOGY V. SALAS
278 SCRA 216
FACTS:
Private respondents Salas, et.al are the majority and controlling
members of the Board of Trustees of Western Institute of Technology,
Inc. a stock corporation engaged in the operation, among others, of an
educational institution. Then, the board of directors amended their by
laws giving the members of board of directors a compensation. The ten
per centum of the net profits shall be distributed equally among the ten
members of the Board of Trustees.
ISSUE: WON the compensation of the board of directors as stated in
their by laws violates the corporation code?
HELD: NO.
There is no argument that directors or trustees, as the case may be, are
not entitled to salary or other compensation when they perform nothing
more than the usual and ordinary duties of their office. This rule is
founded upon a presumption that directors/trustees render service
gratuitously, and that the return upon their shares adequately furnishes
the motives for service, without compensation.
Under the foregoing section, there are only TWO (2) WAYS BY WHICH
MEMBERS OF THE BOARD CAN BE GRANTED COMPENSATION
APART FROM REASONABLE PER DIEMS:
(1) when there is a provision in the by-laws fixing their
compensation; and
(2) when the stockholders representing a majority of the
outstanding capital stock at a regular or special stockholders’
meeting agree to give it to them.
In the case at bench, Resolution No. 48, s. 1986 granted monthly
compensation to private respondents not in their capacity as members
of the board, but rather as officers of the corporation, more particularly
as Chairman, Vice-Chairman, Treasurer and Secretary of Western
Institute of Technology. Clearly, therefore, the prohibition with respect to
granting compensation to corporate directors/trustees as such under
Section 30 is not violated in this particular case.
Atty. Ong: In this case, dual ang capacity nila, they are directors at the
same time officers din. They received compensation as officers kasi
nag-trabahao naman talaga sila as President/ Vice-Pres., then that
compensation should not be within the ambit of the proscription.
___________________________
Section 30 is an important topic.
Remember the CONCEPT OF BUSINESS JUDGMENT?
Based on this concept, there is a presumption that all of the
decisions of the directors are done in good faith and for that they cannot
be held liable.
BUT once you prove that it was done in bad faith, with gross
negligence, then you can impute liability to the directors based on
Section 30.
Liability of Directors, Trustees or Officers
Section 30. Liability of Directors, Trustees or Officers. - Directors or
trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence or
bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and
other persons.
A director, trustee or officer shall not attempt to acquire, or any interest
adverse to the corporation in respect of any matter which has been
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
reposed in them in confidence, and upon which, equity imposes a
disability upon themselves to deal in their own behalf; otherwise, the said
director, trustee or officer shall be liable as a trustee for the corporation
and must account for the profits which otherwise would have accrued to
the corporation.
Atty. Ong: To destroy the presumption of business judgment, Section 30
is the basis for the imputation of liability to the directors or trustees.
PAITING V. SAN JOSE PETROLEUM, INC.
18 SCRA 924
FACTS:
Some of the provisions of the Articles of Incorporation of respondent
SAN JOSE PETROLEUM are noteworthy; viz:
[1] the director of the Company need not be share-holders;
[2] that in the meeting of the board of directors, any director may
be represented and may vote through a proxy who also need not be a
director or stockholder; and
[3] that no contract or transaction between the corporation and
any other association or partnership will be affected, except in case of
fraud, by the fact that any of the directors or officers of the corporation
is interested in, or is a director or officer of, such other association or
partnership, and that no such contract or transaction of the corporation
with any other person or persons, firm, association or partnership shall
be affected by the fact that any director or officer of the corporation is a
party to or has an interest in, such contract or transaction, or has in
anyway connection with such other person or persons, firm, association
or partnership; and finally, that all and any of the persons who may
become director or officer of the corporation shall be relieved from all
responsibility for which they may otherwise be liable by reason of any
contract entered into with the corporation, whether it be for his benefit or
for the benefit of any other person, firm, association or partnership in
which he may be interested.
ISSUE: Whether these provisions are in direct opposition to our
corporation law and corporate practices.
RULING: YES.
These provisions alone would outlaw any corporation locally organized
or doing business in this jurisdiction. Consider the unique and unusual
provision that no contract or transaction between the company and any
other association or corporation shall be affected except in case of fraud,
by the fact that any of the directors or officers of the company may be
interested in or are directors or officers of such other association or
corporation; and that none of such contracts or transactions of this
company with any person or persons, firms, associations or corporations
shall be affected by the fact that any director or officer of this company
is a party to or has an interest in such contract or transaction or has any
connection with such person or persons, firms, associations or
corporations: and that any and all persons who may become directors
or officers of this company are hereby relieved of all responsibility which
they would otherwise incur by reason of any contract entered into which
this company either for their own benefit, or for the benefit of any person,
firm, association or corporation in which they may be interested.
The impact of these provisions upon the traditional judiciary* relationship
between the directors and the stockholders of a corporation is too
obvious to escape notice by those who are called upon to protect the
interest of investors. The directors and officers of the company can do
anything, short of actual fraud, with the affairs of the corporation even to
benefit themselves directly or other persons or entities in which they are
interested, and with immunity because of the advance condonation or
relief from responsibility by reason of such acts. This and the other
provision which authorize the election of non-stockholders as directors,
completely disassociate the stockholders from the government and
management of the business in which they have invested.
To cap it all on April 17, 1957, admittedly to assure continuity of the
management and stability of SAN JOSE PETROLEUM, OIL
INVESTMENTS, as holder of the only subscribed stock of the former
corporation and acting "on behalf of All future holders of voting trust
certificates", entered into a voting trust agreement 12 with James L.
Buckley and Austin E. Taylor whereby said Trustees were given
39
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
authority to vote the shares represented by the outstanding trust
certificate (including those that may henceforth be issued) in the
following manner:
[a] At all elections of directors, the Trustees will
designate a suitable proxy or proxies 'to vote for the election of directors
designated by the Trustees in their own discretion, having in mind the
best interests of the holders of the voting trust certificates, it being
understood that any and all of the Trustees shall be eligible for election
as directors;
[b] On any proposition for removal of a director, the
Trustees shall designate a suitable proxy or proxies to vote for or against
such proposition as the Trustees their own discretion may determine,
having in mind the best interest of the holders of the voting trust
certificates;
[c] With respect to all other matters arising at any
meeting of stockholders, the Trustees will instruct such proxy or proxies
attending each meetings to vote the shares of stock held by the Trustee
in accordance with the written instructions of each holder of voting trust
certificates.
It was also therein provided that the said Agreement shall be binding
upon the parties thereto, their successors, and upon all holders of voting
trust certificates.
And these are the voting trust certificates that are offered to investors as
authorized by the Security and Exchange Commissioner. It cannot be
doubted that the sale of respondent's securities would, to say the least,
work or tend to work fraud to Philippine investors.
January 24, 2020 by J. Lagat
Palay, Inc vs Clave, this is a family-owned corporation; related sa mga
Dizon.
PALAY, INC vs CLAVE
FACTS: Palay, Inc., through its President, Albert Onstott executed in
favor of private respondent, Nazario Dumpit, a Contract to Sell a parcel
of Land owned by said corporation. The contract expressly provided for
automatic extrajudicial rescission upon default in payment of any
monthly instalment after the lapse of 90 days from the expiration of the
grace period of one month, without need of notice and with forfeiture of
all instalments paid.
Dumpit paid the down payment and several instalments, but failed to
pay the balance. Almost six years later, Dumpit wrote Palay, Inc offering
to update all his overdue accounts with interest, and seeking its written
consent to the assignment of his rights to a certain Lourdes Dizon.
However, Palay, Inc informed Dumpit that his Contract to Sell had long
been rescinded pursuant to paragraph 6 of the contract, and that the lot
had already been resold.
Dumpit filed a letter complaint with the National Housing Authority (NHA)
for reconveyance with an alternative prayer for refund. NHA finds the
rescission void in the absence of either judicial or notarial demand,
ordered Palay, Inc. and Alberto Onstott in his capacity as President of
the corporation, jointly and severally, to refund immediately to Nazario
Dumpit. Palay,Inc. appealed but subsequently denied for lack of merit.
ISSUE: WON corporate president Onstott should be held personally
liable as such?
RULING: NO.
In this case, Onstott was made liable because he was then the President
of the corporation and he appeared to be the controlling stockholder.
No sufficient proof exists on record that said Onstott used the
corporation to defraud private respondent. He cannot, therefore, be
made personally liable just because he "appears to be the controlling
stockholder".
Mere ownership by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
TRAMAT MERCANTILE vs CA
G.R. NO. 111008 NOVEMBER 7, 1994
Melchor de la Cuesta, doing business under the name and style of
"Farmers Machineries," sold to Tramat, 1 unit HINOMOTO TRACTOR.
David Ong, Tramat's president and manager, issued check for P33,500
payment (apparently replacing an earlier postdated check for
P33,080.00).
Tramat, in turn, sold the tractor, together with an attached lawn mower
fabricated by it, to the Metropolitan Waterworks and Sewerage System
("NAWASA") for P67,000.
David Ong caused a "stop payment" of the check when NAWASA
refused to pay the tractor and lawn mower after discovering that, aside
from some stated defects of the attached lawn mower, the engine was
a reconditioned unit. De la Cuesta filed an action for the recovery of
P33,500.
ISSUE:
WON Ong can be held jointly and severally liable with Tramat?
RULING: No.
Ong acted, not in his personal capacity, but as an officer of a
corporation, TRAMAT, with a distinct and separate personality. As such,
it should only be the corporation, not the person acting for and on its
behalf, that properly could be made liable thereon.
Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly attach, as
a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for
bad faith, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by a specific provision of law, to personally answer for
his corporate action.
CARAG vs NLRC
520 SCRA 28
FACTS:
An illegal dismissal case was brought against MAC (the corporation)
about its illegal closure of business. That it was made without notice of
any kind regarding its closure, as required under labor laws.
Antonio Carag, as the Chairman of the Board, along with Armando
David, as president, were included as respondents in order to guarantee
the satisfaction of any judgement award.
ISSUE: when is a director personally liable for the debts of the
corporation?
RULING: No.
The rule is that a director is not personally liable for the debts of the
corporation, which has a separate legal personality of its own.
The exceptions to the rule (Sec.31) are as follows:
Section 31 makes a director personally liable for corporate debts if he
wilfully and knowingly votes for or assents to patently unlawful acts of
the corporation.
Section 31 also makes a director personally liable if he is guilty of gross
negligence or bad faith in directing the affairs of the corporation.
40
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Complainants did not allege in their complaint that Carag wilfully and
knowingly voted for or assented to any patently unlawful act of MAC.
Complainants did not present any evidence showing that Carag wilfully
and knowingly voted for or assented to any patently unlawful act of MAC.
Neither did Arbiter Ortiguerra make any finding to this effect in her
Decision.
Complainants did not also allege that Carag is guilty of gross negligence
or bad faith in directing the affairs of MAC. Complainants did not present
any evidence showing that Carag is guilty of gross negligence or bad
faith in directing the affairs of MAC. Neither did Arbiter Ortiguerra make
any finding to this effect in her Decision.
To hold a director personally liable for debts of the corporation, and thus
pierce the veil of corporate fiction, the bad faith or wrongdoing of the
director must be established clearly and convincingly. Bad faith is never
presumed.
Bad faith does not connote bad judgment or negligence. Bad faith
imports a dishonest purpose. Bad faith means breach of a known duty
through some ill motive or interest. Bad faith partakes of the nature of
fraud.
Neither does bad faith arise automatically just because a corporation
fails to comply with the notice requirement of labor laws on company
closure or dismissal of employees.
The failure to give notice is not an unlawful act because the law does
not define such failure as unlawful. Such failure to give notice is a
violation of procedural due process but does not amount to an unlawful
or criminal act.
For a wrongdoing to make a director personally liable for debts of the
corporation, the wrongdoing approved or assented to by the director
must be a patently unlawful act. Mere failure to comply with the notice
requirement of labor laws on company closure or dismissal of
employees does not amount to a patently unlawful act. Patently unlawful
acts are those declared unlawful by law which imposes penalties for
commission of such unlawful acts. There must be a law declaring the
act unlawful and penalizing the act.
HR CARLO CONSTRUCTION vs MARINA PROPERTIES CORP.
FACTS:
MPC is engaged in the business of real estate development. It entered
into a contract with HLC to construct a condominium complex.
HLC instituted a case for sum of money against not only MPC but also
against MPC’s alleged president, TYPOCO and TAN, seeking the
payment of various sums for costs of labor escalation, change orders
and material price escalation, etc.
TYPOCO and TAN alleged that they are not parties to the Construction
Contract and Amendatory Contract and are therefore not liable to HLC.
ISSUE: WON Typoco and Tan be held solidarily liable with MPC
RULING : No.
The personal liability of corporate officers validly attaches only
when:
• they assent to a patently unlawful act of the corporation; or
• they are guilty of bad faith or gross negligence in directing its
affairs; or
• they incur conflict of interest, resulting in damages to the
corporation, its stockholders or other persons.
The records are bereft of any evidence that TYPOCO acted in bad faith
with gross or inexcusable negligence, or that he acted outside the scope
of his authority as company president.
SEAOIL PETROLEUM CORP. vs AUTOCORP GROUP
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
FACTS:
SEAOIL purchased excavator from AUTOCORP. Despite repeated
demands, SEAOIL refused to pay the remaining balance. AUTOCORP
filed a complaint for recovery of personal property with replevin.
SEAOIL claims that it and AUTOCORP were only utilized as conduits to
settle obligation of UNILINE in favor of FOCUS (foreign entity).
RODRIGUEZ is a stockholder and director of AUTOCORP.
RODRIGUEZ is also the owner of UNILINE. UNILINE was not able to
settle the said amount. Hence, UNILINE, through RODRIGUEZ,
proposed to settle the obligation through conveyance of vehicles and
heavy equipment. The excavator in controversy was allegedly one part
of the vehicles conveyed to FOCUS.
SEAOIL claims that RODRIGUEZ initially issued checks in favor of
AUTOCORP as payment for the excavator. However, due to the fact that
it was company policy for AUTOCORP not to honor postdated checks
issued by its own directors, RODRIGUEZ requested YU to issue
postdated checks in favor of AUTOCORP. In turn, said checks would be
funded by the checks issued by RODRIGUEZ.
SEAOIL claims that the real transaction is that UNILINE, through
RODRIGUEZ, owed money to FOCUS. In lieu of payment, UNILINE
instead agreed to convey the excavator to FOCUS. This was to be paid
by checks issued by SEAOIL but which in turn were to be funded by
checks issued by UNILINE.
ISSUE: May Rodriguez, a stockholder and director of UNILINE be
personally liable for the debts of the corporation?
HOLDING: No
Rodriguez, as stockholder and director of UNILINE, cannot be held
personally liable for the debts of the corporation, which has a separate
legal personality of its own.
While Section 31 of the Corporation Code lays down the exceptions to
the rule, the same does not apply in this case.
The bad faith or wrongdoing of the director must be established clearly
and convincingly. Bad faith is never presumed.
The burden of proving bad faith or wrongdoing on the part of Rodriguez
was, on Seaoil, a burden which it failed to discharge. Thus, it was proper
for the trial court to have dismissed the third-party complaint against
Rodriguez on the ground that he was not a party to the sale of the
excavator.
Quantum of Proof needed to hold directors liable:
CLEAR AND CONVINCING EVIDENCE
MAGALING vs ONG
FACTS:
Spouses Reynaldo and Lucil MAGALING are the controlling
stockholders/owners of Termo Loans and allegedly had used the
corporation as mere alter ego or adjunct to evade the payment of valid
obligation.
ONG extended loan to the spouses based on the assurance and
representation of Reynaldo. Despite demands, oral and written, the
spouses Magaling and/ or Termo Loans unjustifiably and illegally failed,
refused and neglected to pay.
It was alleged further that Reynaldo, as President of Termo Loans,
together with the corporation’s treasurer, signed a Promissory Note in
favor of Ong.
Because of the failure of Termo Loans to pay its outstanding obligation
despite demand, Ong instituted a Complaint for the collection of the sum
against the spouses and Termo Loans, praying that they be ordered to
pay, jointly and severally.
Ong argues that Reynaldo is negligent in managing the affairs of
TERMO that being president, it is incumbent upon him to know the
financial condition of his company, and that he was found wanting and
41
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
did not know the financial condition of his company and how many
creditors does the company have.
One glaring fact that stands out is that these creditors are left with an
empty bag and cannot collect because of the negligence of Reynaldo
Magaling in running his financing companies.
ISSUE: May spouses Magaling be held personally liable for the
corporate obligation of Termo Loans in favor of Ong?
RULING: YES
GENERAL RULE: SEPARATE PERSONALITY
It is basic that a corporation is a juridical entity with legal personality
separate and distinct from those acting for and in its behalf and, in
general, from the people comprising it. The general rule is that
obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities, and vice versa.
EXCEPTION:
There are times, however, when solidary liabilities may be
incurred and the veil of corporate fiction may be pierced.
[1] THERE IS NO BAD FAITH
To hold a director, a trustee or an officer personally liable for the debts
of the corporation and, thus, pierce the veil of corporate fiction, bad faith
or gross negligence by the director, trustee or officer in directing the
corporate affairs must be established clearly and convincingly.
Bad faith is a question of fact and is evidentiary. Bad faith does not
connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious wrongdoing. It means breach of a
known duty through some ill motive or interest. It partakes of the nature
of fraud.
Here, there is nothing substantial on record to show that Reynaldo, as
President of Termo Loans, has, indeed, acted in bad faith in inviting Ong
to invest in the corporation and/or in obtaining a loan from Ong for said
corporation in order to warrant his personal liability. From all indications,
the proceeds of the investment and/or loan were indeed utilized by
Termo Loans. Likewise, bad faith does not arise just because a
corporation fails to pay its obligations, because the inability to pay one’s
obligation is not synonymous with fraudulent intent not to honor the
obligations.
[2] THERE IS GROSS NEGLIGENCE
The foregoing discussion notwithstanding, this Court still cannot totally
absolve Reynaldo Magaling from any liability considering his gross
negligence in directing the affairs of Termo Loans; thus, he must be
made personally liable for the debt of Termo Loans to Ong.
In order to pierce the veil of corporate fiction, for reasons of negligence
by the director, trustee or officer in the conduct of the transactions of the
corporation, such negligence must be gross.
Gross negligence is one that is characterized by the want of even slight
care, acting or omitting to act in a situation where there is a duty to act,
not inadvertently but willfully and intentionally with a conscious
indifference to consequences insofar as other persons may be affected;
and must be established by clear and convincing evidence.
Parenthetically, gross or willful negligence could amount to bad faith.
The casual manner, insouciance and nonchalance, nay, indifference, to
the predicament of the distressed corporation glaringly exhibited a
lackadaisical attitude from a top office of a corporation, a conduct totally
abhorrent in the corporate world.
Reynaldo Magaling was grossly negligent in directing the affairs of
Termo Loans without due regard to the plight of its investors and thus
should be held jointly and severally liable for the corporate obligation of
Termo Loans to Ong.
from 2018: EXCEPTIONAL CIRCUMSTANCES WARRANTING
DISREGARD OF A SEPARATE PERSONALITY
[Pls. take note of this case, because this case made a summary of the
instances wherein the director can be held personally liable.]
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
You have:
1. When DIRECTORS and TRUSTEES or, in appropriate case, the
OFFICERS of a corporation:
a. vote for or assent to patently unlawful actsof the corporation;
• act in bad faith OR with gross negligence in directing the corporate
affairs;
• are guilty of conflict of interest to the prejudice of the corporation,
its stockholders or members, and other persons;
2. When a DIRECTOR or OFFICER has consented to the issuance of
watered down stocks or who, having knowledge thereof, did not
forthwith file with the corporate secretary his written objection thereto;
3. When a DIRECTOR, TRUSTEE or OFFICER has contractually
agreed OR stipulated to hold himself personally and solidarily liable
with the corporation; or
[Example: Kung mag mag-lo-loan ka diba, usually President ang
pinapa-sign ng contract of surety? So in that particular case, the Director
can be held personally liable]
4. When a DIRECTOR, TRUSTEE or OFFICER is made, by specific
provision of law, personally liable for his corporate action.
What is DOCTRINE OF CORPORATE OPPORTUNITY?
The doctrine of "corporate opportunity" is precisely a recognition by the
courts that the fiduciary standards could not be upheld where the
fiduciary was acting for two entities with competing interests. This
doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the
corporation justly calls for protection.
GOKONGWEI vs SEC
FACTS:
The corporation by-law was amended which renders a stockholder
ineligible to be director, if he be also director in a corporation whose
business is in competition with that of the other corporation.
Gokoinwei claims that the amended by-laws are invalid and
unreasonable because they were tailored to suppress the minority and
prevent them from having representation in the Board, at the same time
depriving Gokongwei of his "vested right" to be voted for and to vote for
a person of his choice as director.
Andres, Jose and San Miguel Corporation contended that exclusion of
a competitor from the Board is legitimate corporate purpose.
It is alleged that Gokongwei, has exercised, personally or thru two
corporations owned or controlled by him, control over the following
shareholdings in San Miguel Corporation, i.e.:
John Gokongwei, Jr. — 6,325 shares;
Universal Robina Corporation — 738,647 shares;
CFC Corporation — 658,313 shares, or a total of 1,403,285 shares.
Since the outstanding capital stock of San Miguel Corporation is
represented by 33,139,749 shares, the total shares owned or controlled
by Gokongwei represents 4.2344% of the total outstanding capital stock
of San Miguel Corporation.
ISSUE: Is the amended by-laws of SMC disqualifying a competitor from
nomination or election to the Board of Directors of SMC valid and
reasonable?
RULING: YES
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED
DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge
that its affairs are dominated by a majority of the stockholders and that
he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and lawfully enacted
by-laws and not forbidden by law." To this extent, therefore, the
stockholder may be considered to have "parted with his personal right
or privilege to regulate the disposition of his property which he has
42
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
invested in the capital stock of the corporation, and surrendered it to the
will of the majority of his fellow incorporators.
It cannot therefore be justly said that the contract, express or implied,
between the corporation and the stockholders is infringed by any act of
the former which is authorized by a majority."
Pursuant to Section 18 of the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital
stock of the corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the dissenting
minority has only one right, viz.: "to object thereto in writing and demand
payment for his share."
Under section 22 of the same law, the owners of the majority of the
subscribed capital stock may amend or repeal any by- law or adopt new
by-laws. It cannot be said, therefore, that petitioner has a vested right to
be elected director, in the face of the fact that the law at the time such
right as stockholder was acquired contained the prescription that the
corporate charter and the by-law shall be subject to amendment,
alteration and modification.
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be considered
is whether the disqualification of a competitor from being elected to the
BOD is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt that
their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust."
"The ordinary trust relationship of directors of a corporation and
stockholders is not a matter of statutory or technical law. It springs from
the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders.
Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof.
A director is a fiduciary. Their powers are powers in trust.
1. He who is in such fiduciary position cannot serve himself
first and his cestuis second.
2. He cannot manipulate the affairs of his corporation to their detriment
and in disregard of the standards of common decency.
3. He cannot by the intervention of a corporate entity violate the ancient
precept against serving two masters .
4. He cannot utilize his inside information and strategic position for his
own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do so directly.
5. He cannot violate rules of fair play by doing indirectly though the
corporation what he could not do so directly.
6. He cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how absolute
in terms that power may be and no matter how meticulous he is to
satisfy technical requirements. For that power is at all times subject
to the equitable limitation that it may not be exercised for the
aggrandizement, preference or advantage of the fiduciary to the
exclusion or detriment of the cestuis.
A person cannot serve two hostile and adverse master,
without detriment to one of them. A judge cannot be impartial if
personally interested in the cause. No more can a director. Human
nature is too weak -for this. Take whatever statute provision you please
giving power to stockholders to choose directors, and in none will you
find any express prohibition against a discretion to select directors
having the company's interest at heart, and it would simply be going far
to deny by mere implication the existence of such a salutary power
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH
RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE
BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN
COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS
BEEN SUSTAINED AS VALID
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
Corporations have the power to make by-laws declaring a person
employed in the service of a rival company to be ineligible for the
corporation's Board of Directors.
An amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation whose
business is in competition with or is antagonistic to the other corporation
is valid [Fletcher].
This is based upon the principle that where the director is so employed
in the service of a rival company, he cannot serve both, but must betray
one or the other. Such an amendment "advances the benefit of the
corporation and is good."
Section 21 of the Corporation Law expressly provides that a
corporation may make by-laws for the qualifications of directors. Thus,
it has been held that an officer of a corporation cannot engage in a
business in direct competition with that of the corporation where he is a
director by utilizing information he has received as such officer, under
"the established law that a director or officer of a corporation may not
enter into a competing enterprise which cripples or injures the business
of the corporation of which he is an officer or director.
It is also well established that corporate officers "are not permitted to use
their position of trust and confidence to further their private interests." In
a case where directors of a corporation cancelled a contract of the
corporation for exclusive sale of a foreign firm's products, and after
establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the
court held that equity would regard the new contract as an offshoot of
the old contract and, therefore, for the benefit of the corporation, as a
"faultless fiduciary may not reap the fruits of his misconduct to the
exclusion of his principal.
The doctrine of "corporate opportunity" is precisely a recognition by
the courts that the fiduciary standards could not be upheld where the
fiduciary was acting for two entities with competing interests. This
doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the
corporation justly calls for protection.
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information,
such as:
a. marketing strategies and pricing structure;
b. budget for expansion and diversification;
c. research and development; and
d. sources of funding, availability of personnel, proposals of mergers or
tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of a
competing corporation, from taking advantage of the information which
he acquires as director to promote his individual or corporate interests
to the prejudice of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made.
Certainly, where two corporations are competitive in a substantial sense,
it would seem improbable, if not impossible, for the director, if he were
to discharge effectively his duty, to satisfy his loyalty to both corporations
and place the performance of his corporation duties above his personal
concerns.
Section 31 are the dealings of directors, trustees, officers.
It’s very tempting for directors. Let’s say, uupo ako sa hospital company
as director and I have another business which supplies medical
equipments. It’s very tempting for me to milk my own hospital for me to
profit. I would ensure that all the contracts of supplying medical
equipments would come from my own company. That is why Section 31
is there to prevent the situation wherein you abuse your fiduciary duties
to the corporation.
43
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
A contract of the corporation with one or more of its directors, trustees
or officers, [please take note] not only with the directors but also with
their spouses, relatives within their 4th-civil degree of consanguinity or
affinity is voidable [please take note: it is not void but VOIDABLE] at the
option of such corporation, unless the following are present:
note the requisites:
a) the presence of such director, trustee in the board meeting which
the contract has been approved must not be necessary to constitute a
quorum;
b) the vote of such director was not necessary for approval of the
contract;
so you have two checks. Hindi siya kailangan for quorum, and hindi siya
kailangan for approval
c) the contract is fair and reasonable under the circumstances,
d) in case of corporation vested with public interest, material contracts
are approved by at least 2/3 of the entire membership of the board [this
is the exception to the majority rule], with at least a majority of the
independent directors voting to approve the material contract;
e) In case of an officer, the contract has been previously authorized by
the board of directors.
Where any of the first three (3) conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or
of at least two-thirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting and the contract
is fair and reasonable under the circumstances.
So, kung wala ka nung first 3 conditions, pwede pang ma-ratify ng
stockholders. But this only pertains with the director or trustee. If the
contract is with the relative of the director or with the officer, it cannot be
ratified absent of any of the first three. Did you get it?
Ratification with Stockholders is allowed IF:
the contract is with director or trustee
Ratification is not allowed if it is with relatives, spouse or officers.
PRIME WHITE vs CEMENT CORP
FACTS: Te and Prime White thru its President, Falcon and Trazo, as
Chairman of the Board, entered into a dealership agreement whereby
said TE was obligated to act as the exclusive dealer and/or distributor of
Prime White’s cement.
Te entered into a written agreement with several hardware stores
dealing in buying and selling white cement.
After Te was assured by his supposed buyer that his allocation of white
cement can be disposed of, TE informed Prime White that he is making
the necessary preparation for the opening of the requisite letter of credit
to cover the price of the due initial delivery.
Prime White replied that the board of directors of the said defendant
decided to impose the conditions.
Several demands to comply with the dealership agreement were made
by the Te to Prime White however, Prime White refused to comply with
the same, and Te was constrained to cancel his agreement for the
supply of white cement with third parties, which were concluded in
anticipation of, and pursuant to the said dealership agreement.
Notwithstanding that the dealership agreement between the Te and
Prime White was in force and subsisting, the Prime White, in violation
of, and with evident intention not to be bound by the terms and
conditions thereof, entered into an exclusive dealership agreement with
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
a certain Napoleon Co for the marketing of white cement in Mindanao.
ISSUE: Whether the "dealership agreement" referred by the President
and Chairman of the Board is a valid and enforceable contract.
RULING:NO.
In the instant case, Te was not an ordinary stockholder; he was a
member of the Board of Directors and Auditor of the corporation as well.
He was what is often referred to as a "self-dealing" director.
A director of a corporation holds a position of trust and as such, he owes
a duty of loyalty to his corporation. In case his interests conflict with
those of the corporation, he cannot sacrifice the latter to his own
advantage and benefit.
As corporate managers, directors are committed to seek the maximum
amount of profits for the corporation. This trust relationship "is not a
matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders."
On the other hand, a director’s contract with his corporation is not in all
instances void or voidable. If the contract is fair and reasonable under
the circumstances, it may be ratified by the stockholders provided a full
disclosure of his adverse interest is made.
Granting arguendo that the "dealership agreement" involved here would
be valid and enforceable if entered into with a person other than a
director or officer of the corporation, the fact that the other party to the
contract was a Director and Auditor of the petitioner corporation changes
the whole situation.
First of all, The contract was neither fair nor reasonable. The
"dealership agreement" entered into in July, 1969, was to sell and supply
to respondent Te 20,000 bags of white cement per month, for five years
at the fixed price of P9.70 per bag. Te is a businessman himself and
must have known, or at least must be presumed to know, that at that
time, prices of commodities in general, and white cement in particular,
were not stable and were expected to rise.
At the time of the contract, Prime White had not even commenced the
manufacture of white cement, the reason why delivery was not to begin
until 14 months later. He must have known that within that period of six
years, there would be a considerable rise in the price of white cement.
Despite this, no provision was made in the "dealership agreement" to
allow for an increase in price mutually acceptable to the parties. Instead,
the price was pegged at P9.70 per bag for the whole five years of the
contract. Fairness on his part as a director of the corporation from whom
he was to buy the cement, would require such a provision.
In fact, this unfairness in the contract is also a basis which renders a
contract entered into by the President, without authority from the Board
of Directors, void or voidable, although it may have been in the ordinary
course of business.
We believe that the fixed price of P9.70 per bag for a period of five years
was not fair and reasonable. Te, himself, when he subsequently entered
into contracts to resell the cement to his "new dealers" Henry Wee and
Gaudencio Galang stipulated as follows:
"The price of white cement shall be mutually determined by us but in no
case shall the same be less than P14.00 per bag (94 lbs)."
The contract with Henry Wee was on September 15, 1969, and that with
Gaudencio Galang, on October 13, 1967. A similar contract with
Prudencio Lim was made on December 29, 1969. All of these contracts
were entered into soon after his "dealership agreement" with Prime
White, and in each one of them he protected himself from any increase
in the market price of white cement. Yet, except for the contract with
Henry Wee, the contracts were for only two years from October, 1970.
Why did he not protect the corporation in the same manner when he
entered into the "dealership agreement"? For that matter, why did the
President and the Chairman of the Board not do so either? As director,
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
specially since he was the other party in interest, respondent Te’s
bounden duty was to act in such manner as not to unduly prejudice the
corporation.
He was guilty of disloyalty to the corporation; he was attempting in effect,
to enrich himself at the expense of the corporation. There is no showing
that the stockholders ratified the "dealership agreement" or that they
were fully aware of its provisions. The contract was therefore not valid
and this Court cannot allow him to reap the fruits of his disloyalty.
February 6, 2020 0:00-22:00 by Mary Caroline Castro
We are going to discuss contracts which actually ought to deal with
conflicting interest of directors, trustees or officers. We have section 31.
Section 31. Dealings of Directors, Trustees or Officers with the
Corporation. – A contract of the corporation with (1) one or more of its
directors, trustees, officers or their spouses and relatives within the
fourth civil degree of consanguinity or affinity is voidable, at the option
of such corporation, unless all the following conditions are present:
(a) The presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;
(b) The vote of such director or trustee was not necessary for the
approval of the contract;
(c) The contract is fair and reasonable under the circumstances;
(d) In case of corporations vested with public interest, material contracts
are approved by at least two-thirds (2/3) of the entire membership of the
board, with at least a majority of the independent directors voting to
approve the material contract; and
(e) In case of an officer, the contract has been previously authorized by
the board of directors.
Where any of the first three (3) conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or
of at least two-thirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting and the contract
is fair and reasonable under the circumstances.
Please take note of the requisites. The contract of the corporation with
(1) one or more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity or affinity is—
VOIDABLE.
Please take note that it is voidable. And the one who has the right to
question or make it avoided is the— CORPORATION.
The requisites to avoid the contract of the corporation, to wit:
1. The presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to
constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for the
approval of the contract;
3. The contract is fair and reasonable under the circumstances;
4. In case of corporations vested with public interest, material
contracts are approved by at least two-thirds (2/3) of the entire
membership of the board, with at least a majority of the
independent directors voting to approve the material contract;
and
5. In case of an officer, the contract has been previously
authorized by the board of directors.
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You have to follow the requisites for you to have a valid (annulment of
contract).
Please take note of the APPROVAL— at least two-thirds (2/3) of the
entire membership of the board, with at least a majority of the
independent directors voting to approve the material contract.
We already discussed Prime White. So, what happen in the case of
Metroheights Subdivision?
METROHEIGHTS SUBDIVISIONS HOMEOWNERS
ASSOCIATIONS, INC. v. CMS CONSTRUCTION AND
DEVELOPMENT CORP.
GR NO. 209359. October 17, 2018.
Facts: Sometime in April 1992, respondent CMS Construction made
diggings and excavations, and started to lay water pipes along
Fisheries Street and Morning Star Drive in Sanville Subdivision,
Quezon City, petitioner's neighboring subdivision; that in the process,
respondent CMS Construction, with the knowledge and consent of
respondent MWSS but without petitioner's knowledge and consent,
unilaterally cut-off and disconnected the latter's new and separate
water service connection on Visayas Avenue; that on May 28, 1992,
petitioner's members were waterless, which lasted for three (3) days,
and that petitioner's polyvinyl chloride (PVC) pipes and radius elbow,
valued at around P30,000.00, were stolen by respondent CMS
Construction's workers; that when petitioner's officers discovered the
illegal cutting of the water connection on May 30, 1992, they
immediately complained to the respondents and demanded for the
restoration of their water line; that respondent CMS Construction only
made a temporary reconnection with the use of a 2-inch rubber hose
to the new water line it constructed at Sanville Subdivision; and that
despite petitioner's verbal and written demands, respondents have
failed to restore petitioner's water line connection in its original state
and to return the missing PVC pipes and radius elbow.
Thus, prompted Metroheights Subdivision Homeowners Association,
Inc. to file a complaint for damages against respondents CMS
Construction and Development Corporation (CMS Construction),
Tomasito Cruz, Tita Cruz, Simonette Cruz, Angel Cruz, Ernesto Cruz
(the Cruzes), and Metropolitan Waterworks and Sewerage System
(MWSS).
Issue: Whether or Not spouses Cruz (Directors/stockholders of the
CMS construction) should be held liable. -NO
Held: We find that respondents MWSS and CMS Construction
should be held liable for damages to petitioner but not the Cruzes
who are the directors and stockholders of respondent CMS
Construction. Section 31 of the Corporation Code is the governing
law on personal liability of officers for the debts of the corporation, to
wit:
Sec. 31. Liability of directors, trustees or officers. — Directors or
trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence
or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
We find that petitioner failed to show that the Cruzes committed any
of those above-quoted acts to make them personally liable.
This is the case of determining whether the director is liable.
Remember the concept of BUSINESS JUDGMENT. General Rule,
whatever the directors’ decision—they are entitled to the protection of
Business Judgment Rule. The Court will not look into it.
The Business Judgment Rule
The corporate principle recognizing corporate power and competence
to be lodged primarily with the Board of Directors is embodied in the
“Business judgment rule,” thus: A resolution or transaction pursued
within the corporate powers and business operations of the corporation,
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
and passed in good faith by the Board of Directors, is valid and binding;
and generally the courts have no authority to review the same or
substitute their own judgment , even when it can be proven that the
exercise of such power may cause losses to the corporation or
decreases its profits (Villanueva p. 312-313).
The ONLY EXCEPTION is if the act(s) is—
1. UNLAWFUL,
2. there is BAD FAITH, or
3. CONFLICT OF INTEREST
Conflict of Interest—doon papasok ang mga self-dealing and
interlocking contracts with the directors. Because that would question
their interest as a director. Please take note of that.
We have another type of director’s contract—a contract between inter-
locking directors. Ang meaning lang nito is— if may contract between
two (2) corporations and the director of one is also the director of another
kaya sya nag I inter-locked.
Kung ako, director nang A, director din ako nang B—so, what is the
danger with that scenario? Of course, if construction company ‘yong isa
at ang isa is to supply construction materials—of course, I will always
ensure that the contract that will be approved is kung saan din ako may
holdings. That is the conflict of interest that the (Revised) Corporation
Code is trying to avoid.
Is it void per se if, let’s say contract involving inter-locking directors? The
answer is—NO.
Section 32. Contracts Between Corporations with Interlocking
Directors. – Except in cases of fraud, and provided the contract is fair
and reasonable under the circumstances, a contract between two (2) or
more corporations having interlocking directors shall not be invalidated
on that ground alone: Provided, That if the interest of the interlocking
director in one (1) corporation is substantial and the interest in the other
corporation or corporations is merely nominal, the contract shall be
subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty percent (20%) of the outstanding
capital stock shall be considered substantial for purposes of interlocking
directors.
Except in cases of FRAUD and provided that the contract is fair and
reasonable—the contract of two or more corporations having inter-
locking directors shall not be invalidated on the ground alone. Provided
that the interest of the director on one corporation is substantial and the
other one is nominal—it is subject to the requisites of the previous
provision. You have your section 31 requisites. As to the one
corporation to which director has nominal interest share.
Bakit ganun ‘yong batas? Kasi pag nominal prone to abuse. Since it is
prone to abuse—it must have a certain safety net to avoid the abuse of
the director who has substantial interest in one and nominal interest in
another one. For purposes of this section, a stockholdings exceeding
twenty percent (20%) of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
Let’s go to section 33— Disloyalty of a director.
Section 33. Disloyalty of a Director. – Where a director, by virtue of
such office, acquires a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such
corporation, the director must account for and refund to the latter all such
profits, unless the act has been ratified by a vote of the stockholders
owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that
the director risked one’s own funds in the venture.
Again, these are the exceptions to the Business Judgement Rule. Where
a director, by virtue of such office, acquires a business opportunity which
should belong to the corporation, thereby obtaining profits to the
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prejudice of such corporation, the director must account for and refund
to the latter all such profits, unless the act has been ratified by a vote of
the stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked one’s own funds in the
venture.
Remember your concept of Fiduciary Rule. A director holds a position
of fiduciary as to the corporation. So, it gives us the concept of
BUSINESS OPPORTUNITY.
Please take note that—by virtue of the office of the director if meron
s’yang na acquire na business opportunity which should belong to the
corporation there is this remedy that you can—should refund the
corporation.
For example, may lupa na in-offer sa corporation at a very low price—
ang nangyari for some reason hindi na push through. Tapos the week
after binili mo (same price). That is the concept of business opportunity.
Business opportunity is given to the corporation but yet because of your
position as director—you channel the opportunity to your own private
interest, then the corporation suffered, you are going to refund the
corporation and must account all the profits that you have make. Unless,
of course it was ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock.
Exe Comms. is under the provisions of section 34.
Section 34. Executive, Management, and Other Special
Committees. – If the bylaws so provide, the board may create an
executive committee composed of at least three (3) directors. Said
committee may act, by majority vote of all its members, on such specific
matters within the competence of the board, as may be delegated to it
in the bylaws or by majority vote of the board, except with respect to the:
(a) approval of any action for which shareholders’ approval is also
required; (b) filling of vacancies in the board; (c) amendment or repeal
of bylaws or the adoption of new bylaws; (d) amendment or repeal of
any resolution of the board which by its express terms is not amendable
or repealable; and (e) distribution of cash dividends to the shareholders.
The board of directors may create special committees of temporary or
permanent nature and determine the members’ term, composition,
compensation, powers, and responsibilities.
You have— Executive, Management, and Other Special Committees.
For small corporations, usually wala naman Exe Comm. But for big
corporations may Executive Committee.
Ano ba ‘yang executive committee? If you try to look at the updated
GIS—meron nang provision nang exe comm, aside nang determining
whether the person is a director, meron pang officer, meron pang exe
comm. Is he also involve in an executive committee?
Ano ngayon ang purpose nang exe comm? If the bylaws so provide, the
board may create an executive committee composed of at least three
(3) directors. Said committee may act, by majority vote of all its
members, on such specific matters within the competence of the board,
as may be delegated to it in the bylaws or by majority vote of the board,
except with respect to the:
(a) approval of any action for which shareholders’ approval is also
required;
(b) filling of vacancies in the board;
(c) amendment or repeal of bylaws or the adoption of new
bylaws;
(d) amendment or repeal of any resolution of the board which by
its express terms is not amendable or repealable; and
(e) distribution of cash dividends to the shareholders.
Ano ang purpose nang executive committee? Remember that the board
is composed of 15 members. Now, what happens if you have to decide
46
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
a decision for example in hiring a HR manager. Do you really have to
convene all the15 members and to vote majority for that? That is very
inefficient. For that purposes, nagkakaroon nag executive committee.
The Board itself can actually create an Executive Committee and
delegate specific matters which that executive committee can decide—
the majority of that. For example, gawa tayo nag corporation, 15 tayo—
to avoid inefficiencies gawa tayo nang executive committee of 3s. three
3s divide. Kayo ang sa HR matters, kayo sa finance matters, etc. So that
it will be more efficient.
Remember if kasi walang executive committee, all at the board must
decide and you will have to get the majority. Please take note, the
conduct of the business. That is the purpose of the Executive
Committee.
But what are those that cannot be delegated to the Executive
Committee? ‘Yun sya na nakalista. From letter A to E. Those are cannot
be delegated to executive committee. Of course, to be more efficient this
deciding matters, otherwise it will fall to the board at large.
The board of directors may create special committees of temporary or
permanent nature and determine the members’ term, composition,
compensation, powers, and responsibilities. So, we have the case of
Filipinas Port Services Inc. v. Go.
FILIPINAS PORT SERVICES, INC. v. GO
GR No. 161886. March 16, 2007.
Facts: CRUZ, purportedly in representation of FILPORT and its
stockholders, among which is Minterbro, filed with the SEC a petition
which he describes as a derivative suit against the herein
RESPONDENTS INCUMBENT MEMBERS OF FILPORTS BOARD
OF DIRECTORS, for alleged acts of mismanagement detrimental to
the interest of the corporation and its shareholders at large, i.e., the
creation of an executive committee composed of seven (7) members
of the board with compensation of P500.00 for each member per
meeting, an office which, to Cruz, is not provided for in the by-laws
of the corporation and whose function merely duplicates those of the
President and General Manager;
CRUZ alleged that despite demands made upon the RESPONDENT
MEMBERS OF THE BOARD OF DIRECTORS to desist from
creating the positions in question and to account for the amounts
incurred in creating the same, the demands were unheeded. CRUZ
thus prayed that the RESPONDENT MEMBERS OF THE BOARD
OF DIRECTORS be made to pay Filport, jointly and severally, the
sums of money variedly representing the damages incurred as a
result of the creation of the offices/positions complained of and the
aggregate amount of the questioned increased salaries.
The RESPONDENTS denied the allegations of mismanagement and
materially averred that the creation of the executive committee and
the grant of per diems for the attendance of each member are
allowed under the by-laws of the Corporation;
RTC found that FILPORTS BOARD OF DIRECTORS has the power
to create positions not provided for in the by-laws of the corporation
since the board is the governing body
Issue: Whether or not FILPORTS BOARD OF DIRECTORS acted
within its power in creating the executive committee. -YES
Held: Unfortunately, the bylaws of the corporation are silent as to the
creation by its board of directors of an executive committee.
Under Section 35 of the Corporation Code, the creation of an
executive committee must be provided for in the bylaws of the
corporation. Notwithstanding the silence of Filports by-laws on
the matter, we cannot rule that the creation of the executive
committee by the board of directors is illegal or unlawful.
RATIONALE:
[1] One reason is the absence of a showing as to the true nature and
functions of said executive committee considering that the executive
committee, referred to in Section 35 of the Corporation Code which
is as powerful as the board of directors and in effect acting for the
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board itself, should be distinguished from other committees which are
within the competency of the board to create at anytime and whose
actions require ratification and confirmation by the board.
[2] Another reason is that, ratiocinated by both the two (2) courts
below, the Board of Directors has the power to create positions not
provided for in Filports by-laws since the board is the corporations
governing body, clearly upholding the power of its board to exercise
its prerogatives in managing the business affairs of the corporation.
[3] As well, as testified to and admitted by petitioner Cruz himself, it
was during his incumbency as Filport president that the executive
committee in question was created, and that he was even the one
who moved for the creation of the positions of the AVPs for
Operations, Finance and Administration. By his acquiescence and/or
ratification of the creation of the aforesaid offices, Cruz is virtually
precluded from suing to declare such acts of the board as invalid or
illegal. And it makes no difference that he sues in behalf of himself
and of the other stockholders. Indeed, as his voice was not heard in
protest when he was still Filports president, raising a hue and cry only
now leads to the inevitable conclusion that he did so out of spite and
resentment for his non-reelection as president of the corporation.
Sir: Sino si Cruz dito?
A: He was the former president of the Filport and then subsequently he
lost in the election. Then, he filed for a derivative suit.
Sir: Saan na Court?
A: Davao.
Sir: Yes. In Sasa.
You have the executive committee contemplated in the case of Filipinas
Port Services, Inc. is not of one that requires the—for it to be created
under the by-laws of the corporation. That is under section 33.
Sir: What are the functions of the executive committee in this case? Di
ba, sabi nang Supreme Court na: No. it is not the one that is mentioned
in Section 34.
A: The function of the Executive Committee here is the same— like the
Board.
Sir: Sa case na ‘to?
A: It was only mentioned here that the function of the executive
committee here is the same as the board. So, the SC said that it was not
the Executive Committee mentioned in Section 34.
Sir: Kasi they failed to provide? Anong nakalagay dun?
A: They failed to provide the true nature and functions of the Executive
Committee.
Sir: Yes. They failed to provide. Hindi nila na alleged ang function nang
Executive Committee. Ang sabi nang Supreme Court, it might be
another department of the Corporation.
(Sir talks about Filipinas Port Service)
February 06, 2020 by APRIL LATORZA
POWERS OF A CORPORATION
Please refer to the attached table.
Let us go one by one.
POWER TO EXTEND OR SHORTEN CORPORATE TERM
Section 36. Power to Extend or Shorten Corporate Term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of
directors or trustees, and ratified at a meeting by the stockholders
or members representing at least two-thirds (2/3) of the
outstanding capital stock or of its members. Written notice of the
proposed action and the time and place of the meeting shall be sent to
the stockholders or members at their respective place of residence as
47
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
shown in the books of the corporation, and must be deposited to the
addressee in the post office with postage prepaid, served personally, or
when allowed in the bylaws or done with the consent of the stockholder,
sent electronically in accordance with the rules and regulations of the
Commission on the use of electronic data messages. In case of
extension of corporate term, a dissenting stockholder may exercise the
right of appraisal under the conditions provided in this Code.
Q: Would this still be applicable (referring to extension of term) even if
the corporation has perpetual existence?
RIGHT OF APPRAISAL UNDER SECTION 80:
Take note of the instances kasi hindi lahat ng ginagawa ng board of
director pwede mo e-exercise ang appraisal right mo. Ang concept ng
appraisal right is may decision ang board of director na hindi ka
amenable, you dissent, after dissenting you want out kasi you don’t want
that. So what are the intances that you can exercise your appraisal right?
Section 80. When the Right of Appraisal May Be Exercised. - Any
stockholder of a corporation shall have the right to dissent and demand
payment of the fair value of the shares in the following instances:
a. In case an amendment to the articles of incorporation has the effect
of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or
shortening the term of corporate existence; xxx
Now please take note, nakalagay sa Section 80 ang shortening sap ag
exercise ng appraisal right but if you look at Section 36, this is only in
case of extension of the corporate term which you can exercise right of
appraisal. This is also an issue in the old Corporation Code. Sino ba
talaga ang masunod, is it Section 36 or Section 80? Legal luminaries
are of the opinion that Section 36 should be followed because extension,
practically changes the rights but that is in view of the limited 50-year
period but ngayon nag change na, perpetually existence. Do their
arguments still valid? In Sir’s opinion, pag eeshorten mo yung time that
is actually restricting because now when you incorporate as a
shareholder you have that expectation of perpetual existence. So, any
change other than the expectation of perpetual that would relatively
restrict your right as a stockholder. So then, you can exercise your basic
right. Anyway, we still have to wait for case discussing this matter.
b. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate property
and assets as provided in this Code;
Remember the word S-L-E-M-P- of all or substantially all of the
corporate property and assets.
c. In case of merger or consolidation;
d. In case of investment of corporate funds for any purpose other
than the primary purpose of the corporation.
Please take note nakalagay primary purpose. So even if ang corporation
mag invest sa secondary purpose nya, it is not primary, then the
stockholder has the right to dissent and demand payment.
So paano e exercise ang right of appraisal?
HOW RIGHT OF APPRAISAL IS EXERCISED.
Section 81. How Right is Exercised. - The dissenting stockholder who
votes against a proposed corporate action may exercise the right of
appraisal by making a written demand on the corporation for the
payment of the fair value of shares held within thirty (30) days from the
date on which the vote was taken: Provided, That failure to make the
demand within such perios shall be deemed a waiver of the appraisal
right. If the proposed corporate action is implemented, the corporation
shall pay the stockholder, upon surrender of the certificate or certificates
of stock representing the stockholder's shares, the fair value thereof as
of the day before the vote was taken excluding any appreciation or
depreciation in anticipation of such corporate action.
If, within sixty (60) days form the approval of the corporate action by the
stockholders, the withdrawing stockholder and the corporation cannot
agree on the fair value of the shares, it shall be determined and
appraised by three (3) disinterested persons, one of whom shall be
named by the stockholder, another by the corporation and the third by
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the two (2) thus chosen. The findings of the majority of the appraisers
shall be final, and their award shall be paid by the corporation within
thirty (30) days after such award is made: Provided, That no payment
shall be made to any dissenting stockholder or unless the corporation
has unrestricted retained earnings in its books to cover such
payment: Provided, further, That upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer the
shares to the corporation.
February 06, 2020 by Anton Maligad
RIGHT OF APPRAISAL
Q: How do you exercise the right of appraisal?
A: Section 81 of the Revised Corporate Code
Section 81—How right is exercised
The dissenting stockholder who votes against a proposed
corporate action may exercise the right of appraisal by making
a written demand on the corporation for the payment of the fair
value of the shares held within thirty (30) days from the date on
which the vote was taken: Provided, That failure to make the demand
within such period shall be deemed a waiver of the appraisal right. If
the proposed corporate action is implemented, the corporation shall
pay the stockholder, upon surrender of the certificate or certificates
of stock representing the stockholder’s shares, the fair value thereof
as of the day before the vote was taken, excluding any appreciation
or depreciation in anticipation of such corporate action.
If, within sixty (60) days from the approval of the corporate action by
the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined
and appraised by three (3) disinterested persons, one of whom shall
be named by the stockholder, another by the corporation, and the
third by the two (2) thus chosen. The findings of the majority of the
appraisers shall be final, and their award shall be paid by the
corporation within thirty (30) days after such award is made:
Provided, That no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted retained
earnings in its books to cover such payment: Provided, further, That
upon payment by the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer the shares to the corporation.
Discussion:
Atty. Ong: Okay, so please take note that to exercise your appraisal
right:
• First, make a written demand;
• Take note of the time period—within thirty (30) days from the
date on which the vote was taken;
• Waiver—The failure to make a demand is a waiver of the
appraisal right;
• Determination of the fair value—If the fair value cannot be
determined, you can refer it to the Commissioner or three (3)
disinterested persons. 1—voted by the shareholder, another
by the corporation, and the third voted by the two (2) thus
chosen
The findings of the majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty (30) days after such
award is made: Provided, That no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover such payment
Provided, further, That upon payment by the corporation of the agreed
or awarded price, the stockholder shall forthwith transfer the shares to
the corporation.
Section 83—When right to Payment Ceases
No demand for payment under this Title may be withdrawn unless
the corporation consents thereto. If, however, such demand for
payment is withdrawn with the consent of the corporation, or if the
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
proposed corporate action is abandoned or rescinded by the
corporation or disapproved by the Commission where such approval
is necessary, or if the Commission determines that such stockholder
is not entitled to the appraisal right, then the right of the stockholder
to be paid the fair value of the shares shall cease, the status as the
stockholder shall be restored, and all dividend distributions which
would have accrued on the shares shall be paid to the stockholder.
Discussion:
Atty. Ong: So, therefore, the appraisal right is premised on the
corporate action. So when the corporate action is abandoned you can
no longer exercise your right of appraisal.
Q: Who bears the cost of appraisal?
A: It shall be borne by the corporation. Section 84 Revised Corporate
Code.
Section 84—Who bears the Costs of Appraisal
The costs and expenses of appraisal shall be borne by the
corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price, which the corporation may have
offered to pay the stockholder, in which case they shall be borne by
the latter. In the case of an action to recover such fair value, all costs
and expenses shall be assessed against the corporation, unless the
refusal of the stockholder to receive payment was unjustified.
POWER TO TEMPORARY CEASE CORPORATE OPERATION
Atty. Ong: Now it is said under SEC opinion No. 43-04, this pertains to
the power to temporary cease corporate operation. So, “they” (directors
and stockholders) decide to temporary cease the operations.
The issue here is whether or not such temporary cessation shall be
decided by the Board of Directors?
SEC OPINION NO. 43-04 (October 26, 2004)
CESSATION OF BUSINESS OPERATION.-
ISSUE: Does the resolution of the approval of the majority of the
board of directors in a special meeting constituting quorum, to
temporary cease corporate business operation for reasons beyond
its control, still need the ratification of the stockholders? Or is it
enough to be approved by the majority of the Board of Directors?
A: The issue as to the temporary cessation of operation can no
longer be classified as an ordinary business transaction such as to
limit its approval to the BOD. Therefore, it should be decided by the
stockholders as well.
It is well- established that corporate‘s powers shall be exercised,
controlled and held by the board of directors or trustees. However,
there are limitations to this power.
[1] Limitations imposed by the Constitution, statues, articles or by
laws; 
 or the incurring, creating or increasing of any bonded indebtedness.
[2] It cannot perform constituent functions that is acts involving
fundamental changes in the corporation which needs the approval
or ratification from the stockholders. 
 approval of the Commission, and where appropriate, of the Philippine
[3] It cannot exercise power not possessed by the corporation. 
 shall be made within six (6) months from the date of approval of
The corporate powers conferred upon the BOD usually involves the
ordinary business transaction of the corporation and do not extend
beyond the management of ordinary corporate affairs.
In this case, the issue of stoppage of business operation cannot be
classified as an ordinary business transaction, such as to limit the
approval to the BOD. Cessation of the business, though temporary,
is a fundamental concern, which should be decided not only by
the board, but also by the stockholders themselves, who would
stand to be primarily affected by such changes.
So, even temporary stoppage as long as it is not within the ordinary
business of the corporation, requires a ratification or approval by
the stockholders.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
Issue: Does it require a majority approval of the stockholders or 2/3
approval of the stockholders?
Held: In this particular opinion, the SEC held that considering the
critical nature of the cessation of business operation, which is not a
mere exercise of management prerogative, the 2/3 vote of the
outstanding capital stock is required either prior to the voting
or subsequent ratification.
SUMMARY: For approval of the temporary cessation of business,
the following are required:
• Stockholders—2/3 approval of the outstanding capital
stock;
• BOD—majority approval
POWER TO INCREASE OR DECREASE CAPITAL STOCK
Section 37—Power to Increase or Decrease Capital Stock; Incur,
Create or Increase Bonded Indebtedness
No corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by a
majority vote of the board of directors and by two-thirds (2/3) of the
outstanding capital stock at a stockholders’ meeting duly called for
the purpose. Written notice of the time and place of the stockholders’
meeting and the purpose for said meeting must be sent to the
stockholders at their places of residence as shown in the books of
the corporation and served on the stockholders personally, or
through electronic means recognized in the corporation’s bylaws
and/or the Commission’s rules as a valid mode for service of notices.
A certificate must be signed by a majority of the directors of the
corporation and countersigned by the chairperson and secretary of
the stockholders’ meeting, setting forth:
(a)That the requirements of this section have been complied with;
(b)The amount of the increase or decrease of the capital stock;
(c)In case of an increase of the capital stock, the amount of capital
stock or number of shares of no- par stock thereof actually
subscribed, the names, nationalities and addresses of the persons
subscribing, the amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on the subscription
in cash or property, or the amount of capital stock or number of
shares of no-par stock allotted to each stockholder if such increase
is for the purpose of making effective stock dividend therefor
authorized;
(d)Any bonded indebtedness to be incurred, created or increased;
(e)The amount of stock represented at the meeting; and
(f)The vote authorizing the increase or decrease of the capital stock,
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require prior
Competition Commission. The application with the Commission
the board of directors and stockholders, which period may be
extended for justifiable reasons.
Copies of the certificate shall be kept on file in the office of the
corporation and filed with the Commission and attached to the
original articles of incorporation. After approval by the
Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall be deemed increased
or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Commission shall not accept for
filing any certificate of increase of capital stock unless
accompanied by a sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
certificate, showing that at least twenty-five percent (25%) of the
increase in capital stock has been subscribed and that at least
twenty-five percent (25%) of the amount subscribed has been
paid in actual cash to the corporation or that property, the
valuation of which is equal to twenty-five percent (25%) of the
subscription, has been transferred to the corporation: Provided
further, That no decrease in capital stock shall be approved by
the Commission if its effect shall prejudice the rights of
corporate creditors.
Q: What do you mean by bonded indebtedness?
A: It refers to negotiable corporate bonds, which is secured by mortgage
or corporate property.
Q: If the corporation shall take out a loan from the bank does it
need approval from 2/3 of the outstanding stocks? In relation to
Section 37 of the RCC.

Nonstock corporations may incur, create or increase bonded
indebtedness when approved by a majority of the board of trustees
and of at least two- thirds (2/3) of the members in a meeting duly
called for the purpose.
Bonds issued by a corporation shall be registered with the
Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
Discussion:
Atty. Ong: If you want to increase your capital stock remember, that if
you submit to the SEC an application, there is a requirement regarding
authorized capital stock. You can increase the authorized capital
stock—you have the power to increase the capital stock.
Q: What would be your reason to increase the capital stock of the
corporation?
A: The following may be the reasons to increase the authorized capital
stock of the corporation—
• Corporate expansion;
• For purposes of corporate loan
Q: If the corporation takes out a P100 million loan from BPI, is that
a bonded indebtedness?
A: It is not a bonded indebtedness because such is not secured by
mortgage or corporate property.
Q: Give me an example of a corporate bond
A: It is a loan, which is secured by corporate property.
Atty. Ong: The reason why there is a requirement of 2/3 approval for of
the outstanding stockholders in relation to bonded indebtedness, is
because it would prejudice the assets of the corporation.
There is this Memorandum Circular (SEC interim guidelines for the
Registration of Bonds December 14, 1987)—which provides for the
guidelines for registering corporate bonds.
A corporation cannot automatically issue corporate bonds.
POWER TO DENY PRE-EMPTIVE RIGHT
Section 38—Power to deny Preemptive Right.

Q: What is the voting requirement? All stockholders of a stock corporation shall enjoy preemptive right to
subscribe to all issues or disposition of shares of any class, in
A: Majority vote of the board of directors and at least two-thirds (2/3) of proportion to their respective shareholdings, unless such right is
the outstanding capital stock—in a stockholders meeting duly held for denied by the articles of incorporation or an amendment thereto:
such purpose. Provided, That such preemptive right shall not extend to shares
• Written notice; issued in compliance with laws requiring stock offerings or minimum
• Certificate must be signed by the majority of the directors of stock ownership by the public; or to shares issued in good faith with
the corporation and countersigned by the chairperson and the approval of the stockholders representing two-thirds (2/3) of the
secretary of the stockholders’ meeting outstanding capital stock, in exchange for property needed for
corporate purposes or in payment of a previously contracted debt.
Initial Registration of the Increase of Authorized
Corporation Capital Stock Discussion:
The 25%-25% rule doesn’t The 25%-25% rule applies.
apply. Atty. Ong: We will discuss the denial of preemptive right, when we
Therefore, the 25% of the discuss the rights of a stockholder.
Therefore, there is no increase of the authorized
requirement that 25% of the capital stock must be Q: Can you deny a preemptive right?
authorized capital stock must be subscribed.
subscribed. A: Yes, but you have to follow the approval of the 2/3 of the outstanding
Likewise, there the 25% of the capital stock
Likewise, there is no subscribed shares must be paid
requirement that the 25% of the up in actual cash or property. POWER TO SELL, DISPOSE, LEASE/ENCUMBER ASSETS
subscribed shares must be paid
up. So let’s say that the authorized Section 39—Sale or Other Disposition of Assets
capital stock is increased by
So you can have P100,000 P100 and I want to increase it to Subject to the provisions of Republic Act No. 10667, otherwise
worth of authorized capital stock P200. So for the increase of known as “Philippine Competition Act”, and other related laws, a
and just pay P50. P100, I need to subscribe 25%. corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge, or otherwise
Out of the 25% subscription I dispose of its property and assets, upon such terms and conditions
need at least 25% to be paid up. and for such consideration, which may be money, stocks, bonds, or
other instruments for the payment of money or other property or
Q: Now, what is the purpose of the retention of the 25%-25% rule? consideration, as its board of directors or trustees may deem
expedient.
Atty. Ong: I don’t know any other reason.
A sale of all or substantially all of the corporation’s properties and
Please take note that there is no appraisal right in the increase of assets, including its goodwill must be authorized by the vote of the
the capital stock. So, if the Board of Directors decide to increase the stockholders representing at least two- thirds (2/3) of the outstanding
capital stock and you (as a shareholder) refuses or is against such capital stock, or at least two-thirds (2/3) of the members, in a
increase—you cannot exercise any appraisal right. stockholders’ or members’ meeting duly called for the purpose.

In nonstock corporations where there are no members with voting

POWER TO CREATE OR INCREASE BONDED INDEBTEDNESS rights, the vote of at least a majority of the trustees in office will be

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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
sufficient authorization for the corporation to enter into any
transaction authorized by this section.
The determination of whether or not the sale involves all or
substantially all of the corporation’s properties and assets must be
computed based on its net asset value, as shown in its latest financial
statements. A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was incorporated.
Written notice of the proposed action and of the time and place for
the meeting shall be addressed to stockholders or members at their
places of residence as shown in the books of the corporation and
deposited to the addressee in the post office with postage prepaid,
served personally, or when allowed by the by-laws or done with the
consent of the stockholder, sent electronically: Provided, That any
dissenting stockholder may exercise the right of appraisal under the
conditions provided in this Code.
After such authorization or approval by the stockholders or members,
the board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge, or other
disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge, or otherwise
dispose of any of its property and assets if the same is necessary in
the usual and regular course of business of the corporation or if the
proceeds of the sale or other disposition of such property and assets
shall be appropriated for the conduct of its remaining business.
Discussion:
Atty. Ong: The sale requires the approval of –
• 2/3 of the outstanding capital stock; or
• 2/3 of its members
In relation to the Bulk Sales Law—if you sell assets in bulk, you need
to have a statement of creditors. Otherwise, your sale shall be
considered as void. It is still a valid law.
In nonstock corporations where there are no members with voting rights,
the vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized
by this section.
The determination of whether or not the sale involves all or substantially
all of the corporation’s properties and assets must be computed based
on its net asset value, as shown in its latest financial statements. A sale
or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
This is a good revision because it applies to sale of substantial corporate
assets.
Q: If you sell a property worth P2,000,000 is it substantial? How will
you measure substantial corporate assets?
A: It will be based on the net asset value as shown in its latest financial
statements or another criteria
• Other Criteria—would the sale render incapable the
continuing of the business of the corporation in accomplishing
its purpose? If yes, then the sale of such asset, regardless of
its value, is considered a substantial sale of corporate
property. So even if the value of the asset is merely nominal,
but it is the main asset of the corporation, then the sale of such
asset is a substantial sale of corporate property.
***Discussion on stock transaction tax and the net asset value.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
Peña vs. CA
FACTS: PAMPANGA BUS CO., INC. (PAMBUSCO) is the owner of
the three lots in dispute which were mortgaged to Development Bank
of the Philippines (DBP), which were later on foreclosed.
Rosita Peña was awarded the lots in a foreclosure sale for being the
highest bidder. Subsequently, the Board of Directors of PAMBUSCO,
3 out of its 5 directors, issued a resolution to assign its right of
redemption to Marcelino Enriquez, who redeemed the property.
Peña now avers that she is the legitimate owner of the subject lands
for having purchased the same in a foreclosure proceeding instituted
by the DBP against PAMBUSCO and the deed of assignment
executed by PAMBUSCO in favor of Enriquez was void ab initio for
being an ultra vires act of its board of directors and for being without
any valuable consideration.
It should be noted that the by-laws of PAMBUSCO provide that four
out of five directors must be present in a special meeting of the board
to constitute a quorum, and that the corporation has already ceased
to operate. In this case, only 3 out of 5 directors issued a resolution
to assign its right of redemption to Marcelino Enriquez.
ISSUE: Whether deed of assignment is void.
RULING: Yes.
The by-laws of a corporation are its own private laws which
substantially have the same effect as the laws of the corporation.
They are in effect, written, into the charter. In this sense they become
part of the fundamental law of the corporation with which the
corporation and its directors and officers must comply.
Apparently, only three (3) out of five (5) members of the board of
directors of respondent PAMBUSCO convened by virtue of a prior
notice of a special meeting. There was no quorum to validly transact
business since it is required under its by-laws that at least four (4)
members must be present to constitute a quorum in a special
meeting of the board of directors.
Further, under the Corporation Law, the sale or disposition of any
and/or substantially all properties of the corporation requires, in
addition to a proper board resolution, the affirmative votes of the
stockholders holding at least two-thirds (2/3) of the voting power in
the corporation in a meeting duly called for that purpose. This was
not complied with in the case at bar.
February 7, 2020 by Belle Fabe 00-00:28
ISLAMIC DEPARTMENT OF THE PHILIPPINES vs. CA
272 SCRA 454
FACTS:
1971, the ISLAMIC DIRECTORATE OF THE PHILIPPINES ("IDP") was
incorporated with the primary purpose of establishing a mosque, school,
and other religious infrastructures in Quezon City.
When President Marcos declared martial law in 1972, most of the
members of the 1971 Board of Trustees ("Tamano Group") flew to the
Middle East to escape political persecution. Thereafter, two contending
groups claiming to be the IDP Board of Trustees sprung: the Carpizo
group and Abbas group.
In a suit between the two groups, SEC rendered a decision in 1986
declaring both groups to be null and void. SEC recommeded that the a
new by-laws be approved and a new election be conducted upon the
approval of the by-laws. However, the SEC recommendation was not
heeded.
In 1989, the Carpizo group passed a Board Resolution authorizing the
sale of the land to Iglesia Ni Cristo ("INC"), and a Deed of Sale was
eventually executed. Subsequently, the Tamano Group filed a petition
before the SEC questioning the sale.
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Meanwhile, INC filed a suit for specific performance before RTC Branch
81 against the Carpizo group.
ISSUE: Whether or not the sale between the Carpizo group and INC is
null and void.
RULING: Yes. Since the SEC has declared the Carpizo group as a void
Board of Trustees, the sale it entered into with INC is likewise void.
Without a valid consent of a contracting party, there can be no valid
contract.
In this case, the IDP, never gave its consent, through a legitimate Board
of Trustees, to the disputed Deed of Absolute Sale executed in favor of
INC. Therefore, this is a case not only of vitiated consent, but one where
consent on the part of one of the supposed contracting parties is totally
wanting. Ineluctably, the subject sale is void and produces no effect
whatsoever.
The subject lot constitutes the only property of IDP. Hence, its sale to a
third-party is a sale or disposition of all the corporate property and assets
of IDP. For the sale to be valid, the majority vote of the legitimate Board
of Trustees, concurred in by the vote of at least 2/3 of the bona fide
members of the corporation should have been obtained. These
requirements were not met in the case at bar.
CALTEX (PHILS) INC vs. PNOC SHIPPING AND TRANSPORT
CORP
498 SCRA 400
FACTS: Caltex (Phils.), Inc. v. Luzon Stevedoring Corporation was
pending before the then Intermediate Appellate Court (IAC) directing
LUSTEVECO to pay Caltex. Meanwhile, PSTC and Luzon Stevedoring
Corporation entered into an Agreement of Assumption of Obligations.
The agreement provides that PSCTC shall assume all the obligations
of LUSTEVECO with respect to the claims to Caltex.
The RTC ruled in favor or Caltex, issued a writ of execution. However,
the judgment was not satisfied because of the prior foreclosure of
LUSTEVECO’s properties.
Caltex subsequently learned of the Agreement between PSTC and
LUSTEVECO. Caltex sent successive demands to PSTC asking for the
satisfaction of the judgment rendered by the CFI. PSTC informed
Caltex that it was not a party to the prior case and thus, PSTC would
not pay LUSTEVECO’s judgment debt. PSTC advised Caltex to
demand satisfaction of the judgment directly from LUSTEVECO.
Caltex filed a complaint for sum of money against PSTC.
ISSUE: Whether PSTC is bound by the Agreement when it assumed
all the obligations of LUSTEVECO.
RULING: Yes. PSTC may be held liable for the obligations of
LUSTEVECO to Caltex.
LUSTEVECO transferred, conveyed and assigned to PSTC all of
LUSTEVECO’s business, properties and assets pertaining to its tanker
and bulk business "together with all the obligations relating to the said
business, properties and assets." When PSTC assumed all the
properties, business and assets of LUSTEVECO pertaining to
LUSTEVECO’s tanker and bulk business, PSTC also assumed all of
LUSTEVECO’s obligations pertaining to such business.
While the Corporation Code allows the transfer of all or substantially all
the properties and assets of a corporation, the transfer should not
prejudice the creditors of the assignor. The only way the transfer can
proceed without prejudice to the creditors is to hold the assignee liable
for the obligations of the assignor. The acquisition by the assignee of
all or substantially all of the assets of the assignor necessarily includes
the assumption of the assignor’s liabilities, unless the creditors who did
not consent to the transfer choose to rescind the transfer on the ground
of fraud. To allow an assignor to transfer all its business, properties and
assets without the consent of its creditors and without requiring the
assignee to assume the assignor’s obligations will defraud the
creditors. The assignment will place the assignor’s assets beyond the
reach of its creditors.
Apura, Bayquen, Cabarlo, Castro, Claros, Fabe, Flores, Lagat, Latorza, Maligad | III-Manresa 2019
Even if PSTC did not expressly assume to pay the creditors of
LUSTEVECO, PSTC would still be liable to Caltex up to the value of
the assets transferred. The transfer of all or substantially all of the
unencumbered assets of LUSTEVECO to PSTC cannot work to
defraud the creditors of LUSTEVECO. A creditor has a real interest to
go after any person to whom the debtor fraudulently transferred its
assets.
You have transfer of all or substantially all of the assets of the
corporation to another which requires the approval of the board of the
corporation.
Another good question of the transfer of all or substantially all of the
properties, what happens if the transferee corporation has liabilities or
has creditors, is the transfer of all or substantially all of the assets also
involves the transfer of the liabilities?
It’s very relevant knowledge because one way to acquire an entity is not
only to purchase shares but also to acquire its assets. We have asset
and acquisitions – how do you merge or acquire or consolidate
corporations to corporations, there’s a lot of– there’s a million ways to
do that. One of the corporate structuring [amended] is to acquire assets
– purchase of assets only, what they do, instead of acquiring the shares
of the acquired entity, what is only bought, is the asset.
For example, there’s a power plant – X Company has a power plant,
power entity, power user. There comes Y Company who wants to get a
share of X Company, but instead of purchasing the shares because he
knows that if he purchases a share, he is going to be a shareholder, so
I have all the rights and obligations also of a shareholder, so there’s a
concept of legal capital –so what happens instead of purchasing the
shares, I’m going to purchase the assets or purchase the power plant
and I will operate it.
There becomes a question whether or not the purchase itself of an
asset, not the shares, also involves the purchase of the acquired entity’s
liabilities— so the liabilities will be passed on, so if you’re a creditor you
cannot run into anything, because thee corporation [acquired entity] has
no more asset. We have what you call the Nell Doctrine which was
enunciated in the case of Y-I Leisure vs. Yu.
Y-I LEISURE vs. YU
SEPTEMBER 8, 2015
FACTS:
Mt. Arayat Development Co. Inc. (MADCI) was a real estate
development corporation. On the other hand, respondent James Yu (Yu)
was a businessman, interested in purchasing golf and country club
shares.
MADCI offered for sale shares of a golf and country club located in the
vicinity of Mt. Arayat in Arayat, Pampanga, for the price of P550.00 per
share. Relying on the representation of MADCI's brokers and sales
agents, Yu bought 500 golf and 150 country club shares for a total price
of P650,000.00 which he paid by installment with (14) Far East Bank
and Trust Company (FEBTC) checks.
Upon full payment of the shares to MADCI, Yu visited the supposed site
of the golf and country club and discovered that it was non-existent. In
a letter, dated February 5, 2000, Yu demanded from MADCI that his
payment be returned to him. MADCI recognized that Yu had an
investment of P650,000.00, but the latter had not yet received any
refund.
Yu filed with the RTC a complaint for collection of sum of money and
damages with prayer for preliminary attachment against MADCI and its
president Rogelio Sangil (Sangil) to recover his payment for the
purchase of golf and country club shares. In his transactions with
MADCI, Yu alleged that he dealt with Sangil, who used MADCI's
corporate personality to defraud him.
MADCI claimed that it was Sangil who defrauded Yu. It invoked the
Memorandum of Agreement (MOA), dated May 29, 1999, entered into
by MADCI, Sangil and petitioner Yats International Ltd. (YIL). Under the
MOA, Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments. Thus,
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
it was MADCI's position that Sangil should be ultimately liable to refund
the payment for shares purchased.
Yu filed an Amended Complaint, wherein he also impleaded YIL, Y-I
Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI).
According to Yu, he discovered in the Registry of Deeds of Pampanga
that, substantially, all the assets of MADCI, consisting of one hundred
twenty (120) hectares of land located in Magalang, Pampanga, were
sold to YIL, YILPI and YICRI. The transfer was done in fraud of MADCI's
creditors, and without the required approval of its stockholders and
board of directors under Section 40 of the Corporation Code. Yu also
alleged that Sangil even filed a case in Pampanga which assailed the
said irregular transfers of lands.
YIL, YILPI and YICRI alleged that they only had an interest in MADCI in
1999 when YIL bought some of its corporate shares pursuant to the
MOA. This occurred (2) years after Yu bought his golf and country club
shares from MADCI. As a mere stockholder of MADCI, YIL could not be
held responsible for the liabilities of the corporation. As to the transfer of
properties from MADCI to YILPI and subsequently to YICRI, they
averred that it was not undertaken to defraud MADCI's creditors and it
was done in accordance with the MOA. In fact, it was stipulated in the
MOA that Sangil undertook to settle all claims for refund of third parties.
ISSUE: Whether or not the Nell doctrine is applicable in this case
RULING: Yes.
In the 1965 case of Nell v. Pacific Farms, Inc (hereafter referred to as
the Nell Doctrine), the SC ruled that:
Generally, where one corporation sells or otherwise transfers all of its
assets to another corporation, the latter is not liable for the debts and
liabilities of the transferor, except:
1. Where the purchaser expressly or impliedly agrees to assume
such debts;
2. Where the transaction amounts to a consolidation or merger of
the corporations;
3. Where the purchasing corporation is merely a continuation of the
selling corporation; and
4. Where the transaction is entered into fraudulently in order to
escape liability for such debts.
The Nell Doctrine states the general rule that the transfer of all the
assets of a corporation to another shall not render the latter liable to the
liabilities of the transferor. If any of the above-cited exceptions are
present, then the transferee corporation shall assume the liabilities of
the transferor.
The general rule expressed by the doctrine reflects the principle of
relativity under Article 1311 of the Civil Code. Contracts, including the
rights and obligations arising therefrom, are valid and binding only
between the contracting parties and their successors-in-interest. Thus,
despite the sale of all corporate assets, the transferee corporation
cannot be prejudiced as it is not in privity with the contracts between the
transferor corporation and its creditors.
FIRST EXCEPTION: where the transferee corporation expressly or
impliedly agrees to assume the transferor's debts, is provided
under Article 2047 of the Civil Code. When a person binds himself
solidarity with the principal debtor, then a contract of suretyship is
produced. Necessarily, the corporation which expressly or impliedly
agrees to assume the transferor's debts shall be liable to the same.
SECOND EXCEPTION: as to the merger and consolidation of
corporations, is well-established under Sections 76 to 80, Title X of the
Corporation Code. If the transfer of assets of one corporation to
another amounts to a merger or consolidation, then the transferee
corporation must take over the liabilities of the transferor.
ANOTHER EXCEPTION: where the sale of all corporate assets is
entered into fraudulently to escape liability for transferor's debts, can be
found under Article 1388 of the Civil Code. It provides that whoever
acquires in bad faith the things alienated in fraud of creditors, shall
indemnify the latter for damages suffered. Thus, if there is fraud in the
transfer of all the assets of the transferor corporation, its creditors can
hold the transferee liable.
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The legal basis of the last in the (4) exceptions to the Nell Doctrine,
where the purchasing corporation is merely a continuation of the selling
corporation, is challenging to determine. Dean Cesar Villanueva
explained that this exception contemplates the "business-enterprise
transfer." In such transfer, the transferee corporation's interest goes
beyond the assets of the transferor's assets and its desires to acquire
the latter's business enterprise, including its goodwill.
In other words, in this last exception, the transferee purchases not only
the assets of the transferor, but also its business. As a result of the sale,
the transferor is merely left with its juridical existence, devoid of its
industry and earning capacity.
Section 40 suitably reflects the business-enterprise transfer under the
exception of the Nell Doctrine because the purchasing or transferee
corporation necessarily continued the business of the selling or
transferor corporation. Given that the transferee corporation acquired
not only the assets but also the business of the transferor corporation,
then the liabilities of the latter are inevitably assigned to the former.
MADCI indeed had assets consisting of 120 hectares of landholdings in
Magalang, Pampanga, to be developed into a golf course, pursuant to
its primary purpose. Because of its alleged violation of the MOA,
however, MADCI was made to transfer all its assets to the petitioners.
No evidence existed that MADCI subsequently acquired other lands for
its development projects. Thus, MADCI, as a real estate development
corporation, was left without any property to develop eventually
rendering it incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
Section 40 must apply.
If your transactions fall under the then Section 40, now Section 39,
would that also mean there’s also a transfer of liabilities? Is that
rule an absolute rule? No. You look into the intention of the parties.
How do you determine the intention of the parties? How do you
categorize this transfer under Section 39 assumes liabilities and
this transfer under Section 39 doesn’t assume liabilities, if you are
faced with that problem which is which?
It must be clarified, however, that not every transfer of the entire
corporate assets would qualify under Section 40. It does not apply (1) if
the sale of the entire property and assets is necessary in the usual and
regular course of business of corporation, or (2) if the proceeds of the
sale or other disposition of such property and assets will be appropriated
for the conduct of its remaining business. Thus, the litmus test to
determine the applicability of Section 40 would be the capacity of the
corporation to continue its business after the sale of all or substantially
all its assets.
Please take note of that exception – it doesn’t mean that if all the assets
are sold or substantially all of the assets, the liabilities are automatically
included. It depends upon whether or not the business could still
continue doing its business and it depends upon the purpose. If the
purpose of selling it is, it is under dissolution, then of course, the
transferee would not be covered by the liabilities because the proceeds
is to pay the creditor, the debts itself. Please qualify if you’re faced with
that problem. You need to qualify.
POWER TO ACQUIRE OWN SHARES
Section 40. Power to Acquire Own Shares – Provided, that the
corporation has unrestricted earnings in the books to cover the shares
to be purchased or acquired, a stock corporation shall have the power
to purchase or acquire its own shares for a legitimate corporate purpose
or purposes, including the following cases:
(a) To eliminate fractional shares arising out of stock dividends
(b) To collect or compromise an indebtedness to the corporation, arising
out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to payment
for their shares under the provisions of this Code.
(c) is an example of the exercise of an appraisal right – you will appraise,
the corporation will buy your shares, it will go to the treasury shares.
53
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
Please take note it’s not similar to redemption or cancellation. The
product of the exercise of an appraisal right is it would result to treasury
shares. It’s not cancellation. Therefore, it can be re-issued later on.
POWER TO INVEST CORPORATE FUNDS
Section 41. Power to Invest Corporate Funds in Another
Corporation or Business or for Any Other Purpose. – Subject to the
provisions of this Code, a private corporation may invest its funds in any
other corporation, business or for any purpose other than the primary
purpose for which it was organized, when approved by a majority of the
board of directors or trustees and ratified by the stockholders
representing at least (2/3) of the outstanding capital stock, or by at least
(2/3) of the members in the case of non-stock corporations, at a meeting
duly called for the purpose.
Notice of the proposed investment and the time and place of the meeting
shall be addressed to each stockholder or member at the place of
residence as shown in the books of the corporation and deposited to the
addressee in the post office with postage prepaid, served personally, or
sent electronically in accordance with the rules and regulations of the
Commission on the use of electronic data message, when allowed by
the bylaws or done with the consent of the stockholders: Provided, That
any dissenting stockholder shall have appraisal right as provided
inthis Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval of
the stockholders or members shall not be necessary.
Remember this also involves the appraisal right— when the shareholder
doesn’t want the corporation investing for other purposes, that’s actually
a mode wherein you can exercise his/her appraisal right.
xxx where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or
members shall not be necessary.
Please qualify – which requires the approval or which does not require
approval.
POWER TO DECLARE DIVIDENDS
Section 42. Power to Declare Dividends. – The board of directors of
a stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, property, or in stock
to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from
the delinquent stockholders until their unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing at least two-
thirds (2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus profits in excess
of one hundred percent (100%) of their paid-in capital stock, except: (a)
when justified by definite corporate expansion projects or programs
approved by the board of directors; or (b) when the corporation is
prohibited under any loan agreement with financial institutions or
creditors, whether local or foreign, from declaring dividends without their
consent, and such consent has not yet been secured; or (c) when it can
be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need
for special reserve for probable contingencies.
Therefore, you must have an unrestricted retained earnings before you
can declare dividend[s].
Please take note – if any other dividends except stock dividend, there’s
no need for shareholder approval. But if it’s stock dividends that are
declared, you need the 2/3 outstanding capital stock at a regular or
special meeting duly called for the purpose.
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Stock corporations are prohibited from retaining surplus profits in excess
of one hundred percent (100%) of their paid-in capital stock xxx
This is related to your IAET – you cannot have more than 100% because
the purpose of that, you’re actually avoiding the payments of dividends
tax because you’re just accumulating it, EXCEPT:
a) when justified by definite corporate expansion projects or
programs approved by the board of directors; or
if there are future plans for expansion, you can accumulate
because you will use that for expansion and that is actually one
of the defenses if you’re charged with IAET – there is a plan for
corporate expansion which will be used by the accumulation of
earnings.
b) when the corporation is prohibited under any loan
agreement with financial institutions or creditors, whether
local or foreign, from declaring dividends without their
consent, and such consent has not yet been secured; or
c) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve
for probable contingencies.
Please take note of the exception.
The board of directors of a stock corporation may declare dividends out
of the unrestricted retained earnings which shall be payable in cash,
property, or in stock to all stockholders on the basis of outstanding stock
held by them xxx
What is this provision saying— which shall be payable in cash,
property, or in stock xxx?
Please take note the property here might also involve stocks invested
by the corporation, held by the corporation, stocks of other
corporation[s].
EXAMPLE: X Company has an investment in Y Company, so that is in
the form of shares so it can declare that. This will not be considered a
stock dividend, this will be considered property dividends.
EXAMPLE: X Company has many assets aside from cash. It has an
investment in Y Company and then, instead of declaring or distributing
money [cash], its stocks in Y Company will be declared, issued to the
shareholders.
This will not fall under the stock dividends because the stock dividends
that is stated, is pertaining to the own stocks of the company not the
stocks held by the company as investments. Please be very careful
when you are faced with that problem because you might construe it as
a stock dividend and then you’ll say it requires 2/3. It is still property
dividends in the form of stocks.
POWER TO ENTER INTO MANAGEMENT
Section 43. Power to Enter into Management Contract. – No
corporation shall conclude a management contract with another
corporation unless such contract is approved by the board of directors
and by stockholders owning at least the majority of the outstanding
capital stock, or by at least a majority of the members in the case of a
nonstock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (a)
where a stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control more
than one-third (1/3) of the total outstanding capital stock entitled to vote
of the managing corporation; or (b) where a majority of the members of
the board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds (2/3)
of the total outstanding capital stock entitled to vote, or by at least two-
thirds (2/3) of the members in the case of a nonstock corporation.
54
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
These shall apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources
may be entered into for such periods as may be provided by the
pertinent laws or regulations. No management contract shall be entered
into for a period longer than five (5) years for any one (1) term.
Very, very important.
MANAGEMENT CONTRACT – This is a contract entered into between
two corporations wherein one corporation will manage the other
corporation.
This is very prevalent in conglomerates or sister companies or related-
party companies – companies that are considered related parties.
Remember your concept of interlocking directors – this is similar. If there
is a contract between the managed and the manager or the managing
contract, what is the only requirement approval? You only need the
majority.
But if 1/3 is owned by interlocking shareholders or there are interlocking
directors or majority interlocking directors, you need to get the approval
of at least two-thirds (2/3) of the total outstanding capital stock xxx of the
managed corporation because they are in the losing end, because they
are the managed ones.
X— this one is earning
Y – this one is losing
And this operates in a heavily taxed jurisdiction, let’s say 30% and this
[other one] operates in a tax haven. What they do, to lower your income,
you’ll be managed, the other one will manage. They will execute a
management contract – when it will manage the other one, they will pay
a fee.
February 7, 2020 by Chen Lee T. Apura
SEC. 43. Power to Enter into Management Contract. – No corporation
shall conclude a management contract with another corporation unless
such contract is approved by the board of directors and by stockholders
owning at least the majority of the outstanding capital stock, or by at
least a majority of the members in the case of a nonstock corporation,
of both the managing and the managed corporation, at a meeting duly
called for the purpose: Provided, That (a) where a stockholder or
stockholders representing the same interest of both the managing and
the managed corporations own or control more than one-third (1/3) of
the total outstanding capital stock entitled to vote of the managing
corporation; or (b) where a majority of the members of the board of
directors of the managing corporation also constitute a majority of the
members of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a nonstock corporation.
These shall apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources
may be entered into for such periods as may be provided by the
pertinent laws or regulations.
No management contract shall be entered into for a period longer than
five (5) years for any one (1) term.
Pag mina-manage kita, you will pay me a fee. These are all related
companies. So this will involve additional expenses which would lower
its profit therefore lower its tax.
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Ito naman (referring to the managing corporation), magkakaprofit din
siya pero nasa tax haven.
So all in all, if you look at the big picture, you save taxes. This is one
way to structure companies to save taxes. They call it service
agreements or operating agreements. They call it a lot of terms just to
avoid being termed as a management contract. Essentially it is the
same.
ULTRA VIRES ACTS
SEC. 44. Ultra Vires Acts of Corporations. – No corporation shall
possess or exercise corporate powers other than those conferred by this
Code or by its articles of incorporation and except as necessary or
incidental to the exercise of the powers conferred.
You look at ano ba ang mga powers ng corporation. Those that are
expressly indicated in the:
1. Revised Corporation Code
2. Articles of Incorporation – look at its primary and secondary
purpose
3. Those that are necessary or incidental to the exercise of the
powers conferred
Other than that, they are ultra vires or outside the authority of the
corporation.
We have several ultra vires acts.
CLASSIC ULTRA VIRES
MONTELIBANO VS BACOLOD-MURCIA MILLING CO. INC.
G.R. No. L-15092 May 18, 1962
FACTS:
Montelibano et al. are sugar planters adhered to the Bacolod-Murcia
Milling Co., Inc‘s sugar central mill under identical milling contracts
originally executed in 1919. In 1936, it was proposed to execute
amended milling contracts, increasing the planters‘ share of the
manufactured sugar, besides other concessions. To this effect, a printed
Amended Milling Contract form was drawn up. The Board of Directors
of Bacolod-Murcia Milling Co., Inc. adopted a resolution granting further
concessions to the planters over and above those contained in the
printed Amended Milling Contract on August 10, 1936.
In 1953, the Montelibanos initiated an action, contending that 3 Negros
sugar centrals had already granted increased participation to their
planters, and that under paragraph 9 of the resolution of August 20,
1936, the Bacolod-Murica had become obligated to grant similar
concessions to the appellants herein.
The Bacolod-Murcia Milling Co., inc., resisted the claim, urging that the
resolution in question was null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the corporate
directors to adopt.
ISSUE: Was the act of the BOD ultra vires?
HELD: NO. The Bacolod-Murcia Milling Co., Inc. is ordered to pay
appellants the increase of participation in the milled sugar in accordance
with paragraph 9 of the Resolution of August 20, 1936.
It is a well-known rule of law that questions of policy or of management
are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment
of the board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are not
reviewable by the courts.
There can be no doubt that the directors of the Bacolod-Murcia had
authority to modify the proposed terms of the Amended Milling Contract
for the purpose of making its terms more acceptable to the other
contracting parties. The rule is that —
55
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
It is a question, therefore, in each case of the logical relation of the act
to the corporate purpose expressed in the charter. If that act is one which
is lawful in itself, and not otherwise prohibited, is done for the purpose
of serving corporate ends, and is reasonably tributary to the promotion
of those ends, in a substantial, and not in a remote and fanciful sense,
it may fairly be considered within charter powers. The test to be applied
is whether the act in question is in direct and immediate furtherance of
the corporation's business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the
power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed.
1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses
or decrease the profits of the central, the court has no authority to review
them.
ZOMER DEVELOPMENT CORPORATION VS. INTERNATIONAL
EXCHANGE BANK
G.R. NO. 150694 : March 13, 2009
FACTS: Zomer Development issued a resolution to guarantee by
executing REM the loans of Prime Aggregates in International Exchange
Bank. Eventually Prime Aggregates defaulted in payment and the REM
over the properties of Zomer Development were foreclosed and
consolidated in favor of International Exchange Bank. Zomer now
comes to Court to declare the REM void for being ULTRA VIRES as it
was not empowered by its by-laws to mortgage its property in favor of
third party – Prime Aggregates.
ISSUE: Can Zomer raise ULTRA VIRES as a defense?
RULING: NO.
The transactions between the Petitioner and the Private Respondent
over its properties are neither malum in se or malum prohibitum. Hence,
the Petitioner cannot hide behind the cloak of ultra vires for a defense.
x x x x The plea of ultra vires will not be allowed to prevail, whether
interposed for or against a corporation, when it will not advance justice
but, on the contrary, will accomplish a legal wrong to the prejudice of
another who acted in good faith.
Ultra vires here was used to invalidate the mortgage. The Court said it
cannot be used to justify a wrong. Take note that in this particular case
the Court ruled whether or not it will side with the legal wrong to the
prejudice of another who acted in good faith. Ang nangyari, minortgage
tapos na forclose. Ngayon, ultra vires na ang defense to invalidate the
mortgage. (Lifted from 2018 TSN)
REPUBLIC VS. ACOJE MINING CO. INC.
G.R. No. L-18062 February 28, 1963
FACTS:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of
Posts requesting the opening of a post, telegraph and money order
offices at its mining camp at Sta. Cruz, Zambales, to service its
employees and their families that were living in said camp. Acting on the
request, the Director of Posts wrote in reply stating that if aside from free
quarters the company would provide for all essential equipment and
assign a responsible employee to perform the duties of a postmaster
without compensation from his office until such time as funds therefor
may be available he would agree to put up the offices requested.
On April 11, 1949, the Director of Posts again wrote a letter to the
company stating among other things that "In cases where a post office
will be opened under circumstances similar to the present, it is the policy
of this office to have the company assume direct responsibility for
whatever pecuniary loss may be suffered by the Bureau of Posts by
reason of any act of dishonesty, carelessness or negligence on the part
of the employee of the company who is assigned to take charge of the
post office," thereby suggesting that a resolution be adopted by the
board of directors of the company expressing conformity to the above
condition relative to the responsibility to be assumed buy it in the event
a post office branch is opened as requested.
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The post office branch was opened at the camp on October 13, 1949
with one Hilario M. Sanchez as postmaster. He is an employee of the
company. On May 11, 1954, the postmaster went on a three-day leave
but never returned. The company immediately informed the officials of
the Manila Post Office and the provincial auditor of Zambales of
Sanchez' disappearance with the result that the accounts of the
postmaster were checked and a shortage was found in the amount of
P13,867.24.
The several demands made upon the company for the payment of the
shortage in line with the liability it has assumed having failed, the
government commenced the present action on September 10, 1954
before the Court of First Instance of Manila seeking to recover the
amount of Pl3,867.24. The company in its answer denied liability for said
amount contending that the resolution of the board of directors wherein
it assumed responsibility for the act of the postmaster is ultra vires, and
in any event its liability under said resolution is only that of a guarantor
who answers only after the exhaustion of the properties of the principal,
aside from the fact that the loss claimed by the plaintiff is not supported
by the office record.
ISSUE: Whether the resolution adopted was an ultra vires act.
RULING: No.
It should be noted that the opening of a post office branch at the mining
camp of appellant corporation was undertaken because of a request
submitted by it to promote the convenience and benefit of its employees.
The idea did not come from the government, and the Director of Posts
was prevailed upon to agree to the request only after studying the
necessity for its establishment and after imposing upon the company
certain requirements intended to safeguard and protect the interest of
the government.
Thus, after the company had signified its willingness to comply with the
requirement of the government that it furnish free quarters and all the
essential equipment that may be necessary for the operation of the office
including the assignment of an employee who will perform the duties of
a postmaster, the Director of Posts agreed to the opening of the post
office stating that "In cases where a post office will be opened under
circumstances similar to the present, it is the policy of this office to have
the company assume direct responsibility for whatever pecuniary loss
may be suffered by the Bureau of Posts by reason of any act of
dishonesty, carelessness or negligence on the part of the employee of
the company who is assigned to take charge of the post office"
On the basis of the foregoing facts, it is evident that the company cannot
now be heard to complain that it is not liable for the irregularity
committed by its employee upon the technical plea that the resolution
approved by its board of directors is ultra vires. The least that can be
said is that it cannot now go back on its plighted word on the ground of
estoppel.
The claim that the resolution adopted by the board of directors of
appellant company is an ultra vires act cannot also be entertained it
appearing that the same covers a subject which concerns the benefit,
convenience and welfare of its employees and their families. While as a
rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and
therefore beyond the powers conferred upon it by law (19 C.J.S., Section
965, p. 419), there are however certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if they
are necessary to promote the interest or welfare of the corporation.
Thus, it has been held that "although not expressly authorized to do so
a corporation may become a surety where the particular transaction is
reasonably necessary or proper to the conduct of its business,"1 and
here it is undisputed that the establishment of the local post office is a
reasonable and proper adjunct to the conduct of the business of
appellant company. Indeed, such post office is a vital improvement in
the living condition of its employees and laborers who came to settle in
its mining camp which is far removed from the postal facilities or means
of communication accorded to people living in a city or municipality.
Please take note. What if an action is considered as ultra vires, what is
the status of the contract? The status is merely voidable, if it is not
against the law, customs, moral, public order and public policy. If it is the
latter, that is void. You have to determine that there is an ultra vires
56
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
which will result in a voidable contract and there is also an ultra vires act
which results in a void contract.
ULTRA VIRES ACTS – STATUS OF CONTRACT
VOIDABLE CONTRACT VOID CONTRACT
Ultra Vires Ultra Vires
Not against law, customs, moral Against law, customs, moral
public order and public policy. public order and public policy.
MAGALLANES WATERCRAFT ASSOCIATION, INC. VS. AUGUIS
GR No. 211485 May 30, 2016
FACTS: Petitioner Magallanes Watercraft Association, Inc. (MWAI) is a
local association of motorized banca owners and operators ferrying
cargoes and passengers from Magallanes, Agusan del Norte, to Butuan
City and back. Respondents Margarito C. Auguis (Auguis) and Dioscoro
C. Basnig (Basnig) were members and officers of MWAI — vice-
president and secretary, respectively.
On December 5, 2003, the Board of Trustees (Board) of MWAI passed
Resolution No. 1, Series of 2003, and thereafter issued Memorandum
No. 001 suspending the rights and privileges of Auguis and Basnig as
members of the association for thirty (30) days for their refusal to pay
their membership dues and berthing fees because of their pending oral
complaint and demand for financial audit of the association funds.
Auguis had an accumulated unpaid obligation of P4,059.00 while Basnig
had P7,552.00.
In spite of the suspension of their privileges as members, Auguis and
Basnig still failed to settle their obligations with MWAI. For said reason,
the latter issued Memorandum No. 002, Series of 2004, dated January
8, 2004, suspending their rights and privileges for another thirty (30)
days.
It is contended that MWAI committed an ultra vires act or acted beyond
the scope of its powers when it suspended the rights of Auguis and
Basnig as members of MWAI to berth on the seaport of Magallanes and
operate their bancas.
ISSUE: Whether the petitioner committed an ultra vires act.
RULING: NO.
Under Section 3 (a) and Section 3 (c) Article V of MWAI’s By-Laws, its
members are bound “[t]o obey and comply with the by-laws, rules and
regulations that may be promulgated by the association from time to
time” and “[t]o pay membership dues and other assessments of the
association.” Thus, the respondents were obligated to pay the
membership dues of which they were delinquent. MWAI could not be
faulted in suspending the rights and privileges of its delinquent
members.
The fact alone that neither the articles of incorporation nor the by-laws
of MWAI granted its Board the authority to discipline members does not
make the suspension of the rights and privileges of the
respondent’s ultra vires. In National Power Corporation v. Vera, the
Court stressed that an act might be considered within corporate powers,
even if it was not among the express powers, if the same served the
corporate ends, to wit:
For if that act is one which is lawful in itself and not otherwise prohibited,
and is done for the purpose of serving corporate ends, and reasonably
contributes to the promotion of those ends in a substantial and not in a
remote and fanciful sense, it may be fairly considered within the
corporation’s charter powers.
This Court is guided by jurisprudence in the application of the above
standard. In the 1963 case of Republic of the Philippines v. Acoje Mining
Company, Inc. the Court affirmed the rule that a corporation is not
restricted to the exercise of powers expressly conferred upon it by its
charter, but has the power to do what is reasonably necessary or proper
to promote the interest or welfare of the corporation.
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In University of Mindanao vs. BSP, the Court wrote that corporations
were not limited to the express powers enumerated in their charters, but
might also perform powers necessary or incidental thereto, to wit:
A corporation may exercise its powers only within those definitions.
Corporate acts that are outside those express definitions under the law
or articles of incorporation or those “committed outside the object for
which a corporation is created” are ultra vires.
The only exception to this rule is when acts are necessary and incidental
to carry out a corporation’s purposes, and to the exercise of powers
conferred by the Corporation Code and under a corporation’s articles of
incorporation. . . .
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc. stated the test to
determine if a corporate act is in accordance with its purposes:
It is a question, therefore, in each case, of the logical relation of the act
to the corporate purpose expressed in the charter. If that act is one which
is lawful in itself, and not otherwise prohibited, is done for the purpose
of serving corporate ends, and is reasonably tributary to the promotion
of those ends, in a substantial, and not in a remote and fanciful, sense,
it may fairly be considered within charter powers. The test to be applied
is whether the act in question is in direct and immediate furtherance of
the corporation’s business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the
power to do it; otherwise, not.
Based on the foregoing, MWAI can properly impose sanctions on Auguis
and Basnig for being delinquent members considering that the payment
of membership dues enables MWAI to discharge its duties and functions
enumerated under its charter. Moreover, respondents were obligated by
the by-laws of the association to pay said dues. The suspension of their
rights and privileges is not an ultra vires act as it is reasonably
necessary or proper in order to further the interest and welfare of MWAI.
Also, the imposition of the temporary ban on the use of MWAI’s berthing
facilities until Auguis and Basnig have paid their outstanding obligations
was a reasonable measure that the former could undertake to ensure
the prompt payment of its membership dues. Otherwise, MWAI will be
rendered inutile as it will have no means of ensuring that its members
will promptly settle their obligations. It will be exposed to deleterious
consequences as it will be unable to continue with its operations if the
members continue to be delinquent in the payment of their obligations,
without fear of possible sanctions.
Again, how do you know if the act is within the powers of the
corporation? You look at the Articles of Incorporation related to the
purpose. Another thing is you look at the Revised Corporation Code,
kasi may mga express powers. The fact that you are registered as a
Corporation, you have those powers. There’s no need to reiterate that
in the AOI.
The AOI contains the powers agreed upon by the incorporators as within
the powers of the corporation.
The third one, reasonably necessary and incidental to its existence. How
do you notice that? You look at the AOI. It should be in furtherance of
the business. That is why your primary purpose should not be narrow
enough that it will avoid actions that is necessary for the business. It
should not also be broad enough na hindi mo alam ano ba talagang
gusto mong gawin.
The technique for drafting an AOI is that you must be specific as to the
business and you must be broad as to the powers that the corporation
can exercise. Otherwise, those acts will be considered as ultra vires.
This is the problem with the current SEC online. Because under such,
you can only provide one primary business, you can only put it in
phrases. So it is very very dangerous. So I don’t recommend using their
format of AOI. Rather, you make your own AOI to avoid the problem of
having an action which will be considered as ultra vires.
MEETINGS
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
2 TYPES OF MEETINGS:
1. Board of Directors’ Meeting
2. Stockholders’ Meeting
BOARD OF DIRECTORS’ STOCKHOLDERS’ MEETING
MEETING
Day to day businesses In relation to powers, there are
approvals by the stockholders
which must be secured. In order
to do that, you must conduct a
meeting.
SEC. 48. Kinds of Meetings. – Meetings of directors, trustees,
stockholders, or members may be regular or special.
2 TYPES OF BOD & STOCKHOLDERS’ MEETING:
1. Regular Meeting –pre-determined; regardless of whether there is
an agenda or none.
2. Special Meeting – in cases of emergencies, transactions that they
have to tackle.
SEC. 49. Regular and Special Meetings of Stockholders or
Members. – Regular meetings of stockholders or members shall be held
annually on a date fixed in the bylaws, or if not so fixed, on any date
after April 15 of every year as determined by the board of directors or
trustees: Provided, That written notice of regular meetings shall be sent
to all stockholders or members of record at least twenty-one (21) days
prior to the meeting, unless a different period is required in the bylaws,
law, or regulation: Provided, further, That written notice of regular
meetings may be sent to all stockholders or members of record through
electronic mail or such other manner as the Commission shall allow
under its guidelines.
At each regular meeting of stockholders or members, the board of
directors or trustees shall endeavor to present to stockholders or
members the following:
a) The minutes of the most recent regular meeting which shall include,
among others:
(1) A description of the voting and vote tabulation procedures used in
the previous meeting;
(2) A description of the opportunity given to stockholders or members
to ask questions and a record of the questions asked and answers
given;
(3) The matters discussed and resolutions reached;
(4) A record of the voting results for each agenda item;
(5) A list of the directors or trustees, officers and stockholders or
members who attended the meeting; and
(6) Such other items that the Commission may require in the interest
of good corporate governance and the protection of minority
stockholders.
b) A members’ list for nonstock corporations and, for stock corporations,
material information on the current stockholders, and their voting rights;
c) A detailed, descriptive, balanced and comprehensible assessment of
the corporation’s performance, which shall include information on any
material change in the corporation’s business, strategy, and other
affairs;
d) A financial report for the preceding year, which shall include financial
statements duly signed and certified in accordance with this Code and
the rules the Commission may prescribe, a statement on the adequacy
of the corporation’s internal controls or risk management systems, and
a statement of all external audit and non-audit fees;
e) An explanation of the dividend policy and the fact of payment of
dividends or the reasons for nonpayment thereof;
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f) Director or trustee profiles which shall include, among others, their
qualifications and relevant experience, length of service in the
corporation, trainings and continuing education attended, and their
board representations in other corporations;
g) A director or trustee attendance report, indicating the attendance of
each director or trustee at each of the meetings of the board and its
committees and in regular or special stockholder meetings;
h) Appraisals and performance reports for the board and the criteria and
procedure for assessment;
i) A director or trustee compensation report prepared in accordance with
this Code and the rules the Commission may prescribe;
j) Director disclosures on self-dealings and related party transactions;
and/or
k) The profiles of directors nominated or seeking election or reelection.
A director, trustee, stockholder, or member may propose any other
matter for inclusion in the agenda at any regular meeting of stockholders
or members.
Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the bylaws: Provided, however,
That at least one (1) week written notice shall be sent to all stockholders
or members, unless a different period is provided in the bylaws, law or
regulation.
A stockholder or member may propose the holding of a special meeting
and items to be included in the agenda.
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member: Provided, That general waivers of notice in the
articles of incorporation or the bylaws shall not be allowed: Provided,
further, That attendance at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the
express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened.
Whenever for any cause, there is no person authorized or the person
authorized unjustly refuses to call a meeting, the Commission, upon
petition of a stockholder or member on a showing of good cause
therefor, may issue an order directing the petitioning stockholder or
member to call a meeting of the corporation by giving proper notice
required by this Code or the bylaws. The petitioning stockholder or
member shall preside thereat until at least a majority of the stockholders
or members present have chosen from among themselves, a presiding
officer.
Unless the bylaws provide for a longer period, the stock and transfer
book or membership book shall be closed at least twenty (20) days for
regular meetings and seven (7) days for special meetings before the
scheduled date of the meeting.
In case of postponement of stockholders’ or members’ regular meetings,
written notice thereof and the reason therefor shall be sent to all
stockholders or members of record at least two (2) weeks prior to the
date of the meeting, unless a different period is required under the
bylaws, law or regulation.
The right to vote of stockholders or members may be exercised in
person, through a proxy, or when so authorized in the bylaws, through
remote communication or in absentia. The Commission shall issue the
rules and regulations governing participation and voting through remote
communication or in absentia, taking into account the company’s scale,
number of shareholders or members, structure, and other factors
consistent with the protection and promotion of shareholders’ or
member’s meetings.
Regular meetings of stockholders or members shall be held
annually on a date fixed in the bylaws, or if not so fixed, on any
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
date after April 15 of every year as determined by the board of
directors or trustees:
If you submit your by-laws, you are actually required to put there the
date of the meeting. It could be a specific date, April 15 of every year or
the 1st Monday of June or 1st Wednesday of July. Whatever you put there
will be your annual meeting.
Kung wala kang nilagay, it should be on any date after April 15 of every
year. What is the purpose of that? Because the tax findings are on April
15. One of the agenda that you have to discuss during the meeting is
the financial performance of the company in the preceding calendar or
fiscal year and the appointment of the auditors. The appointment of the
auditors require the approval of the stockholders. That is why it should
be taken up after the filing of the financial report.
Provided, That written notice of regular meetings shall be sent to
all stockholders or members of record at least twenty-one (21) days
prior to the meeting, unless a different period is required in the
bylaws, law, or regulation:
So may notice requirement. Before it was not 21 days.
Provided, further, That written notice of regular meetings may be
sent to all stockholders or members of record through electronic
mail or such other manner as the Commission shall allow under its
guidelines.
This is the revised provision – through electronic mail or such other
manners.
Before, it has to be through registered mail. But now they actually allow
electronic mail. Kasi, who checks naman their actual mail boxes, you
are more inclined to check your email.
d) A financial report for the preceding year, which shall include
financial statements duly signed and certified in accordance with
this Code and the rules the Commission may prescribe, a
statement on the adequacy of the corporation’s internal controls or
risk management systems, and a statement of all external audit and
non-audit fees;
Ito yung sinasabi ko na financial report for the preceding year kaya po
siya April 15 because at such time, chances are audited na yung
balances, meaning already checked and verified by the independent
auditor.
Special meetings of stockholders or members shall be held at any
time deemed necessary or as provided in the bylaws: Provided,
however, That at least one (1) week written notice shall be sent to
all stockholders or members, unless a different period is provided
in the bylaws, law or regulation.
Again, if you talk about special meeting, different siya from the regular.
There is only a special issue to be tackled.
A stockholder or member may propose the holding of a special
meeting and items to be included in the agenda.
Under the RCC, a stockholder is given the opportunity to call for a
meeting or to propose for a meeting and agenda for that meeting.
Notice of any meeting may be waived, expressly or impliedly, by
any stockholder or member: Provided, That general waivers of
notice in the articles of incorporation or the bylaws shall not be
allowed: Provided, further, That attendance at a meeting shall
constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting is not lawfully
called or convened.
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Gaano, ka important ang notice of meeting? It is very important.
Because if there are irregularities in a meeting, whatever resolution that
has been passed there, you can have them avoided.
If you are the corporate secretary, you really have to follow what is in the
by-laws. Otherwise, they can question that – the manner, the
irregularities. Once they found out that there are indeed irregularities, all
of what has been resolved during the meeting may be avoided.
Whenever for any cause, there is no person authorized or the
person authorized unjustly refuses to call a meeting, the
Commission, upon petition of a stockholder or member on a
showing of good cause therefor, may issue an order directing the
petitioning stockholder or member to call a meeting of the
corporation by giving proper notice required by this Code or the
bylaws. The petitioning stockholder or member shall preside
thereat until at least a majority of the stockholders or members
present have chosen from among themselves, a presiding officer.
Because, nagkakaroon ng problema. What if the presiding officer hindi
mag call ng meeting kasi ayaw niya madiscuss ang issue? So what is
the recourse of those shareholders who wants to resolve the issue? Ito
na yun - The Commission, upon petition of a stockholder or member on
a showing of good cause therefor, may issue an order directing the
petitioning stockholder or member to call a meeting of the corporation
by giving proper notice required by this Code or the bylaws.
So a shareholder can file a petition before the Commission for the
conduct of a meeting. And the Commission gives authority to the one
who petitioned.
The right to vote of stockholders or members may be exercised in
person, through a proxy, or when so authorized in the bylaws,
through remote communication or in absentia. The Commission
shall issue the rules and regulations governing participation and
voting through remote communication or in absentia, taking into
account the company’s scale, number of shareholders or
members, structure, and other factors consistent with the
protection and promotion of shareholders’ or member’s meetings.
This is also a revision. Before you can only vote in person or in proxy
pag shareholders’ meeting. Now, meron ng remote communication or in
absentia. But this is subject to the guidelines imposed by the SEC. As
of the date, there is still no guidelines issued on how do you vote in
absentia or remote communication. Through text lang ba or send to
2366. Ganun?
Until there is a guideline from the SEC, this is still not in effect.
SEC. 50. Place and Time of Meetings of Stockholders or Members.
– Stockholders’ or members’ meetings, whether regular or special, shall
be held in the principal office of the corporation as set forth in the articles
of incorporation, or, if not practicable, in the city or municipality where
the principal office of the corporation is located: Provided, That any city
or municipality in Metro Manila, Metro Cebu, Metro Davao, and other
Metropolitan areas shall, for purposes of this section, be considered a
city or municipality.
Notice of meetings shall be sent through the means of communication
provided in the bylaws, which notice shall state the time, place and
purpose of the meetings.
Each notice of meeting shall further be accompanied by the following:
a) The agenda for the meeting;
b) A proxy form which shall be submitted to the corporate secretary
within a reasonable time prior to the meeting;
c) When attendance, participation, and voting are allowed by remote
communication or in absentia, the requirements and procedures to
be followed when a stockholder or member elects either option;
and
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
d) When the meeting is for the election of directors or trustees, the
requirements and procedure for nomination and election.
All proceedings and any business transacted at a meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting is improperly held or
called: Provided, That all the stockholders or members of the corporation
are present or duly represented at the meeting and not one of them
expressly states at the beginning of the meeting that the purpose of their
attendance is to object to the transaction of any business because the
meeting is not lawfully called or convened.
Stockholders’ or members’ meetings, whether regular or special,
shall be held in the principal office of the corporation as set forth
in the articles of incorporation, or, if not practicable, in the city or
municipality where the principal office of the corporation is
located: Provided, That any city or municipality in Metro Manila,
Metro Cebu, Metro Davao, and other Metropolitan areas shall, for
purposes of this section, be considered a city or municipality.
This is very important because pag stockholders’ meeting, diyan nagma-
matter yung principal place of business. Kasi dun dapat yung meeting.
If the principal place of business is in Davao, nag hold ng meeting sa
Gensan, that can be questioned. That is an irregularity.
This is very different if it is a BODs’ meeting. Kasi iba yung qualifications.
SEC. 51. Quorum in Meetings. – Unless otherwise provided in this
Code or in the bylaws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a majority of
the members in the case of nonstock corporations.
SEC. 52. Regular and Special Meetings of Directors or Trustees;
Quorum. – Unless the articles of incorporation or the bylaws provides
for a greater majority, a majority of the directors or trustees as stated in
the articles of incorporation shall constitute a quorum to transact
corporate business, and every decision reached by at least a majority of
the directors or trustees constituting a quorum, except for the election of
officers which shall require the vote of a majority of all the members of
the board, shall be valid as a corporate act.
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the bylaws provide otherwise.
Special meetings of the board of directors or trustees may be held at
any time upon the call of the president or as provided in the bylaws.
Meetings of directors or trustees of corporations may be held anywhere
in or outside of the Philippines, unless the bylaws provide otherwise.
Notice of regular or special meetings stating the date, time and place of
the meeting must be sent to every director or trustee at least two (2)
days prior to the scheduled meeting, unless a longer time is provided in
the bylaws. A director or trustee may waive this requirement, either
expressly or impliedly.
Directors or trustees who cannot physically attend or vote at board
meetings can participate and vote through remote communication such
as videoconferencing, teleconferencing, or other alternative modes of
communication that allow them reasonable opportunities to participate.
Directors or trustees cannot attend or vote by proxy at board meetings.
A director or trustee who has a potential interest in any related party
transaction must recuse from voting on the approval of the related party
transaction without prejudice to compliance with the requirements of
Section 31 of this Code.
Unless the articles of incorporation or the bylaws provides for a
greater majority, a majority of the directors or trustees as stated in
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the articles of incorporation shall constitute a quorum to transact
corporate business, and every decision reached by at least a
majority of the directors or trustees constituting a quorum, except
for the election of officers which shall require the vote of a majority
of all the members of the board, shall be valid as a corporate act.
Ang majority na sinasabi ng batas is only the minimum. Pwede mo yan
taasan. Can you have a majority of 2/3? Pwede. Because that is more
than the majority which is ½.
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the bylaws provide
otherwise.
Bakit monthly ang sa BOD and annually ang stockholders? Kasi yung
BOD, sila nag ma-manage ng day-to-day operations. They have to meet
frequently.
Notice of regular or special meetings stating the date, time and
place of the meeting must be sent to every director or trustee at
least two (2) days prior to the scheduled meeting, unless a longer
time is provided in the bylaws. A director or trustee may waive this
requirement, either expressly or impliedly.
At least 2 days lang.
Directors or trustees who cannot physically attend or vote at board
meetings can participate and vote through remote communication
such as videoconferencing, teleconferencing, or other alternative
modes of communication that allow them reasonable opportunities
to participate. Directors or trustees cannot attend or vote by proxy
at board meetings.
This is very important. Sa stockholders, walang tele or video-
conferencing. Imagine mo kung meron. 1000 videos sabay-sabay. It is
only for BOD.
Directors or trustees cannot attend or vote by proxy at board meetings.
Why? Because you are put in that position, the stockholders are
confident in your qualification. If mag proxy ka lang naman, ibigay mo
nalang sa ibang tao ang vote mo.
It is only the directors who can vote by video or tele-conferencing.
A director or trustee who has a potential interest in any related
party transaction must recuse from voting on the approval of the
related party transaction without prejudice to compliance with the
requirements of Section 31 of this Code.
Remember those contracts with the directors – interlocking and self-
dealing contracts. Fair and reasonable, merong fraud, etc.
SEC. 53. Who Shall Preside at Meetings. – The chairman or, in his
absence, the president shall preside at all meetings of the directors or
trustees as well as of the stockholders or members, unless the bylaws
provide otherwise.
February 7, 2020 by Cavin Jhon Cabarlo
Section 56. Voting Right for Treasury Shares. – Treasury shares shall
have no voting right as long as such shares remain in the Treasury.
This is because treasury shares are owned by the company.
Section 57. Manner of Voting; Proxies. – Stockholders and members
may vote in person or by proxy in all meetings of stockholders or
members.
When so authorized in the bylaws or by a majority of the board of
directors, the stockholders or members of corporations may also vote
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
through remote communication or in absentia: Provided, That the votes
are received before the corporation finishes the tally of votes.
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for purposes of
quorum.
The corporation shall establish the appropriate requirements and
procedures for voting through remote communication and in absentia,
taking into account the company’s scale, number of shareholders or
members, structure and other factors consistent with the basic right of
corporate suffrage.
Proxies shall be in writing, signed and filed, by the stockholder or
member, in any form authorized in the bylaws and received by the
corporate secretary within a reasonable time before the scheduled
meeting. Unless otherwise provided in the proxy form, it shall be valid
only for the meeting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at any one time.
Please take note of the form of proxies as stated in the last paragraph
of the provision.
Proxy is an agent legally authorized to act in behalf of another. This is
usually employed by shareholders not attending the shareholder’s
meeting in allowing someone (proxy) to cast votes on their behalf.
The proxy form must be received by the corporate secretary. He has to
evaluate the proxy form in accordance with the rules on proxy
appreciation. If the corporate secretary finds that the proxy is invalid, the
votes cast will not be counted. Take note that the proxy is valid only at
a particular meeting and the authority is not recurring as opposed to
voting trusts.
Section 58. Voting Trusts. – One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon
a trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any time: Provided,
That in the case of a voting trust specifically required as a condition in a
loan agreement, said voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Commission;
otherwise, the agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting trust agreement
shall be cancelled and new ones shall be issued in the name of the
trustee or trustees, stating that they are issued pursuant to said
agreement. The books of the corporation shall state that the transfer in
the name of the trustee or trustees is made pursuant to the voting trust
agreement.
The trustee or trustees shall execute and deliver to the transferors,
voting trust certificates, which shall be transferable in the same manner
and with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner
as any other corporate book or record: Provided, That both the trustor
and the trustee or trustees may exercise the right of inspection of all
corporate books and records in accordance with the provisions of this
Code.
Any other stockholder may transfer the shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of said
agreement.
No voting trust agreement shall be entered into for purposes of
circumventing the laws against anti-competitive agreements, abuse of
dominant position, anti-competitive mergers and acquisitions, violation
of nationality and capital requirements, or for the perpetuation of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement
shall automatically expire at the end of the agreed period. The voting
trust certificates as well as the certificates of stock in the name of the
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trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the trustors.
The voting trustee or trustees may vote by proxy or in any manner
authorized under the bylaws unless the agreement provides otherwise.
Voting trust is a classic tool for avoiding foreign equity restrictions but
the Anti-Dummy Law has been very consistent in saying that the foreign
equity restrictions apply to voting trust agreements. What happens is
that a certain Filipino stockholder owns the legal title of the stocks. Such
stockholder will execute a voting trust agreement conveying all the rights
under the shares to a foreigner. Effectively, this is a violation of the
foreign equity restriction because the Filipino stockholder owns the
shares in paper but it is the foreigner who exercises the rights under
such shares. Take note that the voting trust agreement does not only
transfer the right to vote but also all other rights pertaining to such shares
for a period not exceeding 5 years at any time but may be extended.
For purposes of the bar, foreign equity restrictions apply to voting trust
agreements.
“That in the case of a voting trust specifically required as a
condition in a loan agreement, said voting trust may be for a period
exceeding five (5) years but shall automatically expire upon full
payment of the loan”
This is a negative covenant of a bank. In this scenario, the bank extends
loan to a corporation in exchange for the execution of a voting trust
agreement. For example, a corporation loans money for purposes of
expansion. However, when it receives the loan proceeds, the
corporation may subsequently decide to stop the expansion. Thus, this
covenant serves as an assurance that the corporation will use the loan
proceeds as intended. A representative from the bank will have the right
to vote by virtue of the voting trust agreement in any corporate decision
and make sure that the loan proceeds will be used as intended.
“A voting trust agreement must be in writing and notarized, and
shall specify the terms and conditions thereof. A certified copy of
such agreement shall be filed with the corporation and with the
Commission; otherwise, the agreement is ineffective and
unenforceable.”
Please take note of the defect of the contract once form is not followed.
The contract becomes ineffective and unenforceable.
“The voting trustee or trustees may vote by proxy or in any manner
authorized under the bylaws unless the agreement provides
otherwise.”
This provision provides that the trustee can still vote by proxy. In
summary, a voting trust agreement can execute a proxy but a proxy
cannot execute a voting trust agreement.
SEC Memorandum No. 15-2001
In relation to Section 16 of the Electronic Commerce Act (R.A. 8792) and
Section 25 of the Corporation Code of the Philippines (BP68) the
following are the guidelines for the conduct of teleconferencing and
videoconferencing (i.e. conferences or meetings through electronic
medium or telecommunications where the participants who are not
physically present are located at different local or international places)
of the Board of Directors for the information and guidance of all
concerned:
1. The Secretary of the meeting shall assume the following
responsibilities:
a. to safeguard the integrity of the meeting via
tele/videoconferencing
b. to find good tele/videoconference equipment/facilities
c. to record the proceedings and prepare the minutes of the meeting
d. to store for safekeeping and mark the tape recording/s and/or
other electronic recording mechanism as part of the records of the
corporation
2. The Secretary shall send out the notices of the meeting to all directors
in accordance with the manner of giving notice as stated in the corporate
by-laws.
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
3. The notice shall include the following:
a. Inquiry on whether the director will attend physically or through
tele/videoconferencing;
b. Contact number/s of the Secretary and office staff whom the
director may call to notify and state whether he shall be physically
present or attend through tele/videoconferencing;
c. Agenda of the meeting;
d. All documents to be discussed in the meeting, including
attachments, shall be numbered and duly marked by the Secretary in
such a way that all the directors, physically or electronically present, can
easily follow, refer to the documents and participate in the meeting.
4. If the director chooses tele/videoconferencing, he shall give notice of
at least five days prior to the scheduled meeting to the Secretary. The
latter shall be informed of his contact number/s. In the same way, the
Secretary shall inform the director concerned of the contact number/s
he will call to join the meeting. The Secretary shall keep the records of
the details, and on the date of the scheduled meeting, confirm and note
such details as part of the minutes of the meeting.
5. In the absence of an arrangement, it is presumed that the director will
physically attend the Board meeting.
6. At the start of the scheduled meeting, a roll call shall be made by the
Secretary. Every director and participant shall state, for the record, the
following:
a. Full Name
b. Location
c. For those attending through tele/videoconferencing, he shall
confirm that:
i. he can completely and clearly hear the others who can clearly
hear him at the end of the line
ii. state whether he has received the agenda and all the
materials for the meeting
iii. specify type of device used
Thereafter, the Secretary shall confirm and note the contact numbers
being used by the directors and participants not physically present. After
the roll call, the Secretary may certify the existence of a quorum.
7. All participants shall identify themselves for the record, before
speaking and must clearly hear and/or see each other in the course of
the meeting. If a person fails to identify himself, the Secretary shall
quickly state the identity of the last speaker. If the person speaking is
not physically present and the Secretary is not certain of the identity of
the speaker, the Secretary must inquire to elicit a confirmation or
correction.
If a motion is objected to and there is a need to vote and divide the
Board, the Secretary should call the roll and note the vote of each
director who should identify himself.
If a statement of a director/participant in the meeting via
tele/videoconferencing is interrupted or garbled, the Secretary shall
request for a repeat or reiteration, and if need be, the Secretary shall
repeat what he heard the director/participant was saying for confirmation
or correction.
8. The Secretary shall require all the directors who attended the meeting,
whether personally or through tele/videoconferencing, to sign the
minutes of the meeting to dispel all doubts on matters taken up during
the meeting.
Take note that the Revised Corporation Code now allows meetings
through teleconferencing and videoconferencing. Please read the SEC
Memorandum 15-2001. This ensures the integrity of the meeting and
avoid any possibility of wiretapping.
PEOPLE V. DUMLAO
G.R. No. 168918, March 2, 2009
Facts: Dumlao was charged, being one of the members of the GSIS
Board of Trustees who allegedly approved the lease-purchase of the
GSIS properties together with a five-storey building, in favor of
respondent La’o, which lease-purchase agreement was deemed by the
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Office of the Ombudsman to be grossly disadvantageous to the
government.
In his defense, Dumlao averred that the alleged approved Board
Resolution was not approved by the GSIS Board of Trustees, contrary
to the allegation in the information. Since the signatures of four out of
the seven members of the board did not appear in the minutes of the
meeting held on 23 April 1982, there was no quorum present or no
majority that approved the supposed resolution. This being the case, he
asserts that there was no resolution adopted by the GSIS Board of
Trustees approving the sale of the subject properties to respondent La’o.
Issue: Whether or not there was an approved resolution sufficient to
impute the offense charged to Dumlao. – YES.
Held: The non-signing by the majority of the members of the GSIS
Board of Trustees of the minutes of the meeting does not necessarily
mean that the supposed resolution was not approved by the board. The
signing of the minutes by all the members of the board is not required.
There is no provision in the Corporation Code of the Philippines that
requires that the minutes of the meeting should be signed by all the
members of the board.
The proper custodian of the books, minutes and official records of a
corporation is usually the corporate secretary. Being the custodian of
corporate records, the corporate secretary has the duty to record and
prepare the minutes of the meeting. The signature of the corporate
secretary gives the minutes of the meeting probative value and
credibility.
In this case, Antonio Eduardo B. Nachura, Deputy Corporate Secretary,
recorded, prepared and certified the correctness of the minutes of the
meeting of 23 April 1982; and the same was confirmed by Leonilo M.
Ocampo, Chairman of the GSIS Board of Trustees. Said minutes
contained the statement that the board approved the sale of the
properties, subject matter of this case, to respondent La’o.
The services of a corporate secretary is essentially called corporate
housekeeping. One of the best practices of corporate housekeeping is
assigning serial numbers to the minutes of the meeting (e.g 2019-01).
LOPEZ REALTY V. SPOUSES TANJANGCO
G.R. No. 154291, November 12, 2014
Facts: Lopez Realty, Inc. (LRI) and Dr. Jose Tanjangco were the
registered owners of three parcels of land and the building thereon. In a
special meeting of LRI, the sale of one-half share of LRI in the property
was discussed. The Tanjangcos offered to purchase the undivided
share of LRI in the property for P3.6 Million. The Board eventually gave
Asuncion Lopez the priority to purchase the property which right should
be exercised within 10 days. However, Asuncion failed to exercise the
option to purchase within the specified period. Thus, on August 17,
1981, while Asuncion was abroad, the remaining directors, in a special
meeting, passed and approved a resolution authorizing Arturo Lopez to
immediately negotiate with the Tanjangcos for the sale of the one-half
undivided share of LRI.
On the strength of the board resolution. Arturo Lopez executed a Deed
of Sale on August 25, 1981 selling LRI’s one-half interest in the
properties to the Tanjangcos.
Upon learning the above developments, Asuncion requested the
Tanjangcos to not proceed with the sale. Consequently, the Board of
LRI passed a resolution deciding to postpone the sale of the LRI’s
interest. Upon her arrival, Asuncion moved for the repeal of the
resolution passed on August 17, 1981 authorizing Arturo to proceed with
the sale. Despite these series of objections, Arturo was able to execute
a Deed of Sale in favor of spouses Tanjangco.
LRI and Asuncion filed a case for the annulment of sale against the
Tanjangcos alleging that the authority conferred to Arturo has been
revoked by a subsequent resolution by the BOD to postpone the sale.
Later, the stockholders of LRI has a meeting where they voted to ratify
and confirm the sale of the subject properties to the spouses Tanjancgo.
Asuncion refused to prepare the minutes of the meeting on said
shareholder’s meeting. During the trial with the RTC, Asuncion
62
 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
attempted to establish that the sale had not been validly ratified during
the shareholder’s meeting for failure to meet the required number of
votes.
Issue #1: Whether or not the meeting held on August 17, 1981
authorizing Arturo to negotiate the sale was valid. – NO.
Held: Section 53 of the Corporation Code provides that meetings of
directors or trustees of corporations may be held anywhere in or outside
of the Philippines, unless the by-laws provides otherwise. Notice of the
regular or special meetings stating the date, time and place of the
meeting must be sent to every director or trustee, at least, one (1) day
prior to the scheduled meeting, unless otherwise provided by the by-
laws. A director or trustee may waive this requirement, either expressly
or impliedly.
A meeting of the board of directors is legally infirm if there is failure to
comply with the requirements or formalities of the law or the
corporation’s by laws and any action taken on such meeting may be
challenged as a consequence
Asuncion alleged that no notice was sent to her prior to the 17 August
1981 meeting. The Court is inclined to give credit to this allegation
considering that defendants never contested the same. Hence, the said
meeting was illegal and the resolution adopted during the meeting would
not produce the effect of binding the corporation, Lopez Realty.
Issue #2: Whether or not there was ratification of the sale. – YES.
The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any, prescribed by
its charter or by the general law. Thus, directors must act as a body in a
meeting called pursuant to the law or the corporation’s by-laws,
otherwise, any action taken therein may be questioned by any objecting
director or shareholder. However, the actions taken in such a meeting
by the directors or trustees may be ratified expressly or impliedly.
"Ratification means that the principal voluntarily adopts, confirms and
gives sanction to some unauthorized act of its agent on its behalf. It is
this voluntary choice, knowingly made, which amounts to a ratification
of what was theretofore unauthorized and becomes the authorized act
of the party so making the ratification. The substance of the doctrine is
confirmation after conduct, amounting to a substitute for a prior authority.
Ratification can be made either expressly or impliedly. Implied
ratification may take various forms — like silence or acquiescence, acts
showing approval or adoption of the act, or acceptance and retention of
benefits flowing therefrom."
In the present case, the ratification was expressed through the July 30,
1982 Board Resolution. Asuncion claims that the July 30, 1982 Board
Resolution did not ratify the Board Resolution dated August 17, 1981 for
lack of the required number of votes because Juanito is not entitled to
vote while Leo voted "no" to the ratification of the sale even if the minutes
stated otherwise. Asuncion assails the authority of Juanito to vote
because he was not a director and he did not own any share of stock
which would qualify him to be one. On the contrary, Juanito defends his
right to vote as the representative of Teresita’s estate. Upon examination
of the July 30, 1982 minutes of the meeting, it can be deduced that the
meeting is a joint stockholders and directors’ meeting. The Court takes
into account that majority of the board of directors except for Asuncion,
had already approved of the sale to the spouses Tanjangco prior to this
meeting. As a consequence, the power to ratify the previous resolutions
and actions of the board of directors in this case lies in the stockholders,
not in the board of directors. It would be absurd to require the board of
directors to ratify their own acts—acts which the same directors already
approved of beforehand. Hence, Juanito, as the administrator of
Teresita’s estate even though not a director, is entitled to vote on behalf
of Teresita’s estate as the administrator thereof.
In stock corporations, shareholders may generally transfer their shares.
Thus, on the death of a shareholder, the executor or administrator duly
appointed by the Court is vested with the legal title to the stock and
entitled to vote it. Until a settlement and division of the estate is effected,
the stocks of the decedent are held by the administrator or executor.
In Dumlao, the Court ruled that the signing of the minutes by all the
directors is not a requisite and that the lack of signatures on the minutes
does not mean that the resolution was not passed by the board.
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However, there is a notable disparity between the facts in Dumlao and
the instant case. In Dumlao, the corporate secretary therein recorded,
prepared and certified the correctness of the minutes of the meeting
despite the fact that not all directors signed the minutes.
In the absence of Asuncion’s certification, only Juanito, Benjamin and
Rosendo, owning 67% of the shares and whose signatures appeared on
the minutes, could be considered as to have ratified the sale to the
spouses Tanjangco. Whatever defect there was on the sale to the
spouses Tanjangco pursuant to the August 17, 1981 Board Resolution,
the same was cured through its ratification in the July 30, 1982 Board
Resolution. It is of no moment whether Arturo was authorized to merely
negotiate or to enter into a contract of sale on behalf of LRI as all his
actions in connection to the sale were expressly ratified by the
stockholders holding 67% of the outstanding capital stock.
LAO V. YAO BAO LIM
G.R. No. 201306, August 9, 2017
Facts: This case involves a dispute between two groups of shareholders
– the group of Lao and the group of King.
On March 15, 2002, a general shareholder’s meeting was held wherein
Lao and his colleagues were elected as members of the BOD. This
prompted Yao Bio Lim and King to file a petition for the annulment of the
said election and all corporate acts of Lao and his colleagues as the
alleged newly elected directors and officers.
Yao Bio Lim and King averred that they received a notice of meeting on
March 4, 2002 informing them of the general shareholder’s meeting.
However, said notice did not state the agenda or the purpose of the
meeting. Also, said notice did not comply with the requirement under the
Corporation Code that notices should be sent at least 2 weeks prior to
the meeting.
On the other hand, Lao claimed that the stockholders' meeting and the
elections were conducted in accordance with the PSI's by-laws which
provide that the notice should be sent at least 5 days before the meeting.
Issue: Whether or not the general shareholder’s meeting as well as the
election is invalid? – NO.
Held: Section 50 of the Corporation Code prescribes that “regular
meetings of stockholders shall be held annually on a date fixed in the
by-laws. Artivle VIII (3) of the PSI’s by-laws fixed the annual meeting of
stockholders on the third Friday of March every year. The SC took
judicial notice that March 15, 2002 was the third Friday of March 2002
which characterizes the meeting as the general shareholder’s meeting,
The agenda for the meeting, which includes the elections of the new
board of directors and ratification of acts of the incumbent board of
directors and management, was the standard order of business in a
regular annual meeting of stockholders of a corporation.
Regarding the time for serving notice of the meeting to all stockholders,
Section 50 of the Corporation Code provides that the written notice of
regular meetings shall be sent at least 2 weeks prior to the meeting
unless a different period is required by the by-laws.
Under the PSI’s by-laws, notice of every regular or special meeting must
be mailed or personally delivered to each stockholder not less than 5
days prior to the date set for the meeting.
In this case, the PSI’s by-laws providing only for a five (5)-day prior
notice must prevail over the two (2)-week notice under the Corporation
Code. By its terms, the Corporation Code allows the “shortening (or
lengthening) of the period within which to send the notice to call a special
(or regular meeting). Thus, the mailing of the Notice to respondents on
March 5, 2002 calling for the annual stockholders’ meeting to be held on
March 15, 2002 is not irregular, since it complies with what was stated
in the PSI’s by-laws.
If the by-laws provide for a specific period within which notice shall be
sent for the stockholders’ meeting, it is the by-laws which will prevail.
The Revised Corporation Code merely states the standard in the
absence of a provision in the by-laws. The Corporation is free to stipulate
any provision in the by-laws regarding notices.
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 Atty. Raymund Christian S. Ong Abrantes BUSINESS ORGANIZATION II Ateneo de Davao University College of Law
LIM V. MOLDEX LAND, INC.
G.R. No. 206038, January 25, 2017
Facts: Condocor held its annual general membership meeting. Its
corporate secretary certified, and Jaminola, as Chairman, declared the
existence of a quorum even though only 29 of the 108 unit buyers were
present. The declaration of quorum was based on the presence of the
majority of the voting rights, including those pertaining to the 220 unsold
units held by Moldex through its representatives. Lim, through her
attorney-in-fact, objected to the validity of the meeting. The objection
was denied. Thus, Lim and all the other unit owners present, except for
one, walked out and left the meeting. Despite the walkout, the election
of new BOD proceeded.
Consequently, Lim filed an election protest before the RTC. Said court,
however, dismissed the complaint holding that there was a quorum.
Issue: Whether or not there was a quorum which validated the general
membership meeting? -
Held: In corporate parlance, the term "meeting" applies to every duly
convened assembly either of stockholders, members, directors,
trustees, or managers for any legal purpose, or the transaction of
business of a common interest. Under Philippine corporate laws,
meetings may either be regular or special. A stockholders' or members'
meeting must comply with the following requisites to be valid:
in good standing will suffice in order to consider a meeting valid as
regards the presence of quorum. The 31 members will naturally have to
exercise their voting rights. It is in this instance when the number of
voting rights each member is entitled to becomes significant. If 29 out of
the 31 members are entitled to 1 vote each, another member (known as
A) is entitled to 20 votes and the remaining member (known as B) is
entitled to 15 votes, then the total number of voting rights of all 31
members is 64. Thus, majority of the 64 total voting rights, which is 33
(50% plus 1), is necessary to pass a valid act. Assuming that only A and
B concurred in approving a specific undertaking, then their 35 combined
votes are more than sufficient to authorize such act.
The By-Laws of Condocor has no rule different from that provided in the
Corporation Code with respect the determination of the existence of a
quorum. The quorum during the July 21, 2012 meeting should have
been majority of Condocor's members in good standing. Accordingly,
there was no quorum during the July 21, 2012 meeting considering that
only 29 of the 108 unit buyers were present.
As there was no quorum, any resolution passed during the July 21, 2012
annual membership meeting was null and void and, therefore, not
binding upon the corporation or its members. The meeting being null and
void, the resolution and disposition of other legal issues emanating from
the null and void July 21, 2012 membership meeting has been rendered
unnecessary.

1. The meeting must be held on the date fixed in the By-Laws

or in accordance with law;

2. Prior written notice of such meeting must be sent to all

stockholders/members of record;

3. It must be called by the proper party;

4. It must be held at the proper place; and

5. Quorum and voting requirements must be met.

Of these five (5) requirements, the existence of a quorum is crucial. Any

act or transaction made during a meeting without quorum is rendered of
no force and effect, thus, not binding on the corporation or parties
concerned.

In relation thereto, Section 52 of the Corporation Code of the Philippines

provides:

Section 52. Quorum in meetings. - Unless otherwise provided

for in this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital
stock or a majority of the members in the case of non-stock
corporations.

Thus, for stock corporations, the quorum is based on the number of

outstanding voting stocks while for non-stock corporations, only those
who are actual, living members with voting rights shall be counted in
determining the existence of a quorum.

To be clear, the basis in determining the presence of quorum in non-

stock corporations is the numerical equivalent of all members who are
entitled to vote, unless some other basis is provided by the By-Laws of
the corporation. The qualification "with voting rights" simply recognizes
the power of a non-stock corporation to limit or deny the right to vote of
any of its members. To include these members without voting rights in
the total number of members for purposes of quorum would be
superfluous for although they may attend a particular meeting, they
cannot cast their vote on any matter discussed therein.

Similarly, Section 6 of Condocor’s By-Laws provides that the attendance

of a simple majority of the members who are in good standing shall
constitute a quorum.

It must be emphasized that insofar as Condocor is concerned, quorum

is different from voting rights. Applying the law and Condocor's By-Laws,
if there are 100 members in a non-stock corporation, 60 of which are
members in good standing, then the presence of 50% plus 1 of those
members in good standing will constitute a quorum. Thus, 31 members

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