The Code implements Section 16, Article XII of the Philippine Constitution which
I. INTRODUCTION
A. Laws Governing Corporations Before the Corporation Code
1. Code of Commerce Articles 151 to 159 of the Spanish Code of Commerce of 1885
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956 ). The entity was then known as
"sociedades anonimas" and not as "corporations".
PROHIBITION AGAINST EXTENSION OF CORPORATE EXISTENCE BY
AMENDMENT OF THE ORIGINAL ARTICLES, APPLICABLE TO "SOCIEDADES ANONIMAS,"-
The prohibition contained in section 18 of Act No. 1459, against extending the period of corporate
existence by amendment articles, was intended to apply, and does apply to sociedades
anonimas, already formed, organized and existing, at the time of the effectivity of the Corporation
Law (Act 1459)
PROHIBITION VALID AND IMPAIRS NO VESTED RIGHT- The aforesaid statutory
prohibition is valid and impairs no vested rights or constitutional inhibition where no agreement to
extend the original period of corporate life was perfected before the enactment of the Corporation
Law.
WHEN "SOCIEDAD ANONIMAS", MAY NOT CLAIM TO REFORM INTO CORPORATION
UNDER SECTION 75 OF THE ACT.--A socieciad anonima, existing before the Corporation Law,
that continues to do business as such for a reasonable time after its enactment, is deemed to
have made its election and may not sub-sequently claim to reform into a corporation under
section 75 of Act No. 1459. Particularly should this be the case where it has asserted its
privileges as such sociedad anOnima before invoking its alleged right to reform into a corporation.
2. Corporation Law (Act No. 1459) - It had some 27 piecemeal amendments during the Act's
74 year history. It rapidly became obsolete and antiquated and not adapted to the changing
times in the business and industrial world. Benguet, supra.
Harden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).
CORPORATIONS ; MINING CORPORATION ; PROHIBITION AGAINST OWWNG
INTEREST IN OTHER MINING CORPORATION ; RIGHT OF ACTION
Inasmuch as the Corporation Law contains, in section 190 (A), provisions fully
penalizing the violation of subsection 6 of section 13 of Act no 1459 - which prohibits the
acquisition by one mining corporation of any interest in another and in as much as these
provisions have been enacted in the exercise of the general police powers of the government , it
results that, where one mining corporation acquires a prohibited interest in another such
corporation, the shareholders of the latter cannot maintain an action to annul the contract by
which such interest was acquired. The remedy must be sought in a criminal proceeding or quo
warranto action, under section 190 (A), instituted by the government. Until thus assailed in a
direct proceeding the contract by which the interest was acquired will be treated as valid, as
between the parties.
B. The Corporation Code
Philippine corporate law is now governed by the present Corporation Code (the "Code",
or Batas Pambansa Blg. 68, which became effective on May 1, 1980. Explanatory Note of
Cabinet Bill No. 3 which was later approved as BP 68).
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provides, among others, that "(t)he Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations."
All references to the Code shall pertain to the Corporation Code of the Philippines and to sections
therein.
C. Other Special Laws
While the Code is the general law on corporations, there are special laws which govern
special kinds of corporations like the Insurance Code, the General Banking Law, the
Condominium Law, and Finance Company Act.
Section 4, the Code: Corporations created by special laws or charters are governed
primarily by the provisions of the special law or charter creating them or applicable to them,
supplemented by the provisions of the Code, insofar as they are applicable.
II. DEFINITION AND ATTRIBUTES OF A CORPORATION
A. Definition
Sec. 2. Corporation defined. – (ACSP)
A corporation is an artificial being
created by operation of law,
having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to its
existence.
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose, created by law; their
personality begins as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private interest or purpose to which the law
grants a juridical personality, separate and distinct from that of each shareholder, partner or
member. (35a)
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are
governed by the laws creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
Partnerships and associations for private interest or purpose are governed by the provisions of
this Code concerning partnerships. (36 and 37a)
Art. 46. Juridical persons may acquire and possess property of all kinds, as well as
incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of
their organization. (38a)
Art. 1775. Associations and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own name with third persons,
shall have NO JURIDICAL PERSONALITY, and shall be GOVERNED by the provisions relating
to CO-OWNERSHIP. (1669)
B. Four Distinguishing Characteristics of a Corporation
• A corporation is an artificial being
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• It is created by operation of law
• A corporation has a right of succession
• It has the powers, attributes and properties expressly authorized by law or incidental to its
existence
1. A corporation is an artificial being
Situs Dev. Corporation vs. Asiatrust Bank, Inc., G.R. No. 180036, January 16, 2013.
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY: It is a fundamental principle
in corporate law that a corporation is a juridical entity with a legal personality separate and distinct
from the people comprising it. Hence, the rule is that assets of stockholders may not be
considered as assets of the corporation, and vice-versa. The mere fact that one is a majority
stockholder of a corporation does not make one s property that of the corporation, since the
stockholder and the corporation are separate entities.
Spouses Borromeo vs. CA and Equitable Savings Bank, 550 SCRA 269 [2008]
THE RIGHT OF FORECLOSURE CANNOT BE EXERCISED BY AGAINST THE
MORTGAGOR BY ANY PERSON OTHER THAN CREDITOR-MORTGAGEE OR ITS ASSIGNS -
In this case, petitioners rights to their property is restricted by the REM they executed over it.
Upon their default on the mortgage debt, the right to foreclose the property would be vested upon
the creditor-mortgagee. Nevertheless, the right of foreclosure cannot be exercised against the
petitioners by any person other than the creditor-mortgagee or its assigns.
THE FACT THAT A CORPORATION OWNS ALL OF THE STOCKS OF AN OTHER
CORPORATION, TAKEN ALONE, IS NOT SUFFICIENT TO JUSTIFY THEIR BEING TREATED
AS ONE ENTITY - ANY CLAIM OR SUIT OF THE PARENT CORPORATION CANNOT BE
PURSUED BY THE SUBSIDIARY BASED SOLELY ON THE REASON THAT THE FORMER
OWNS THE MAJORITY OR EVEN THE ENTIRE STOCK OF THE LATTER - Respondent,
although a wholly-owned subsidiary of EPCIB, has an independent and separate juridical
personality from its parent company. The fact that a corporation owns all of the stocks of another
corporation, taken alone, is notsufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiary's separate existence shall be respected, and the liability
of the parent corporation, as well as the subsidiary, shall be confined to those arising from their
respective. businesses. A corporation has a separate personality distinct from its stockholders
and other corporations to which it may be conducted. Any claim or suit of the parent corporation
cannot be pursued by the subsidiary based solely on the reason that the former owns the majority
or even the entire stock of the latter. From a perusal of the records, petitioners did not enter into a
Loan Agreement and REM with respondent. respondent, therefore, has no right to foreclose the
subject property even after default, since this right can only be claimed by the creditor-mortgagor,
EPCIB ; and, consequently, the extrajudicial foreclosure of the REM by respondent would be in
violation of petitioners property rights.
Asia's Emerging Dragon Corporation vs. DOTC, et al., 549 SCRA 44 [2008]
THE INTEREST OF A STOCKHOLDER, IF ANY, IS INDIRECT, CONTINGENT AND
INCHOATE IN SO FAR AS THE STRUCTURE THAT WAS BUILT BY THE CORPORATION IS
CONCERNED.-The matter in controversy is the NAIA IPT III. MIIC has no connection at all to this
structure. It is merely a stockholder of PIATCO, the builder of NAIA IPT III. Its interest, if any, is
indirect, contingent and inchoate. PIATCO has a legal personality separate and distinct from that
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of its stockholders, including MI-IC. It has rights and obligations which pertain solely to itself, not
to any of its component members (I. e., its stockholders). The members may change but the
juridical person (in this case, PIATCO) remains the same without alteration. Its property is not
merged with those owned by its stockholders. No stockholder can identify itself with the
corporation. Nor can any stockholder claim to possess a right which properly and exclusively
belongs to the corporation. Thus, it is PIATCO alone which is entitled to receive payment of just
compensation.
If parties with conjectural, collateral, consequential, expectant and remote interest were
allowed to intervene, proceedings would become unnecessarily complicated, expensive and
interminable.- MHC has no right to the reliefs it prays for. It wants to complete NAIA IPT Ill and
mana it for 25 years. But on what ground? As stockholder of PIATCO, the bidder whose contracts
were nullified? How can MHC derive its claim tooperate NATA IPT III from PIATCO when
PIATCO itself has no Legal right to operate the facility? Clearly, mhcs claim js not only baseless
but also absurd. If parties with such a conjectural, collateral, consequential, expectant and remote
interest were allowed to intervene. proceedings would become unnecessarily complicated,
expensive and interminable. It will only unduly delay and prolong the adjudication of the rights of
the original parties.
Manila Elec. Co. vs. TE.A.M. Elec. Corp. (TEC), et al., 540 SCRA 62 [2008]
AS A RULE, A CORPORATION IS NOT ENTITLED TO MORAL DAMAGES
BECAUSE, NOT BEING A NATURAL PERSON, IT CANNOT EXPERIENCE PHYSICAL
SUFFERING OR SENTIMENTS LIKE WOUNDED FEELINGS,SERIOUS ANXIETY, MENTAL
ANGUISH AND MORAL SHOCK, THE ONLY EXCEPTION TO THIS RULE IS WHEN THE
CORPORATION HAS A REPUTATION THAT IS DEBASED, RESULTING IN ITS HUMILIATION
IN THE BUSINESS REALM.-We, however, deem it proper to delete the award of moral damages.
TEC's claim was premised allegedly on the damage to its goodwill and reputation. As a rule, a
corporation is not entitled to moral damages because, not being a natural person, it cannot
experience physical suffering or sentiments like wounded feelings, serious anxiety, mental
anguish and moral shock. The only exception to this rule is when the corporation has a reputation
that is debased, resulting in its
humiliation in the business realm. But in such a case, it is imperative for the claimant to present
proof to justify the award. It is essential to prove the existence of the factual basis of the damage
and its causal relation to petitioners acts. In the present case, the records are bereft of any
evidence that the name or reputation of TEC/TPC has been debased as a result of petitioner's
acts. Besides, the trial court simply awarded moral damages in the dispositive portion of its
decision without stating the basis thereof.
Doctrine of Piercing the Veil of Corporate Fiction - A corporation will be looked upon as a
legal entity as a general rule, and until sufficient reason to the contrary appears, but when the
notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons. The main effect is that
stockholders will be held personally liable for the acts and contracts of the corporation whose
existence, at least for the purpose of the particular situation involved, is ignored.
Hacienda Cataywa/Manuel Villanueva vs. Rosario Lorenzo, G.R. No. 179640, March 18, 2015
While a corporation may exist for any lawful purpose, the law will regard it as an
association of persons or, in case of two corporations, merge them into one, when its corporate
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legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of
corporate fiction.
The doctrine applies only when such corporate fiction is used
• to defeat public convenience, justify wrong, protect fraud,
• or defend crime,
• or when it is made as a shield to confuse the legitimate issues,
• or where a corporation is the mere alter ego or business conduit of a person,
• or where the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must be
established clearly and convincingly. It cannot be presumed.
Basic rule that "the corporate veil may be pierced only if it becomes a shield for fraud, illegality
or inequity committed against a third person.3
The Court has expressed the language of piercing doctrine when applied to alter ego cases, as
follows: Where the stock of a corporation is owned by one person whereby the corporation
functions only for the benefit of such individual owner, the corporation and the individual should
be deemed the same.
FVR Skills and Services Exponents, Inc., et al. vs. Jovert Seva et aL, G.R. No. 200857, October
22, 2014
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.
A director or officer shall only be personally liable for the obligations of the corporation,
if the following conditions concur: (1) the complainant alleged in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and (2) the complainant clearly and convincingly proved such unlawful
acts, negligence or bad faith.
To hold an officer personally liable for the debts of the corporation, and thus pierce the
veil of corporate fiction, it is necessary to clearly and convincingly establish the bad faith or
wrongdoing of such officer, since bad faith is never presumed. Because the respondents were not
able to clearly show the definite participation of Burgos and Rana in their illegal dismissal, we
uphold the general rule that corporate officers are not personally liable for the money claims of
the discharged employees, unless they acted with evident malice and bad faith in terminating
their employment.
Gerardo Lanuza Jr. and Antonio 0. Olbes vs. BF Corporation, et al., G.R. No. 17438, October 1,
2014
A corporation is an artificial entity created by fiction of law. This means that while it is
not a person, naturally, the law gives it a distinct personality and treats it as such. A corporation,
in the legal sense, is an individual with a personality that is distinct and separate from
other persons including its stockholders, officers, directors, representatives,and other
juridical entities. The law vests in corporations rights,powers, and attributes as if they were
natural persons with physical existence and capabilities to act on their own.For instance, they
have the power to sue and enter into transactions or contracts.
Because a corporation’s existence is only by fiction of law, it can only exercise its rights
and powers through itsdirectors, officers, or agents, who are all natural persons. A corporation
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cannot sue or enter into contracts without them.A consequence of a corporation’s separate
personality is that consent by a corporation through its representatives is not consent of the
representative, personally. Its obligations, incurred through official acts of its representatives, are
its own. A stockholder, director, or representative does not become a party to a contract just
because a corporation executed a contract through that stockholder, director or
representative.Hence, a corporation’s representatives are generally not bound by the terms
of the contract executed by the corporation. They are not personally liable for obligations
and liabilities incurred on or in behalf of the corporation.
Piercing the corporate veil is warranted when "[the separate personality of a
corporation] is used as a means to perpetrate 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."85 It is also warranted in alter ego cases "where a corporation is merely a farce since it is
a mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation." When corporate veil is pierced, the corporation and
persons who are normally treated as distinct from the corporation are treated as one person, such
that when the corporation is adjudged liable, these persons, too, become liable as if they were the
corporation. Among the persons who may be treated as the corporation itself under certain
circumstances are its directors and officers.
Instance when directors, trustees or officers may become liable for corporate acts. 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.When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty, any interest adverse to the corporation in
respect of any matter which has been reposed in him in confidence, as to which equity
imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued to the
corporation. (n)
Based on the above provision, a director, trustee, or officer of a corporation may be
made solidarily liable with it for all damages suffered by the corporation, its stockholders or
members, and other persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for or assented to a
patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with
his or her duties as director or trustee.
Solidary liability with the corporation will also attach in the following instances:
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 a) "When a director or officer has consented to the issuance of watered stocks or
who, having knowledge thereof, did not forthwith file with the corporate secretary
his written objection thereto";87
b) "When a director, trustee or officer has contractually agreed or stipulated to
hold himself personally and solidarily liable with the corporation";88 and
c) "When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action."89
When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these persons
and the corporation should be treated as one. Without a trial, courts and tribunals have no
basis for determining whether the veil of corporate fiction should be pierced. Courts or
tribunals do not have such prior knowledge. Thus, the courts or tribunals must first determine
whether circumstances exist to warrant the courts or tribunals to disregard the distinction between
the corporation and the persons representing it. The determination of these circumstances must
be made by one tribunal or court in a proceeding participated in by all parties involved, including
current representatives of the corporation, and those persons whose personalities are impliedly
the same as the corporation. This is because when the court or tribunal finds that circumstances
exist warranting the piercing of the corporate veil, the corporate representatives are treated as the
corporation itself and should be held liable for corporate acts. The corporation’s distinct
personality is disregarded, and the corporation is seen as a mere aggregation of persons
undertaking a business under the collective name of the corporation.
However, when the courts disregard the corporation’s distinct and separate personality
from its directors or officers, the courts do not say that the corporation, in all instances and for all
purposes, is the same as its directors, stockholders, officers, and agents. It does not result in an
absolute confusion of personalities of the corporation and the persons composing or representing
it. Courts merely discount the distinction and treat them as one, in relation to a specific act, in
order to extend the terms of the contract and the liabilities for all damages to erring corporate
officials who participated in the corporation’s illegal acts. This is done so that the legal fiction
cannot be used to perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for the
piercing of the corporate veil, parties who are normally treated as distinct individuals
should be made to participate in the arbitration proceedings in order to determine if such
distinction should indeed be disregarded and, if so, to determine the extent of their
liabilities.
WPM International Trading Inc., and Warlito Manlapaz vs. Fe Corazon Labayen, G.R. No.
182770, September 17, 2014
The question of whether a corporation is a mere instrumentality or alter-ego of
another is purely one of fact. 
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The rule is settled that a corporation has a personality separate and distinct from the
persons acting for and in its behalf and, in general, from the people comprising
it. Following this principle, the obligations incurred by the corporate officers, or other persons
acting as corporate agents, are the direct accountabilities of the corporation they represent, and
not theirs. Thus, a director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation; it is only in exceptional circumstances that
solidary liability will attach to them.
Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic
instances, namely:
 when the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
 in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud,
or defend a crime; or
 is used in alter ego cases, i.e., where a corporation is essentially a farce, since it
is a mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. 
Piercing the corporate veil based on the alter ego theory requires the concurrence of
three elements, namely:
(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention
of plaintiff's legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of. DcITaC
The absence of any of these elements prevents piercing the corporate veil.
The mere ownership by a single stockholder of even all or nearly all of the capital
stocks of a corporation is not by itself a sufficient ground to disregard the separate
corporate personality. To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established.
The control necessary to invoke the instrumentality or alter ego rule is not majority or
even complete stock control but such domination of finances, policies and practices that
the controlled corporation has, so to speak, no separate mind, will or existence of its own,
and is but a conduit for its principal. The control must be shown to have been exercised at the
time the acts complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made.
The piercing of the veil of corporate fiction is frowned upon and thus, must be
done with caution. It can only be done if it has been clearly established that the separate and
distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a
deception. The court must be certain that the corporate fiction was misused to such an extent that
injustice, fraud, or crime was committed against another, in disregard of its rights; it cannot be
presumed.
Olongapo City vs Subic Water and Sewerage Company, GR No. 171626, August 6, 2014
Subic Water is a corporation. A corporation, as a juridical entity, primarily acts through
its board of directors, which exercises its corporate powers. In this capacity, the general rule is
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that, in the absence of authority from the board of directors, no person, not even its
officers, can validly bind a corporation.  Section 23 of the Corporation Code provides:
Section 23. The board of directors or trustees. — Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders of stocks, or where there is
no stock, from among the members of the corporation, who shall hold office for one (1) year until
their successors are elected and qualified.
OCWD is just a ten percent (10%) shareholder of Subic Water. As a mere shareholder,
OCWD's juridical personality cannot be equated nor confused with that of Subic Water. It is basic
in corporation law that a corporation is a juridical entity vested with a legal personality
separate and distinct from those acting for and in its behalf and, in general, from the
people comprising it. Under this corporate reality, Subic Water cannot be held liable for
OCWD's corporate obligations in the same manner that OCWD cannot be held liable for the
obligations incurred by Subic Water as a separate entity. The corporate veil should not and
cannot be pierced unless it is clearly established that the separate and distinct personality of the
corporation was used to justify a wrong, protect fraud, or perpetrate a deception. 
Palm Avenue Holding Co., Inc and Palm Avenue Realty and Development Corporation vs.
Sandiganbayan, G.R. No. 173082, August 6, 2014
The Court's ruling in Presidential Commission on Good Government v.
Sandiganbayan,  which remains good law, reiterates the necessity of the Republic to actually
implead corporations as defendants in the complaint, out of recognition for their distinct
and separate personalities, failure to do so would necessarily be denying such entities
their right to due process. Here, the writ of sequestration issued against the assets of the Palm
Companies is not valid because the suit in Civil Case No. 0035 against Benjamin Romualdez as
shareholder in the Palm Companies is not a suit against the latter. The Court has held, contrary
to the assailed Sandiganbayan Resolution in G.R. No.173082, that failure to implead these
corporations as defendants and merely annexing a list of such corporations to the complaints is a
violation of their right to due process for it would be, in effect, disregarding their distinct and
separate personality without a hearing.  Here, the Palm Companies were merely mentioned as
Item Nos. 47 and 48, Annex A of the Complaint, as among the corporations where defendant
Romualdez owns shares of stocks. Furthermore, while the writ of sequestration was issued on
October 27, 1986, the Palm Companies were impleaded in the case only in 1997, or already a
decade from the ratification of the Constitution in 1987, way beyond the prescribed period.
Girly G. Ico vs. Systems Technology Institute Inc, et aL, G.R. 185100, July 9, 2014
A corporation, as a juridical entity, may act only through its directors, officers and
employees. Obligations incurred as a result of the directors’ and officers’ acts as corporate
agents, are not their personal liability but the direct responsibility of the corporation they
represent. As a rule, they are only solidarily liable with the corporation for the illegal termination of
services of employees if they acted with malice or bad faith.
To hold a director or officer personally liable for corporate obligations, two
requisites must concur:
(1) it must be alleged in the complaint that the director or officer assented to patently
unlawful acts of the corporation or that the officer was guilty of gross negligence or bad
faith; and
(2) there must be proof that the officer acted in bad faith.
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Arco Pulp and Paper Co., Inc., and Candida Santos vs. Dan T. Lim, doing business under the
name and style of Quality Papers & Plastics Products Enterprises, G.R. No. 206806, June 25,
2014
As a general rule, directors, officers, or employees of a corporation cannot be
held personally liable for obligations incurred by the corporation. However, this veil of
corporate fiction may be pierced if complainant is able to prove, as in this case, that
(1) the officer is guilty of negligence or bad faith, and
(2) such negligence or bad faith was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the President
and Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment
of petitioner corporation's obligations to respondent on behalf of petitioner Arco Pulp and Paper.
This is clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co.,
Inc." Any obligation arising from these acts would not, ordinarily, be petitioner Santos' personal
undertaking for which she would be solidarily liable with petitioner Arco Pulp and Paper.
Pacific Rehouse Corporation vs. Court of Appeals, G.R. No. 199687, March 24, 2014
The Court already ruled in Kukan International Corporation v. Reyes  that compliance
with the recognized modes of acquisition of jurisdiction cannot be dispensed with even in
piercing the veil of corporate fiction, to wit:
The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given transaction, is
basically applied only to determine established liability; it is not available to confer on the court a
jurisdiction it has not acquired, in the first place, over a party not impleaded in a case. Elsewise
put, a corporation not impleaded in a suit cannot be subject to the court's process of
piercing the veil of its corporate fiction. In that situation, the court has not acquired jurisdiction
over the corporation and, hence, any proceedings taken against that corporation and its property
would infringe on its right to due process. Aguedo Agbayani, a recognized authority on
Commercial Law, stated as much:
"23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. . . .
This is so because the doctrine of piercing the veil of corporate fiction comes to
play only during the trial of the case after the court has already acquired jurisdiction over
the corporation. Hence, before this doctrine can be applied, based on the evidence presented, it
is imperative that the court must first have jurisdiction over the corporation. . . ." 
From the preceding, it is therefore correct to say that the court must first and foremost
acquire jurisdiction over the parties; and only then would the parties be allowed to present
evidence for and/or against piercing the veil of corporate fiction. If the court has no jurisdiction
over the corporation, it follows that the court has no business in piercing its veil of
corporate fiction because such action offends the corporation's right to due process.
"The question of whether one corporation is merely an alter ego of another is
purely one of fact. So is the question of whether a corporation is a paper company, a sham or
subterfuge or whether petitioner adduced the requisite quantum of evidence warranting the
piercing of the veil of respondent's corporate entity." 
"It is a fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporations to which it may be connected. But,
this separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used
5
as a device to defeat the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation
is merely an adjunct, a business conduit or an alter ego of another corporation."  obligations incurred by the corporation and while there may be instances where solidary
"Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of
the corporate entity of the "instrumentality" may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of finances,
policies and practices that the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It must be kept in mind that the control
must be shown to have been exercised at the time the acts complained of took place. Moreover,
the control and breach of duty must proximately cause the injury or unjust loss for which the
complaint is made
(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention
of plaintiff's legal right; and
(3) The aforesaid control and breach of duty must [have] proximately caused the injury or unjust
loss complained of.  Abbot Laboratories vs. Alacaraz, G.R. No. 192571, July 23, 2013
The absence of any one of these elements prevents 'piercing the corporate veil' in applying the
'instrumentality' or 'alter ego' doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's relationship to that operation. Hence,
all three elements should concur for the alter ego doctrine to be applicable.  officers who entered into contracts in behalf of the corporation cannot be held personally liable for
Livesey vs. Binswanger Philippines, G.R. No. 177493, March 19, 2014
It has long been settled that the law vests a corporation with a personality
distinct and separate from its stockholders or members. In the same vein, a corporation, by
legal fiction and convenience, is an entity shielded by a protective mantle and imbued by law with
a character alien to the persons comprising it.  Nonetheless, the shield is not at all times
impenetrable and cannot be extended to a point beyond its reason and policy. Circumstances
might deny a claim for corporate personality, under the "doctrine of piercing the veil of corporate
fiction." 
Piercing the veil of corporate fiction is an equitable doctrine developed to
address situations where the separate corporate personality of a corporation is abused or
used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes, such as to evade a just and due
obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded
and the individuals composing it and the two corporations will be treated as identical.  A corporation is an artificial entity created by operation of law. It possesses the right of
Nuccio Saverios vs. Puyat, G.R. No. 186433, November 27, 2013
The rule is settled that a corporation is vested by law with a personality separate
and distinct from the persons composing it. Following this principle, a stockholder,
generally, is NOT answerable for the acts or liabilities of the corporation, and vice versa.
The obligations incurred by the corporate officers, or other persons acting as corporate
Corporation Law 2016: JVL & JSD
agents, are the direct accountabilities of the corporation they represent, and not theirs. A
director, officer or employee of a corporation is generally NOT held personally liable for
liabilities may arise, these circumstances are exceptional. 
Incidentally, we have ruled that mere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stocks of the corporation is not, by itself, a sufficient ground for
disregarding the separate corporate personality. Other than mere ownership of capital stocks,
circumstances showing that the corporation is being used to commit fraud or proof of existence of
absolute control over the corporation have to be proven. In short, before the corporate fiction can
be disregarded, alter-ego elements must first be sufficiently established. 
In Hi-Cement Corporation v. Insular Bank of Asia and America (later PCI-Bank, now
Equitable PCI-Bank), we refused to apply the piercing the veil doctrine on the ground that the
corporation was a mere alter ego because mere ownership by a stockholder of all or nearly all of
the capital stocks of a corporation does not, by itself, justify the disregard of the separate
corporate personality. In this cited case, we ruled that in order for the ground of corporate
ownership to stand, the following circumstances should also be established:
(1) that the stockholders had control or complete domination of the corporation's finances and
that the latter had no separate existence with respect to the act complained of;
(2) that they used such control to commit a wrong or fraud; and
(3) the control was the proximate cause of the loss or injury.
Doctrine dictates that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it, such that, save for certain exceptions, corporate
the liabilities of the latter. Personal liability of a corporate director, trustee, or officer, along
(although not necessarily) with the corporation, may validly attach, as a rule, Only when —
(1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or
gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages
to the corporation, its stockholders, or other persons;
(2) he consents to the issuance of watered down 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 personally answerable for his corporate action.
It is a well-settled rule that bad faith cannit be presumed and he who alleges bad fauth has
the onus of proving it
Development Bank of the Philippines vs. Hydro Resources Contractors Corporation, GR. No.
167603, March 13, 2013
succession and such powers, attributes, and properties expressly authorized by law or incident to
its existence.  It has a personality separate and distinct from that of its stockholders and from that
of other corporations to which it may be connected. As a consequence of its status as a distinct
legal entity and as a result of a conscious policy decision to promote capital formation,  a
corporation incurs its own liabilities and is legally responsible for payment of its obligations.  In
other words, by virtue of the separate juridical personality of a corporation, the corporate
6
debt or credit is not the debt or credit of the stockholder. This protection from liability for To summarize, piercing the corporate veil based on the alter ego theory requires the
shareholders is the principle of limited liability.  concurrence of three elements: control of the corporation by the stockholder or parent
Equally well-settled is the principle that the corporate mask may be removed or the corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
corporate veil pierced when the corporation is just an alter ego of a person or of another caused to the plaintiff by the fraudulent or unfair act of the corporation.  The absence of any of
corporation. For reasons of public policy and in the interest of justice, the corporate veil will these elements prevents piercing the corporate veil. 
justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed This Court finds that none of the tests has been satisfactorily met in this case. In applying
against third persons.  the alter ego doctrine, the courts are concerned with reality and not form, with how the
Sarona v. National Labor Relations Commission 46 has defined the scope of corporation operated and the individual defendant's relationship to that operation. With
application of the doctrine of piercing the corporate veil: respect to the control element, it refers not to paper or formal control by majority or even
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: complete stock control but actual control which amounts to "such domination of finances, policies
1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion and practices that the controlled corporation has, so to speak, no separate mind, will or existence
of an existing obligation; of its own, and is but a conduit for its principal."  In addition, the control must be shown to have
2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a been exercised at the time the acts complained of took place.
crime; or While ownership by one corporation of all or a great majority of stocks of another
3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business corporation and their interlocking directorates may serve as indicia of control, by themselves and
conduit of a person, or where the corporation is so organized and controlled and its affairs are so without more, however, these circumstances are insufficient to establish an alter ego relationship
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another or connection between DBP and PNB on the one hand and NMIC on the other hand, that will
corporation. justify the puncturing of the latter's corporate cover. This Court has declared that "mere
In this connection, case law lays down a three-pronged test to determine the ownership by a single stockholder or by another corporation of all or nearly all of the
application of the alter ego theory, which is also known as the instrumentality theory, capital stock of a corporation is not of itself sufficient ground for disregarding the
namely: separate corporate personality."  This Court has likewise ruled that the "existence of
(1) Control, not mere majority or complete stock control, but complete domination, not only of interlocking directors, corporate officers and shareholders is not enough justification to pierce the
finances but of policy and business practice in respect to the transaction attacked so that the veil of corporate fiction in the absence of fraud or other public policy considerations." 
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;  Stronghold Insurance Company, Inc. vs. Tomas Cuenca, et. al., G.R. No. 173297, March 6, 2013
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention Given the separate and distinct legal personality of Arc Cuisine, Inc., the Cuencas and
of plaintiff's legal right; and Tayactac lacked the legal personality to claim the damages sustained from the levy of the
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust former's properties.
loss complained of.  The injury complained of is thus primarily to the corporation, so that the suit for
The first prong is the "instrumentality" or "control" test. This test requires that the the damages claimed should be by the corporation rather than by the stockholders  (3
subsidiary be completely under the control and domination of the parent. It examines the parent Fletcher, Cyclopedia of Corporation pp. 977-980). The stockholders may not directly claim
corporation's relationship with the subsidiary. It inquires whether a subsidiary corporation is so those damages for themselves for that would result in the appropriation by, and the distribution
organized and controlled and its affairs are so conducted as to make it a mere instrumentality or among them of part of the corporate assets before the dissolution of the corporation and the
agent of the parent corporation such that its separate existence as a distinct corporate entity will liquidation of its debts and liabilities, something which cannot be legally done in view of section 16
be ignored.  It seeks to establish whether the subsidiary corporation has no autonomy and the of the Corporation Law, which provides:
parent corporation, though acting through the subsidiary in form and appearance, "is operating No shall corporation shall make or declare any stock or bond dividend or any dividend
the business directly for itself."  whatsoever except from the surplus profits arising from its business, or divide or distribute its
The second prong is the "fraud" test. This test requires that the parent corporation's conduct in capital stock or property other than actual profits among its members or stockholders until after
using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the payment of its debts and the termination of its existence by limitation or lawful dissolution.
the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent xxx xxx xxx
corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a In the present case, the plaintiff stockholders have brought the action not for the
showing of "an element of injustice or fundamental unfairness."  benefit of the corporation but for their own benefit, since they ask that the defendant make
The third prong is the "harm" test. This test requires the plaintiff to show that the defendant's good the losses occasioned by his mismanagement and pay to them the value of their respective
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm participation in the corporate assets on the basis of their respective holdings. Clearly, this
suffered.  A causal connection between the fraudulent conduct committed through the cannot be done until all corporate debts, if there be any, are paid and the existence of the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff corporation terminated by the limitation of its charter or by lawful dissolution in view of
should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will the provisions of section 16 of the Corporation Law.
have been treated unjustly by the defendant's exercise of control and improper use of the
corporate form and, thereby, suffer damages. 

7
Corporation Law 2016: JVL & JSD
- Heirs of Fe Tan Uy, represented by her heir, Mauling Uy Lim vs. 3 of 22 International Exchange
Bank, G.R. No. 166282 & 83, February 13, 2013 - Park Hotel vs Soriano, GR No. 171118,
September 10, 2012 Gold Line Tours vs. Heirs of Maria Concepcion Lacsa, GR No. 159108,
June 18, 2012 Ramirez, et aL vs. Mar Fishing Co., Inc., G.R. No. 168208, January 13, 2012 -
Jiao, et al. vs. NLRC, et aL, 670 SCRA 184 [2012] - Prince Transport, Inc. vs. Garcia, G.R. No.
167291, January 12, 2011 Marc ll Marketing, Inc. vs. Joson, 662 SCRA 35 [2011] - Hacienda
Luisita, Inc. vs. Presidential Agrarian Reform Council, 660 SCRA 525 [2011] - Kukan International
Corporation vs. Hon. Judge Amor Reyes, G.R. No. 182729, September 29, 2010 Continental
Cement Corp. vs. Asea Brown Boveri, 659 SCRA 137 [2010] - Perforated Materials, Inc., et aL
vs. Diaz, 633 SCRA 258 [2010] - Queensland-Tokyo Commodities, Inc. et aL vs. George, 630
SCRA 304 [2010] - Wensha Spa Center, Inc. vs. Yung, 628 SCRA 311 [2010] - Prisma
Construction and Devt. Corp. vs. Menchavez, 614 SCRA 590 [2010] - Yamamoto vs. Nishino
Leather Industries, 551 SCRA 447 [2008] - Lim vs. Court of Appeals 323 SCRA 102 [2000] - test
in determining the applicability of the doctrine of piercing the veil of corporate fiction. - Luxuria
Homes, Inc. vs. Court of Appeals, 302 SCRA 315 (1999)
Notes:
(1) Moral Damages – cannot be awarded in favor of corporations because they do not have
feelings and mental state. They may not even claim moral damages for besmirched reputation
(NAPOCOR v. Philipp Brothers Oceanic, 2001).However, a corporation can recover moral
damages under Art 2219 (7) if it was the victim of defamation (Pilipinas Broadcasting Network v.
Ago Medical and Educational Center, 2005).
(2) Criminal Liability – Since a corporation as a person is a mere legal fiction, it cannot be
proceeded against criminally because it cannot commit a crime in which personal violence or
malicious intent is required. Criminal action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. v. Hurd
[1914], Time Inc. v. Reyes, 1971)
(2) Doctrine of Separate Personality: A corporation, upon coming into existence, is invested by
law with a personality separate and distinct from those persons composing it as well as from any
other legal entity to which it may be related. (Yutivo Sons Hardware v. CTA, 1961)
Liability for Torts and Crimes
Alfredo Ching vs. the Secretary of Justice, et aL, G. R. No. 164317, February 6, 2006 Singian, Jr.
vs. Sandiganbayan G.R. Nos. 160577-94, December 16, 2005 The Executive Secretary, et al. vs.
Court of Appeals, et al., G.R. No. 131719, May 25, 2004 Edward C. Ong vs. the Court of Appeals
and the People of the Philippines, G.R. No. 119858, April 29, 2003 Naguiat vs. National Labor
Relations Commission G.R. No. 116123, March 13, 1997 Philippine National Bank vs. Court of
Appeals, et aL, G.R. No. L-27155, May 18, 1978
Recovery of Moral Damages - Herman C. Crystal, et aL vs. Bank of the Philippine Islands, G.R.
No. 172428, November 28, 2008 Manila Electric Company vs. T.E.A.M. Electronics Corporation,
Technology Electronics Assembly and Management Pacific Corporation; and Ultra Electronics
Instruments, Inc., G.R. No. 131723, December 13, 2007 Filipinas Broadcasting Network, Inc.,vs.
AGO Medical And Educational Center-Bicol Christian College of Medicine, (AMEC-BCCM) and
Angelita F. Ago, G.R. No. 141994, January 17, 2005
2. It is created by operation of law
Corporation Law 2016: JVL & JSD
Sec. 16, Art. XII, 1987 Constitution 
The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled corporations may be created
or established by special charters in the interest of the common good and subject to the test of
economic viability.
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose, created by law; their
personality begins as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private interest or purpose to which the law
grants a juridical personality, separate and distinct from that of each shareholder, partner or
member. (35a)
Notes:
Mere consent of the parties to form a corporation is not sufficient. The State must give its consent
either through a special law (in case of government corporations) or a general law (i.e.,
Corporation Code in case of private corporations).
A corporation comes into existence upon the issuance of the certificate of incorporation. Then
and only then will it acquire juridical personality to sue and be sued, enter into contracts, hold or
convey property or perform any legal act in its own name (Ladia).
3. A corporation has a right of succession
Sec. 11. . Corporate term. - A corporation shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless sooner dissolved or unless said period is extended.
The corporate term as originally stated in the articles of incorporation may be extended for
periods not exceeding fifty (50) years in any single instance by an amendment of the articles of
incorporation, in accordance with this Code; Provided, That no extension can be made earlier
than five (5) years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the Securities and Exchange
Commission.
Sec. 116. Religious societies. - Any religious society or religious order, or any diocese,
synod, or district organization of any religious denomination, sect or church, unless forbidden by
the constitution, rules, regulations, or discipline of the religious denomination, sect or church of
which it is a part, or by competent authority, may, upon written consent and/or by an affirmative
vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate
for the administration of its temporalities or for the management of its affairs, properties and
estate by filing with the Securities and Exchange Commission, articles of incorporation
verified by the affidavit of the presiding elder, secretary, or clerk or other member of such
religious society or religious order, or diocese, synod, or district organization of the religious
denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district organization is a
religious organization of a religious denomination, sect or church;
8
2. That at least two-thirds (2/3) of its membership have given their written consent or have voted
to incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden by competent authority or by the constitution,
rules, regulations or discipline of the religious denomination, sect, or church of which it forms a
part;
4. That the religious society or religious order, or diocese, synod, or district organization desires
to incorporate for the administration of its affairs, properties and estate;
5. The place where the principal office of the corporation is to be established and located, which
place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the religious society or
religious order, or the diocese, synod, or district organization to serve for the first year or such
other period as may be prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more
than fifteen (15). (160a)
Note:
Its continued existence during its stated term cannot be affected by any change in the members
or stockholders or by any transfer of shares by a stockholder to a 3rd person.
4. It has the powers, attributes and properties expressly authorized by law or incidental
to its existence
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this
Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic
or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan
political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.
Note:
Corporation Law 2016: JVL & JSD
A corporation has no power except those expressly conferred on it by the Corporation Code and
by its articles of incorporation, those which may be incidental to such conferred powers, those
that are implied from its existence, and those reasonably necessary to accomplish its purposes.
In turn, a corporation exercises said powers through its Board of Directors and/or its duly
authorized officers and agents. (Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 2004).
• Ryuichi Yamamoto vs. Nishino Leather Industries, Inc. and Ikuo Nishino, G.R. No. 150283,
April 16, 2008 • International Express Travel & Tours vs. Court of Appeals, 373 SCRA 474 (2002)
• Rebecca Boyer-Roxas and Guillermo Roxas vs. Hon. Court of Appeals and Heirs of Eugenia V.
Roxas, Inc., G.R. No. 100866, July 14, 1992
C. Alternative Forms of Business Organizations (Differentiated From a Corporation):
1. Single Proprietorship - A form of business organization with only one proprietary owner; a
single individual conducts business under his own name.
2. Partnerships –
Art. 1767 (Civil Code) By the contract of partnership two or more persons bind
themselves to contribute money, property, industry to a common fund, with the intention of
dividing the profits among themselves.
Limited Partnership –
Art. 1844 (Civil Code) A limited partnership is one formed by two or more persons
under the provisions of the following articles, having as members one or more general partners
and one or more limited partners. The limited partners as such shall NOT be bound by the
obligations of the partnership.
3. Joint Ventures –
Aurbach v Sanitary Wares, December 15, 1989 - "generally understood to mean an organization
formed for some temporary purpose. It is in fact hardly distinguishable from the partnership, since
their elements are similar community of interest in the business, sharing of profits and losses, and
a mutual right of control.  The main distinction cited by most opinions in common law jurisdictions
is that the partnership contemplates a general business with some degree of continuity, while the
joint venture is formed for the execution of a single transaction, and is thus of a temporary nature.
This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular partnership may have for its object a
specific undertaking. It would seem therefore that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the law of partnerships. The Supreme Court has
however recognized a distinction between these two business forms, and has held that although
a corporation cannot enter into a partnership contract, it may however engage in a joint venture
with others."
4. Business Trusts -
Art. 1440 NCC (1442 CC) A legal relation whereby one person, called the Trustor,
conveys a property in confidence to another, called the trustee, for the benefit of a person called
the beneficiary.
9

5. Cooperatives -
Sec. 3, R.A. No. 6938, are dully registered association of persons with a common bond
of interest, who have voluntarily joined together to achieve lawful common social and economic
end, making equitable contributions to the capital required and accepting a fair share of the risks
and benefits of the undertaking in accordance with the universally accepted cooperative
principles.
Benny Hung vs. BPI Finance Corporation, G.R. No. 182398, July 20, 2010
III. CLASSIFICATIONS OF CORPORATIONS
A. STOCK CORPORATIONS
Sec. 3. Classes of corporations. - Corporations formed or organized under this Code
may be stock or non-stock corporations. Corporations which have capital stock divided into
shares and are authorized to distribute to the holders of such shares dividends or allotments of
the surplus profits on the basis of the shares held are stock corporations. All other corporations
are non-stock corporations.
Notes:
It is organized for profit. The governing body of a stock corporation is usually the Board of
Directors (except in certain instances, e.g. close corporations).
Republic vs. City of Paranaque, 677 SCRA 246 [2012]
B. NON-STOCK CORPORATIONS
Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is one
where no part of its income is distributable as dividends to its members, trustees, or officers,
subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for which the corporation was organized,
subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of this Title. (n)
Sec. 88. Purposes. - Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof, subject to the special provisions of this Title governing particular classes of
non-stock corporations. (n)
Notes:
-All other corporations are non-stock corporations (Sec. 3)
-Not organized for profit.
-Its governing body is usually the Board of Trustees.
There are two elements for a stock corporation to exist:
Corporation Law 2016: JVL & JSD
(1) Capital stock divided into shares, and
(2) An authority to distribute to the holders of such shares, dividends or allotments of the surplus
profits on the basis of shares held. (Test of WON a stock corporation)
Even if there is a statement of capital stock, the corporation is still NOT a stock corporation if
dividends are NOT supposed to be declared, that is, there is no distribution of retained earnings.
(CIR v. Club Filipino de Cebu, 1962)
Under Sec. 43 of the Corporation Code, a corporation is deemed to have the power to declare
dividends. Thus, so long as the corporation has capital stock and there is no prohibition in its
Articles of Incorporation or in its by-laws for it to declare dividends, such corporation is a stock
corporation.
C. CLOSE CORPORATION
Sec. 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall
be held of record by not more than a specified number of persons, not exceeding twenty
(20);
(2) all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and
(3) The corporation shall not list in any stock exchange or make any public
offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall
NOT be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation within the
meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest in accordance with the provisions of this
Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply suppletorily except insofar as this Title
otherwise provides.
San Juan Structural and Steel Fabricators, Inc., 296 SCRA 631 [1998].
D. FOREIGN CORPORATION
Sec. 123. Definition and rights of foreign corporations. - For the purposes of this
Code, a foreign corporation is one formed, organized or existing under any laws other than those
of the Philippines and whose laws allow Filipino citizens and corporations to do business in its
own country or state. It shall have the right to transact business in the Philippines after it shall
have obtained a license to transact business in this country in accordance with this Code and a
certificate of authority from the appropriate government agency. (n)
E. RELIGIOUS CORPORATION
Sec. 109. Classes of religious corporations. - Religious corporations may be
incorporated by one or more persons. Such corporations may be classified into corporations sole
and religious societies.
10
Religious corporations shall be governed by this Chapter and by the general provisions on non-
stock corporations insofar as they may be applicable. (n)
1. Sec. 110. Corporation sole. - For the purpose of administering and managing, as
trustee, the affairs, property and temporalities of any religious denomination, sect or
church, a corporation sole may be formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of such religious denomination, sect or church.
(154a)
Iglesia Evangelista Metodista en las Islas Filipinas, Inc. et al. vs. Bishop Nathanael Lazaro, et al.,
624 SCRA 224 [2010]
Republic vs. Iglesia Ni Cristo 127 SCRA 687
2. Sec. 116. Religious societies. - Any religious society or religious order, or any
diocese, synod, or district organization of any religious denomination, sect or
church, unless forbidden by the constitution, rules, regulations, or discipline of the
religious denomination, sect or church of which it is a part, or by competent authority,
may, upon written consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate for the administration
of its temporalities or for the management of its affairs, properties and estate by filing
with the Securities and Exchange Commission, articles of incorporation verified by the
affidavit of the presiding elder, secretary, or clerk or other member of such religious
society or religious order, or diocese, synod, or district organization of the religious
denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district organization is a
religious organization of a religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their written consent or have
voted to incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese, synod, or
district organization desiring to incorporate is not forbidden by competent authority or by the
constitution, rules, regulations or discipline of the religious denomination, sect, or church of
which it forms a part;
4. That the religious society or religious order, or diocese, synod, or district organization
desires to incorporate for the administration of its affairs, properties and estate;
5. The place where the principal office of the corporation is to be established and located,
which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the religious society
or religious order, or the diocese, synod, or district organization to serve for the first year or
such other period as may be prescribed by the laws of the religious society or religious
order, or of the diocese, synod, or district organization, the board of trustees to be not less
than five (5) nor more than fifteen (15). (160a)
F. EDUCATIONAL CORPORATIONS
Sec. 106. Incorporation. - Educational corporations shall be governed by special laws
and by the general provisions of this Code. (n)
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Sec. 107. Pre-requisites to incorporation. - Except upon favorable recommendation
of the Ministry of Education and Culture, the Securities and Exchange Commission shall not
accept or approve the articles of incorporation and by-laws of any educational institution. (168a)
Sec. 108. Board of trustees. - Trustees of educational institutions organized as non-
stock corporations shall NOT be less than five (5) nor more than fifteen (15): Provided,
however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so
classify themselves that the term of office of one-fifth (1/5) of their number shall expire every
year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular
term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and authority of trustees shall be
defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations. (169a)
B.P. Bldg 232, the Education Act of 1982
Section 25. Establishment of Schools - ALL schools shall be established in
accordance with law. The establishment of new national schools and the conversion of existing
schools from elementary to national secondary or tertiary schools shall be by law: Provided, That
any private school proposed to be established must incorporate as an non-stock educational
corporation in accordance with the provisions of the Corporation Code of the Philippines. This
requirement to incorporate may be waived in the case of family-administered pre-school
institutions.
Government assistance to such schools for educational programs shall be used exclusively for
that purpose.
G. GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS)
Section 16, Article XII, 1987 Constitution - The Congress shall not, except by general
law, provide for the formation, organization, or regulation of private corporations. Government-
owned or controlled corporations may be created or established by special charters in the interest
of the common good and subject to the test of economic viability.
Funa vs. Manila Economic and Cultural Office, GR. No. 193462, February 4, 2014 - Philippine
Society for the Prevention of Cruelty to Animals vs. COA, 534 SCRA 112 [2007] - - Boy Scouts of
the Philippines vs. Commission on Audit, G.R. No. 177131, June 7, 2011 - Carandang vs.
Desierto, G.R. No. 148076, January 12, 2011 - Liban vs. Gordon, GR No. 175352, January 10,
2011 - Manila International Airport Authority vs. CA, 495 SCRA 591 [20061 - Feliciano vs. COA,
419 SCRA 363 [2003] - NHA vs. Heirs of Guivelindo, 404 SCRA 389 [2003] - Baluyot vs.
Holganza, 325 SCRA 248 [2000] - Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271
(1994)
H. DE FACTO CORPORATION
Sec. 20. De facto corporations. - The due incorporation of any corporation claiming in
good faith to be a corporation under this Code, and its right to exercise corporate powers, shall
NOT be inquired into collaterally in any private suit to which such corporation may be a party.
Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
Sawadjaaan vs. CA, 459 SCRA 516 [2005] Hall vs. Piccio, 86 Phil. 603 (1950)
11
I. CORPORATION BY ESTOPPEL
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof: Provided, however, That when any
such ostensible corporation is sued on any transaction entered by it as a corporation or on any
tort committed by it as such, it shall NOT be allowed to use as a defense its lack of corporate
personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.
Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc. 317 SCRA 728 [1999]
J. PUBLIC CORPORATION (CIVIL CODE)
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose, created by law; their
personality begins as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private interest or purpose to which the law
grants a juridical personality, separate and distinct from that of each shareholder, partner or
member. (35a)
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are
governed by the laws creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
Partnerships and associations for private interest or purpose are governed by the provisions of
this Code concerning partnerships.
Boy Scouts of the Philippines vs. COA, 651 SCRA 146 [2011] • Macasaet vs. Francisco, G.R. No.
156759, June 5, 2013 International Express Travel & Tour Services, Inc. vs. Hon. Court of
Appeals, G.R. No. 119002, October 19, 2000 Reynaldo M. Lozano vs. Hon. Eliezer R. De los
Santos, Presiding Judge, RTC, Br. 58, Angeles City; and Antonio Anda, G.R. No. 125221, June
19, 1997 People of the Philippines vs. Engr. Carlos Garcia, G.R. No. 117010, April 18, 1997
Pioneer Surety & Insurance Corporation vs. Court of Appeal, 175 SCRA 668 (1989)
K. NATIONALITY OF CORPORATIONS
1. PLACE OF INCORPORATION TEST
The corporation is a national of the country under whose laws it is organized or
incorporated (Sec. 123).
Sec. 123. Definition and rights of foreign corporations. - For the purposes of this
Code, a foreign corporation is one formed, organized or existing under any laws other than those
of the Philippines and whose laws allow Filipino citizens and corporations to do business in its
own country or state. It shall have the right to transact business in the Philippines after it shall
have obtained a license to transact business in this country in accordance with this Code and a
certificate of authority from the appropriate government agency. (n)
Domestic corporations – organized and governed under and by Philippine laws
Foreign Corporations – organized under laws other than those of the Philippines and can operate
only in the territory of the state under whose laws it was formed. However, they may be licensed
to do business here (Campos).
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2. CONTROL TEST
A corporation shall be considered a Filipino corporation if the Filipino ownership of its
capital stock is at least 60%, and where the 60-40 Filipino-alien equity ownership is NOT in doubt
(SEC Opinion dated 6 November 1989; DOJ Opinion No. 18, s. 1989).
Therefore, its shareholdings in another corporation shall be considered to be of Filipino
nationality when computing the percentage of Filipino equity of that second corporation (SEC
Opinion dated 23 November 1993).
Control test is applied in the following:
 Exploitation of Natural Resources - Section 2, Art. XII CONST. “only Filipino Citizens or
Corporations whose capital stock are at least 60% owed by Filipinos can qualify to
exploit natural resources.”
 Public Utilities - Sec. 11, Art XII, CONST. “xxx no franchise, certificate or any other form
of authorization for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the laws of the
Philippines at least 60% of whose capital is owned by such citizens. “
 War-time Test - If the controlling stockholders are enemies, then the nationality of the
corporation will be base on the citizenship of the majority stockholders in times of war
(Filipinas Compania de Seguros v Christian Huenfeld, 1951) .
 Investment Test - Sec. 3(a) and (b), Foreign Investments Act of 1991 (RA7042). It
considers for purpose of investment a “Philippine National” as a corporation organized
under the laws of the Philippines of which at least 60% of the capital stock outstanding
and entitled to vote is owned and held by citizens of the Philippines, or a trustee of the
funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of
Philippine nationals.
Note: In the recently decided case of Gamboa vs. Teves (G.R. No. 176579, June 28, 2011),
the SC ruled as follows:
“The term "capital" in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the present case only
to common shares, and not to the total outstanding capital stock (common and non-voting
preferred shares).
The 60 percent of the "capital" assumes, or should result in, "controlling interest" in the
corporation. Compliance with the required Filipino ownership of a corporation shall be determined
on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are
generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which
have been assigned or transferred to aliens cannot be considered held by Philippine citizens or
Philippine nationals.
Individuals or juridical entities not meeting the aforementioned qualifications are considered as
non-Philippine nationals.”
In the later 2012 case of Gamboa v. Teves, (G.R. No. 176579, October 9, 2012) The SC
reversed the previous ruling and held that:
“Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to
voting control of the corporation but also to the beneficial ownership of the corporation, it is
12
therefore imperative that such requirement apply uniformly and across the board to all classes of
shares, regardless of nomenclature and category, comprising the capital of a corporation. Under
the Corporation Code, capital stock consists of all classes of shares issued to stockholders,
that is, common shares as well as preferred shares, which may have different rights,
privileges or restrictions as stated in the articles of incorporation.
Since a specific class of shares may have rights and privileges or restrictions different from the
rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also
to shares without voting rights. Preferred shares, denied the right to vote in the election of
directors, are anyway still entitled to vote on the eight specific corporate matters mentioned above
under Section 6 of the Corporation Code. Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60
percent of the common shares and at least 60 percent of the preferred nonvoting shares must be
owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos.
In short, the 60-40 ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-voting, preferred voting or
any other class of shares. This uniform application of the 60- 40 ownership requirement in favor
of Filipino citizens clearly breathes life to the constitutional command that the ownership and
operation of public utilities shall be reserved exclusively to corporations at least 60 percent of
whose capital is Filipino-owned. Applying uniformly the 60- 40 ownership requirement in favor of
Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and
restrictions, guarantees effective Filipino control of public utilities, as mandated by the
Constitution.”
stockholders of layer after layer of investing corporations have been established, the very
essence of the Grandfather Rule (Redmont Consolidated Mines, Corp v. McArthur Mining, Inc., et
al., 2010).
 SEC formula: SEC Letter Opinion “Shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60% only the number of shares corresponding to such
percentage shall be considered as of Philippine nationality.”
Narra Nickel Mining and Development Corporation, et al. vs. Redmont Consolidated Mines
Corporation, G.R. No. 199580, January 28, 2015 • Narra Nickel Mining and Development
Corporation, et al., vs. Redmont Consolidated Mines Corporation, G.R. No. 199580, April 21,
2014
IV. FORMATION OF CORPORATIONS
A. Persons Involved in Incorporation
1. Promoters
Sec. 3.10, The Securities Regulation Code, Rep. Act No. 8799 Promoter" is a
person who, acting alone or with others, takes initiative in founding and organizing the business
or enterprise of the issuer and receives consideration therefor.

Heirs of Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et al., G.R. No. 176579, LIABILITY OF PROMOTER
October 9, 2012 • Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et al., G.R. No. General rule: The promoter binds himself PERSONALLY & assumes the responsibility
176579, June 28, 2011 • Marissa R. Unchuan vs. Antonio J.P. Lozada, Anita Lozada and the of looking to the proposed corporation for reimbursement.
Register of Deeds of Cebu City, G.R. No. 172671, April 16, 2009 Exceptions:
(1) Express or implied agreement to the contrary
3. GRANDFATHER RULE (2) Novation, not merely adoption or ratification of the contract
Method used to determine the nationality of a corporation by which the percentage of
Filipino equity in corporations engaged in nationalized and/or partly nationalized areas of LIABILITY OF CORPORATION FOR PROMOTER’S CONTRACTS
activities, provided for under the constitution and other nationalization laws, is computed, in cases General rule: A corporation is NOT bound by the contract. A corporation, until
where corporate shareholders are present in the situation, by attributing the nationality of the organized, has no life and no legal existence. It could not have had an agent (the promoter) who
second or even subsequent tier of ownership to determine the nationality of the corporate could legally bind it. (Cagayan Fishing Development Co., Inc. v. Sandiko)
stockholder. (Villanueva, 2003).
It involves the computation of Filipino ownership of a corporation in which another Exceptions: A corporation may be bound by the contract if it makes the contract its
corporation of partly Filipino and partly foreign equity owns capital stock. The percentage of own by:
shares held by the second corporation in the first is multiplied by the latter’s own Filipino equity,
and the product of these percentages is determined to be the ultimate Filipino ownership of the (1) Adoption or ratification of the ENTIRE contract after incorporation.
subsidiary corporation (SEC Opinion re; Silahis Intl Hotel May 4, 1987). Notes:
The Grandfather Rule must be applied to accurately determine the actual participation, (a) Power of the corporation to adopt a contract must be understood to
both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or be limited to such contracts as the corporation itself, after its
business. organization, would be authorized to make. (Builders’
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be Duntile Co. v. Dunn Mfg. Co.)
determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is (b) Novation or the intent to novate the original contract is required to
owned by “Filipino citizens”, or as interpreted, by natural or individual Filipino citizens. If such adopt or ratify the pre-incorporation contract. (Campos, 1990)
investing corporation is in turn owned to some extent by another investing corporation, the same (2) Acceptance of benefits under the contract with knowledge of the terms thereof.
process must be observed. One must not stop until the citizenships of the individual or natural (3) Performance of its obligation under the contract

13
Corporation Law 2016: JVL & JSD

Cagayan Fishing Development Co., Inc. vs. Sandiko, 65 Phil. 223 [1937]
Rizal Light & Ice Co., Inc. vs. Mun. of Morong, 25 SCRA 302, 306 [1968]
Fletcher, Cyclopedia on Corporation, Permanent H., Vol I, Chap. 9, sec. 189, p.335 - a
"promoter is an organizer and projector who brings persons to unite in forming a
corporation, "promoter" is not the same as "incorporator; any person, who acting alone or in
conjunction with one or more persons, directly or indirectly takes initiative in founding or
organizing the business or enterprise of an issuer."
Sec. 60. Subscription contract. - Any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be formed shall be deemed a subscription within
the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or
some other contract. (n)
Sec. 61. Pre-incorporation subscription. - A subscription for shares of stock of a
corporation still to be formed shall be irrevocable for a period of at least six (6) months from
the date of subscription, unless all of the other subscribers consent to the revocation, or unless
the incorporation of said corporation fails to materialize within said period or within a longer
period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation
subscription may be revoked after the submission of the articles of incorporation to the Securities
and Exchange Commission. (n)
2. Incorporators –
Sec. 10. Number and qualifications of incorporators. - Any number of natural
persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of
whom are residents of the Philippines, may form a private corporation for any lawful purpose or
purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least
one (1) share of the capital stock of the corporation.
NUMBER AND QUALIFICATIONS OF INCORPORATORS
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a subscriber to at least 1 share of the capital stock of the
corporation (Sec. 10)
i. Natural Persons - except that Sec. 4, Rural Banks Act (R.A. No. 7353), allows duly
established cooperatives and corporations primarily organized to hold equities in rural banks may
organize a rural bank
ii. Capacity to contract
iii. At least five (5) incorporatiors but NOT more than 15
iv. Residence requirement
Sec. 5., Rural Banks Act (R.A. No. 7353), ALL members of the Board of Directors of
the rural bank shall be citizens of the Philippines at the time of their assumption to office:
Provided, however, That nothing in this Act shall be construed as prohibiting any appointive or
elective public official from serving as director, officer, consultant or in any capacity in the bank.
No Director or officer of any rural bank shall, either directly or indirectly, for himself or
as the representative or agent of another borrow any of the deposits or funds of such banks, nor
shall he become a guarantor, indorser, or surety for loans from such bank to others, or in any
Corporation Law 2016: JVL & JSD
manner be an obligor for money borrowed from the bank or loaned by it except with the written
approval of the majority of the directors of the bank, excluding the director concerned. Any such
approval shall be entered upon the records of the corporation and a copy of such entry shall be
transmitted forthwith to the appropriate supervising department. The director/officer of the bank
who violates the provisions of this section shall be immediately dismissed from his office and
shall be penalized in accordance with Section 26 of this Act.
The Monetary Board may regulate the amount of credit accommodations that may be
extended directly to the directors, officers or stockholders of rural banks of banking institutions.
However, the outstanding credit accommodations which a rural bank may extend to each of its
stockholders owning two percent (2%) or more of the subscribed capital stock, its directors, or
officers shall be limited to an amount equivalent to the respective outstanding deposits and book
value of the paid-in capital contributions in the bank.
Section 11, Art. XVI, 1987 Constitution
(1) The ownership and management of mass media shall be limited to citizens of the
Philippines, or to corporations, cooperatives or associations, wholly-owned and
managed by such citizens. The Congress shall regulate or prohibit monopolies in
commercial mass media when the public interest so requires. No combinations in
restraint of trade or unfair competition therein shall be allowed.
(2) The advertising industry is impressed with public interest, and shall be regulated by
law for the protection of consumers and the promotion of the general welfare.
ONLY Filipino citizens or corporations or associations at least seventy (70) per
centum of the capital of which is owned by such citizens shall be allowed to
engage in the advertising industry. The participation of foreign investors in the
governing body of entities in such industry shall be limited to their proportionate share
in the capital thereof, and all the executive and managing officers of such entities must
be citizens of the Philippines.
Sec. 5, Retail Trade Liberalization Act of 2000 (R.A. No. 8762)
Foreign Equity Participation. - Foreign-owned partnerships, associations and
corporation formed and organized under the laws of the Philippines may, upon
registration with the Securities and Exchange Commission (SEC) and the Department
of Trade and Industry (DTI), or in case of foreign owned single proprietorships, with the
DTI, Engage or invest in the retail trade business, subject to the following categories.
Category A – Enterprises with paid-up capital of the equivalent in Philippine Peso of
the than Two million five hundred thousand US dollars (US$2,500,000.00) shall be
reserved exclusively for Filipino citizens and corporations wholly owned by Filipino
citizens.
Category B – Enterprises with a minimum paid-up capital of the equivalent in
Philippine Pesos of two million five hundred thousand US dollar (US$2,500,000.00) but
less than Seven million five hundred thousand US dollars (US$7,500,000.00) may
be wholly owned by foreigners except for the first two (2) years after the effectivity of
this Act wherein foreign participation shall be limited to not more than sixty percent
(60%) of total equity.
Category C – Enterprises with a paid-up capital of the equivalent in Philippine Pesos
of Seven million five hundred thousand US dollars (US$7,500,000.00), or more may
be wholly owned by foreigners: Provided, however, That in no case shall the
investments for establishing a store in vestments for establishing a store in Categories
B and C be less than the equivalent in Philippine pesos of Eight hundred thirty
thousand US dollars (US$830,000.00).
14
 Category D – Enterprises specializing in high-end or luxury products with a paid-up
capital of the equivalent in Philippine Pesos of Two hundred fifty thousand US dollars
(US$250,000.00) per store may be wholly owned by foreigners.
The foreign investor shall be required to maintain in the Philippines the full amount of
the prescribed minimum capital unless the foreign investor has notified the SEC and
the DTI of its intention to repatriate its capital and cease operations in the Philippines.
The actual use in Philippine operations of the inwardly remitted minimum capital
requirement shall be monitored by the SEC.
Failure to maintain the full amount of the prescribed minimum capital prior to
notification of the SEC and the DTI, shall subject the foreign investor to penalties or
restrictions on any future trading activities/business in the Philippines.
Foreign retail stores shall secure a certification from the Bangko Sentral ng Pilipinas
(BSP) and the DTI, which will verify or confirm inward remittance of the minimum
required capital investments.
B. Articles of Incorporation
Lanuza vs. CA, 454 SCRA 54 [2005] - Alicia E. Gala, et al. vs. Ellice Agro-Industrial Corporation,
et al., G.R. No. 156819, December 11, 2003
1. Form and Contents Required - Sec. 14 and 15
Hyatt Elevators and Escalators Corporation vs. Goldstar Elevators Phils. Inc., G.R. No. 161026,
October 24, 2005
a. Corporate Name –
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.
Sec. 19. Commencement of corporate existence. - A private corporation formed or
organized under this Code commences to have corporate existence and juridical personality and
is deemed incorporated from the date the Securities and Exchange Commission issues a
certificate of incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and corporate under
the name stated in the articles of incorporation for the period of time mentioned therein, unless
said period is extended or the corporation is sooner dissolved in accordance with law.
Sec. 14. Contents of the articles of incorporation. - All corporations organized under this
code shall file with the Securities and Exchange Commission articles of incorporation in any of
the official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by special law:
(1) The name of the corporation; x x x
Corporation Law 2016: JVL & JSD
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this
Code has the power and capacity:
(1) To sue and be sued in its corporate NAME; x x x
(11 Zuellig Freight and Cargo Systems vs. National Labor Relations Commission, et al., G.R. No.
157900, July 22, 2013 United Church of Christ in the Phils Inc. vs. Bradford United Church of
Christ, 674 SCRA 92 [2012] - P.C. Javier & Sons, Inc., et al. vs. CA, 462 SC RA 36 [2005] --
Industrial Refractories Corporation of the Philippines vs. Court of Appeals, Securities and
Exchange Commission and Refractories Corporation of the Philippines, G.R. No. 122174,
October 3, 2002 Laureano Investment and Development Corporation v. Court of Appeals, 272
SCRA 253 [1997] - Pison-Arceo Agricultural Development Corp. v. NLRC, 279 SCRA 312 [1997]
SEC requires a Name Verification Slip and a Consent to Change Name to be submitted as
part of incorporation papers. See also SEC Guidelines in the Approval of Corporate and
Partnership Names (1977).
b. Purpose Clause –
Sec. 14. Contents of the articles of incorporation. - All corporations organized
under this code shall file with the Securities and Exchange Commission articles of incorporation
in any of the official languages duly signed and acknowledged by all of the incorporators,
containing substantially the following matters, except as otherwise prescribed by this Code or by
special law:
(2) The specific purpose or purposes for which the corporation is being incorporated .
Where a corporation has more than one stated purpose, the articles of incorporation shall state
which is the primary purpose and which is/are he secondary purpose or purposes:
Provided, That a non-stock corporation may not include a purpose which would change or
contradict its nature as such; x x x
Sec. 45. Ultra vires acts of corporations. –
NO corporation under this Code shall possess or exercise any corporate powers
except those conferred by this Code or by its articles of incorporation and
except such as are necessary or incidental to the exercise of the powers so conferred. (n) 
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this
Code has the power and capacity:
(11) To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.
3 reasons for requiring a purpose clause:
(i) to inform a prospective stockholder what line of business his money is to be risked.
(ii) to inform management within what lines of business it is authorized to act; and
(iii) to inform those who deal with the corporation whether a contract into which he
contemplates entering is one within the general authority of the management. (Ballantine on
Corporations, Rev. ed. [1946]
Sec. 17(2), Grounds when articles of incorporation or amendment may be
rejected or disapproved. - The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in compliance with the
15
requirements of this Code: Provided, That the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or disapproval:
(2) That the purpose or purposes of the corporation are
patently unconstitutional,
illegal,
immoral, or
contrary to government rules and regulations; x x x
Sec. 88. Purposes. - Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof, subject to the special provisions of this Title governing particular classes of
non-stock corporations. (n)  Sec. 116. Religious societies. - Any religious society or religious order, or any
Luneta Motor Co. v. AD Santos, Inc. 5 SCRA 809
c. Place of Principal Office –
Sec. 14. Contents of the articles of incorporation. - All corporations organized under this
code shall file with the Securities and Exchange Commission articles of incorporation in any of
the official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by special law:
(3) The place where the principal office of the corporation is to be located, which must be
within the Philippines; x x x
Sec. 51. Place and time of meetings of stockholders or members. - Stockholders'
or members' meetings, whether regular or special, shall be held in the city or municipality where
the principal office of the corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city
or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the meeting
be improperly held or called, provided ALL the stockholders or members of the corporation are
present or duly represented at the meeting. (24 and 25)
Rule 4, Sec. 2, 1997 Rules of Civil Procedure
Venue of personal actions. - All other actions may be commenced and tried where the plaintiff or
any of the principal plaintiffs resides, or where the defendant or any of the principal defendants
resides, or in the case of a non-resident defendant where he may be found, at the election of the
plaintiff.
Sy v. Tyson Enterprises, Inc., 119 SCRA [1982] - Clavecilla Radio System v. Antillon, 19 SCRA
379 [1967] - Chua Guan vs. Samahang Magsasaka, 62 Phil. 472 [1935] d.
d. Corporate Term.
Corporation Law 2016: JVL & JSD
Sec. 14. Contents of the articles of incorporation. - All corporations organized under this
code shall file with the Securities and Exchange Commission articles of incorporation in any of
the official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by special law:
(4) The term for which the corporation is to exist; x x x
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty
(50) years from the date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of incorporation may be extended
for periods not exceeding fifty (50) years in any single instance by an amendment of the articles
of incorporation, in accordance with this Code; Provided, That no extension can be made
earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the Securities and Exchange
Commission.
diocese, synod, or district organization of any religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or
church of which it is a part, or by competent authority, may, upon written consent and/or by an
affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership,
incorporate for the administration of its temporalities or for the management of its affairs,
properties and estate by filing with the Securities and Exchange Commission, articles of
incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of
such religious society or religious order, or diocese, synod, or district organization of the religious
denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district organization is a
religious organization of a religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their written consent or have voted
to incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden by competent authority or by the constitution,
rules, regulations or discipline of the religious denomination, sect, or church of which it forms a
part;
4. That the religious society or religious order, or diocese, synod, or district organization desires
to incorporate for the administration of its affairs, properties and estate;
5. The place where the principal office of the corporation is to be established and located, which
place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the religious society or
religious order, or the diocese, synod, or district organization to serve for the first year or such
other period as may be prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more
than fifteen (15). (160a)
e. Incorporators and Directors - number and qualifications:
Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not
less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are
residents of the Philippines, may form a private corporation for any lawful purpose or purposes.
Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1)
share of the capital stock of the corporation.
NUMBER AND QUALIFICATIONS OF INCORPORATORS
16
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a subscriber to at least 1 share of the capital stock of the
corporation (Sec. 10)
Sec. 14. Contents of the articles of incorporation. - All corporations organized under this code
shall file with the Securities and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by special law:
xxx
(6) The number of directors or trustees, which shall NOT be less than five (5) nor more than
fifteen (15);
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 to be elected from among the holders of stocks, or where there is no stock,
from among the members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock
of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-
stock corporations must be members thereof. a majority of the directors or trustees of all
corporations organized under this Code must be residents of the Philippines.
Sec. 92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more
than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as
soon as organized, so classify themselves that the term of office of one-third (1/3) of their number
shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the
board of trustees shall be held annually and trustees so elected shall have a term of three (3)
years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular
term shall hold office only for the unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a
non-stock corporation may be directly elected by the members. (n)
Nautica Canning Corporation, et aL vs. Roberto C. Yumul, G.R. No.164588, October 19, 2005
i. Not less than 5 nor more than 15;
Non-stock except educational corporations — may be more than 15 trustees —
Sec. 92.
In case of merged or consolidated banks, the number of directors shall NOT
exceed 21 — Sec. 17, General Banking Law of 2000, RA 8791 (GBL).
ii. Nationality must be stated in the Articles.
 Majority of directors of corporations organized under the Code must be residents of the
Philippines.
 "Philippine National" — a citizen of the Philippines or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized
Corporation Law 2016: JVL & JSD
under the laws of the Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines; -
at least 60% of the members of the Board of Directors of each of both corporations
must be citizens of the Philippines, in order that corporations shall be considered as
Philippine national. Sec. 3(a), RA 7042, as amended, the Foreign Investments Act of
1991.
 Anti-Dummy Law, CA 108, as amended — In areas which are partially nationalized,
aliens may be directors of a corporation, proportionate to their allowable participation
or shares in the capital of the corporation. See also Sec. 15, GBL
f. Authorized Capital Stock; subscribed and paid-up —
Sec. 12. Minimum capital stock required of stock corporations. - Stock
corporations incorporated under this Code shall NOT be required to have any minimum
authorized capital stock except as otherwise specifically provided for by special law, and
subject to the provisions of the following section.
 No required minimum authorized capital stock except as required by special law but
paid-up capital stock cannot be lower than P5,000
 (Sec. 13). — to insure the adequacy of corporate capitalization for the protection of
third persons who deal with the corporation; to give assurance to the public that may
deal with the new corporation that it is actually able to operate and undertake to do
business and to meet obligations as they arise from the start of the operations.
 Authorized — amount fixed in the articles of incorporation to be subscribed and
paid-in or secured to be paid in by the shareholders of a corporation, at the
organization of the corporation or afterwards, and upon which it is to conduct its
operations. 11 Fletcher, Cyclopedia of the Law of Private Corporation, perm ed., p. 10.
 Subscription — Bayla vs. Silang Traffic Co., Inc., 73 Phil 557 (1942 — Sec. 13).
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated
in the articles of incorporation must be subscribed at the time of incorporation, and at least
twenty-five (25%) per cent of the total subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the contract of subscription without need of
call, or in the absence of a fixed date or dates, upon call for payment by the board of
directors: Provided, however, That in no case shall the paid-up capital be less than five
Thousand (P5,000.00) pesos.
SUBSCRIPTION REQUIREMENT
The amount of capital stock to be subscribed and paid for the purposes of incorporation
(Sec. 13):
(1) At the time of incorporation, at least 25% of the authorized capital stock stated in the AOI
should be subscribed;
(2) At least 25% of the said 25% above, must be paid upon subscription;
(3) The balance to be payable on
(a) Dates fixed in the subscription contract or
(b) Upon call by the BOD in the absence of fixed dates
(4) The paid-up capital can in no case be lower than P5,000.00
 Paid-up—
17
 Sec. 14. Contents of the articles of incorporation. - All corporations organized
under this code shall file with the Securities and Exchange Commission articles of
incorporation in any of the official languages duly signed and acknowledged by all of the
incorporators, containing substantially the following matters, except as otherwise prescribed
by this Code or by special law: x x x
The Securities and Exchange Commission shall NOT accept the articles of
incorporation of any stock corporation unless accompanied by a sworn statement of
the Treasurer elected by the subscribers showing that at least twenty-five (25%)
percent of the authorized capital stock of the corporation has been subscribed,
and at least twenty-five (25%) of the total subscription has been fully paid to him
in actual cash and/or in property the fair valuation of which is equal to at least
twenty-five (25%) percent of the said subscription, such paid-up capital being not
less than five thousand (P5,000.00) pesos.
 Par value share — value stated in the certificate of stock as an amount in pesos
representing the nominal value of the shares. The par value must be stated in the
articles of incorporation, and par shares cannot be issued at less than the par value,
which can be changed only by an amendment of the articles of incorporation. Campos,
The Corporation Code, p. 80(1980].
 No Par share —
Sec. 14. Contents of the articles of incorporation. - All corporations organized under
this code shall file with the Securities and Exchange Commission articles of incorporation in
any of the official languages duly signed and acknowledged by all of the incorporators,
containing substantially the following matters, except as otherwise prescribed by this Code
or by special law: x x x
(8) If it be a stock corporation, the amount of its authorized capital stock in lawful money
of the Philippines, the number of shares into which it is divided , and in case the share
are par value shares, the par value of each, the names, nationalities and residences of the
original subscribers, and the amount subscribed and paid by each on his subscription ,
and if some or all of the shares are without par value, such fact must be stated;
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be
divided into classes or series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in
this Code: Provided, further, That there shall always be a class or series of shares which
have complete voting rights. Any or all of the shares or series of shares may have a par
value or have no par value as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That preferred shares of stock
may be issued only with a stated par value. The board of directors, where authorized in
the articles of incorporation, may fix the terms and conditions of preferred shares of stock or
any series thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Corporation Law 2016: JVL & JSD
Shares of capital stock issued WITHOUT par value shall be deemed fully paid and non-
assessable and the holder of such shares shall NOT be LIABLE to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not be issued for a
consideration less than the value of five (P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its no-par value shares shall be treated
as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate
of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer only to
stocks with voting rights.
 Issued value — Sec. 6. g.
g. Other Matters:
 should not be inconsistent with law;
 may include that which the incorporators may deem necessary and convenient.
 May include
(i) classes of shares;
(ii) preferences;
(iii) restrictions, e.g. partially nationalized business (Sec. 15[11]). h.
h. Treasurer's Affidavit: Sworn Statement of the Treasurer-in-trust that at least 25% of
the authorized capital stock of the corporation has been subscribed, and at least 25%
of the total subscription has been fully paid to him in actual cash and/or in property the
fair valuation of which is equal to at least 25% of said subscription, such paid-up capital
being not less than p5,000.
2. Grounds for Rejection by SEC (SEC 17)
a. Non-compliance with prescribed form. (Sec. 14 and 15)
b. Patently unconstitutional, immoral, illegal purposes, or those which contravene
government rules and regulations.
18
 c. False Treasurer's Affidavit
d. Non-compliance with the Required Percentage of ownership of capital stock of
Filipinos.
Constitutional and statutory requirements:
1. Mass media - Sec. 11, Art. XVI, Phi. Consti.; 100%
2. Domestic Banks - Sec.11, GBL of 2000; 60%
3. Telecommunications - Sec. 7(2); Art. XV, Phi. Consti,; 60%
4. Recruitment Agency - Labor Code, Art. 27; 75%
5. Foreign Investment Act
Sec. 17. Grounds when articles of incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in compliance with the
requirements of this Code: Provided, That the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in accordance
with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral,
or contrary to government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if
false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines
has not been complied with as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and
quasi-banking institutions, building and loan associations, trust companies and other financial
intermediaries, insurance companies, public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or approved by the Commission unless
accompanied by a favorable recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.
GROUNDS FOR DISAPPROVING Articles of Incorporation (SEC. 17) (F2P2)
(1) AOI does not SUBSTANTIALLY comply with the form prescribed
(2) Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and
regulations
(3) Treasurer’s Affidavit concerning the amount of capital subscribed and or paid is false
(4) Required percentage of ownership of Filipino citizens has not been complied with.
Remedy in case of rejection of AOI: Petition for review in accordance with the Rules of Court
(Sec. 6, last par., PD 902-A)
C. By-Laws
Sec. 36 - one of the inherent powers and capacities of a corporation is to adopt by law, not
contrary to law, morals, public policy, and to amend or repeal the same in accordance with the
Code.
Corporation Law 2016: JVL & JSD
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this
Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers
Forest Hills Golf and Country Club Inc. vs. Gardpro Inc., G.R. No. 164686, October 22, 2014
1) Time of Adoption:
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must, within
one (1) month after receipt of official notice of the issuance of its certificate of incorporation by
the Securities and Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote
of the stockholders representing at least a majority of the outstanding capital stock, or of
at least a majority of the members in case of non-stock corporations, shall be necessary.
The by-laws shall be signed by the stockholders or members voting for them and shall be kept in
the principal office of the corporation, subject to the inspection of the stockholders or members
during office hours. A copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and
filed PRIOR to incorporation; in such case, such by-laws shall be approved and signed by all
the incorporators and submitted to the Securities and Exchange Commission, together with the
articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall NOT accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust
19
company, insurance company, public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the appropriate government How delegation is revoked: Any power delegated to the board of directors or trustees to amend or
agency to the effect that such by-laws or amendments are in accordance with law. (20a) repeal any by-laws or adopt new by-laws shall be considered as revoked.

WHEN ADOPTION IS MADE (SEC. 46) Loyola Grand Villas Homeowners (South) Asso., Inc. vs. CA, 276 SCRA 681 (1997)
(1) Prior to incorporation – approved and signed by all the incorporators & submitted to SEC
together with AOI 2) Contents:

(2) After incorporation – within 1 month after receipt of official notice of the issuance of its Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution, this
certificate of incorporation by the SEC. Code, other special laws, and the articles of incorporation, a private corporation may provide
in its by-laws for:
EFFECT OF FAILURE TO FILE THE BY-LAWS WITHIN THE PERIOD 1. The time, place and manner of calling and conducting regular or special meetings of the
Does not imply the "demise" of the corporation. By-laws may be required by law for an directors or trustees;
orderly governance and management of corporations but they are not essential to corporate birth. 2. The time and manner of calling and conducting regular or special meetings of the
Therefore, failure to file them within the period required by law by no means tolls the automatic stockholders or members;
dissolution of a corporation (Loyola Grand Villas Homeowners Assn. v. CA (1997) 3. The required quorum in meetings of stockholders or members and the manner of voting
therein;
Note: Section 22 on the effect of failure to formally organize within 2 years from incorporation, the 4. The form for proxies of stockholders and members and the manner of voting them;
corporation’s corporate powers cease and the corporation is deemed dissolved. Organization 5. The qualifications, duties and compensation of directors or trustees, officers and
includes: the filing & approval of bylaws with the SEC and the election of directors and officers employees;
(Campos). 6. The time for holding the annual election of directors of trustees and the mode or manner
of giving notice thereof;
NATURE AND FUNCTION OF BY LAWS 7. The manner of election or appointment and the term of office of all officers other than
(1) Product of agreement of the stockholders/members and establish the rules for internal directors or trustees;
government of the corporation (Campos) 8. The penalties for violation of the by-laws;
(2) “A rule or law of a corporation for its government” (13 Am. Jur., 283) 9. In the case of stock corporations, the manner of issuing stock certificates; and
(3) Mere internal rules among stockholders and cannot affect or prejudice 3rd persons who deal 10. Such other matters as may be necessary for the proper or convenient transaction of its
with the corporation unless they have knowledge of the same (China Banking Corp v CA, 1997) corporate business and affairs. (21a) 
(4) “According to its function, by-laws may be defined as the rules and regulations or private laws
enacted by the corporation to regulate, govern and control its own actions, affairs and concerns a) time, place and manner of calling and conducting directors' or trustees'
and its stockholders or members and directors and officers with relation thereto and among regular or special meetings; Sec. 53 allows meetings to be held outside of
themselves in their relation to it.” (9 Fletcher Cyc. Corp., 1963 rev. ed., Sec. 4166 at 622 cited in the Philippines;
Lopez, 1994) b) time and manner of calling and conducting stockholders' or members' regular
or special meetings; the place is a matter of law, i.e. Sec. 51
REQUISITES OF VALID BY-LAWS c) required quorum in stockholders' or members' meetings and the manner of
(1) Must be approved by the affirmative vote of the stockholders representing MAJORITY of the voting; i
outstanding capital stock or majority of members (If filed pre-incorporation: must be approved and d) form for proxies of stockholders and members and the manner of voting
signed by all incorporators) them;
(2) Must be kept in the principal office of the corporation, subject to inspection of stockholders or e) qualifications, duties and compensation of directors or trustees, officers and
members during office hours (Sec. 74) employees; Sec. 25 - sets the statutory officers to be elected, i.e. President,
Secretary and Treasurer, but by-laws can provide for others;
BINDING EFFECTS f) time for directors' annual elections; mode and manner of giving notice
ONLY from date of issuance of SEC of certification that bylaws are not inconsistent with the Code thereof;
Pending approval, they CANNOT bind stockholders or corporation g) manner of election or appointment and the term of office of all officers other
than directors or trustees;
AMENDMENT OR REVISION h) manner of stock issuance;
Effected by: Majority vote of the members of the Board and majority vote of the owners of the i) other matters necessary for the proper or convenient transaction of its
OCS or members, in a meeting duly called for the purpose. Delegation to the BOD of the power corporate business and affairs
to amend or repeal by-laws: by vote of stockholders representing 2/3 of the OCS or 2/3 of the
members 3) Other Allowable Contents

20
Corporation Law 2016: JVL & JSD

i. sec. 24 - time to exercise right to vote;
ii. sec. 25 - additional officers;
iii. sec. 35 - executive committee creation;
iv. sec. 54 - presiding officer at meetings;
v. sec. 66 - interest rate on unpaid subscriptions;
vi. sec. 74 - entries in the stock and transfer book
4) Role: -
Fleischer vs. Botica Nolasco, 47 Phil. 583!19251
But the Corporation Code now ALLOWS reasonable transfer restrictions in close
corporations).
Pena vs. CA, 193 SCRA 717 (1991)
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.  d.
Apparently, only three (3) out of five (5) members of the board of directors of
respondent PAMBUSCO convened on November 19, 1974 by virtue of a prior notice of a
special meeting. There was no quorum to validly transact business since, under Section 4
of the amended by-laws herein above reproduced, at least four (4) members must be
present to constitute a quorum in a special meeting of the board of directors of respondent
PAMBUSCO.  Code has the power and capacity:
Under Section 25 of the Corporation Code of the Philippines, the articles of
incorporation or by-laws of the corporation may fix a greater number than the majority of the
number of board members to constitute the quorum necessary for the valid transaction of
business. Any number less than the number provided in the articles or by-laws therein cannot
constitute a quorum and any act therein would not bind the corporation; all that the attending
directors could do is to adjourn.  Grace Christian High School vs. CA, 281 SCRA 133 [1997])
As a matter of fact, the three (3) alleged directors who attended the special meeting on
November 19, 1974 were not listed as directors of respondent PAMBUSCO in the latest general
information sheet of respondent PAMBUSCO filed with the SEC dated 18 March 1951. Similarly,
the latest list of stockholders of respondent PAMBUSCO on file with the SEC does not show that
the said alleged directors were among the stockholders of respondent PAMBUSCO.
Under Section 30 of the then applicable Corporation Law, only persons who own at least one
(1) share in their own right may qualify to be directors of a corporation. Further,
under Section 28 1/2 of the said law, the sale or disposition of all 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. No doubt, the questioned resolution
was not confirmed at a subsequent stockholders meeting duly called for the purpose by the
affirmative votes of the stockholders holding at least two-thirds (2/3) of the voting power in the
corporation. The same requirement is found in Section 40 of the present Corporation Code.
PMI College vs. NLRC, 277 SCRA 462 (1997)
Corporation Law 2016: JVL & JSD
BY LAWS; OPERATE MERELY AS INTERNAL RULES AMONG THE STOCKHOLDERS,
THEY CANNOT AFFECT OR PREJUDICE THIRD PERSONS UNLESS THEY HAVE
KNOWLEDGE OF THE SAME;— Neither can we concede that such contract would be invalid just
because the signatory thereon was not the Chairman of the Board which allegedly violated
petitioner's by-laws. Since by-laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons who deal with the corporation,
unless they have knowledge of the same." No proof appears on record that private respondent
ever knew anything about the provisions of said by-laws. In fact, petitioner itself merely asserts
the same without even bothering to attach a copy or excerpt thereof to show that there is such a
provision. How can it now expect the Labor Arbiter and the NLRC to believe it? That this
allegation has never been denied by private respondent does not necessarily signify admission of
its existence because technicalities of law and procedure and the rules obtaining in the courts of
law do not strictly apply to proceedings of this nature. 
5) Limitations:
a. Not contrary to law, morals, or public policy (sec. 36(5))
b. Not inconsistent with the Code (sec. 46(3); sec. 23)
c. Cannot impair contract obligations
General and uniform in operation; affect all alike
e. Consistent with Articles of Incorporation
f. Reasonable and not arbitrary and oppressive
a. Not contrary to law, morals, or public policy –
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
These provisions of 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. But in the
case of petitioner, there is no reason at all for its representative to be given a seat in the board.
Nor does petitioner claim a right to such seat by virtue of an office held. In fact it was not given
such seat in the beginning. It was only in 1975 that a proposed amendment to the by-laws sought
to give it one.
Since the provision in question is contrary to law, the fact that for fifteen years it has not
been questioned or challenged but, on the contrary, appears to have been implemented by the
members of the association cannot forestall a later challenge to its validity. Neither can it attain
validity through acquiescence because, if it is contrary to law, it is beyond the power  of the
members of the association to waive its invalidity. For that matter the members of the association
may have formally adopted the provision in question, but their action would be of no avail
because no provision of the by-laws can be adopted if it is contrary to law. 
21
 It is probable that, in allowing petitioner's 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 petitioner's
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.
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."  AUTHORIZED TO REGULATE BUT NOT RESTRICT STOCKHOLDERS RIGHT TO
b. Not inconsistent with the Code
Sec. 46. Adoption of by-laws. -
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.
Sec 23
c. Cannot impair contract obligations (Fleischer vs. Nolasco, supra).
Salafranca vs. Philamlife (Pamplona) Village v. Homeowners Asso., Inc., 300 SCRA 469, 479
(1998)
TERMINATION BASED ON AMENDED BY-LAWS CANNOT IMPAIR OBLIGATION OF
EXISTING CONTRACTS OR RIGHTS. — Admittedly, the right to amend the by-laws lies solely in
the discretion of the employer, this being in the exercise of management prerogative or business
judgment. However this right, extensive as it may be, cannot impair the obligation of existing
contracts or rights. If private respondent wanted to make the petitioner's position co-terminus with
that of the Board of Directors, then the amendment must be effective after petitioner's stay with
the private respondent, not during his term. Obviously, the measure taken by the private
respondent in amending its by-laws is nothing but a devious, but crude, attempt to circumvent
petitioner's right to security of tenure as a regular employee guaranteed under the Labor Code.
d. General and uniform in operation; affect all alike - (8 Fletcher Cyc. Corp., Sec. 4192).
e. Consistent with Articles of Incorporation - (Fletcher, supra, Sec. 410)
Rural Bank of Salinas, Inc. vs. CA, 210 SCRA 510 (1992), quoting from Tomson on Corporation
Sec. 4137, cited in Fleischer vs. Nolasco, 47 Phil. 583.
Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive
jurisdiction to hear and decide cases involving intracorporate controversies. An
intracorporate controversy has been defined as one which arises between a stockholder
and the corporation. There is no distinction, qualification, nor any exception whatsoever
A corporation, either by its board, its by-laws, or the act of its officers, cannot
create restrictions in stock transfers
The right of a transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks
Corporation Law 2016: JVL & JSD
The corporation's obligation to register is ministerial.
"In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does
not try to decide the question of ownership."
The duty of the corporation to transfer is a ministerial one and if it refuses to make such
transaction without good cause, it may be compelled to do so by mandamus."
f. Reasonable and not arbitrary and oppressive - (Fletcher, supra, Sec. 4191).
Thomson vs. Court of Appeals, 298 SCRA 280 (1988).
TRANSFER THEIR SHARES; TRANSFER OF SHARES BETWEEN PARTIES IN CASE AT BAR
IS FEASIBLE. — Private respondent does not insist nor intend to transfer the club membership in
its name but rather to its designated nominee. The Manila Polo Club does not necessarily prohibit
the transfer of proprietary shares by its members. The Club only restricts membership to
deserving applicants in accordance with its rules, when the amended Articles ofIncorporation
states that: "No transfer shall be valid except between the parties, and shall be registered in the
Membership Book unless made in accordance with these Articles and the By-Laws." Thus, as
between parties herein, there is no question that a transfer is feasible. Moreover, authority
granted to a corporation to regulate the transfer of its stock does not empower it to restrict
the right of a stockholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be followed in effecting
transfer. In this case, the petitioner was the nominee of the private respondent to hold the share
and enjoy the privileges of the club. But upon the expiration of petitioner's employment as officer
and consultant of AmCham, the incentives that go with the position, including use of the MPC
share, also ceased to exist. It now behooves petitioner to surrender said share to private
respondent's next nominee, another natural person. Obviously this arrangement of trust and
confidence cannot be defeated by the petitioner's citation of the MPC rules to shield his untenable
position, without doing violence to basic tenets of justice and fair dealing. 
D. Commencement of Corporate Existence –
Sec. 19. Commencement of corporate existence. - A private corporation formed or
organized under this Code commences to have corporate existence and juridical personality and
is deemed incorporated from the date the Securities and Exchange Commission issues a
certificate of incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and corporate under
the name stated in the articles of incorporation for the period of time mentioned therein, unless
said period is extended or the corporation is sooner dissolved in accordance with law.
Sec. 22. Effects on non-use of corporate charter and continuous in-operation of
a corporation.- If a corporation does not formally organize and commence the transaction of its
business or the construction of its works within two (2) years from the date of its incorporation, its
corporate powers cease and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall be a ground for the
suspension or revocation of its corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes beyond
the control of the corporation as may be determined by the Securities and Exchange
Commission.
22
 Sec. 112. Submission of the articles of incorporation. - The articles of
incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop,
bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy
of the commission, certificate of election or letter of appointment of such chief archbishop, bishop,
priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned
in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding
elder shall become a corporation sole and all temporalities, estate and properties of the religious
denomination, sect or church theretofore administered or managed by him as such chief
archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a
corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect
or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries
thereof. (n)
Sec. 117. Methods of dissolution. - A corporation formed or organized under the
provisions of this Code may be dissolved voluntarily or involuntarily. (n)
V. POWERS OF CORPORATIONS
A. General Powers - Secs. 36 and 45 - Sec. 36 confers the powers and capacity of a corporation
and Sec. 45 states that corporate powers not expressly conferred by the Code or the articles of
incorporation or those which are not necessary or incidental to the exercise of the conferred
powers are Ultra Vires Acts.
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this
Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.
Corporation Law 2016: JVL & JSD
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by its articles
of incorporation and except such as are necessary or incidental to the exercise of the powers so
conferred. (n) 
Spouses Afulugencia vs. Metropolitan Bank and Trust Co. G.R. No. 185145, February 05, 2014
Wala ako nakita related sa corpo
 
Ligaya Esguerra, et al. vs. Holcim Philippines, Inc., G.R. No. 182571, September 2, 2013
The general rule is that a corporation can only exercise its powers and transact its business
through its board of directors and through its officers and agents when authorized by a board
resolution or its bylaws. The power of a corporation to sue and be sued is exercised by the
board of directors. The physical acts of the corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the purpose by corporate bylaws or by a
specific act of the board. Absent the said board resolution, a petition may not be given due
course.52
In Bank of the Philippine Islands v. Court of Appeals, 53 the Court held that the application of the
rules must be the general rule, and the suspension or even mere relaxation of its application, is
the exception. This Court may go beyond the strict application of the rules only on exceptional
cases when there is truly substantial compliance with the rule.54
In the event that the petitioners’ claim is beyond the subject area and period, and HOLCIM denies
such indebtedness, the governing rule should be Section 43, Rule 39 of the Rules of Court, to wit:
SEC. 43. Proceedings when indebtedness denied or another person claims the property.— If it
appears that a person or corporation, alleged to have property of the judgment obligor or to be
indebted to him, claims an interest in the property adverse to him or denies the debt, the court
may authorize, by an order made to that effect, the judgment obligee to institute an action against
such person or corporation for the recovery of such interest or debt, forbid a transfer or other
disposition of such interest or debt within one hundred twenty (120) days from notice of the order,
and may punish disobedience of such order as for contempt. Such order may be modified or
vacated at any time by the court which issued it, or by the court in which the action is brought,
upon such terms as may be just. (Emphasis ours)
Pursuant to this Rule, in the examination of a person, corporation, or other juridical entity
who has the property of such judgment obligor or is indebted to him (Rule 39, Section 37),
and such person, corporation, or juridical entity denies an indebtedness, the court may
only authorize the judgment obligee to institute an action against such person or
corporation for the recovery of such interest or debt. Nothing in the Rules gives the court
the authority to order such person or corporation to pay the judgment obligee and the
court exceeds its jurisdiction if it orders the person who denies the indebtedness to pay
the same. In Atilano II v. Asaali,72 the Court held that an "[e]xecution of a judgment can only be
issued against one who is a party to the action, and not against one who, not being a party
thereto, did not have his day in court. Due process dictates that a court decision can only bind a
party to the litigation and not against innocent third parties."73
23
Skyway Traffic Management and Security Division Workers Organization vs. PNCC Skyway
Corporation, GR No. 171231, February 17, 2010
The purpose of requiring verification is to secure an assurance that the allegations in the
petition have been made in good faith; or are true and correct, not merely speculative. This
requirement is simply a condition affecting the form of pleadings, and non-compliance therewith
does not necessarily render it fatally defective. Truly, verification is only a formal, not a
jurisdictional, requirement.
With respect to the certification of non-forum shopping, it has been held that the certification
requirement is rooted in the principle that a party-litigant shall not be allowed to pursue
simultaneous remedies in different fora, as this practice is detrimental to an orderly judicial
procedure. However, this Court has relaxed, under justifiable circumstances, the rule requiring
the submission of such certification considering that, although it is obligatory, it is not
jurisdictional. Not being jurisdictional, it can be relaxed under the rule of substantial compliance. 12
The rationale to justify the authority of corporate officers or representatives of the
corporation to sign the verification or certificate against forum shopping, being "in a
position to verify the truthfulness and correctness of the allegations in the petition."
In the case at bar, We rule that Rene Soriano has sufficient authority to sign the verification and
certification against forum shopping for the following reasons: First, the resolution dated June 30,
2006 was merely a reiteration of the authority given to the Union President to file a case before
this Court assailing the CBA violations committed by the management, which was previously
conferred during a meeting held on October 5, 2005. Thus, it can be inferred that even prior to the
filing of the petition before Us on February 27, 2006, the president of the union was duly
authorized to represent the union and to file a case on its behalf. Second, being the president of
the union, Rene Soriano is in a position to verify the truthfulness and correctness of the
allegations in the petition. Third, assuming that Mr. Soriano has no authority to file the
petition on February 27, 2006, the passing on June 30, 2006 of a Board Resolution
authorizing him to represent the union is deemed a ratification of his prior execution, on
February 27, 2006, of the verification and certificate of non-forum shopping, thus curing
any defects thereof. Ratification in agency is the adoption or confirmation by one person of an
act performed on his behalf by another without authority. 14
Mid Pasig Land and Development Corporation vs. Tablante, G.R. No. 162924, February 4, 2010;
PNCC
It must be borne in mind that Sec. 23, in relation to Sec. 25 of the Corporation Code, clearly
enunciates that all corporate powers are exercised, all business conducted, and all
properties controlled by the board of directors. A corporation has a separate and distinct
personality from its directors and officers and can only exercise its corporate powers
through the board of directors. Thus, it is clear that an individual corporate officer cannot
solely exercise any corporate power pertaining to the corporation without authority from
the board of directors. This has been our constant holding in cases instituted by a
corporation.
In sum, we have held that the following officials or employees of the company can sign the
verification and certification without need of a board resolution: (1) the Chairperson of the Board
of Directors, (2) the President of a corporation, (3) the General Manager or Acting General
Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case.1avvphi1
Corporation Law 2016: JVL & JSD
While the above cases do not provide a complete listing of authorized signatories to the
verification and certification required by the rules, the determination of the sufficiency of the
authority was done on a case to case basis. The rationale applied in the foregoing cases is to
justify the authority of corporate officers or representatives of the corporation to sign the
verification or certificate against forum shopping, being "in a position to verify the truthfulness and
correctness of the allegations in the petition." 10
From the foregoing, it is thus clear that the failure to attach the Secretary’s Certificate,
attesting to General Manager Antonio Merelos’s authority to sign the Verification and
Certification of Non-Forum Shopping, should not be considered fatal to the filing of the
petition. Nonetheless, the requisite board resolution was subsequently submitted to the
CA, together with the pertinent documents. 11 Considering that petitioner substantially
complied with the rules, the dismissal of the petition was, therefore, unwarranted. Time and
again, we have emphasized that dismissal of an appeal on a purely technical ground is frowned
upon especially if it will result in unfairness. The rules of procedure ought not to be applied in a
very rigid, technical sense for they have been adopted to help secure, not override, substantial
justice. For this reason, courts must proceed with caution so as not to deprive a party of statutory
appeal; rather, they must ensure that all litigants are granted the amplest opportunity for the
proper and just ventilation of their causes, free from the constraint of technicalities. 12
1. To sue and be sued
COSCO Philippines, Inc. vs. Kemper Insurance Co., 670 SCRA 343.
A corporation has no powers except those expressly conferred on it by the Corporation Code and
those that are implied from or are incidental to its existence. In turn, a corporation exercises said
powers through its board of directors and/or its duly authorized officers and agents. It has been
observed that the power of a corporation to sue and be sued in any court is lodged with
the board of directors that exercises its corporate powers. Physical acts, like the signing
of documents, can be performed only by natural persons duly authorized for the purpose
by corporate by-laws or by a specific act of the board of directors. 37 Thus, any person suing
on behalf of the corporation should present proof of such authority. 
Pasricha vs. Don Luis Dison Realty, Inc., 548 SCRA 273 [2008
The capacity of a corporation to institute an ejectment suit is not affected by the
subsequent suspension and revocation of certificate of registration
We uphold the capacity of respondent company to institute the ejectment case. Although the
Securities and Exchange Commission (SEC) suspended and eventually revoked respondent’s
certificate of registration on February 16, 1995, records show that it instituted the action for
ejectment on December 15, 1993. Accordingly, when the case was commenced, its registration
was not yet revoked.35 Besides, as correctly held by the appellate court, the SEC later set aside
its earlier orders of suspension and revocation of respondent’s certificate, rendering the issue
moot and academic.36
We likewise affirm Ms. Bautista’s capacity to sue on behalf of the company despite lack of proof
of authority to so represent it. A corporation has no powers except those expressly conferred on it
by the Corporation Code and those that are implied from or are incidental to its existence. In turn,
a corporation exercises said powers through its board of directors and/or its duly authorized
officers and agents. Physical acts, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the
24
board of directors.37 Thus, any person suing on behalf of the corporation should present proof of
such authority. Although Ms. Bautista (corporate officer) initially failed to show that she had
the capacity to sign the verification and institute the ejectment case on behalf of the
company, when confronted with such question, she immediately presented the Secretary’s
Certificate38 confirming her authority to represent the company.
There is ample jurisprudence holding that subsequent and substantial compliance may
call for the relaxation of the rules of procedure in the interest of justice
Munoz vs. People of the Philippine, 548 SCRA 473 [2008]
The issue of whether a corporate officer may bring suit on behalf of his corporation for violation of
B.P. Blg. 22 is not novel. In Tam Wing Tak v. Makasiar,35 the Court affirmed the dismissal of a
criminal case for violation of B.P. Blg. 22 for lack of authority of the private complainant, thus:
Second, it is not disputed in the instant case that Concord, a domestic corporation, was the payee
of the bum check, not petitioner. Therefore, it is Concord, as payee of the bounced check, which
is the injured party. Since petitioner was neither a payee nor a holder of the bad check, he had
neither the personality to sue nor a cause of action against Vic Ang Siong. Under Section 36 of
the Corporation Code, read in relation to Section 23, it is clear that where a corporation is
an injured party, its power to sue is lodged with its board of directors or trustees. Note
that petitioner failed to show any proof that he was authorized or deputized or granted
specific powers by Concord's board of director to sue Victor And Siong for and on behalf
of the firm. Clearly, petitioner as a minority stockholder and member of the board of
directors had no such power or authority to sue on Concord's behalf. x x x36
Cagayan ValL Drug Corp. vs. Comm. of int. Rev. 545 SCRA 10 [2008]
It must be borne in mind that Sec. 23, in relation to Sec. 25 of the Corporation Code, clearly
enunciates that all corporate powers are exercised, all business conducted, and all properties
controlled by the board of directors. A corporation has a separate and distinct personality from its
directors and officers and can only exercise its corporate powers through the board of directors.
Thus, it is clear that an individual corporate officer cannot solely exercise any corporate
power pertaining to the corporation without authority from the board of directors. This has
been our constant holding in cases instituted by a corporation.
In sum, we have held that the following officials or employees of the company can sign the
verification and certification without need of a board resolution:
(1) the Chairperson of the Board of Directors,
(2) the President of a corporation,
(3) the General Manager or Acting General Manager,
(4) Personnel Officer, and
(5) an Employment Specialist in a labor case.
Philippine Airlines v. Flight Attendants and Stewards Association of the Philippines, we ruled that
only individuals vested with authority by a valid board resolution may sign the certificate
of non-forum shopping on behalf of a corporation. The action can be dismissed if the
certification was submitted unaccompanied by proof of the signatory’s authority. 14 We believe that
appending the board resolution to the complaint or petition is the better procedure to
obviate any question on the authority of the signatory to the verification and certification.
The required submission of the board resolution is grounded on the basic precept that corporate
powers are exercised by the board of directors,15 and not solely by an officer of the corporation.
Corporation Law 2016: JVL & JSD
Hence, the power to sue and be sued in any court or quasi-judicial tribunal is necessarily lodged
with the said board.
United Paragon Mining Corporation vs. CA, 497 SCRA 638 [2006]
We start with the basic concept that a corporation, like petitioner UPMC, has no power except
those expressly conferred on it by the Corporation Code and those that are implied or incidental
to its existence. In turn, a corporation exercises said powers through its board of directors and/or
its duly authorized officers and agents. It has thus been observed that the power of a
corporation to sue and be sued in any court is lodged with its board of directors that
exercises its corporate powers. In turn, physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for the purpose by
the corporate by-laws or by a specific act of the board of directors. 9
Throughout the proceedings before the Voluntary Arbitrator, that is, from the filing of the position
papers up to the filing of the motion for reconsideration, UPMC was duly represented by its
counsel, Atty. Archimedes O. Yanto. True it is that Cesario’s complaint for illegal dismissal was
filed against the corporation and Daniel. It appears obvious to us, however, that Daniel was
merely a nominal party in that proceedings, as in fact he was impleaded thereat in his capacity as
UPMC’s Personnel Superintendent who signed the termination letter. For sure, Cesario’s
complaint contains no allegation whatsoever for specific claim or charge against Daniel in
whatever capacity. As it is, Daniel was not in anyway affected by the outcome of the illegal
dismissal case because only the corporation was made liable therein to Cesario. Being not a
real party-in-interest, Daniel has no right to file the petition in CA-G.R. SP No. 44450 in
behalf of the corporation without any authority from its board of directors. It is basic in law
that a corporation has a legal personality entirely separate and distinct from that of its
officers and the latter cannot act for and on its behalf without being so authorized by its
governing board.
In Premium Marble Resources, Inc. v. Court of Appeals, 10 we made it clear that in the absence of
an authority from the board of directors, no person, not even the officers of the corporation, can
validly bind the latter:
Gonzales vs. Climax Mining Ltd., 452 SCRA 607 [2005]
Under Section 3, Rule 46 of the Rules of Court, a petitioner is required to submit, together with
the petition, a sworn certification of non-forum shopping, and failure to comply with this
requirement is sufficient ground for dismissal of the petition. The requirement that petitioner
should sign the certificate of non-forum shopping applies even to corporations, the Rules of Court
making no distinction between natural and juridical persons. The signatory in the case of the
corporation should be "a duly authorized director or officer of the corporation" who has knowledge
of the matter being certified. 15 If, as in this case, the petitioner is a corporation, a board
resolution authorizing a corporate officer to execute the certification against forum-
shopping is necessary. A certification not signed by a duly authorized person renders the
petition subject to dismissal.16
PET Plans, Inc. vs. CA, 446 SCRA 510 [2005]
In the present case, a reading of the subject resolution issued by the Board of Directors of PET
PLANS, shows that it authorizes Espino to represent only PET PLANS, not its co-petitioner,
25
Ocampo. Nothing in the records at hand indicates that Espino is clothed with special authority to
represent Ocampo. Hence, Espino does not represent Ocampo, in the filing of CA-G.R. SP No.
62410. As such, Ocampo, being a petitioner in his own right, should have also signed the
verification and certificate of non-forum shopping attached to the petition of CA-G.R. SP No.
62410. Ordinarily, Ocampo should have been considered a nominal party as he was merely
impleaded by complainant in his capacity as the president of PET PLANS and no specific
claim or charge against him, in his personal capacity, was alleged in the complaint filed
with the NLRC, Regional Arbitration Branch. However, considering that the Labor Arbiter's
decision made him jointly and solidarily liable with PET PLANS, he has become a real
party-in-interest whose stake, subsequent to the Labor Arbiter's decision, have become
distinct from those of petitioner corporation. As such, it becomes inevitable for him to sign
the verification and certificate of non-forum shopping.
In the present case, it cannot be said with certainty that Espino knows beyond doubt that Ocampo
has not filed before any court or tribunal a separate case related to the present petition and the
petition in CA-G.R. SP No. 62410. In Loquias vs. Office of the Ombudsman, 16 we held that failure
of one of the petitioners to sign the verification and certificate against forum shopping constitutes
a defect in the petition, which is a ground for dismissing the same. While we have held in rulings
subsequent to Loquias that this rule may be relaxed, petitioners must comply with two
conditions:
first, petitioners must show justifiable cause for their failure to personally sign the
certification and;
second, they must also be able to prove that the outright dismissal of the petition would
seriously impair the orderly administration of justice. 17 In the present case, we find that
petitioners failed to prove the presence of these conditions. The dismissal by the Court of
Appeals of CA-G.R. SP No. 62410 should have put petitioners on guard as to the basic
procedural requirements in filing the petition. Notwithstanding such dismissal and their
subsequent filing of a motion for reconsideration, petitioners still failed to substantially comply
with the requirements of the Rules by the failure of Ocampo to sign the certificate of non-forum
shopping. In the present petition filed before us, PET PLANS once again failed to submit proof
that it has authorized Espino to file the present petition or to sign the verification and certificate
against forum shopping attached thereto. Likewise, petitioner Ocampo again failed to sign the
certificate of non-forum shopping. We cannot allow a party to gain an advantage from its
flagrant disregard of the Rules. 18 We find this fatal to petitioners' cause.
2. Succession
3. To Adopt and use a Corporate Seal - Sec. 63
4. To Amend Articles of Incorporation
5. To Adopt By-laws and to Amend or Repeal the Same
6. To Issue Stocks to Subscribers and to Admit Members
7. To Acquire and Convey Property
8. To Enter into Mergers/Consolidation
9. To Make Reasonable Donations
10. To Establish pension, Retirement and Other Plans for Directors, Trustees, Officers and
Employees
11. To Exercise Essential, Necessary or Incidental or Implied Powers to Carry Out Purposes
(Sec. 45)
B. Specific (Express) Powers Different provisions of the Code grant a corporation the power to:
Corporation Law 2016: JVL & JSD
1. Extend or Shorten Corporate Term
Sec. 37. Power to extend or shorten corporate term. - A private corporation may
extend or shorten its term as stated in the articles of incorporation when approved by a majority
vote of the board of directors or trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3)
of the members in case of non-stock corporations. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise his appraisal right under the conditions
provided in this code. (n)
Sec. 81. Instances of appraisal right.- Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;
2. Increase or Decrease Capital Stock
Sec. 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par
stock thereof actually subscribed, the names, nationalities and residences of the persons
subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the
amount paid by each on his subscription in cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose
of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
26
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the other
shall be filed with the Securities and Exchange Commission and attached to the original articles
of incorporation. From and after approval by the Securities and Exchange Commission and the
issuance by the Commission of its certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as
the certificate of filing may declare: Provided, That the Securities and Exchange Commission
shall not accept for filing any certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing
of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock
has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has
been paid either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%) percent of the
subscription: Provided, further, That no decrease of the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the
approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange Commission,
which shall have the authority to determine the sufficiency of the terms thereof. (17a)
Central Textile Mills, Inc. vs. National Wages and Productivity Commission, 260 SCRA 368
[1996].
Petitioner maintains in the instant action that its authorized capital stock, not its unauthorized
paid-up capital, should be used in arriving at its capital impairment for 1990. Citing two SEC
Opinions dated August 10, 1971, and July 28, 1978, interpreting Section 38 of the Corporation
Code, it claims that "the capital stock of a corporation stand(s) increased or decreased only from
and after approval and the issuance of the certificate of filing of increase of capital stock."
We agree.
The guidelines on exemption specifically refer to paid-up capital, not authorized capital
stock, as the basis of capital impairment for exemption from WO No. NCR-02. The records
reveal, however, that petitioner included in its total paid-up capital payments on advance
subscriptions, although the proposed increase in its capitalization had not yet been approved by,
let alone presented for the approval of, the SEC. As observed by the Board in its order of
February 4, 1992, "the aforementioned (r)esolution (of August 15, 1990) has not been filed by the
corporation with the SEC, nor was a petition to amend its Articles of Incorporation by reason of
the increase in its capitalization filed by the same.
In the case at hand, petitioner's capital held answerable for the additional wages would include
funds it only holds in trust, which to reiterate may not be deemed par of its paid-up capital, the
losses of which shall be the basis of the 25% referred to above. To include such funds in the
paid-up capital would be prejudicial to the corporation as an employer considering that the
Corporation Law 2016: JVL & JSD
records clearly show that it is entitled to exemption, even as the anomaly was brought about by
an auditing error.
3. Incur, Create or Increase Bonded Indebtedness (Sec. 38)
4. Deny Preemptive Right
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock corporation
shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to
shares to be issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of a previously contracted debt.
Majority of Stockholders of Ruby Industrial Corporation vs. Lim, GR No. 165887, June 6, 2011
A stock corporation is expressly granted the power to issue or sell stocks. 59 The power to issue
shares of stock in a corporation is lodged in the board of directors and no stockholders’ meeting
is required to consider it because additional issuances of shares of stock does not need approval
of the stockholders.60 What is only required is the board resolution approving the additional
issuance of shares. The corporation shall also file the necessary application with the SEC to
exempt these from the registration requirements under the Revised Securities Act (now the
Securities Regulation Code).
Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a
stockholder of a stock corporation to subscribe to all issues or disposition of shares of
any class, in proportion to their respective shareholdings. The right may be restricted or
denied under the articles of incorporation, and subject to certain exceptions and limitations. The
stockholder must be given a reasonable time within which to exercise their preemptive rights.
Upon the expiration of said period, any stockholder who has not exercised such right will be
deemed to have waived it.
The validity of issuance of additional shares may be questioned if done in breach of trust by the
controlling stockholders. Thus, even if the pre-emptive right does not exist, either because
the issue comes within the exceptions in Section 39 or because it is denied or limited in
the articles of incorporation, an issue of shares may still be objectionable if the directors
acted in breach of trust and their primary purpose is to perpetuate or shift control of the
corporation, or to "freeze out" the minority interest.66 In this case, the following relevant
observations should have signaled greater circumspection on the part of the SEC -- upon the
third and last remand to it pursuant to our January 20, 1998 decision -- to demand transparency
and accountability from the majority stockholders, in view of the illegal assignments and
objectionable features of the Revised BENHAR/RUBY Plan, as found by the CA and as affirmed
by this Court:
5. Sell or Dispose of Substantially All Assets
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing
laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
27
substantially all of its property and assets, including its goodwill, upon such terms and conditions
and for such consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors or trustees may
deem expedient, when authorized by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, OR in case of non-stock corporation, by the vote of at least
to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the
purpose. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and
assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets, subject to the rights of third parties under any
contract relating thereto, without further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other disposition of
such property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient authorization for the corporation to enter into any
transaction authorized by this section. 
Islamic Directorate of the Philippines vs. CA, 272 SCRA 454 (1997);
A juridical person cannot be a party where it was not duly represented by its legitimate
governing board
It is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751, was entitled,
"Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant," 31 the IDP can not
be considered essentially a formal party thereto for the simple reason that it was not duly
represented by a legitimate Board of Trustees in that case. As a necessary consequence, Civil
Case No. Q-90-6937, a case for Specific Performance with Damages, a mere action in
personam, did not become final and executory insofar as the true IDP is concerned since
petitioner corporation, for want of legitimate representation, was effectively deprived of its day in
court in said case. Res inter alios judicatae nullum allis praejudicium faciunt. Matters adjudged in
a cause do not prejudice those who were not parties to it. 32 Elsewise put, no person (natural or
juridical) shall be affected by a proceeding to which he is a stranger. 
The SEC has the unquestionable authority to pass upon the issue as to who among the
different contending groups is the legitimate governing board of a corporate body
Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the
Tandang Sora property, allegedly in the name of the IDP, have to be struck down for having been
Corporation Law 2016: JVL & JSD
done without the consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New
Civil Code lays down the essential requisites of contracts:
There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
All these elements must be present to constitute a valid contract. For, where even one is absent,
the contract is void. As succinctly put by Tolentino, consent is essential for the existence of a
contract, and where it is wanting, the contract is non-existent. 38 In this case, the IDP, owner of
the subject parcels of land, never gave its consent, thru a legitimate Board of Trustees, to the
disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, 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. (where a corporate body never gave its consent thru a legitimate governing
board, to a deed of absolute sale, the subject sale is void and produces no effect
whatsoever.
The Tandang Sora property, it appears from the records, constitutes the only property of the IDP.
Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of
IDP falling squarely within the contemplation of the foregoing section. 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 twin
requirements were not met as the Carpizo Group which voted to sell the Tandang Sora property
was a fake Board of Trustees, and those whose names and signatures were affixed by the
Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale
were, from all indications, not bona fide members of the IDP as they were made to appear to be.
Apparently, there are only fifteen (15) official members of the petitioner corporation including the
eight (8) members of the Board of Trustees.
Pena vs. CA, 193 SCRA 717 (1991)**
6. Acquire its Own Shares
Sec. 41. Power to acquire own shares. - A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but
not limited to the following cases: Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code.
7. Invest Corporate Funds in Another Corporation or Business or For Any Other Purpose
Sec. 42. Power to invest corporate funds in another corporation or business or
for any other purpose. - Subject to the provisions of this Code, a private corporation may invest
its funds in any other corporation or business or for any purpose other than the primary purpose
for which it was organized when approved by a majority of the board of directors or trustees and
28
ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock,
or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a
stockholder's or member's meeting duly called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this Code: Provided, however,
That where the investment by the corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval of the stockholders or members
shall not be necessary.
De la Rama vs. Ma-ao Sugar Central Co., 27 SCRA 247(19693).
Plaintiff-appellants contend that the investment of corporate funds by defendants-
appelleant in another coporations constitutes a violation of section 17 ½ of the
Corporation Law. e of shares, bonds, securities, and other evidences of indebtedness of
any domestic or foreign corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of the stockholders; but when the purchase of
shares of another corporation is done solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval of the stockholders is necessary.
In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc.
"to refrain from making investments in Acoje Mining, Mabuhay Printing and any other company
whose purpose is not connected with the sugar central business." This portion of the decision
should be reversed because, Sec. 17-½ of the Corporation Law allows a corporation to
"invest its fund in any other corporation or business, or for any purpose other than the
main purpose for which it was organized," provided that its board of directors has been so
authorized by the affirmative vote of stockholders holding shares entitling them to exercise at
least two-thirds of the voting power.
8. Declare Dividends
Sec. 43. Power to declare dividends. - The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on
the subscription plus costs and expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock
dividend shall be issued without the approval of stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2) when the corporation is prohibited
under any loan agreement with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not yet been secured; or (3)
when it can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for probable
contingencies. 
Corporation Law 2016: JVL & JSD
Nelson & Co. vs. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968]).
Lepanto maintains that this Court erred in ordering Lepanto to issue and deliver to Nielson shares
of stock together with fruits thereof.
From the above-quoted provision of Section 16 of the Corporation Law, the consideration for
which shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits.
Shares of stock are given the special name "stock dividends" only if they are issued in lieu of
undistributed profits. If shares of stocks are issued in exchange of cash or property then those
shares do not fall under the category of "stock dividends". A corporation may legally issue shares
of stock in consideration of services rendered to it by a person not a stockholder, or in payment of
its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock
issued in exchange of property, because services is equivalent to property. 14 Likewise a share of
stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash.
But a share of stock thus issued should be part of the original capital stock of the corporation
upon its organization, or part of the stocks issued when the increase of the capitalization of a
corporation is properly authorized. In other words, it is the shares of stock that are originally
issued by the corporation and forming part of the capital that can be exchanged for cash or
services rendered, or property; that is, if the corporation has original shares of stock unsold or
unsubscribed, either coming from the original capitalization or from the increased capitalization.
Those shares of stock may be issued to a person who is not a stockholder, or to a person already
a stockholder in exchange for services rendered or for cash or property. But a share of stock
coming from stock dividends declared cannot be issued to one who is not a stockholder of
a corporation.
A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of
the corporation among the stockholders as dividends. A stock dividend of a corporation is a
dividend paid in shares of stock instead of cash, and is properly payable only out of surplus
profits.15 So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the
dividend money to purchase additional shares of stock at par. 16 When a corporation issues stock
dividends, it shows that the corporation's accumulated profits have been capitalized instead of
distributed to the stockholders or retained as surplus available for distribution, in money or kind,
should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather
to postpone said realization, in that the fund represented by the new stock has been transferred
from surplus to assets and no longer available for actual distribution. 17 Thus, it is apparent that
stock dividends are issued only to stockholders. This is so because only stockholders are entitled
to dividends. They are the only ones who have a right to a proportional share in that part of the
surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the
stockholder; the proportional interest of each stockholder remains the same. 18If a stockholder is
deprived of his stock dividends - and this happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder — then the proportion of the stockholder's interest
changes radically. Stock dividends are civil fruits of the original investment, and to the owners of
the shares belong the civil fruits.19
The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion
of the profits of the enterprise which the corporation, by its governing agents, sets apart for
ratable division among the holders of the capital stock. It means the fund actually set aside, and
declared by the directors of the corporation as dividends and duly ordered by the director, or by
29
the stockholders at a corporate meeting, to be divided or distributed among the stockholders
according to their respective interests. 20
National Tel. Commission vs. CA, 311 SCRA 508, 514-515 (1999).
The term "capital" and other terms used to describe the capital structure of a corporation are of
universal acceptance, and their usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a corporation. The capital subscribed is the
total amount of the capital that persons (subscribers or shareholders) have agreed to take and
pay for, which need not necessarily be, and can be more than, the par value of the shares. In
fine, it is the amount that the corporation receives, inclusive of the premiums if any, in
consideration of the original issuance of the shares. In the case of stock dividends, it is the
amount that the corporation transfers from its surplus profit account to its capital account. It is the
same amount that can loosely be termed as the "trust fund" of the corporation. The "Trust Fund"
doctrine considers this subscribed capital as a trust fund for the payment of the debts of the
corporation, to which the creditors may look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may be returned or released to the stockholder
(except in the redemption of redeemable shares) without violating this principle. Thus, dividends
must never impair the subscribed capital; subscription commitments cannot be condoned or
remitted; nor can the corporation buy its own shares using the subscribed capital as the
consideration therefor.
In the same way that the Court in PLDT vs. PSC has rejected the "value of the property
and equipment" as being the proper basis for the fee imposed by Section 40(e) of the Public
Service Act, as amended by Republic Act No. 3792, so also must the Court disallow the idea of
computing the fee on "the par value of [PLDT's] capital stock subscribed or paid excluding stock
dividends, premiums, or capital in excess of par." Neither, however, is the assessment made by
the National Telecommunications Commission on the basis of the market value of the
subscribed or paid-in capital stock acceptable since it is itself a deviation from the explicit
language of the law.
All things studiedly considered, and mindful of the aforesaid ruling of this Court in the case
of Philippine Long Distance Telephone Company vs. Public Service Commission, it should be
reiterated that the proper basis for the computation of subject fee under Section 40(e) of the
Public Service Act, as amended by Republic Act No. 3792, is "the capital stock subscribed
or paid and not, alternatively, the property and equipment.
9. Enter into Management Contracts
Sec. 44. Power to enter into management contract. - No corporation shall conclude
a management contract with another corporation unless such contract shall have been approved
by the board of directors and by stockholders owning at least the majority of the outstanding
capital stock, or by at least a majority of the members in the case of a non-stock corporation, of
both the managing and the managed corporation, at a meeting duly called for the purpose:
Provided, That (1) where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of
the members of the board of directors of the managing corporation also constitute a majority of
the members of the board of directors of the managed corporation, then the management
contract must be approved by the stockholders of the managed corporation owning at least two-
thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of
Corporation Law 2016: JVL & JSD
the members in the case of a non-stock corporation. No management contract shall be entered
into for a period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all of the business of another corporation,
whether such contracts are called service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources may be entered into for
such periods as may be provided by the pertinent laws or regulations. 
B. Who Exercises Corporate Powers (Sec. 23) -
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 to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director. Trustees of non-stock corporations
must be members thereof. a majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines
ABS-CBN Corp. vs. CA, 301 SCRA 572 (1999).
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-
offer in a draft contract, VIVA through its Board of Directors, rejected such counter-offer, Even if it
be conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not
bind VIVA, as there was no proof whatsoever that Del Rosario had the specific authority to do so.
Under Corporation Code,  46 unless otherwise provided by said Code, corporate powers,
such as the power; to enter into contracts; are exercised by the Board of Directors.
However, the Board may delegate such powers to either an executive committee or
officials or contracted managers. The delegation, except for the executive committee, must be
for specific purposes, 47 Delegation to officers makes the latter agents of the corporation;
accordingly, the general rules of agency as to the bindings effects of their acts would 
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power of the
Board, the latter must specially authorize them to do so. That Del Rosario did not have the
authority to accept ABS-CBN's counter-offer was best evidenced by his submission of the draft
contract to VIVA's Board of Directors for the latter's approval. In any event, there was between
Del Rosario and Lopez III no meeting of minds.
D. Ultra Vires Acts
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by its articles
30
of incorporation and except such as are necessary or incidental to the exercise of the powers so
conferred.
1. Concept and Types — merely a voidable ad which may be enforced by performance,
ratification, or estoppel.
Atrium Management Corporation vs. CA, 353 SCRA 23, [2001]
Hi-Cement, however, maintains that the checks were not issued for consideration and that
Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who
admittedly was in need of financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation
and is authorized to sign checks for the corporation. At the time of the issuance of the checks,
there were sufficient funds in the bank to cover payment of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act of issuing the checks was well
within the ambit of a valid corporate act, for it was for securing a loan to finance the
activities of the corporation, hence, not an ultra vires act.
"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 power conferred upon it
by law"16 The term "ultra vires" is "distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel, while the latter is void
and cannot be validated."17
The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were
personally liable for the checks issued as corporate officers and authorized signatories of the
check.
"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;
"2. He consents to the issuance of watered down 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."18
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-
Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she
signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry
for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware
that the checks were strictly endorsed for deposit only to the payee's account and not to
be further negotiated. What is more, the confirmation letter contained a clause that was not true,
that is, "that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement
from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms. de Leon
may be held personally liable therefor.
2. Ratification of Ultra Vires Acts:
Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954];
Corporation Law 2016: JVL & JSD
Can defendant corporation give by way of donation the proceeds of said insurance policies to the
minor children of the late Enrico Pirovano under the law or its articles of corporation, or is that
donation an ultra vires act? 
After a careful perusal of the provisions above quoted we find that the corporation was given
broad and almost unlimited powers to carry out the purposes for which it was organized among
them, (1) "To invest and deal with the moneys of the company not immediately required, in such
manner as from time to time may be determined" and, (2) "to aid in any other manner any person,
association, or corporation of which any obligation or in which any interest is held by this
corporation or in the affairs or prosperity of which this corporation has a lawful interest.", a
donation made to the heirs of its late president in recognition of the valuable services
rendered by the latter which had immensely contributed to its growth , comes within this
broad grant of power and cannot be considered as an ultra vires act.
Illegal acts contemplates the doing of an act which is contrary to law, morals, or public policy or
public duty, and are, like similar transactions between the individuals void. They cannot serve as
basis of a court action, nor require validity ultra vires acts on the other hand, or those which
are not illegal and void ab initio, but are merely within are not illegal and void ab initio, but
are not merely within the scope of the articles of incorporation, are merely voidable and
may become binding and enforceable when ratified by the stockholders.
Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933].***
(a) Estoppel or Ratification
Vicente vs. Geraldez, 52 SCRA 210 (1973).
The law specifically requires that "juridical persons may compromise only in the form
and with the requisites which may be necessary to alienate their property."   Under the
corporation law the power to compromise or settle claims in favor of or against the
corporation is ordinarily and primarily committed to the Board of Directors. The right of
the Directors "to compromise a disputed claim against the corporation rests upon their
right to manage the affairs of the corporation according to their honest and informed
judgment and discretion as to what is for the best interests of the corporation."  6 This
power may however be delegated either expressly or impliedly to other corporate officials
or agents. Thus it has been stated, that as a general rule an officer or agent of the corporation
has no power to compromise or settle a claim by or against the corporation, except to the extent
that such power is given to him either expressly or by reasonable implication from the
circumstances. 7 It is therefore necessary to ascertain whether from the relevant facts it could be
reasonably concluded that the Board of Directors of the HI Cement Corporation had authorized its
lawyers to enter into the said compromise agreement.
 Whatever authority the officers or agents of a corporation may have is derived
from the board of directors, or other governing body, unless conferred by the charter of
the corporation. A corporation officer's power as an agent of the corporation must
therefore be sought from the statute, the charter, the by-laws, or in a delegation of
authority to such officer, from the acts of board of directors, formally expressed or implied
from a habit or custom of doing business.  8 In the case at bar no provision of the charter and
31
by-laws of the corporation or any resolution or any other act of the board of directors of HI
Cement Corporation has been cited, from which We could reasonably infer that the administrative
manager had been granted expressly or impliedly the power to bind the corporation or the
authority to compromise the case. Absent such authority to enter into the compromise, the
signature of Atty. Cardenas on the agreement would be legally ineffectual.
 In order to ratify the unauthorized act of an agent and make it binding on the
corporation, it must be shown that the governing body or officer authorized to ratify had
full and complete knowledge of all the material facts connected with the transaction to
which it relates. 9 It cannot be assumed also that Atty. Cardenas, as administrative manager of
the corporation, had authority to ratify. For ratification can never be made "on the part of the
corporation by the same persons who wrongfully assume the power to make the contract, but the
ratification must be by the officer or governing body having authority to make such contract and,
as we have seen, must be with full knowledge."
Aguenza vs. Metropolitan Bank Co., 271 SCRA 1 (1997).
A careful study of the responsive pleading filed by Atty. Francisco Pangilinan, counsel
for Intertrade, would reveal that there was neither express nor implied admission of corporate
liability warranting the application of the general rule. Thus, the alleged judicial admission may be
contradicted and controverted because it was taken out of context and no admission was made at
all.
In any event, assuming arguendo that the responsive pleading did contain the aforesaid
admission of corporate liability, the same may not still be given effect at all. As correctly found by
the trial court, the alleged admission made in the answer by the counsel for Intertrade was
"without any enabling act or attendant ratification of corporate act,"  9 as would authorize or even
ratify such admission. In the absence of such ratification or authority, such admission does
not bind the corporation.
The respondent appellate court likewise adjudged Intertrade liable because of the two
letters emanating from the office of Mr. Arrieta which the respondent court considered "as
indicating the corporate liability of the corporation." 10 These documents and admissions cannot
have the effect of a ratification of an unauthorized act. As we elucidated in the case of  Vicente
v. Geraldez,  "ratification can never be made on the part of the corporation by the same
persons who wrongfully assume the power to make the contract, but the ratification must
be by the officer as governing body having authority to make such contract." In other
words, the unauthorized act of respondent Arrieta can only be ratified by the action of the Board
of Directors and/or petitioner Aguenza jointly with private respondent Arrieta.
(b) Apparent Authority
Advance Paper Corporation vs. Arma Traders Corporation, G.R. No 176897, December 11, 2013.
The doctrine of apparent authority provides that a corporation will be estopped
from denying the agent’s authority if it knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, and it holds him out to the public as
possessing the power to do those acts. The doctrine of apparent authority does NOT apply if
the principal did not commit any acts or conduct which a third party knew and relied upon
in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s acts
or conduct must have produced a change of position to the third party’s detriment.
A]pparent authority is derived not merely from practice. Its existence may be
ascertained through  support the conclusion that Mondigo has been clothed with "apparent authority" to verbally alter
Corporation Law 2016: JVL & JSD
(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, 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
Inasmuch as a corporate president is often given general supervision and control over
corporate operations, the strict rule that said officer has no inherent power to act for the
corporation is slowly giving way to the realization that such officer has certain limited powers in
the transaction of the usual and ordinary business of the corporation." 80 "In the absence of a
charter or bylaw provision to the contrary, the president is presumed to have the authority
to act within the domain of the general objectives of its business and within the scope of
his or her usual duties
Banate, et al. vs. Philippine Countryside Rural Bank, Inc. 625 SCRA 21 [2010]
The authority of a corporate officer or agent in dealing with third persons may be actual
or apparent. Actual authority is either express or implied. The extent of an agent’s express
authority is to be measured by the power delegated to him by the corporation, while the extent of
his implied authority is measured by his prior acts which have been ratified or approved, or their
benefits accepted by his principal. 18 The doctrine of "apparent authority," on the other hand, with
special reference to banks, had long been recognized in this jurisdiction. The existence of
apparent authority 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, within or beyond the scope of his ordinary powers.
Accordingly, the authority to act for and to bind a corporation may be presumed from acts
of recognition in other instances when the power was exercised without any objection
from its board or shareholders
Under the doctrine of apparent authority, acts and contracts of the agent, as are within
the apparent scope of the authority conferred on him, although no actual authority to do such acts
or to make such contracts has been conferred, bind the principal. 20 The principal’s liability,
however, is limited only to third persons who have been led reasonably to believe  by the conduct
of the principal that such actual authority exists, although none was given. In other words,
apparent authority is determined only by the acts of the principal and not by the acts of the
agent.21There can be no apparent authority of an agent without acts or conduct on the part of the
principal; such acts or conduct must have been known and relied upon in good faith as a result of
the exercise of reasonable prudence by a third party as claimant, and such acts or conduct must
have produced a change of position to the third party’s detriment.
Further, we would be unduly stretching the doctrine of apparent authority were
we to consider the power to undo or nullify solemn agreements validly entered into as
within the doctrine’s ambit. Although a branch manager, within his field and as to third
persons, is the general agent and is in general charge of the corporation, with apparent
authority commensurate with the ordinary business entrusted him and the usual course
and conduct thereof, yet the power to modify or nullify corporate contracts remains
generally in the board of directors.26 Being a mere branch manager alone is insufficient to
terms of written contracts, especially when viewed against the telling circumstances of this case:
32
the unequivocal provision in the mortgage contract; PCRB’s vigorous denial that any agreement
to release the mortgage was ever entered into by it; and, the fact that the purported agreement
was not even reduced into writing considering its legal effects on the parties’ interests. To put it
simply, the burden of proving the authority of Mondigo to alter or novate the mortgage contract
has not been established.
Associated Bank vs. Sps. Pronstroller, 558 SCRA 113[2008]
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. The power and responsibility to decide whether
the corporation should enter into a contract that will bind the corporation is lodged in the board of
directors. However, just as a natural person may authorize another to do certain acts for and on
his behalf, the board may validly delegate some of its functions and powers to officers,
committees and 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.34
The authority of a corporate officer or agent in dealing with third persons may be actual or
apparent. The doctrine of "apparent authority," with special reference to banks, had long been
recognized in this jurisdiction. 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, within or beyond the scope of his ordinary powers. 36
Accordingly, the authority to act for and to bind a corporation may be presumed from
acts of recognition in other instances, wherein the power was exercised without any objection
from its board or shareholders. Undoubtedly, petitioner had previously allowed Atty. Soluta to
enter into the first agreement without a board resolution expressly authorizing him; thus, it had
clothed him with apparent authority to modify the same via the second letter-agreement. 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.
Naturally, the third person has little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be maintained by holding the
corporation strictly to the liability fixed upon it by its agents in accordance with law.What
transpires in the corporate board room is entirely an internal matter. Hence, petitioner may not
impute negligence on the part of the respondents in failing to find out the scope of Atty. Soluta’s
authority. Indeed, the public has the right to rely on the trustworthiness of bank officers and their
acts.
We would like to emphasize that if a corporation knowingly permits its officer, or any
other agent, to perform acts within the scope of an apparent authority, holding him out to the
public as possessing power to do those acts, the corporation will, as against any person who has
dealt in good faith with the corporation through such agent, be estopped from denying such
authority.
DBP vs. Spouses Ong, 460 SCRA 170 [2005]
‘In passing upon the liability of a corporation in cases of this kind it is always well to
keep in mind the situation as it presents itself to the third party with whom the contract is made.
Corporation Law 2016: JVL & JSD
Naturally he can have little or no information as to what occurs in corporate meetings; and he
must necessarily rely upon the external manifestation of corporate consent. The integrity of
commercial transactions can only be maintained by holding the corporation strictly to the liability
fixed upon it by its agents in accordance with law; and we would be sorry to announce a doctrine
which would permit the property of man in the city of Paris to be whisked out of his hands and
carried into a remote quarter of the earth without recourse against the corporation whose name
and authority had been used in the manner disclosed in this case. As already observed, it is
familiar doctrine that if a corporation knowingly permits one of its officers, or any other
agent, to do acts within the scope of an apparent authority, and thus holds him out to the
public as possessing power to do those acts, the corporation will, as against any one who
has in good faith dealt with the corporation through such agent, be estopped from denying
his authority; and where it is said 'if the corporation permits this means the same as 'if the
thing is permitted by the directing power of the corporation.’"
In this light, the bank is estopped from questioning the authority of the bank manager to
enter into the contract of sale. If a corporation knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, it holds the agent 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 agent's authority.
Unquestionably, petitioner has authorized Tena to enter into the Deed of Sale.
Accordingly, it has a clear legal duty to issue the board resolution sought by respondents. Having
authorized her to sell the property, it behooves the bank to confirm the Deed of Sale so that the
buyers may enjoy its full use.
There is, however, a striking and very material difference between the aforecited case and the
one at bar. For, unlike in Milaor where it was the branch manager who approved the sale for and
in behalf of the bank, here, there is absolutely no approval whatsoever by any responsible bank
officer of the petitioner. True it is that the signature of branch manager Lagrito appears below the
typewritten word "NOTED" at the bottom of respondents’ offer to purchase dated May 25,
1988.14 By no stretch of imagination, however, can the mere "NOTING" of such an offer be taken
to mean an approval of the supposed sale. Quite the contrary, the very circumstance that the
offer to purchase was merely "NOTED" by the branch manager and not "approved", is a
clear indication that there is no perfected contract of sale to speak of.
Inter-Asia Investments Industries, Inc. vs. CA, 403 SCRA 452 [2003
[A]pparent 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, 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 power to bind the corporation.
x x x (Emphasis and underscoring supplied)
As correctly argued by private respondent, 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.
33

Prime White Cement Corp. vs. IAC, 220 SCRA 103, 113 [1993];
There is only one legal issue to be resolved by this Court: whether or not the
"dealership agreement" referred by the President and Chairman of the Board of petitioner
corporation is a valid and enforceable contract.  transaction is reasonably necessary or proper to the conduct of its business,"and here it is
Under the Corporation Law, which was then in force at the time this case arose,   as well
as under the present Corporation Code, all corporate powers shall be exercised by the Board of
Directors, except as otherwise provided by law. 6 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. These rules are basic, but are all general and thus quite flexible. They
apply where the President or other officer, purportedly acting for the corporation, is dealing with
a third person, i. e., a person outside the corporation.
A board of director or other corporate officer cannot readily enter into a contract
with his own 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
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
3. Legal Consequences of Ultra Vires Act
(a) On the corporation itself:
Rule 66, Sec. 2, Revised Rules of Court: - the corporation may be dissolved under a quo warrant °
proceeding instituted by the Solicitor General.
Sec. 2. When Solicitor General or public prosecutor must commence action.
The Solicitor General or a public prosecutor, when directed by the President of the Philippines, or
when upon complaint or otherwise he has good reason to believe that any case specified in the
preceding section can be established by proof, must commence such action.
b) On the immediate parties to the ultra vires contract:
Republic of the Philippines vs. Acoje Mining Co., 7 SCRA 361 (1963).
Corporation Law 2016: JVL & JSD
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
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.
Even assuming arguendo that the resolution in question constitutes an ultra vires act,
the same however is not void for it was approved not in contravention of law, customs, public
order or public policy. The term ultra vires should be distinguished from an illegal act for the
former is merely voidable which may be enforced by performance, ratification, or estoppel, while
the latter is void and cannot be validated. 2 It being merely voidable, an ultra vires act can be
enforced or validated if there are equitable grounds for taking such action. Here it is fair that the
resolution be upheld at least on the ground of estoppel. The current of modern authorities favors
the rule that where the ultra vires transaction has been executed by the other party and the
corporation has received the benefit of it, the law interposes an estoppel, and will not
permit the validity of the transaction or contract to be questioned, and this is especially true
where there is nothing in the circumstances to put the other party to the transaction on notice that
the corporation has exceeded its powers in entering into it and has in so doing overstepped the
line of corporate privileges
Notice that the phraseology and the terms employed are so clear and sweeping and
that the defendant assumed 'full responsibility for all cash received by the Postmaster.' Here the
responsibility of the defendant is not just that of a guarantor. It is clearly that of a principal."
Pirovano vs. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954]***.
(c) On the rights of the stockholders: Derivative suits
VI. CONTROL AND MANAGEMENT OF THE CORPORATION
3 Levels of Control Over Corporate Affairs.
A. Board of Directors or Trustees (Sec. 23)
Section 23. The board of directors or trustees.
Unless otherwise provided in this Code, the corporate powers of all corporations formed under
this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors are elected and
qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which
he is a director, which share shall stand in his name on the books of the corporation. Any director
34
who ceases to be the owner of at least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director. Trustees of non-stock corporations
must be members thereof. A majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
- Manila Metal Container Corp. vs. PhiL National Bank, 511 SCRA 447 [2006]
As this Court ruled in AF Realty Development, Inc. vs. Diesehuan Freight Services, Inc.:
 
Section 23 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. Just as a natural person may authorize
another to do certain acts in his behalf, so may the board of directors of a corporation validly
delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or
acts of a corporation must be made either by the board of directors or by a corporate agent duly
authorized by the board.  Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the corporation, but not in the course
of, or connected with the performance of authorized duties of such director, are held not binding
on the corporation.
  
Thus, a corporation can only execute its powers and transact its business through its Board of
Directors and through its officers and agents when authorized by a board resolution or its by-
laws.
- Tan vs. Sycip, 499 SCRA 216 [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.
[A]cts of management pertain to the board; and those of ownership, to the stockholders or
members. In the latter case, the board cannot act alone, but must seek approval of the
stockholders or members.
Conformably with the foregoing principles, one of the most important rights of a qualified
shareholder or member is the right to vote -- either personally or by proxy -- for the directors or
trustees who are to manage the corporate affairs. The right to choose the persons who will direct,
manage and operate the corporation is significant, because it is the main way in which a
stockholder can have a voice in the management of corporate affairs, or in which a member in a
nonstock corporation can have a say on how the purposes and goals of the corporation may be
achieved. Once the directors or trustees are elected, the stockholders or members relinquish
corporate powers to the board in accordance with law.
 
In the absence of an express charter or statutory provision to the contrary, the general rule is that
every member of a nonstock corporation, and every legal owner of shares in a stock corporation,
has a right to be present and to vote in all corporate meetings. Conversely, those who are not
stockholders or members have no right to vote. Voting may be expressed personally, or through
proxies who vote in their representative capacities. Generally, the right to be present and to vote
in a meeting is determined by the time in which the meeting is held.
Corporation Law 2016: JVL & JSD
- Gamboa vs. Victorian, 90 SCRA 40 [1979]
[The] courts cannot undertake to control the discretion of the board of directors about
administrative matters as to which they have legitimate power of, action and contracts intra
vires entered into by the board of directors are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority. In the instant case, the plaintiffs aver that the defendants
have concluded a transaction among themselves as will result to serious injury to the interests of
the plaintiffs, so that the trial court has jurisdiction over the case.
1. Board Must Act As a Body in a Meeting - Sec. 25;
Section 25. Corporate officers, quorum.
Immediately after their election, the directors of a corporation must formally organize by
the election of a president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more positions may be held
concurrently by the same person, except that NO one shall act as president and secretary or
as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on
them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum for the transaction of corporate business, and
every decision of at least a majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the election of officers which
shall require the vote of a majority of ALL the members of the board.
Directors or trustees CANNOT attend or vote by proxy at board meetings
NOTA BENE: Cases assigned are malabo for the present topic.
- Firme vs. Bukal Enterprises, 414 SCRA 190 [2003]
[T]here was no approval from the Board of Directors of Bukal Enterprises as would finalize any
transaction with the Spouses Firme. Aviles, an agent, did not have the proper authority to
negotiate for Bukal Enterprises. De Castro, as Bukal Enterprises’ vice president, testified that
HE authorized Aviles to buy the Property. However, there is no Board Resolution authorizing
Aviles to negotiate and purchase the Property on behalf of Bukal Enterprises. It is the board of
directors or trustees which exercises almost all the corporate powers in a corporation. Under
Sections 23 and 36 of the Corporation Code, the power to purchase real property is vested in the
board of directors or trustees. While a corporation may appoint agents to negotiate for the
purchase of real property needed by the corporation, the final say will have to be with the board,
whose approval will finalize the transaction. A corporation can only exercise its powers and
transact its business through its board of directors and through its officers and agents when
authorized by a board resolution or its by-laws.
- Hornilla vs. Salunat, 405 SCRA 220 [2003]
[A] corporations board of directors is understood to be that body which (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
35
trustees or directors clothed with a fiduciary character. It is clearly separate and distinct from the
corporate entity itself.
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. 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
corporations behalf is only nominal party. The corporation should be included as a party in the
suit.
- Safic Alcan &Cie vs. Imperial Vegetable Oil Co., Inc. 355 SCRA 559
A president has no blanket authority to bind a corporation to any contract. An elected president
must act according to the instructions of the Board of Directors. Even in instances when the
president is authorized by the corporations' by-laws to act according to his discretion, that
discretion must not conflict with prior Board orders, resolutions and instructions. A prior
authorization from the board is necessary to bind a corporation, unless ratification was made
thereafter.  It must be pointed out that the Board of Directors, not a lone officer, exercises
corporate power.
- Board of Liquidators v. Heirs of Kalaw, 20 SC RA 987 [1967]
Issue: Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered
into the controverted contracts without the prior approval of the corporation's directorate. Plaintiff
leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as
amongst the duties of the general manager, the obligation: "(b) To perform or execute on behalf
of the Corporation upon prior approval of the Board, all contracts necessary and essential to the
proper accomplishment for which the Corporation was organized."
A rule that has gained acceptance through the years is that a corporate officer "intrusted with the
general management and control of its business, has implied authority to make any contract or do
any other act which is necessary or appropriate to the conduct of the ordinary business of the
corporation. As such officer, "he may, without any special authority from the Board of Directors
perform all acts of an ordinary nature, which by usage or necessity are incident to his office, and
may bind the corporation by contracts in matters arising in the usual course of business.  will result in serious injury to the plaintiffs stockholders.
The problem, therefore, is whether the case at bar is to be taken out of the general concept of the
powers of a general manager, given the cited provision of the NACOCO by-laws requiring prior
directorate approval of NACOCO contracts.
Settled jurisprudence has it that where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general manager may bind the company
without formal authorization of the board of directors.  In varying language, existence of such
authority is established, by proof of  the course of business , the usage and practices  of the
company and by the knowledge  which the board of directors has, or must be   presumed  to have,
of acts and doings of its subordinates in and about the affairs of the corporation.  courts.
Corporation Law 2016: JVL & JSD
So also,
x x x authority to act for and bind a corporation may be presumed from acts of recognition in other
instances where the power was in fact exercised.
x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in
his official capacity to manage its affairs, his authority to represent the corporation may be implied
from the manner in which he has been permitted by the directors to manage its business.
In the case at bar, the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in NACOCO's
behalf without prior board approval. If the by-laws were to be literally followed, the board should
give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and
through acquiescence, practically laid aside the by-law requirement of prior approval.
- Lopez Really vs. Fontecha, 247 SCRA 183, 192 [1995]
As a general rule, a corporation through its board of directors should act in the manner and within
the formalities 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 corporations by- laws, otherwise any action may be
questioned by any objecting stockholder. However, an action of the board of directors during a
meeting, which was illegal for lack of notice may be ratified either expressly, by the action of the
directors in subsequent legal meeting or impliedly by the corporation’s subsequent course of
conduct. Thus, a director who was not notified of a board meeting is precluded from questioning
the validity of the resolution granting gratuity pay to employee approved at that meeting if she
later on acquiesced to it by signing the vouchers for the payment of the gratuity pay. 
2. Business Judgment Rule
- Ong Yong vs, Tiu, 401 SCRA 1 (2003)
[A] judicial order to decrease capital stock without the assent of FLADC's directors and
stockholders is a violation of the "business judgment rule" which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the
corporation and courts will not interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver
that the defendants (members of the board), have concluded a transaction among themselves as
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author
in corporate law, thus:
Courts and other tribunals are wont to override the business judgment of the board mainly
because, courts are not in the business of business, and the laissez faire rule or the free
enterprise system prevailing in our social and economic set-up dictates that it is better for the
State and its organs to leave business to the businessmen; especially so, when courts are ill-
equipped to make business decisions. More importantly, the social contract in the corporate
family to decide the course of the corporate business has been vested in the board and not with
36
- Montelibano vs. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36 [1962];
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 rule is that —
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.
They hold such office charged with the duty to act for the corporation according to their best
judgment, and in so doing they cannot be controlled in the reasonable exercise and performance
of such duty. Whether the business of a corporation should be operated at a loss during
depression, or close down at a smaller loss, is a purely business and economic problem to be
determined by the directors of the corporation and not by the court. 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. (Fletcher on Corporations, Vol. 2, p. 390).
- Philippine Stock Exchange, Inc. v. CA, 281 SCRA 232 [1997].
A corporation is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective body, it
waives no constitutional immunities and perquisites appropriate to such a body. As to its
corporate and management decisions, therefore, the state will generally not interfere with the
same. Questions of policy and of management are left to the honest decision of the 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.
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority
to reverse the PSE's decision in matters of application for listing in the market, the SEC may
exercise such power only if the PSE's judgment is attended by bad faith. In Board of Liquidators
vs. Kalaw, it was held that bad faith does not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a
breach of a known duty through some motive or interest of ill will, partaking of the nature of fraud.
- Benguet Electric Cooperative, Inc. vs. NLRC, 209 SCRA 55 (1992)
Corporation Law 2016: JVL & JSD
[The] applicable general rule is clear enough. The Board members and officers of a corporation
who purport to act for and in behalf of the corporation, keep within the lawful scope of their
authority in so acting, and act in good faith, do not become liable, whether civilly or otherwise, for
the consequences of their acts, Those acts, when they are such a nature and are done under
such circumstances, are properly attributed to the corporation alone and no personal liability is
incurred by such officers and Board members.
In this case, the record showed strong indications that respondent Board members had illegally
suspended and dismissed Cosalan precisely because he was trying to remedy the financial
irregularities and violations of NEA regulations which the COA had brought to the attention of
Beneco.
The Solicitor General has urged that respondent Board members may be held liable for damages
under the foregoing circumstance under Section 31 of the Corporation Code which reads as
follows:
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 jointly liable and
severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons . . . (Emphasis supplied)
We agree with the Solicitor General, firstly, that Section 31 of the Corporation Code is
applicable in respect of Beneco and other electric cooperatives similarly situated. Section 4
of the Corporation Code renders the provisions of that Code applicable in a supplementary
manner to all corporations, including those with special or individual charters so long as those
provisions are not inconsistent with such charters.
We agree with the Solicitor General, secondly, that respondent Board members were guilty of
"gross negligence or bad faith in directing the affairs of the corporation" in enacting the
series of resolutions noted earlier indefinitely suspending and dismissing respondent
Cosalan from the position of General Manager of Beneco. Respondent Board members, in
doing so, acted belong the scope of their authority as such Board members. The dismissal
of an officer or employee in bad faith, without lawful cause and without procedural due process, is
an act that is contra legem. It cannot be supposed that members of boards of directors derive any
authority to violate the express mandates of law or the clear legal rights of their officers and
employees by simply purporting to act for the corporation they control.
3. Requirements of Meeting - Sec. 49- Regular or special meetings; Sec. 53
Section 49. Kinds of meetings.
Meetings of directors, trustees, stockholders, or members may be regular or special.
(a) Notice - state the date, time and place of meeting sent 1 day before, unless by-
laws provide otherwise, or waived by directors.
(b) Place - may be anywhere it pleases even outside of the Philippines.
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(c) Quorum and vote - articles of incorporation CANNOT provide for lesser majority.
Director CANNOT be represented by proxy.
Directors can now participate by video or teleconferencing provided the corporation
adopts practices to preserve the recording of the meetings . (New SEC ruling in light
of the General Banking Law and E-Commerce Act).
- Expert.avel & Tours, Inc. vs. CA, 459 SCRA 147 [2005].
[A] court cannot take judicial notice of any fact which, in part, is dependent on the
existence or non-existence of a fact of which the court has no constructive knowledge.
In this age of modern technology, the courts may take judicial notice that business transactions
may be made by individuals through teleconferencing. Teleconferencing is interactive group
communication (three or more people in two or more locations) through an electronic medium. In
general terms, teleconferencing can bring people together under one roof even though they are
separated by hundreds of miles. This type of group communication may be used in a number of
ways, and have three basic types: (1) video conferencing - television-like communication
augmented with sound; (2) computer conferencing - printed communication through keyboard
terminals, and (3) audio-conferencing-verbal communication via the telephone with optional
capacity for telewriting or telecopying.
A teleconference represents a unique alternative to face-to-face (FTF) meetings.
In the Philippines, teleconferencing and videoconferencing of members of board of directors of
private corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular No. 15, on November 30, 2001, providing the
guidelines to be complied with related to such conferences. Thus, the Court agrees with the RTC
that persons in the Philippines may have a teleconference with a group of persons in South Korea
relating to business transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference
along with the respondent’s Board of Directors, the Court is not convinced that one was
conducted; even if there had been one, the Court is not inclined to believe that a board resolution
was duly passed.
[I]n their affidavit, Suk Kyoo Kim declared that the respondent do[es] not keep a written copy of
the aforesaid Resolution because no records of board resolutions approved during
teleconferences were kept. 
The Court is, thus, more inclined to believe that the alleged teleconference never took
place, and that the resolution allegedly approved by the respondent’s Board of Directors
during the said teleconference was a mere concoction purposefully foisted on the RTC,
the CA and this Court, to avert the dismissal of its complaint against the petitioner.
(d) Agenda
Corporation Law 2016: JVL & JSD
(e) Presiding officer
- Lopez Realty Inc. and Asuncion Lopez-Gonzales vs. Spouses Reynaldo Tanjangco
and Maria Luisa Arguelles-Tanjangco, G.R. No. 154291, November 12, 2014
The Court agrees with the petitioners that the August 17, 1981 Board Resolution did NOT give
Arturo the authority to act as LRI’s representative in the subject sale, as the meeting of the
board of directors where such was passed was conducted without giving any notice to
Asuncion. Section 53 of the Corporation Code provides for the following:
SEC. 53. Regular and special meetings of directors or trustees.—Regular meetings of the board
of directors or trustees of every corporation shall be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors or trustees may be held at any time upon call of the
president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating
the date, time and place of the meeting must be sent to every director or trustee at least one (1)
day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or
trustee may waive this requirement, either expressly or impliedly. (Emphasis ours)
The Court took this matter up in Fontecha, involving herein parties, where it was held that 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:
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 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."
The Court's decision in Fontecha concerns the implied ratification of one of the resolutions
passed on August 17, 1981 by the board of directors of LRI despite of the lack of notice of
meeting to Asuncion. This was owing to the subsequent actions taken therein by the
stockholders, including Asuncion herself, as cited by the CA in its decision. On the other hand,
the sale of the property to the spouses Tanjangco was ratified, not because of implied ratification
as was the case in Fontecha but through the passage of the July 30, 1982 Board Resolution.
38
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 ofthe 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
inthe 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 Court
reiterates its ruling in Tan v. Sycip:
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. (Citation omitted and emphasis
ours)
On the issue that Leo voted against the ratification of sale, the Court notes that only Juanito,
Benjamin and Rosendo signed the minutes of the meeting. It was also not stated who prepared
the minutes, given that Asuncion as the corporate secretary refused to record the same. Also, it
was not explained why Leo was not able to affix his signature on the said minutes if he really
voted in favor of the ratification of the sale. What’s more, Leo was not presented to testify on the
witness stand. Hence, contrary to the position adopted by the CA, only those whose signatures
appear on the minutes of the meeting can be said to have voted in favor of the ratification. This
case must be differentiated from the Court’s ruling in People v. Dumlao, et al.
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. However, there is a notable disparity between the facts in Dumlaoand 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 this
case, it could not even be established who recorded the minutes in view of Asuncion’s
refusal to do so, as demonstrated during the cross examination of Benjamin by the
petitioners’ counsel:
It is the signature of the corporate secretary, as the one who is tasked to prepare and
record the minutes, that gives the minutes of the meeting probative value and credibility,
Thus, without the certification of the corporate secretary, it is incumbent upon the other directors
or stockholders as the case may be, to submit proof that the minutes of the meeting is accurate
and reflective of what transpired during the meeting. Conformably to the foregoing, in the
absence of Asuncion’s certification, only Juanito, Benjamin and Rosendo, whose signatures
appeared on the minutes, could be considered as to have ratified the sale to the spouses
Tanjangco.
Corporation Law 2016: JVL & JSD
In Cua, Jr. et al. v. Tan, et al., the Court held that by virtue of ratification, the acts of the board of
directors become the acts of the stockholders themselves, even if those acts were, at the outset,
unauthorized.
4. Close Corporations - Sec 97
Section 97. Articles of incorporation.
The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the
same and restrictions on their transfers as may be stated therein, subject to the provisions of the
following section;
2. For a classification of directors into one or more classes, each of whom may be
voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors
than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the
corporation shall be managed by the stockholders of the corporation rather than by a board of
directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation
shall be deemed to be directors for the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all officers or employees or that specified
officers or employees shall be elected or appointed by the stockholders, instead of by the board
of directors.
5. Qualifications of Directors and Trustees (Secs. 23 and 27; Sec. 47(5);
Section 23. The board of directors or trustees.
Unless otherwise provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors are elected and
qualified.
39
 Every director must own at least one (1) share of the capital stock of the corporation
of which he is a director, which share shall stand in his name on the books of the corporation.
Any director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
Section 27. Disqualification of directors, trustees or officers.
NO person convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to
the date of his election or appointment, shall qualify as a director, trustee or officer of any
corporation.
Section 47. Contents of by-laws.
Subject to the provisions of the Constitution, this Code, other special laws, and the
articles of incorporation, a private corporation may provide in its by-laws for:
5. The qualifications, duties and compensation of directors or trustees, officers and
employees;
- Gokongwel, Jr. vs. SEC, 89 SCRA 336 [1979]).
The validity or reasonableness of a by-law of a corporation in purely a question of law.  Whether
the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a
legal sense unreasonable and therefore unlawful is a question of law.  This rule is subject,
however, to the limitation that where the reasonableness of a by-law is a mere matter of
judgment, and one upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who are authorized to
make by-laws and who have exercised their authority.  or minutes, at his expense.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by the Board of
Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from
the clear and present danger that the election of a business competitor to the Board may cause
upon the corporation and the other stockholders inseparable prejudice. Submitted for resolution,
therefore, is the issue — whether or not respondent San Miguel Corporation could, as a measure
of self- protection, disqualify a competitor from nomination and election to its Board of Directors.
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.  corporation; all that the attending directors could do is to adjourn.
Corporation Law 2016: JVL & JSD
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. "
(a) A director must OWN at least ONE share of stock
- Nautica Canning Corp. vs. Yumul, 473 SCRA 417 [2005]
Section 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 Nautica’s Director and as President thereof, it
follows that he must have owned at least one share of the corporation’s 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
- Pena vs. CA, 193 SC RA 717 [1991];
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.
Under Section 25 of the Corporation Code of the Philippines, the articles of
incorporation or by-laws of the corporation may fix a greater number than the majority
of the number of board members to constitute the quorum necessary for the valid
transaction of business. Any number less than the number provided in the articles or
by-laws therein cannot constitute a quorum and any act therein would not bind the
40
 Moreover, the records show that respondent PAMBUSCO ceased to operate for about
25 years prior to the board meeting. Being a dormant corporation for several years, it
was highly irregular, for a group of three (3) individuals representing themselves to be
the directors of respondent PAMBUSCO to pass a resolution disposing of the only
remaining asset of the corporation in favor of a former corporate officer.
As a matter of fact, the three (3) alleged directors who attended the special meeting on
November 19, 1974 were not listed as directors of respondent PAMBUSCO in the
latest general information sheet. Similarly, the latest list of stockholders of respondent
PAMBUSCO on file with the SEC does not show that the said alleged directors were
among the stockholders of respondent PAMBUSCO, in contravention of the rule
requiring a director to own one (1) share in their to qualify as director of a corporation.  
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.
At the time of the passage of the questioned resolution, respondent PAMBUSCO was
insolvent and its only remaining asset was its right of redemption over the subject
properties. Since the disposition of said redemption right of respondent PAMBUSCO by
virtue of the questioned resolution was not approved by the required number of
stockholders, the said resolution, as well as the subsequent assignment and sale, were
null and void.
- Detective & Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255 [1969]
[Petitioner contended that respondent Alberto had arrogated to himself the powers of the Board
of Directors of the corporation because he refused to vacate the office and surrender the same to
Jose de la Rosa who had been elected managing director by the Board to succeed him. This
assertion, however, was disputed by respondent Alberto who stated that Jose de la Rosa could
not be elected managing director because he did not own any stock in the corporation.]
There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation.
If he did not own any share of stock, certainly he could not be a director pursuant to the
mandatory provision of Section 30 of the Corporation Law, which in part provides:
Sec. 30. Every director must own in his own right at least one share of the capital stock of the
stock corporation of which he is a director, which stock shall stand in his name on the
books of the corporation
The manager shall be elected by the Board of Directors from among its members  trustees stating that they are issued pursuant to said agreement. In the books
If the managing director-elect was not qualified to become managing director, respondent Fausto
Alberto could not be compelled to vacate his office and cede the same to the managing director-
elect because the by-laws of the corporation provides in articles IV, Section 1 that "Directors shall
serve until the election and qualification of their duly qualified successor.
(b) Mere beneficial ownership in a voting trust arrangement NO longer qualifies
Corporation Law 2016: JVL & JSD
- Lee vs. CA, 205 SCRA 752 [1992].
[W/N the voting trust agreement is valid despite being contrary to the general principle that a
corporation can only be bound by such acts which are within the scope of its officers' or agents'
authority]
In resolving the issue of the propriety of the service of summons in the instant case, we dwell first
on the nature of a voting trust agreement and the consequent effects upon its creation in the light
of the provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders of a
corporation and the trustee or by a group of identical agreements between
individual stockholders and a common trustee, whereby it is provided that for
a term of years, or for a period contingent upon a certain event, or until the
agreement is terminated, control over the stock owned by such stockholders,
either for certain purposes or for all purposes, is to be lodged in the trustee,
either with or without a reservation to the owners, or persons designated by
them, of the power to direct how such control shall be used. (98 ALR 2d. 379
sec. 1 [d]; 19 Am J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly recognizes voting trust
agreements, a more definitive meaning may be gathered. The said provision partly reads:
Sec. 59. Voting Trusts — One or more stockholders of a stock corporation
may create a voting trust for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the share for a period
rights pertaining to the shares for a period not exceeding five (5) years at any
one 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 (5) years but shall automatically expire upon full payment of the
loan. A voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such agreement
shall be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and unenforceable.
The certificate or certificates of stock covered by the voting trust agreement
shall be cancelled and new ones shall be issued in the name of the trustee or
of the corporation, it shall be noted that the transfer in the name of the trustee
or trustees is made pursuant to said voting trust agreement.
By its very nature, a voting trust agreement results in the separation of the voting rights of a
stockholder from his other rights such as the right to receive dividends, the right to inspect the
books of the corporation, the right to sell certain interests in the assets of the corporation and
other rights to which a stockholder may be entitled until the liquidation of the corporation.
41
However, in order to distinguish a voting trust agreement from proxies and other voting pools and
agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are
separated from the other attributes of ownership; (2) that the voting rights granted are intended to
be irrevocable for a definite period of time; and (3) that the principal purpose of the grant of voting
rights is to acquire voting control of the corporation. (5 Fletcher, Cyclopedia of the Law on Private
Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a
trustee not only the stockholder's voting rights but also other rights pertaining to his shares as
long as the voting trust agreement is not entered "for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade or used for purposes of fraud."
(section 59, 5th paragraph of the Corporation Code) Thus, the traditional concept of a voting trust
agreement primarily intended to single out a stockholder's right to vote from his other rights as
such and made irrevocable for a limited duration may in practice become a legal device whereby
a transfer of the stockholder's shares is effected subject to the specific provision of the voting
trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between the
equitable or beneficial ownership of the corporate shares of a stockholders, on the one hand, and
the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing whereby one or
more stockholders of a corporation consent to transfer his or their shares to a trustee in order to
vest in the latter voting or other rights pertaining to said shares for a period not exceeding five
years upon the fulfillment of statutory conditions and such other terms and conditions specified in
the agreement. The five year-period may be extended in cases where the voting trust is executed
pursuant to a loan agreement whereby the period is made contingent upon full payment of the
loan.
In the instant case, the point of controversy arises from the effects of the creation of the voting
trust agreement. The petitioners maintain that with the execution of the voting trust agreement
between them and the other stockholders of ALFA, as one party, and the DBP, as the other party,
the former assigned and transferred all their shares in ALFA to DBP, as trustee. They argue that
by virtue to of the voting trust agreement the petitioners can no longer be considered directors of
ALFA.
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the most immediate
effect of a voting trust agreement on the status of a stockholder who is a party to its execution —
from legal titleholder or owner of the shares subject of the voting trust agreement, he becomes
the equitable or beneficial owner.  owned by him as shown in the books of the corporation multiplied by the whole number of
The penultimate question, therefore, is whether the change in his status deprives the stockholder
of the right to qualify as a director under section 23 of the present Corporation Code which
deletes the phrase "in his own right." Section 30 of the old Code states that:
Corporation Law 2016: JVL & JSD
Every director must own in his own right at least one share of the capital
stock of the stock corporation of which he is a director, which stock shall
stand in his name on the books of the corporation. A director who ceases to
be the owner of at least one share of the capital stock of a stock corporation
of which is a director shall thereby cease to be a director . . . (Emphasis
supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely
affected by the simple act of such director being a party to a voting trust agreement inasmuch as
he remains owner (although beneficial or equitable only) of the shares subject of the voting trust
agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is
required (section 36 of the old Corporation Code). No disqualification arises by virtue of the
phrase "in his own right" provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other persons who
in fact are not beneficial owners of the shares registered in their names on the books of the
corporation becomes formally legalized ( see Campos and Lopez-Campos,  supra, p. 296) Hence,
this is a clear indication that in order to be eligible as a director, what is material is the legal title
to, not beneficial ownership of, the stock as appearing on the books of the corporation.
(c) Majority must be RESIDENTS of the Philippines.
(d) Morally upright and honest.
(e) Not have substantial interest in a competing corporation.
(f) Only NATURAL persons.
(g) Other qualifications provided by by-laws.
6. Election of Diectors and Trustees
(a) Directors Secs. 24 and 26;
Section 24. Election of directors or trustees.
At ALL elections of directors or trustees, there must be present, either in person or by
representative authorized to act by written proxy, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote. The
election must be by ballot if requested by any voting stockholder or member. In stock
corporations, every stockholder entitled to vote shall have the right to vote in person or by
proxy the number of shares of stock standing, at the time fixed in the bylaws, in his own name on
the stock books of the corporation, or where the by-laws are silent, at the time of the election; and
said stockholder may vote such number of shares for as many persons as there are directors to
be elected or he may cumulate said shares and give one candidate as many votes as the number
of directors to be elected multiplied by the number of his shares shall equal, or he may distribute
them on the same principle among as many candidates as he shall see fit:
Provided, That the total number of votes cast by him shall not exceed the number of shares
directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless
otherwise provided in the articles of incorporation or in the by-laws, members of corporations
which have no capital stock may cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate. Candidates receiving the highest number of votes
shall be declared elected. Any meeting of the stockholders or members called for an election may
42
adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no
election is held, or if there are not present or represented by proxy, at the meeting, the owners of
a majority of the outstanding capital stock, or if there be no capital stock, a majority of the
member entitled to vote.
Section 26. Report of election of directors, trustees and officers.
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 and residences of the directors, trustees,
and officers elected. Should a director, trustee or officer die, resign or in any manner cease to
hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or
the director, trustee or officer himself, shall immediately report such fact to the Securities and
Exchange Commission.
- Premium Marble Resources vs. Court of Appeals, 234 SC RA 11 [1996]).
[In case where there are 2 lists of Board Of Directors submitted to SEC, which one is controlling?]
While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected
officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare,
petitioner failed to show proof that this election was reported to the SEC. In fact, the last entry in
their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected
in March 1981.
By the express mandate of the Corporation Code (Section 26), all corporations duly organized
pursuant thereto are required to submit within the period therein stated (30 days) to the Securities
and Exchange Commission the names, nationalities and residences of the directors, trustees and
officers elected.
Sec. 26 of the Corporation Code provides, thus:
Sec. 26. Report of election of directors, trustees and officers. 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 and residences of the directors, trustees and officers elected. xxx
Evidently, the objective sought to be achieved by Section 26 is to give the public information,
under sanction of oath of responsible officers, of the nature of business, financial condition and
operational status of the company together with information on its key officers or managers so
that those dealing with it and those who intend to do business with it may know or have the
means of knowing facts concerning the corporations financial resources and business
responsibility.
The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are the
incumbent officers of Premium has not been fully substantiated. In the absence of an authority
from the board of directors, no person, not even the officers of the corporation, can validly bind
the corporation
(b) Trustee (Secs. 92 and 138).
Corporation Law 2016: JVL & JSD
Section 92. Election and term of trustees.
Unless otherwise provided in the articles of incorporation or the by-laws, the board of
trustees of nonstock corporations, which may be more than fifteen (15) in number as may be
fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of their number shall expire every year; and
subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected
to fill vacancies occurring before the expiration of a particular term shall hold office only for the
unexpired period. NO person shall be elected as trustee unless he is a member of the
corporation. Unless otherwise provided in the articles of incorporation or the by-laws, officers of
a non-stock corporation may be directly elected by the members.
Section 138. Designation of governing boards.
The provisions of specific provisions of this Code to the contrary notwithstanding, non-
stock or special corporations may, through their articles of incorporation or their by-laws,
designate their governing boards by any name other than as board of trustees.
(c) Cumulative Voting (Sec. 24).
7. Removal of Directors or Trustees -Sec. 28;
Section 28. Removal of directors or trustees.
Any director or trustee of a corporation may be removed from office by a vote of
the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3)
of the members entitled to vote: Provided, That such removal shall take place either at a
regular meeting of the corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or trustees, or any of them, must be called by
the secretary on order of the president or on the written demand of the stockholders representing
or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation,
on the written demand of a majority of the members entitled to vote. Should the secretary fail or
refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there
is no secretary, the call for the meeting may be addressed directly to the stockholders or
members by any stockholder or member of the corporation signing the demand. Notice of the
time and place of such meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled under
Section 24 of this Code.
- Roxas vs. De la Rosa, 49 Phil. 609 [1928]
[U]nder the law the directors of a corporation can only be removed from office by a vote of the
stockholders representing at least two-thirds of the subscribed capital stock entitled to vote (Act
No. 1459, sec. 34); while vacancies in the board, when they exist, can be filled by mere majority
43
vote, (Act No. 1459, sec. 25). Moreover, the law requires that when action is to be taken at a
special meeting to remove the directors, such purpose shall be indicated in the call (Act No. 1459,
sec. 34).
[Take note: de facto incumbent board of directors' acts will be valid until they shall be lawfully
removed from the office or cease from the discharge of their functions.]
8. Vacancy in the Board (Sec. 29)
Section 29. Vacancies in the office of director or trustee.
Any vacancy occurring in the board of directors or trustees other than by removal by
the stockholders or members or by expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders in a regular or special meeting called for that
purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired
term of his predecessor in office.
Any directorship or trusteeship to be filled by reason of an increase in the number of
directors or trustees shall be filled only by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the meeting.
- Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, September 4, 2009
[T]he issue for the Court to resolve is whether the remaining directors of a corporations Board,
still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation
of a hold-over director. The resolution of this legal issue is significantly hinged on the
determination of what constitutes a directors term of office.
The holdover period is not part of
the term of office of a member of the
board of directors
 
The word term has acquired a definite meaning in jurisprudence. In several cases, we have
defined term as the time during which the officer may claim to hold the office as of right, and fixes
the interval after which the several incumbents shall succeed one another. The term of office is
not affected by the holdover. The term is fixed by statute and it does not change simply because
the office may have become vacant, nor because the incumbent holds over in office beyond the
end of the term due to the fact that a successor has not been elected and has failed to qualify.  corporation's stockholders, be assured. The shareholder vote is critical to the theory that
 
Term is distinguished from tenure in that an officers tenure represents the term during which the
incumbent actually holds office.  The tenure may be shorter (or, in case of holdover, longer) than
the term for reasons within or beyond the power of the incumbent.
  
Based on the above discussion, when Section 23 of the Corporation Code declares that the
board of directorsshall hold office for one (1) year until their successors are elected and qualified,
we construe the provision to mean that the term of the members of the board of directors shall be
only for one year; their term expires one year after election to the office. The holdover period that
time from the lapse of one year from a members election to the Board and until his successors
election and qualification is not part of the directors original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of
Corporation Law 2016: JVL & JSD
the board of directors continues to serve in a holdover capacity, it implies that the office has a
fixed term, which has expired, and the incumbent is holding the succeeding term.
 
After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintals
term of office is deemed to have already expired. That he continued to serve in the VVCC Board
in a holdover capacity cannot be considered as extending his term. To be precise, Makalintals
term of office began in 1996 and expired in 1997, but, by virtue of the holdover doctrine in Section
23 of the Corporation Code, he continued to hold office until his resignation on  November 10,
1998. This holdover period, however, is not to be considered as part of his term, which, as
declared, had already expired. 
 
With the expiration of Makalintals term of office, a vacancy resulted which, by the terms of Section
29 of the Corporation Code, must be filled by the stockholders of VVCC in a regular or special
meeting called for the purpose. To assume as VVCC does that the vacancy is caused by
Makalintals resignation in 1998, not by the expiration of his term in 1997, is both illogical and
unreasonable. His resignation as a holdover director did not change the nature of the vacancy;
the vacancy due to the expiration of Makalintals term had been created long before his
resignation. 
The powers of the corporations
board of directors emanate from its
stockholders
VVCCs construction of Section 29 of the Corporation Code on the authority to fill up vacancies in
the board of directors, in relation to Section 23 thereof, effectively weakens the stockholders
power to participate in the corporate governance by electing their representatives to the board of
directors. The board of directors is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the affairs of the
corporation from them. The board of directors, in drawing to themselves the powers of the
corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that the
board should exercise not only care and diligence, but utmost good faith in the management of
corporate affairs.[12]
 
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
legitimizes the exercise of power by the directors or officers over properties that they do not own.
[13]
 
This theory of delegated power of the board of directors similarly explains why, under Section 29
of the Corporation Code, in cases where the vacancy in the corporations board of directors is
caused not by the expiration of a members term, the successor so elected to fill in a vacancy shall
be elected only for the unexpired term of the his predecessor in office. The law has authorized the
remaining members of the board to fill in a vacancy only in specified instances, so as not to retard
or impair the corporations operations; yet, in recognition of the stockholders right to elect the
members of the board, it limited the period during which the successor shall serve only to
the unexpired term of his predecessor in office.
44
While the Court in El Hogar approved of the practice of the directors to fill vacancies in the
directorate, we point out that this ruling was made before the present Corporation Code was
enacted[14] and before its Section 29 limited the instances when the remaining directors can fill in
vacancies in the board, i.e., when the remaining directors still constitute a quorum and when the
vacancy is caused for reasons other than by removal by the stockholders or by expiration of the
term.
 
It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy
occurring within the directors term of office. When a vacancy is created by the expiration of a
term, logically, there is no more unexpired term to speak of.Hence, Section 29 declares that it
shall be the corporations stockholders who shall possess the authority to fill in a vacancy caused
by the expiration of a members term.
 
As correctly pointed out by the RTC, when remaining members of the VVCC Board elected
Ramirez to replace Makalintal, there was no more unexpired term to speak of, as Makalintals
one-year term had already expired. Pursuant to law, the authority to fill in the vacancy caused by
Makalintals leaving lies with the VVCCs stockholders, not the remaining members of its board of
directors.
- Grace Christian High School vs. CA, 281 SCRA 133 [1997])
[Petitioner disputes the ruling that the provision in question, giving petitioners representative a
permanent seat in the board of the association, is contrary to law. Petitioner claims that that is not
so because there is really no provision of law prohibiting unelected members of boards of
directors of corporations. Referring to 92 of the present Corporation Code, petitioner says:
It is clear that the above provision of the Corporation Code only provides for the manner of
election of the members of the board of trustees of non-stock corporations which may be more
than fifteen in number and which manner of election is even subject to what is provided in the
articles of incorporation or by-laws of the association thus showing that the above provisions [are]
not even mandatory.]
It is actually 28 and 29 of the Corporation Law not 92 of the present law or 29 of the former
one which require members of the boards of directors of corporations to be elected. These
provisions read:
28. Unless otherwise provided in this Act, the corporate powers of all corporations formed
under this Act shall be exercised, all business conducted and all property of such
corporations controlled and held by a board of not less than five nor more than eleven
directors to be elected from among the holders of stock or, where there is no stock, from the
members of the corporation: Provided, however, That in corporations, other than banks, in
which the United States has or may have a vested interest, pursuant to the powers granted
or delegated by the Trading with the Enemy Act, as amended, and similar Acts of Congress
of the United States relating to the same subject, or by Executive Order No. 9095 of the
President of the United States, as heretofore or hereafter amended, or both, the directors
need not be elected from among the holders of the stock, or, where there is no stock from
the members of the corporation. (emphasis added)
Corporation Law 2016: JVL & JSD
29. At the meeting for the adoption of the original by-laws, or at such subsequent meeting as
may be then determined, directors shall be elected to hold their offices for one year and until
their successors are elected and qualified.Thereafter the directors of the corporation shall be
elected annually by the stockholders if it be a stock corporation or by the members if it be
a nonstock corporation, and if no provision is made in the by-laws for the time of election the
same shall be held on the first Tuesday after the first Monday in January. xxx.(Emphasis
added)
The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980, similarly
provides:
23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year and until their
successors are elected and qualified. (Emphasis added)
These provisions of 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.”
9. Term of Office; Hold-Over Principle - Sec. 23;
Section 23. The board of directors or trustees.
Unless otherwise provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors are elected and
qualified.
Every director must own at least one (1) share of the capital stock of the corporation
of which he is a director, which share shall stand in his name on the books of the corporation.
Any director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
- Government vs. El Hagar Filipino, 50 Phil. 399 [1927];
45
[The failure of the corporation to hold annual meetings and the filling of vacancies in the
directorate in the manner described constitute misdemeanours on the part of the respondent
which justify the resumption of the franchise by the Government and dissolution of the
corporation; and in this connection it is charge that the board of directors of the respondent has
become a permanent and self perpetuating body composed of wealthy men instead of wage
earners and persons of moderate means. ]
Ruling 5: We are unable to see the slightest merit in the charge. No fault can be imputed to the
corporation on account of the failure of the shareholders to attend the annual meetings; and their
non-attendance at such meetings is doubtless to be interpreted in part as expressing their
satisfaction of the way in which things have been conducted. The doctrine above stated finds
expressions in article 66 of the by-laws of the respondent which declares in so many words that
directors shall hold office "for the term of one year on until their successors shall have been
elected and taken possession of their offices." It result that the practice of the directorate of filling
vacancies by the action of the directors themselves is valid. Nor can any exception be taken to
then personality of the individuals chosen by the directors to fill vacancies in the body. Certainly it
is no fair criticism to say that they have chosen competent businessmen of financial responsibility
instead of electing poor persons to so responsible a position. The possession of means does not
disqualify a man for filling positions of responsibility in corporate affairs.
- Nueno vs. Angeles, 76 Phil. 22;
[The four petitioners, including Jose Topacio Nueno, instituted this action against the six
respondents on the ground that petitioners, having been elected as members of the Municipal
Board of Manila in the general election held in December, 1940, for three years, their term of
office has not yet expired because they have not served for three years completely due to the
Japanese occupation, and besides, because they entitled to hold-over or continue in office until
their successors are elected and qualified, and therefore respondents' appointments are null and
void. ISSUE: whether or not, under the law, petitioners are entitled to hold-over as members of
the Municipal Board of the City of Manila]
The contention that petitioners are entitled to continue in office because they have not completely
served for three years due to the war, is untenable, even assuming that they had not discharged
the duties of their office during the Japanese occupation of Manila.
For the simple reason that the term of an office must be distinguished from the tenure of the
incumbent. The term means the time during which the officer may claim to hold the office as of
light, and fixes the interval after which the several incumbents shall succeed one another. The
tenure represents the term during which the incumbent actually holds the office. The term of
office is not affected by the hold-over. The tenure may be shorter than the term for reasons within
or beyond the power of the incumbent. There is no principle, law or doctrine by which the term of
an office may be extended by reason of war.
From the foregoing it clearly appears that petitioners are not entitled to hold-over, and after the
expiration of their term of office on December 31, 1943, the offices of members of the Municipal
Board of Manila became vacant from January 1, 1944, because of failure to hold the regular
election on the second Tuesday of December 1943 and the special election, and consequently to
elect the would-be incumbents. And during the interregnum or temporary vacancy from January
1, 1944, until the said special election is held and new members elected or, in case of failure to
Corporation Law 2016: JVL & JSD
elect, appointed by the President (under section 16 [c] and [d] of Commonwealth Act No. 357) the
President had, under section 16 (a) of the same Act, the power to appoint the respondents or any
other, at his discretion, to fill said temporary vacancy or vacancies.
As the petitioners are not entitled to hold-over or continue, after the expiration of their term, in the
offices claimed by them and held now by the respondents, they have no right to bring the present
action and impugn the validity of the latter's appointments, according to the provisions of section
6, Rule 68, of the Rules of Court.
- Ponce vs. Encarnacion, 94 Phil. 81 [1953]).
The only question to determine in this case is whether under and pursuant to section 26 of Act
No. 1459, known as the Corporation law, the respondent court may issue the order complained
of. Said section provides: —
Whenever, from any cause, there is no person authorized to call a meeting, or when the officer
authorized to do so refuses, fails or neglects to call a meeting, any judge of a Court of First
Instance on the showing of good cause therefor, may issue an order to any stockholder or
member of a corporation, directing him to call a meeting of the corporation by giving the proper
notice required by this Act or by-laws; and if there be no person legally authorized to preside at
such meeting, the judge of the Court of First Instance may direct the person calling the meeting to
preside at the same until a majority of the members or stockholders representing a majority of the
stock members or stockholders presenting a majority of the stock present and permitted by law to
be voted have chosen one of their number to act as presiding officer for the purposes of the
meeting.
On the showing of good cause therefor, the court may authorize a stockholder to call a meeting
and to preside threat until the majority stockholders representing a majority strockholders
representing a majority of the stock present and permitted to be voted shall have chosen one
among them to preside it. And this showing of good cause therefor exists when the court is
apprised of the fact that the by-laws of the corporation require the calling of a general meeting of
the stockholders to elect the board of directors but call for such meeting has not been done.
The requirement that "on the showing of good cause therefor" the court may grant to a
stockholder the authority to call such meeting and to preside thereat does not mean that the
petition for such authority must be set for hearing with notice served upon the board of directors.
It may be likened to a writ of preliminary injunction or attachment may be issued ex parte upon
compliance with the requirements of the rules and upon the court being satisfied that the same
should be issued.
The alleged illegality of the election of one member of the board of directors at the
meeting called as authorised by the court being subsequent to the order complained of cannot
affect the validity and legality of the order. If it be true that one of the directors elected at such
meeting was not qualified in accordance with the provisions of the by-laws, the remedy of an
aggrieved party would be a quo warranto.
An alleged previous agreement to dissolve the corporation does not affect or render illegal the
said order of the court.
46

10. Compensation of Directors - Sec. 30 –
Section 30. Compensation of directors.
In the absence of any provision in the by-laws fixing their compensation, the directors
shall NOT receive any compensation, as such directors, except for reasonable per diems:
Provided, however, That any such compensation other than per diems may be granted to
directors by the vote of the stockholders representing at least a MAJORITY of the outstanding
capital stock at a regular or special stockholders' meeting. In NO case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding year.
- Singson, et al. vs. COA, 627 SCRA 36 [2010]
[Whether or not the disallowance of RATA is valid? YES.]
Section 30 of the corporation code stress that the directors of a corporation shall not receive any
compensation except reasonable per diems. The two instances where the directors are to be
entitled to compensation shall be when it is (1) fixed by the corporation's by-laws or (2) when the
stockholders, representing at least majority of the outstanding capital stock, vote to grant the
same at a regular or special stockholders meeting, subject to the qualification that, in any of the
two situations, the total yearly compensation of directors, as such directors shall in no case
exceed 10% of the net income before income tax of the corporation during the preceding year.
Section 8 of the amended by-laws of PICC in consonance with section 30 of the
corporation code restricted the scope of the compensation by fixing their per diem at Php. 1000.
Thus petitioners are allowed to receive only per diems of Php. 1000 for every meeting attended.
However the board of directors may increase or decrease the amount of per diems, when the
prevailing circumstance shall warrant. No other compensation may be given to them, except only
when they serve the corporation in another capacity.
- Western Institute of Tech., Inc. vs. Solos, 278 SCRA 216, 223 [1997];
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.
The proscription, however, against granting compensation to directors/trustees of a corporation is
not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: " . . .
[T]he directors shall not receive any compensation, as such directors, . . . ." The phrase as such
directors is not without significance for it delimits the scope of the prohibition to compensation
given to them for services performed purely in their capacity as directors or trustees. The
unambiguous implication is that members of the board may receive compensation, in addition to
reasonable per diems; when they render services to the corporation in a capacity other than as
directors/ trustees.
- Kuenzle & Streiff Inc. vs. Comm. of Internal Revenue,120 Phil. 1099);
Corporation Law 2016: JVL & JSD
There is no fixed test for determining reasonableness of a given bonus as compensation. this
depends upon many factors, one of them being "the amount and quality of the services performed
with relation to the business" Other tests suggested are: payment must be made in good faith; the
character of tax payers' business, the volume and amount of its net earnings, its locality, the type
and extend of the services rendered, the salary policy of the corporation, the size of the particular
business, the employees qualifications and contributions to the business venture and general
economic conditions.
- Central Cooperative Exchange, Inc. vs. Enciso, 162 SCRA 706).
. It will be noted that in interpreting section 8 of the By-laws of CCE, the court held that the right of
the stockholders to determine the compensation of the board of directors was explicitly reserved
and even without reservation, the directors are not entitled to compensation. The court ruled that
the directors of corporations presumptively serve without compensation so that while the
directors, in assigning themselves additional duties acted within their power, they nonetheless
acted in excess of their jurisdiction by voting for themselves compensation for such additional
duties.
11. Board Committees (Sec. 35; 5 non-delegable functions
Section 35. Executive committee.
The by-laws of a corporation may create an executive committee, composed of not less
than three members of the board, to be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters within the competence of the board, as
may be delegated to it in the by-laws or on a majority vote of the board, except with respect to:
(1) approval of any action for which shareholders' approval is also required; (2) the filing
of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new
by-laws; (4) the amendment or repeal of any resolution of the board which by its express
terms is not so amendable or repealable; and (5) a distribution of cash dividends to the
shareholders.
12. Duties of Directors
(a) Duty of Diligence
(b) Duty of Loyalty
(c) Duty of Obedience
(d) Duty to Creditors
(a) Duty of Diligence — imposes on the directors the obligation to act only within the corporate
powers, under the penalty of liability for damages unless they acted in good faith and with due
diligence —relate to business judgment rule - (Sec. 31);
Section 31. Liability of directors, trustees or officers.
Directors or trustees who wilfully 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.
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 When a director, trustee or officer attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
- Park Hotel, et aL vs. Harbutt, et al., 680 SCRA 328 [2012]
A corporation, being a juridical entity, may act only through its directors, officers and employees.
Obligations incurred by them, while acting as corporate agents, are not their personal liability but
the direct accountability of the corporation they represent. 38 However, corporate officers may be
deemed solidarily liable with the corporation for the termination of employees if they acted with
malice or bad faith. 39 In the present case, the lower tribunals unanimously found that Percy and
Harbutt, in their capacity as corporate officers of Burgos, acted maliciously in terminating the
services of respondents without any valid ground and in order to suppress their right to self-
organization.
Section 31 of the Corporation Code makes a director personally liable for corporate debts if he
willfully and knowingly votes for or assents to patently unlawful acts of the corporation. It also
makes a director personally liable if he is guilty of gross negligence or bad faith in directing the
affairs of the corporation. Thus, Percy and Harbutt, having acted in bad faith in directing the
affairs of Burgos, are jointly and severally liable with the latter for respondents' dismissal.
- Urban Bank vs. Pena, 659 SCRA 418 [2011]
To hold a director or an officer personally liable for corporate obligations two requisites must
concur: 1) The complainant must allege in the complaint that the direcots or officers assented to
patently unlawful acts of the corporation, or that the officers was guilty of gross negligence or bad
faith; and 2) the complaint must clearly prove such unlawful acts, negligence or bad faith.
- Alert Security and Investigation Agency vs. Pasawilan, 657 SCRA 655 [2011]
Basic is the rule that a corporation has a separate and distinct personality apart from its directors,
officers, or owners. In exceptional cases, courts find it proper to breach this corporate personality
in order to make directors, officers, or owners solidarily liable for the companies’ acts. This is
when directors or trustees 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. Absent any malice or bad faith on the part of the corporate officer, he cannot be
liable. Here, he was not using the veil of corporate fiction.
- Cebu Country Club, Inc. vs. ELIZAGAQUE, et al., 542 SC RA 65 [2008]
CCCI Board of Directors, under its Articles of Incorporation, has the right to approve or
disapprove an application for proprietary membership. But such right should not be exercised
arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on Human Relations provide
restrictions, thus:
Article 19. Every person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith.
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Article 21. Any person who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
- Garcia vs. Social Security Commission, 540 SC RA 456 [2007]
Taking a cue from the above provision, a corporate director, a trustee or an officer, may be held
solidarily liable with the corporation in the following instances:
1. When directors and trustees or, in appropriate cases, the officers of a corporation —
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;
(c) 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 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.
4. When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.
The situation of petitioner, as a director of Impact Corporation when said corporation failed to
remit the SSS premium contributions falls exactly under the fourth situation. Section 28 (f) of
the Social Security Law imposes a civil liability for any act or omission pertaining to the violation
of the Social Security Law, to wit:
(f) If the act or omission penalized by this Act be committed by an association, partnership,
corporation or any other institution, its managing head, directors or partners shall be liable to the
penalties provided in this Act for the offense.
- Powton Conglomerate, Inc. vs. Agcolicol, 400 SC RA 523 [2003]
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 to a patently unlawful act
of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or
when there is a conflict of interest resulting in damages to the corporation, its stockholders or
other persons; (2) he consents to the issuance of watered down 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 personally answerable for his corporate action. Considering that none of
the foregoing exceptions was established in the case at bar, petitioner Chien, who entered into a
contract with respondent in his capacity as President and Chairman of the Board of  Powton,
cannot be held solidarily liable with the latter
- Benguet Electric Cooperative vs. NLRC, 209 SC RA 55;
The applicable general rule is clear enough. The Board members and officers of a corporation
who purport to act for and in behalf of the corporation, keep within the lawful scope of their
authority in so acting, and act in good faith, do not become liable, whether civilly or otherwise, for
the consequences of their acts. Those acts, when they are such a nature and are done under
such circumstances, are properly attributed to the corporation alone and no personal liability is
incurred by such officers and Board members.
48
We agree with the Solicitor General, secondly, that respondent Board members were guilty of
"gross negligence or bad faith in directing the affairs of the corporation" in enacting the series of
resolutions noted earlier indefinitely suspending and dismissing respondent Cosalan from the
position of General Manager of Beneco. Respondent Board members, in so doing, acted beyond
the scope of their authority as such Board members. The dismissal of an officer or employee in
bad faith, without lawful cause and without the procedural due process, is an act that is contra
legem. It cannot be supposed that members of boards of directors derive any authority to violate
the express mandates of law or the clear legal rights of their officers and employees by simply
purporting to act for the corporation they control.
We believe and so hold, further, that not only are Beneco and respondent Board members
properly held solidarily liable for the awards made by the Labor Arbiter, but also that petitioner
Beneco which was controlled by and which could act only through respondent Board members,
has a right to be reimbursed for any amounts that Beneco may be compelled to pay to
respondent Cosalan. Such right of reimbursement is essential if the innocent members of Beneco
are not to be penalized for the acts of respondent Board members which were both done in bad
faith and ultra vires. The liability-generating acts here are the personal and individual acts of
respondent Board members, and are not properly attributed to Beneco itself.
- Board of Liquidators vs. Kalaw, 20 SC RA 987 [1967];
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it means breach of a known duty through
some motive or interest or ill will; it partakes of the nature of fraud.
- Montelibano, et aL, vs. Bacolod-Murcia Milling Co., Inc. 5 SCRA 3
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.
"They hold such office charged with the duty to act for the corporation according to their best
judgment, and in so doing they cannot be controlled in the reasonable exercise and performance
of such duty. Whether the business of a corporation should be operated at a loss during
depression, or close down at a smaller loss, is a purely business and economic problem to be
determined by the directors of the corporation and not by the court. 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."
- Steinberg vs. Velasco, 52 Phil. 1929.
The directors of a corporation are bound to care for its property and manage its affairs in good
faith, and for a violation of their duties resulting in waste of its assets or injury to its property, they
are liable to account the same as any other trustee.
Corporation Law 2016: JVL & JSD
If the directors of a corporation do acts clearly beyond their power, by reason of which a loss
ensued, or dispose of its property without authority, they will be required to make good the loss
out of their private estate.
A director of a corporation is bound to exercise ordinary skill and judgment and cannot excuse his
negligence or unlawful acts on the ground of ignorance or inexperience.
(b) Duty of Loyalty — Fiduciary Duty — (Secs. 31 to 34;
Section 32. Dealings of directors, trustees or officers with the corporation.
A contract of the corporation with one or more of its directors or trustees or officers is
voidable, at the option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board
of directors. Where any of the first two conditions set forth in the preceding paragraph is absent,
in the case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least
twothirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the contract is fair and reasonable
under the circumstances.
Section 33. Contracts between corporations with interlocking directors.
Except in cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between two or more corporations having interlocking directors shall
NOT be invalidated on that ground alone: Provided, That if the interest of the interlocking director
in one corporation is substantial and his interest in the other corporation or corporations is merely
nominal, he shall be subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of
the outstanding capital stock shall be considered substantial for purposes of interlocking
directors.
Section 34. Disloyalty of a director. –
Where a director, by virtue of his office, acquires for himself a business opportunity
which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by refunding the same, unless his
act has been ratified by a vote of the stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds in the venture.
-Gokongwei vs. SEC, 89 SC RA 336, 367; see cited cases [1979)
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
49
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.
-Polymer Rubber Corporation and Ang vs. Salamuding, G.R. No. 185160, July 24, 2013
A corporation, as a juridical entity, may act only through its directors, officers and employees.
Obligations incurred as a result of the directors' and officers' acts as corporate agents, are not
their personal liability but the direct responsibility of the corporation they represent. As a rule, they
are only solidarily liable with the corporation for the illegal termination of services of employees if
they acted with malice or bad faith."
To hold a director or officer personally liable for corporate obligations, two requisites must concur:
(1) it must be alleged in the complaint that the director or officer assented to patently unlawful
acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2) there
must be proof that the officer acted in bad faith.
-Rolando DS. Torres vs. Rural Bank of San Juan, Inc.,et al., G.R. No. 184520, March 13, 2013
As provided in Article 282 of the Labor Code and as firmly entrenched in jurisprudence, an
employer has the right to dismiss an employee by reason of willful breach of the trust and
confidence reposed in him.
To temper the exercise of such prerogative and to reconcile the same with the employee's
Constitutional guarantee of security of tenure, the law imposes the burden of proof upon the
employer to show that the dismissal of the employee is for just cause failing which would mean
that the dismissal is not justified. Proof beyond reasonable doubt is not necessary but the factual
basis for the dismissal must be clearly and convincingly established.
Further, the law mandates that before validity can be accorded to a dismissal premised on loss of
trust and confidence, two requisites must concur, viz.: (1) the employee concerned must be
holding a position of trust; and (2) the loss of trust must be based on willful breach of trust
founded on clearly established facts.
-Mercy Vda. de Roxas vs. Our Lady's Foundation, Inc., G.R. No. 182378, March 6, 2013
[Issue: Whether or not the general manager may be held liable for the obligations of the
corporation]
This Court upholds the doctrine of separate juridical personality of corporate entities. The case
emphasizes that a corporation is a juridical entity with a legal personality separate and distinct
from those acting for and on its behalf and, in general, of the people comprising it. Hence, the
obligations incurred by the corporation, acting through its officers such as in this case, are its sole
liabilities.
Corporation Law 2016: JVL & JSD
-Heirs of Fe Tan Uy, represented by her heir, Mauling Uy Lim vs. International Exchange Bank,
G.R. No. 166282 & 83, February 13, 2013
These shortcomings of Uy are not sufficient to justify the piercing of the corporate veil which
requires that the negligence of the officer must be so gross that it could amount to bad faith and
must be established by clear and convincing evidence. Gross negligence is one that is
characterized by the lack of the slightest care, acting or failing to act in a situation where there is
a duty to act, wilfully and intentionally with a conscious indifference to the consequences insofar
as other persons may be affected.||
-United Coconut Planters Bank vs. Planters Products, Inc., Janet Layson and Gregory Grey, G.R.
No. 179015, June 13, 2012
A corporation like UCPB is liable to innocent third persons where it knowingly permits its officer,
or any other agent, to perform acts within the scope of his general or apparent authority, holding
him out to the public as possessing power to do those acts.
But, here, it is plain from the guarantee Grey executed that he was acting for himself, not in
representation of UCPB. UCPB cannot be bound by Grey's above undertaking since he appears
to have made it in his personal capacity. He signed it under his own name, not in UCPB's name
or as its branch manager. Indeed, the wordings of the undertaking do not at all make any allusion
to UCPB.
As it happens, bank guarantees are highly regulated transactions under the law. They are
undertakings that are not so casually issued by banks or by their branch managers at the dorsal
side of a client's promissory note as if an afterthought. A bank guarantee is a contract that binds
the bank and so may be entered into only under authority granted by its board of directors. Such
authority does not appear on any document. Indeed, PPI had no right to expect branch manager
Grey to issue one without such authorization.
-Antonio C. Carag vs. National Labor Relations Commission, et aL, G.R. No. 147590, April 2,
2007
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. Such procedural defect is called illegal dismissal because it fails to comply with
mandatory procedural requirements, but it is not illegal in the sense that it constitutes 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
50
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.
(i) Doctrine ot Corporate Opportunity
(Sec. 34; Gokongwei, at p. 371).
DOCTRINE OF "CORPORATE OPPORTUNITY". — Corporate officers are not
permitted to the use their position of trust and confidence to further their interests. 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 of 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.
(ii) Self-dealing Directors
(Sec. 32; Prime White Cement Corp. vs. IAC, 220 SC RA 111 [1993])
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." In the case of Gokongwei v.
Securities and Exchange Commission, this Court quoted with favor from Pepper v.
Litton, (89 scra 336) thus: ". . . He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters . . . He cannot utilize his inside
information and his strategic position for his own preferment. He cannot violate rules of
fair play by doing indirectly through the corporation what he could not do directly. 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 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 as provided in
Section 32 of the Corporation Code.
(iii) Fixing 01 Compensation
See cases cited above in Part VI, A, 10.
(iv) Use 01 Inside Intormation
Corporation Law 2016: JVL & JSD
(Secs. 3.8; 23.2; 27 Securities Regulation Code, RA 8799)
3.8. "Insider" means (a) the issuer; (b) a director or officer (or any person performing
similar functions) of, or a person controlling the issuer; gives or gave him access to
material information about the issuer or the security that is not generally available to the
public; (d) A government employee, director, or officer of an exchange, clearing agency
and/or self-regulatory organization who has access to material information about an
issuer or a security that is not generally available to the public; or (e) a person who
learns such information by a communication from any forgoing insiders
23.2. For the purpose of preventing the unfair use of information which may have been
obtained by such beneficial owner, director or officer by reason of his relationship to the
issuer, any profit realized by him from any purchase or sale, or any sale or purchase, of
any equity security of such issuer within any period of less than (6) months unless such
security was acquired in good faith in connection with a debt previously contracted,
shall inure to and be recoverable by the issuer, irrespective of any intention of holding
the security purchased or of not repurchasing the security sold for a period exceeding
six (6) months. Suit to recover such profit may be instituted before the Regional Trial
Court by the issuer, or by the owner of any security of the issuer in the name and in
behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty (60)
days after request or shall fail diligently to prosecute the same thereafter, but not such
shall be brought more than two years after the date such profit was realized. This
Subsection shall not be construed to cover any transaction were such beneficial owner
was not such both time of the owner or the sale, or the sale of purchase, of the security
involved, or any transaction or transactions which the Commission by rules and
regulations may exempt as not comprehended within the purpose of this subsection.
Section 27. Insider’s Duty to Disclose When Trading.
27.1. It shall be unlawful for an insider to sell or buy a security of the issuer, while in
possession of material information with respect to the issuer or the security that is not
generally available to the public, unless: (a) The insider proves that the information was
not gained from such relationship; or (b) If the other party selling to or buying from the
insider (or his agent) is identified, the insider proves: (I) that he disclosed the
information to the other party, or (ii) that he had reason to believe that the other party
otherwise is also in possession of the information. A purchase or sale of a security of
the issuer made by an insider defined in Subsection 3.8, or such insider’s spouse or
relatives by affinity or consanguinity within the second degree, legitimate or common-
law, shall be presumed to have been effected while in possession of material nonpublic
information if transacted after such information came into existence but prior to
dissemination of such information to the public and the lapse of a reasonable time for
market to absorb such information: Provided, however, That this presumption shall be
rebutted upon a showing by the purchaser or seller that he was aware of the material
nonpublic information at the time of the purchase or sale.
27.2. For purposes of this Section, information is "material nonpublic" if: (a) It has not
been generally disclosed to the public and would likely affect the market price of the
security after being disseminated to the public and the lapse of a reasonable time for
the market to absorb the information; or (b) would be considered by a reasonable
person important under the circumstances in determining his course of action whether
to buy, sell or hold a security.
51
 27.3. It shall be unlawful for any insider to communicate material nonpublic information
about the issuer or the security to any person who, by virtue of the communication,
becomes an insider as defined in Subsection 3.8, where the insider communicating the
information knows or has reason to believe that such person will likely buy or sell a
security of the issuer whole in possession of such information.
27.4. (a) It shall be unlawful where a tender offer has commenced or is about to
commence for: (i) Any person (other than the tender offeror) who is in possession of
material nonpublic information relating to such tender offer, to buy or sell the securities
of the issuer that are sought or to be sought by such tender offer if such person knows
or has reason to believe that the information is nonpublic and has been acquired
directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, or any insider of such issuer;
and (ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought
or to be sought by such tender offer, and any insider of such issuer to communicate
material nonpublic information relating to the tender offer to any other person where
such communication is likely to result in a violation of Subsection 27.4 (a)(I). (b) For
purposes of this subsection the term "securities of the issuer sought or to be sought by
such tender offer" shall include any securities convertible or exchangeable into such
securities or any options or rights in any of the foregoing securities.
(v) Interlocking Directors (Sec. 33)
Section 33. Contracts between corporations with interlocking directors.
Except in cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between two or more corporations having interlocking directors shall
NOT be invalidated on that ground alone: Provided, That if the interest of the interlocking director
in one corporation is substantial and his interest in the other corporation or corporations is merely
nominal, he shall be subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of
the outstanding capital stock shall be considered substantial for purposes of interlocking
directors.
(c) Duty of Obedience
-Lopez Realty vs. Fontecha, 247 SCRA 183 [1995]
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
(d) Duty to Creditors
Steinberg vs. Velasco supra; Secs. 31 and 65
The creditors of a corporation have the right to assume that so long as there are debts and
liabilities, the board of directors of the corporation will not use its assets to purchase its own stock
or to declare dividends to its stockholders when the corporation is insolvent.
Corporation Law 2016: JVL & JSD
B. Corporate Officers (Sec. 25)
Section 25. Corporate officers, quorum.
Immediately after their election, the directors of a corporation must formally organize by
the election of a president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more positions may be held
concurrently by the same person, except that NO one shall act as president and secretary or
as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on
them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum for the transaction of corporate business, and
every decision of at least a majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the election of officers which
shall require the vote of a majority of ALL the members of the board.
Directors or trustees CANNOT attend or vote by proxy at board meetings
-Barba vs. Liceo de Cagayan University, D.R. No. 193857, November 28, 2012
It bears stressing that the appointive officials mentioned in Article V of respondent's by-laws are
not corporate officers under the contemplation of the law. Though the board of directors may
create appointive positions other than the positions of corporate officers, the persons occupying
such positions cannot be deemed as corporate officers as contemplated by Section 25 of the
Corporation Code.
-Matling Industrial and Commercial Corp., et al., 633 SCRA 12 120101
The phrase "such other officers as may be provided for in the by-laws" has been clarified, thus:
Conformably with Section 25, a position must be expressly mentioned in the By-Laws in order to
be considered as a corporate office. Thus, the creation of an office pursuant to or under a By-Law
enabling provision is not enough to make a position a corporate office. Guerrea v. Lezama, the
first ruling on the matter, held that the only officers of a corporation were those given that
character either by the Corporation Code or by the By-Laws; the rest of the corporate officers
could be considered only as employees of subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King:
An "office" is created by the charter of the corporation and the officer is elected by the directors or
stockholders. On the other hand, an employee occupies no office and generally is employed not
by the 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. (Emphasis supplied)
SEC Opinion dated November 25, 1993: Thus, pursuant to the above provision (Section 25 of the
Corporation Code), whoever are the corporate officers enumerated in the by-laws are the
exclusive Officers of the corporation and the Board has no power to create other Offices without
amending first the corporate By-laws. However, the Board may create appointive positions other
than the positions of corporate Officers, but the persons occupying such positions are not
52
considered as corporate officers within the meaning of Section 25 of the Corporation Code and
are not empowered to exercise the functions of the corporate Officers, except those functions
lawfully delegated to them. Their functions and duties are to be determined by the Board of
Directors/Trustees.
-Pamplona Plantation Company vs. Acosta, 510 SC RA 249 [2006]
Under Section 25 of the Corporation Code, three officers are specifically provided for which a
corporation must have: president, secretary, and treasurer. The law, however, does not limit
corporate officers to these three. Section 25 gives corporations the widest latitude to provide for
such other offices, as they may deem necessary. The by-laws may and usually do provide for
such other officers, e.g., vice-president, cashier, auditor, and general manager.
-Metro Drug Inc. vs. Narciso, 495 SC RA 286 [2006]
In Zulueta v. Asia Brewery, Inc., we held th
at the requirement for petitioner to sign the certificate of non-forum shopping applied even to
corporations, considering that the mandatory directives of the Rules of Court made no distinction
between natural and juridical persons.
In case of a corporation, it has long been settled that the certificate must be signed for and on its
behalf by a specifically authorized officer or agent who has personal knowledge of the facts
required to be disclosed.
We discussed the rationale behind the rule in National Steel Corporation v. Court of Appeals:
Unlike natural persons, corporations may perform physical actions only through properly
delegated individuals; namely, its officers and/or agents. The corporation, such as the petitioner,
has no powers except those expressly conferred on it by the Corporation Code and those that are
implied or incidental to its existence. In turn, a corporation exercises said powers through its
board of directors and/or its duly authorized officers or agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly authorized for the purpose by
corporate by-laws or by specific act of the board of directors.
Consequently, without the needed proof from the board of directors, the certificate would be
considered defective. Thus, in another case, 23 we held that even the regular officers of a
corporation, like the chairman and president, may not even know the details required in a
certificate of non-forum shopping; they must therefore be authorized by the board of directors just
like any other officer or agent.
1. Powers of Corporate Officers:
(a) Agent of Corporation
-Reyes vs. RCPI Employees Credit Union, Inc., 499 SCRA 319 [2006]
Indisputably, the respondent is a credit cooperative duly organized and existing under
Philippine laws. As such corporate entity, it has its own acts and liabilities and exercises
corporate powers, including the power to enter into all contracts, through its board of directors
pursuant to Section 23 of the Corporation Code.|
Indeed, the evidence submitted by the [petitioner] to prove her claim is insufficient to
establish the fact that [respondent] is indebted to it for . . . it has been held that the power to
borrow money is one of those cases where even a special power of attorney is required. Such
Corporation Law 2016: JVL & JSD
being the case, there is invariably a need of an enabling act of the corporation to be approved by
its Board of Directors. This fact is what the trial court omitted to consider. It failed to recognize the
fact that while [petitioner] sufficiently established the fact that the President and Chairman of the
Board of Directors of the [respondent] as well as its Accounting Officer, had signed the
promissory note, she however dismally failed to prove that Halican was, in the first place,
authorized to borrow money by the Board of Directors of the defendant corporation. Much less,
execute a promissory note in behalf of the said corporation promising to pay the loaned amount
at a stipulated date. We note that [petitioner] was also a member of the Board of Directors which
allegedly resolved to allow the corporation to borrow money from outside sources and such being
the case, she could have just presented said board resolution to prove that Halican was
authorized to borrow money as it can be fairly presumed that she had access to copies of the
defendant corporation's board resolution. Failing in this respect, [petitioner's] action was left
without any leg to stand on insofar as the claimed liability of the [respondent] is concerned.
(Words in brackets added
-Yasuma vs. Heirs of Cecilia S. de Villa, 499 SCRA 466 [2006]
The general principles of agency govern the relation between the corporation and its
officers or agents. 11 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. 12
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. 13 The substance of the doctrine is confirmation after
conduct, amounting to a substitute for a prior authority. 14 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. 16 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.
- Litonjua, Jr. vs. Eternit Corporation, 490 SCRA 204 [2006]
Under Section 36 of the Corporation Code, a corporation may sell or convey its real
properties, subject to the limitations prescribed by law and the Constitution.
The property of a corporation, however, is not the property of the stockholders or
members, and as such, may not be sold without express authority from the board of directors.
Physical acts, like the offering of the properties of the corporation for sale, or the acceptance of a
counter-offer of prospective buyers of such properties and the execution of the deed of sale
covering such property, can be performed by the corporation only by officers or agents duly
authorized for the purpose by corporate by-laws or by specific acts of the board of directors.
Absent such valid delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or connected with, the
performance of authorized duties of such director, are not binding on the corporation.
While a corporation may appoint agents to negotiate for the sale of its real properties,
the final say will have to be with the board of directors through its officers and agents as
53
authorized by a board resolution or by its by-laws. An unauthorized act of an officer of the
corporation is not binding on it unless the latter ratifies the same expressly or impliedly by its
board of directors. Any sale of real property of a corporation by a person purporting to be an
agent thereof but without written authority from the corporation is null and void. The declarations
of the agent alone are generally insufficient to establish the fact or extent of his/her authority.
An agency may be expressed or implied from the act 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. Acceptance by the agent may be expressed, or implied from his acts
which carry out the agency, or from his silence or inaction according to the circumstances.
Agency may be oral unless the law requires a specific form. However, to create or convey real
rights over immovable property, a special power of attorney is necessary. Thus, when a sale of a
piece of land or any portion thereof is through an agent, the authority of the latter shall be in
writing, otherwise, the sale shall be void.
-DBP vs. Ong, 460 SC RA 170 [2005]
The representation of Roy Palasan, a mere clerk at petitioner's Cagayan de Oro City
branch, that the manager had already approved the sale, even if true, cannot bind the petitioner
bank to a contract of sale with respondents, it being obvious to us that such a clerk is not among
the bank officers upon whom such putative authority may be reposed by a third party. There is,
thus, no legal basis to bind petitioner into any valid contract of sale with the respondents, given
the absolute absence of any approval or consent by any responsible officer of petitioner bank
-Vicente vs. Geraldez, 52 SC RA 210 [19731;
Special powers of attorney are necessary, among other cases, in the following: to
compromise and to renounce the right to appeal from a judgment. Attorneys have authority to
bind their clients in any case by any agreement in relation thereto made in writing, and in taking
appeals, and in all matters of ordinary judicial procedure, but they cannot, without special
authority, compromise their clients' litigation, or receive anything in discharge of their clients'
claims but the full amount in cash.
The law specifically requires that "juridical persons may compromise only in the form
and with the requisites which may be necessary to alienate their property." Under the corporation
law the power to compromise or settle claims in favor of or against the corporation is ordinarily
and primarily committed to the Board of Directors. The right of the Directors "to compromise a
disputed claim against the corporation rests upon their right to manage the affairs of the
corporation according to their honest and informed judgment and discretion as to what is for the
best interests of the corporation." This power may however be delegated either expressly or
impliedly to other corporate officials or agents. Thus it has been stated, that as a general rule an
officer or agent of the corporation has no power to compromise or settle a claim by or against the
corporation, except to the extent that such power is given to him either expressly or by
reasonable implication from the circumstances. It is therefore necessary to ascertain whether
from the relevant facts it could be reasonably concluded that the Board of Directors of the HI
Cement Corporation had authorized its lawyers to enter into the said compromise agreement.
-reiterated in Boyer-Roxas vs. CA, 211 SC RA 470 [1992];
The corporation transacts its business only through its officers or agents. (Western
Agro Industrial Corporation v. Court of Appeals, supra) Whatever authority these officers or
agents may have is derived from the board of directors or other governing body unless conferred
by the charter of the corporation. An officer's power as an agent of the corporation must be
Corporation Law 2016: JVL & JSD
sought from the statute, charter, the by-laws or in a delegation of authority to such officer, from
the acts of the board of directors, formally expressed or implied from a habit or custom of doing
business. (Vicente v. Geraldez, 52 SCRA 210 [1973]) In the present case, the record shows that
Eufrocino V. Roxas who then controlled the management of the corporation, being the majority
stockholder, consented to the petitioners' stay within the questioned properties. Specifically,
Eufrocino Roxas gave his consent to the conversion of the recreation hall to a residential house,
now occupied by petitioner Guillermo Roxas. The Board of Directors did not object to the actions
of Eufrocino Roxas. The petitioners were allowed to stay within the questioned properties until
August 27, 1983, when the Board of Directors approved a Resolution ejecting the petitioners.
(b) Corporate Secretary
- Torres, Jr. vs. CA, 278 SCRA 793 [1997];
It is the corporate secretary's duty and obligation to register valid transfers of stocks
and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit
to compel performance. In other words, there are remedies within the law that petitioners could
have availed of, instead of taking the law in their own hands, as the cliche goes.
- Esguerra vs. CA, 267 SC RA 380 [1997].
VECCI's sale of all the properties mentioned in the judicially-approved compromise
agreement was done on the basis of its Corporate Secretary's Certification of these two
resolutions. The partial decision did not require any further board or stockholder resolutions to
make VECCI's sale of these properties valid. Being regular on its face, the Secretary's
Certification was sufficient for private respondent Sureste Properties, Inc., to rely on. It did not
have to investigate the truth of the facts contained in such certification. Otherwise, business
transactions of corporations would become tortuously slow and unnecessarily hampered.
Ineluctably, VECCI's sale of Esguerra Building II to private respondent was not ultra vires but a
valid execution of the trial court's partial decision. Based on the foregoing, the sale is also
deemed to have satisfied the requirements of Section 40 of the Corporation Code.
(c) Corporate Treasurer
-San Juan Structural and Steel Fabricators, Inc. vs. Court of Appeals, 296 SC RA 631,
645 [1998].
Indubitably, a corporation may act only through its board of directors or, when
authorized either by its bylaws 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, bylaws, or relevant
provisions of law. Thus, this Court has held that " 'a 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 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,
the Court has also recognized the rule that "persons dealing with an assumed agent, whether the
54
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 controvert, the burden of proof is upon them to establish it (Harry Keeler vs.
Rodriguez, 4 Phil. 19)." Unless duly authorized, a treasurer, whose powers are limited, cannot
bind the corporation in a sale of its assets. In the case at bar, Respondent Motorich categorically
denies that it ever authorized Nenita Gruenberg, its treasurer, to sell the subject parcel of land.
Consequently, petitioner had the burden of proving that Nenita Gruenberg was in fact authorized
to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Its
offer of evidence before the trial court contained no proof of such authority. It has not shown any
provision of said respondent's articles of incorporation, bylaws or board resolution to prove that
Nenita Gruenberg possessed such power. That Nenita Gruenberg is the treasurer of Motorich
does not free petitioner from the responsibility of ascertaining the extent of her authority to
represent the corporation. Petitioner cannot assume that she, by virtue of her position, was
authorized to sell the property of the corporation. Selling is obviously foreign to a corporate
treasurer's function, which generally has been described as "to receive and keep the funds of the
corporation and to disburse them in accordance with the authority given him by the board or the
properly authorized officers." Neither was such real estate sale shown to be a normal business
activity of Motorich. The primary purpose of Motorich is marketing, distribution, export and import
in relation 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.
(d) Corporate Bookkeeper
-Pabon vs. NLRC, 296 SCRA 7 [1998]
We are of the view that a bookkeeper can be considered as an agent of private
respondent corporation within the purview of Section 13, Rule 14 of the old Rules of Court. The
rationale of all rules with respect to service of process on a corporation is that such service must
be made to an agent or a representative so integrated with the corporation sued as to make it a
priori supposable that he will realize his responsibilities and know what he should do with any
legal papers served on him. The bookkeeper's task is one under consideration. The job of a
bookkeeper is so integrated with the corporation that his regular recording of the corporation's
"business accounts" and "essential facts about the transactions of a business or enterprise"
safeguards the corporation from possible fraud being committed adverse to its own corporate
interest. Although it may be true that the service of summons was made on a person not
authorized to receive the same in behalf of the petitioner, nevertheless since it appears that the
summons and complaint were in fact received by the corporation through its said clerk, the Court
finds that there was substantial compliance with the rule on service of summons. Indeed the
purpose of said rule as above stated to assure service of summons on the corporation had
thereby been attained. The need for speedy justice must prevail over technicality.
an "agent" may also be shown to represent his principal in some one or more of his
relations to others, even though he may not have the power to enter into contracts. The rules on
service of process make service on "agent" sufficient. It does not in any way distinguish whether
the "agent" be general or special, but is complied with even by a service upon an agent having
limited authority to represent his principal. As such, it does not necessarily connote an officer of
the corporation. However, though this may include employees other than officers of a corporation,
this does not include employees whose duties are not so integrated to the business that their
absence of presence will not toll the entire operation of the business. It is for this reason that we
lend credence to the finding of the Labor Arbiter when it ruled that it acquired jurisdiction over
private respondent on the basis of Section 5, Rule III of the NLRC Rules of Procedure.
Corporation Law 2016: JVL & JSD
"Service by registered mail is complete upon receipt by the addressee or his agent." As
can be gleaned from the records, all summons and notices of hearing addressed to private
respondent were served on and received by its bookkeeper on behalf of private respondent as its
employer who, under the circumstances of this case, is considered as an agent within the
contemplation of the aforecited NLRC rule. Such an employee is not one of those lesser
employees of the corporation who would not have been able to appreciate the importance of the
papers delivered to her. In fact in G & G Trading Corporation v. Court of Appeals, we held that
service of summons was properly made to a corporation through a clerk who was not even
authorized to receive the same on behalf of its employer, since what is of paramount importance
is that the purpose of the rule has been attained, thereby the interest of speedy justice has been
subserved.
(e) General Manager
(Section 11, Rule 14 of the 1997 Rules ot Civil Procedure);
Section 11. Service upon domestic private juridical entity.
When the defendant is a corporation, partnership or association organized under the
laws of the Philippines with a juridical personality, service may be made on the president,
managing partner, general manager, corporate secretary, treasurer, or in-house counsel.
2. Liabilities of Corporate Officers: (Sec. 31)
Section 31. Liability of directors, trustees or officers.
Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
- Ever Electrical Manufacturing, Inc. vs. Samahang Manggagawa ng Ever Electrical/NAMWU
Local 224, 672 SCRA 562 [2012]
In the present case, Go may have acted in behalf of EEMI but the company's failure to operate
cannot be equated to bad faith. Cessation of business operation is brought about by various
causes like mismanagement, lack of demand, negligence, or lack of business foresight. Unless it
can be shown that the closure was deliberate, malicious and in bad faith, the Court must apply
the general rule that a corporation has, by law, a personality separate and distinct from that of its
owners. As there is no evidence that Go, as EEMI's President, acted maliciously or in bad faith in
handling their business affairs and in eventually implementing the closure of its business, he
cannot be held jointly and solidarily liable with EEMI.
-Jaime Gosiaco vs. Leticia Ching and Edwin Casta, O.R. No. 173807, April 16, 2009
B.P. Blg. 22 is popularly known as the Bouncing Checks Law. Section 1 of B.P. Blg. 22 provides: 
55
xxx xxx xxx
Where the check is drawn by a corporation, company or entity, the person or persons, who
actually signed the check in behalf of such drawer shall be liable under this Act.
When a corporate officer issues a worthless check in the corporate name he may be
held personally liable for violating a penal statute. The statute imposes criminal penalties on
anyone who with intent to defraud another of money or property, draws or issues a check on any
bank with knowledge that he has no sufficient funds in such bank to meet the check on
presentment. Moreover, the personal liability of the corporate officer is predicated on the principle
that he cannot shield himself from liability from his own acts on the ground that it was a corporate
act and not his personal act.
Let us pursue this point further. B.P. Blg. 22 imposes a distinct civil liability on the
signatory of the check which is distinct from the civil liability of the corporation for the amount
represented from the check. The civil liability attaching to the signatory arises from the wrongful
act of signing the check despite the insufficiency of funds in the account, while the civil liability
attaching to the corporation is itself the very obligation covered by the check or the consideration
for its execution. Yet these civil liabilities are mistaken to be indistinct. The confusion is traceable
to the singularity of the amount of each.
If we conclude, as we should, that under the current Rules of Criminal Procedure, the
civil action that is impliedly instituted in the B.P. Blg. 22 action is only the civil liability of the
signatory, and not that of the corporation itself, the distinctness of the cause of action against the
signatory and that against the corporation is rendered beyond dispute. It follows that the actions
involving these liabilities should be adjudged according to their respective standards and merits.
In the B.P. Blg. 22 case, what the trial court should determine whether n or not the signatory had
signed the check with knowledge of the insufficiency of funds or credit in the bank account, while
in the civil case the trial court should ascertain whether or not the obligation itself is valid and
demandable. The litigation of both questions could, in theory, proceed independently and
simultaneously without being ultimately conclusive on one or the other.
It might be argued that under the current rules, if the signatory were made liable for the amount of
the check by reason of the B.P. Blg. 22 case, such signatory would have the option of recovering
the same amount from the corporation. Yet that prospect does not ultimately satisfy the ends of
justice. If the signatory does not have sufficient assets to answer for the amount of the check — a
distinct possibility considering the occasional large-scale transactions engaged in by corporations
— the corporation would not be subsidiarily liable to the complainant, even if it in truth the
controversy, of which the criminal case is just a part, is traceable to the original obligation of the
corporation. While the Revised Penal Code imposes subsidiary civil liability to corporations for
criminal acts engaged in by their employees in the discharge of their duties, said subsidiary
liability applies only to felonies, 24 and not to crimes penalized by special laws such as B.P. Blg.
22. And nothing in B.P. Blg. 22 imposes such subsidiary liability to the corporation in whose name
the check is actually issued. Clearly then, should the check signatory be unable to pay the
obligation incurred by the corporation, the complainant would be bereft of remedy unless the right
of action to collect on the liability of the corporation is recognized and given flesh.
There are two prevailing concerns should civil recovery against the corporation be
pursued even as the B.P. Blg. 22 case against the signatory remains extant. First, the possibility
that the plaintiff might be awarded the amount of the check in both the B.P. Blg. 22 case and in
the civil action against the corporation. For obvious reasons, that should not be permitted.
Considering that petitioner herein has no chance to recover the amount of the check through the
B.P. Blg. 22 case, we need not contend with that possibility through this case. Nonetheless, as a
matter of prudence, it is best we refer the matter to the Committee on Rules for the formulation of
proper guidelines to prevent that possibility. CaESTA
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The other concern is over the payment of filing fees in both the B.P. Blg. 22 case and
the civil action against the corporation. Generally, we see no evil or cause for distress if the
plaintiff were made to pay filing fees based on the amount of the check in both the B.P. Blg. 22
case and the civil action. After all, the plaintiff therein made the deliberate option to file two
separate cases, even if the recovery of the amounts of the check against the corporation could
evidently be pursued through the civil action alone.
Nonetheless, in petitioner's particular case, considering the previous legal confusion on
whether he is authorized to file the civil case against ASB, he should, as a matter of equity, be
exempted from paying the filing fees based on the amount of the checks should he pursue the
civil action against ASB. In a similar vein and for a similar reason, we likewise find that petitioner
should not be barred by prescription should he file the civil action as the period should not run
from the date the checks were issued but from the date this decision attains finality. The courts
should not be bound strictly by the statute of limitations or the doctrine of laches when to do so,
manifest wrong or injustice would result.
-Elcee Farms, Inc. vs. NLRC, 512 SCRA 602 [2007]
This Court, nonetheless, finds merit in the petitioners' allegation that Corazon Saguemuller should
not be subsidiarily liable with Elcee Farms for separation pay and damages. It is basic that a
corporation is invested by law with a personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which it may be related. 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. 33 In the case of Santos v. National Labor Relations Commission, 34 a corporate
officer was not held liable for the obligations incurred by the corporation, where the corporate
officer was not even shown to have had a direct hand in the dismissal of the employee enough to
attribute to him an unlawful act.
-Ching vs. Secretary of Justice, 481 SCRA 609 [2006]
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under
paragraph 1 (b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It
may be committed by a corporation or other juridical entity or by natural persons. However, the
penalty for the crime is imprisonment for the periods provided in said Article 315. Article 315.
Swindling (estafa). — Any person who shall defraud another by any of the means mentioned
hereinbelow shall be punished by: 1st. The penalty of prision correccional in its maximum period
to prision mayor in its minimum period, if the amount of the fraud is over 12,000 pesos but does
not exceed 22,000 pesos; and if such amount exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period, adding one year for each additional 10,000
pesos; but the total penalty which may be imposed shall not exceed twenty years. In such cases,
and in connection with the accessory penalties which may be imposed and for the purpose of the
other provisions of this Code, the penalty shall be termed prision mayor or reclusion temporal, as
the case may be. Though the entrustee is a corporation, nevertheless, the law specifically makes
the officers, employees or other officers or persons responsible for the offense, without prejudice
to the civil liabilities of such corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such officers or employees are
vested with the authority and responsibility to devise means necessary to ensure compliance with
the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible
share in the violations of the law. If the crime is committed by a corporation or other juridical
entity, the directors, officers, employees or other officers thereof responsible for the offense shall
56
be charged and penalized for the crime, precisely because of the nature of the crime and the
penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized
for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted
for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined.
-Tupaz IV vs. CA, 475 SCRA 398 [2005]
CORPORATE OFFICERS SIGNING JOINTLY AND SEVERALLY WITH THE CORPORATION IN
A TRUST RECEIPT CONTRACT IS LIABLE ONLY AS GUARANTOR; RATIONALE. — In
Prudential Bank v. Intermediate Appellate Court, the Court interpreted a substantially identical
clause in a trust receipt signed by a corporate officer who bound himself personally liable for the
corporation's obligation. The petitioner in that case contended that the stipulation "we jointly and
severally agree and undertake" rendered the corporate officer solidarily liable with the
corporation. We dismissed this claim and held the corporate officer liable as guarantor only. The
Court further ruled that had there been more than one signatories to the trust receipt, the solidary
liability would exist between the guarantors. We held: Petitioner [Prudential Bank] insists that by
virtue of the clear wording of the . . . clause ". . . we jointly and severally agree and
undertake . . .," and the concluding sentence on exhaustion, [respondent] Chi's liability therein is
solidary. . . . Our . . . reading of the questioned solidary guaranty clause yields no other
conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by
the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this
case because the space therein for the party whose property may not be exhausted was not filled
up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by
a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract
of surety. It, however, described the guaranty as solidary between the guarantors; this would
have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree
and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability
existing between themselves. It does not refer to the undertaking between either one or both of
them on the one hand and the petitioner on the other with respect to the liability described under
the trust receipt. . . . Furthermore, any doubt as to the import or true intent of the solidary
guaranty clause should be resolved against the petitioner. The trust receipt, together with the
questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner;
Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; as such, it must be strictly construed against the party responsible for its
preparation.
C. Stockholders
1. Duty of Controlling Interest — Although a shareholder, even if he is also a director, is NOT
disqualified from voting at a stockholders' meeting by the fact that he has some interest adverse
to the corporation, it does NOT mean that a stockholder who is able, either by owning a majority
of the voting shares or otherwise, to control a corporation, owes no duly of good faith to the
corporation or to the minority stockholders. A majority shareholder is subject to the duly of good
faith when he acts by voting at a stockholders' meeting with respect to a matter in which he has a
personal interest. This may occur when he votes to ratify voidable action by the directors, or
where the transaction is one for which a stockholders' vote is necessary, like merger, dissolution
or sale of all the corporate assets.
Corporation Law 2016: JVL & JSD
2. Rights of Stockholders and Members:
(Stockholders of F. Guanson and Sons, Inc. vs. Register of Deeds of Manila, 6 SCRA 373 [1962])
A corporation is a juridical person distinct from the members composing it. Properties
registered in the name of the corporation are owned by it as an entity separate and distinct from
its members. While shares of stock constitute personal property, they do not represent property of
the corporation. A share of stock only typifies an aliquot part of the corporation's property, or the
right to share in its proceeds to that extent when distributed according to law and equity but its
holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the
possession of any definite portion of its property or assets. The stockholder is not a co-owner or
tenant in common of the corporate property.
(a) Right to Vote and to Attend Meetings: (Sec. 6, Sec. 89;
Section 6. Classification of shares.
The shares of stock of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided, That NO share may be
deprived of voting rights except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of the shares or series of
shares may have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall NOT be permitted to issue NO-par value
shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided, That preferred shares of stock may be
issued only with a stated par value. The board of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof:
Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.
Shares of capital stock issued WITHOUT par value shall be deemed fully paid and non-
assessable and the holder of such shares shall NOT be liable to the corporation or to its creditors
in respect thereto: Provided; That shares without par value may NOT be issued for a
consideration less than the value of five (P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its no-par value shares shall be treated as
capital and shall NOT be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate
of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all
of the corporate property;
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 4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance with
this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer only to
stocks with voting rights.
Section 89. Right to vote. - The right of the members of any class or classes to vote
may be limited, broadened or denied to the extent specified in the articles of incorporation or the
by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall
be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws,
a member may vote by proxy in accordance with the provisions of this Code. Voting by mail or
other similar means by members of non-stock corporations may be authorized by the by-laws of
non-stock corporations with the approval of, and under such conditions which may be prescribed
by, the Securities and Exchange Commission.
- RP vs. COCOFED, 372 SC RA 462 [2001]
The Supreme Court uphold the contention of the PCGG ands set aside the assailed
order of the Sandiganbayan. The Court held that the government should be allowed to continue
voting those shares inasmuch as they were purchased with coconut levy funds — funds that are
prima facie public in character or, at the very least, are "clearly affected withy public interest," and
because they belong to it as the prima facie beneficial and true owner thereof. Voting is an act of
dominion that should be exercised by the share owner. One of the recognized rights of an owner
is the right to vote at meetings of the corporation. The right to vote is classified as the right to
control. Voting rights may be for the purpose of, among others, electing or removing directors,
amending a charter or making or amending by laws. Because the subject UCPB shares were
acquired with government funds, the government becomes their prima facie beneficial and true
owner. Ownership includes the right to enjoy, dispose of, exclude and recover a thing without
limitations other than those established by law or by the owner. Ownership has been aptly
described as the most comprehensive of all real rights and the right to vote shares is a mere
incident of ownership. In the present case, the government has been shown to be the prima facie
owner of the funds used to purchase the shares. Hence, it should be allowed the rights and
privileges flowing from such fact.
- PCGG vs. Cojuancgo, 302 SC RA 217 [1999]
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT; HAS NO RIGHT TO
VOTE THE SEQUESTERED SHARES OF STOCK. — Since 1986, petitioner had been voting the
sequestered SMC shares and continued to exercise such right until 1997, except for some period
in the year 1991. During the latter year, the Court in the case of Cojuangco, Jr. vs. Roxas, (195
SCRA 797), on which both respondent stockholders and SB anchor their position in this case,
ruled that the PCGG had no right to vote the said shares. As said by the Court: "The PCGG
cannot perform acts of strict ownership of sequestered property. It is a mere conservator. It may
not vote the shares in a corporation and elect the members of the board of directors. The only
conceivable exception is in a case of a takeover of a business belonging to the government or
Corporation Law 2016: JVL & JSD
whose capitalization comes from public funds, but which landed in private hands as in BASECO.
The constitutional right against deprivation of life, liberty and property without due process of law
is so well-known and too precious so that the hand of the PCGG must be stayed in its
indiscriminate takeover of the voting of shares allegedly ill-gotten in these cases. It is only after
appropriate judicial proceedings when a clear determination is made that said shares are truly ill-
gotten when such a takeover and exercise of acts of strict ownership by the PCGG are justified.
In the light of the foregoing discussion, the Court finds and so holds that the PCGG has no right
to vote the sequestered shares of petitioners including the sequestered corporate shares. Only
their owners, duly authorized representatives or proxies may vote the said shares.
- Price and Sulu Dev. Co. vs. Martin, 58 Phil. 707 [1933];
Until challenged in a proper proceeding, a stockholder according to the books of the
company has a right to participate in any meeting, and in the absence of fraud the action of the
stockholders' meeting cannot be collaterally attacked on account of such participation.
A person who has purchased stock, and who desires to be recognized as a
stockholder, for the purpose of voting, must secure such a standing by having the transfer
recorded upon the books. If the transfer is not duly made upon request, he has, as his remedy, to
compel it to be made.
- Cojuangco Jr. vs. Roxas, 195 SC RA 797 (1991).
It is through the right to vote that the stockholder participates in the management of the
corporation. The right to vote, unlike the rights to receive dividends and liquidating distributions, is
not a passive thing because management or administration is, under the Corporation Code,
vested in the board of directors, with certain reserved powers residing in the stockholders directly.
The board of directors and executive committee (or management committee) and the corporate
officers selected by the board may make it very difficult if not impossible for the PCGG to carry
out its duties as conservator if the Board or officers do not cooperate, are hostile or antagonistic
to the conservator's objectives.
(i) Notice (Sec. 50; Sec. 51;
Section 50. Regular and special meetings of stockholders or members.
Regular meetings of stockholders or members shall be held annually on a date fixed in
the by-laws, or if not so fixed, on any date in April of every year as determined by the board of
directors or trustees: Provided, That written notice of regular meetings shall be sent to ALL
stockholders or members of record at least two (2) weeks prior to the meeting, unless a different
period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws: Provided, however, That at least one (1) week
written notice shall be sent to ALL stockholders or members, unless otherwise provided in the
by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or
member.
Whenever, for any cause, there is NO person authorized to call a meeting, the
Securities and Exchange Commission, upon petition of a stockholder or member on a showing of
good cause therefor, may issue an order to the petitioning stockholder or member directing him to
call a meeting of the corporation by giving proper notice required by this Code or by the by-laws.
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The petitioning stockholder or member shall preside thereat until at least a majority of the
stockholders or members present have chosen one of their number as presiding officer. (24, 26)
Section 51. Place and time of meetings of stockholders of members.
Stockholder's or member's meetings, whether regular or special, shall be held in the
city or municipality where the principal office of the corporation is located, and if practicable in the
principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section,
be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the meeting be
improperly held or called, provided ALL the stockholders or members of the corporation are
present or duly represented at the meeting.
Board of Directors and Election Committee of the SMB Workers Savings and Loan
Association, Inc., et al. vs. Tan, et aL, 105 Phil. 426 [1959])
When it appears that a fair election cannot be had, the court in the exercise of its equity
jurisdiction may appoint a committee with the authority to call, conduct and supervise the election
of the directors or the association.
(ii) Place of Meeting (Sec. 51; 93)
Section 93. Place of meetings.
The by-laws may provide that the members of a non-stock corporation may hold their
regular or special meetings at any place even outside the place where the principal office of the
corporation is located: Provided, That proper notice is sent to all members indicating the date,
time and place of the meeting: and Provided, further, That the place of meeting shall be within the
Philippines.
(iii) Quorum (sec. 52)
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.
(iv) Vote (Sec. 137; 89;
Section 137. Outstanding capital stock defined.
The term "outstanding capital stock", as used in this Code, means the total shares of
stock issued under binding subscription agreements to subscribers or stockholders,
whether or not fully or partially paid, except treasury shares.
Section 89. Right to vote. - The right of the members of any class or classes to vote
may be limited, broadened or denied to the extent specified in the articles of incorporation or the
by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall
be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws,
a member may vote by proxy in accordance with the provisions of this Code. Voting by mail or
Corporation Law 2016: JVL & JSD
other similar means by members of non-stock corporations may be authorized by the by-laws of
non-stock corporations with the approval of, and under such conditions which may be prescribed
by, the Securities and Exchange Commission.
joint owners — sec. 56;
Section 56. Voting in case of joint ownership of stock.
In case of shares of stock owned jointly by two or more persons, in order to vote the
same, the consent of ALL the co-owners shall be necessary, unless there is a written proxy,
signed by all the co-owners, authorizing one or some of them or any other person to vote such
share or shares: Provided, That when the shares are owned in an "and/or" capacity by the
holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor.
pledgors —sec. 55;
Section 55. Right to vote of pledgors, mortgagors, and administrators.
In case of pledged or mortgaged shares in stock corporations, the pledgor or
mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee
or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is
recorded on the appropriate corporate books.
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or members
WITHOUT need of any written proxy.
Lim Tay vs. Court of Appeals. 293 SCRA 634 (1998);
The registration of shares in a stockholder's name, the issuance of stock certificates,
and the right to receive dividends which pertain to the said shares are all rights that flow from
ownership. The determination of whether or not a shareholder is entitled to exercise the above-
mentioned rights falls within the jurisdiction of the SEC. However, if ownership of the shares is not
clearly established and is still unresolved at the time the action for mandamus is filed, then
jurisdiction lies with the regular courts. As a general rule, the jurisdiction of a court or tribunal over
the subject matter is determined by the allegations in the complaint. In the present case,
however, petitioner's claim that he was the owner of the shares of stock in question has no prima
facie basis. In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he
became the owner of the shares when the term for the loans expired. However, the contracts of
pledge, which were made integral parts of the Complaint, contain this common proviso: In the
event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the
date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of
stock . . .."
treasury shares— sec. 57)
Section 57. Voting right for treasury shares.
Treasury shares shall have NO voting right as long as such shares remain in the
Treasury
59

(v) Non-voting stocks or members (sec. 6)
Section 6. Classification of shares.
Where the articles of incorporation provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all
of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance with
this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer only to
stocks with voting rights.
(vi) All stockholders present (sec. 51, last par.)
Section 51. Place and time of meetings of stockholders of members.
All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the meeting be
improperly held or called, provided ALL the stockholders or members of the corporation are
present or duly represented at the meeting.
(vii) No meeting called (Sec. 50; last par.;
Section 50. Regular and special meetings of stockholders or members.
Whenever, for any cause, there is NO person authorized to call a meeting, the Securities and
Exchange Commission, upon petition of a stockholder or member on a showing of good cause
therefor, may issue an order to the petitioning stockholder or member directing him to call a
meeting of the corporation by giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at least a majority of the
stockholders or members present have chosen one of their number as presiding officer.
Ponce et aL vs. Encarnacion, et aL, 94 Phil. 81 [1953])
Under and pursuant to section 26 of Act. No. 1459, on the showing of good cause
therefor the court may authorize a stockholder to call a meeting and to preside thereat until the
majority stockholders representing a majority of the stockholders present and permitted to be
Corporation Law 2016: JVL & JSD
voted shall have chosen one among them to preside it. And this showing of good cause therefor
exists when court is apprised of the fact that the by-laws of the corporation require the calling of a
general meeting of the stockholders to elect the board of directors but the call for such meeting
has not been done.
The requirement that "on the showing of good cause therefor, " the court may grant to a
stockholder the authority to call such meeting and to preside thereat does not mean that the
petition for such authority must be set for hearing with notice served upon the board of directors.
It may be likened to a writ of preliminary injunction or of attachment may be issued ex-parte upon
compliance with the requirements of the rules and upon the court being satisfied that the same
should issue. Such provisional reliefs have not been deemed and held as violative of the due
process of law clause of the Constitution.
The alleged illegality of the election of one member of the board of directors at the
meeting called as authorized by the court being subsequent to the order complained of cannot
affect the validity and legality of the order. If it be true that one of the directors elected at such
meeting was not qualified in accordance with the provisions of the by-laws, the remedy of an
aggrieved party would be quo warranto.
(viii) Necessary Stockholders' Votes:
Election of directors and trustees (Sec. 24; 92; 93; 108; 29).
Section 24. Election of directors or trustees.
At ALL elections of directors or trustees, there must be present, either in person or by
representative authorized to act by written proxy, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote. The
election must be by ballot if requested by any voting stockholder or member. In stock
corporations, every stockholder entitled to vote shall have the right to vote in person or by
proxy the number of shares of stock standing, at the time fixed in the bylaws, in his own name on
the stock books of the corporation, or where the by-laws are silent, at the time of the election; and
said stockholder may vote such number of shares for as many persons as there are directors to
be elected or he may cumulate said shares and give one candidate as many votes as the number
of directors to be elected multiplied by the number of his shares shall equal, or he may distribute
them on the same principle among as many candidates as he shall see fit:
Provided, That the total number of votes cast by him shall not exceed the number of shares
owned by him as shown in the books of the corporation multiplied by the whole number of
directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless
otherwise provided in the articles of incorporation or in the by-laws, members of corporations
which have no capital stock may cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate. Candidates receiving the highest number of votes
shall be declared elected. Any meeting of the stockholders or members called for an election may
adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no
election is held, or if there are not present or represented by proxy, at the meeting, the owners of
a majority of the outstanding capital stock, or if there be no capital stock, a majority of the
member entitled to vote.
Section 92. Election and term of trustees.
Unless otherwise provided in the articles of incorporation or the by-laws, the board of
trustees of nonstock corporations, which may be more than fifteen (15) in number as may be
fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of their number shall expire every year; and
60
subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected
to fill vacancies occurring before the expiration of a particular term shall hold office only for the
unexpired period. NO person shall be elected as trustee unless he is a member of the
corporation. Unless otherwise provided in the articles of incorporation or the by-laws, officers of
a non-stock corporation may be directly elected by the members.
Section 93. Place of meetings.
The by-laws may provide that the members of a non-stock corporation may hold their
regular or special meetings at any place even outside the place where the principal office of the
corporation is located: Provided, That proper notice is sent to all members indicating the date,
time and place of the meeting: and Provided, further, That the place of meeting shall be within the
Philippines.
Section 108. Board of trustees.
Trustees of educational institutions organized as non-stock corporations shall NOT be
less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall
be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the board of
trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as
organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall
expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of
a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5) years. A majority of the
trustees shall constitute a quorum for the transaction of business. The powers and authority
of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors shall
be governed by the provisions on stock corporations.
Section 29. Vacancies in the office of director or trustee.
Any vacancy occurring in the board of directors or trustees other than by removal by
the stockholders or members or by expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders in a regular or special meeting called for that
purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired
term of his predecessor in office.
Any directorship or trusteeship to be filled by reason of an increase in the number of
directors or trustees shall be filled only by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the meeting.
- Barayuga vs. Adventist University of the Philippines, 655 SCRA 640 [ 2011]
Section 108 of the Corporation Code determines the membership and number of
trustees in an educational corporation, viz.:
Section 108. Board of trustees. — Trustees of educational institutions organized as
educational corporations shall not be less than five (5) nor more than fifteen (15): Provided,
however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation or the by-laws, the board of
trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as
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organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall
expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a
particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5) years. A majority of the
trustees shall constitute a quorum for the transaction of business. The powers and authority of
trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors shall
be governed by the provisions on stock corporations.
The second paragraph of the provision, although setting the term of the members of the
Board of Trustees at five years, contains a proviso expressly subjecting the duration to what is
otherwise provided in the articles of incorporation or by-laws of the educational corporation. That
contrary provision controls on the term of office.
In AUP's case, its amended By-Laws provided the term of the members of the Board of
Trustees, and the period within which to elect the officers, thusly:
Article I
Board of Trustees
Section 1. At the first meeting of the members of the corporation, and thereafter every
two years, a Board of Trustees shall be elected. It shall be composed of fifteen members in good
and regular standing in the Seventh-day Adventist denomination, each of whom shall hold his
office for a term of two years, or until his successor has been elected and qualified. If a trustee
ceases at any time to be a member in good and regular standing in the Seventh-day Adventist
denomination, he shall thereby cease to be a trustee.
xxx xxx xxx
Article IV
Officers
Section 1. Election of officers. — At their organization meeting, the members of the
Board of Trustees shall elect from among themselves a Chairman, a Vice-Chairman, a President,
a Secretary, a Business Manager, and a Treasurer. The same persons may hold and perform the
duties of more than one office, provided they are not incompatible with each other. 26 HICSaD
In light of foregoing, the members of the Board of Trustees were to serve a term of
office of only two years; and the officers, who included the President, were to be elected from
among the members of the Board of Trustees during their organizational meeting, which was held
during the election of the Board of Trustees every two years. Naturally, the officers, including the
President, were to exercise the powers vested by Section 2 of the amended By-Laws for a term of
only two years, not five years.
Ineluctably, the petitioner, having assumed as President of AUP on January 23, 2001,
could serve for only two years, or until January 22, 2003. By the time of his removal for cause as
President on January 27, 2003, he was already occupying the office in a hold-over capacity, and
could be removed at any time, without cause, upon the election or appointment of his successor.
His insistence on holding on to the office was untenable, therefore, and with more reason when
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one considers that his removal was due to the loss of confidence on the part of the Board of
Trustees.
Removal of Directors (Sec. 28)
Section 28. Removal of directors or trustees.
Any director or trustee of a corporation may be removed from office by a vote of
the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3)
of the members entitled to vote: Provided, That such removal shall take place either at a
regular meeting of the corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or trustees, or any of them, must be called by
the secretary on order of the president or on the written demand of the stockholders representing
or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation,
on the written demand of a majority of the members entitled to vote. Should the secretary fail or
refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there
is no secretary, the call for the meeting may be addressed directly to the stockholders or
members by any stockholder or member of the corporation signing the demand. Notice of the
time and place of such meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled under
Section 24 of this Code.
Amendment of articles of incorporation (Sec. 16; 103)
Section 16. Amendment of Articles of Incorporation.
Unless otherwise prescribed by this Code or by special law, and for legitimate
purposes, any provision or matter stated in the articles of incorporation may be amended by a
majority vote of the board of directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal right of dissenting stockholders in accordance with the
provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the
members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law
to be set out in the articles of incorporation. Such articles, as amended shall be indicated by
underscoring the change or changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating the fact that said
amendment or amendments have been duly approved by the required vote of the stockholders or
members, shall be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if NOT acted upon within six (6)
months from the date of filing for a cause not attributable to the corporation.
Section 103. Amendment of articles of incorporation.
Any amendment to the articles of incorporation which seeks to delete or remove any
provision required by this Title to be contained in the articles of incorporation or to reduce a
quorum or voting requirement stated in said articles of incorporation shall NOT be valid or
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effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding
capital stock, whether with or without voting rights, or of such greater proportion of shares as may
be specifically provided in the articles of incorporation for amending, deleting or removing any of
the aforesaid provisions, at a meeting duly called for the purpose.
Sale of other disposition of substantially all assets (sec. 40)
Section 40. Sale or other disposition of assets.
Subject to the provisions of existing laws on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of ALL or SUBSTANTIALLY ALL of its property and
assets, including its goodwill, upon such terms and conditions and for such consideration, which
may be money, stocks, bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient, when authorized by the
vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or
in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a
stockholder's or member's meeting duly called for the purpose. Written notice of the proposed
action and of the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the conditions provided in this
Code.
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of
directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange,
mortgage, pledge or other disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval by the stockholders or
members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other disposition of
such property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are NO members with voting rights, the vote of
at least a majority of the trustees in office will be sufficient authorization for the corporation to
enter into any transaction authorized by this section.
Investment in another business or corporation (Secs. 36 and 42;
Section 36. Corporate powers and capacity.
Every corporation incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
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 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks
to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this
Code;
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic
or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan
political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation. (13a)
Section 42. Power to invest corporate funds in another corporation or business
or for any other purpose.
Subject to the provisions of this Code, a private corporation may invest its funds in any
other corporation or business or for any purpose other than the primary purpose for which it was
organized when approved by a majority of the board of directors or trustees and ratified by
the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or
by at least two thirds (2/3) of the members in the case of non-stock corporations, at a
stockholder's or member's meeting duly called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this Code: Provided, however,
That where the investment by the corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval of the stockholders or members
shall NOT be necessary
Gokongwei vs. SEC, 89 SCRA 336 — whether or not SEC gravely abused its
discretion in allowing the stockholders of respondent corporation to ratify the investment of
corporate funds in a foreign corporation).
section 17-1/2 of the Corporation Law allows a corporation to "invest its fund in any
corporation or business or for any purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If
the investment is made in pursuance of the corporate purpose, it does not need the approval of
the stockholders. It is only when the purchase of shares is done solely for investment and not to
accomplish the purpose of its incorporation that the vote of approval of the stockholders holding
shares entitling them to exercise at least two-thirds of the voting power is necessary.
Where the Board of Directors had no authority to make an investment, the corporation,
like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of
its officers or other agents. Mere ultra vires acts or those which are not illegal and void ab initio,
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but are not merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
The purchase of beer manufacturing facilities by San Miguel Corporation was an
investment in the same business as its main purpose in its Articles of Incorporation and is
relevant to the corporate purpose.
The mere fact that a corporation submits the assailed investment to the stockholders
for its ratification at the annual meeting cannot be construed as an admission that the corporation
had committed an ultra vires act, considering the common practices of corporations of periodically
submitting for ratification of their stockholders the acts of their directors, officers and managers.
Chas Realty & Dev't. Corp. vs. Talavera, 397 SCRA 84 [2003]
The trial court and appellate court, unfortunately, have taken an inaccurate
understanding of the memorandum to the Supreme Court of Justice Reynato S. Puno, the
committee chair on the draft of the rules on corporate rehabilitation, still then being proposed; the
memorandum reads, in part, thusly: "3. Rule 4. — Rehabilitation "The following are the principal
deviation from the SEC Rules: "a) The proposed Rules now require, as an attachment to the
petition, a Certificate attesting, among others, that the governing body and owners of the
petitioning debtor have approved and consented to whatever is necessary or desirable (including
but not limited to increasing or decreasing the authorized capital stock of the company and
modification of stockholders' right) to rehabilitate the debtor (Sec. 2, par. (k), Rule 4). This is to
avoid a situation where a rehabilitation plan, after being developed for years, cannot be
implemented because of the refusal of shareholders to approve the arrangements necessary for
its implementation." Nowhere in the aforequoted paragraph can it be inferred that an affirmative
vote of stockholders representing at least two-thirds (2/3) of the outstanding stock is invariably
necessary for the filing of a petition for rehabilitation regardless of the corporate action that the
plan envisions. Just to the contrary, it only requires in the filing of the petition that the corporate
actions therein proposed have been duly approved or consented to by the directors and
stockholders "in consonance with existing laws." The requirement is designed to avoid a situation
where a rehabilitation plan, after being developed and judicially sanctioned, cannot ultimately be
seen through because of the refusal of directors or stockholders to cooperate in the full
implementation of the plan. In fine, a certification on the approval of stockholders is required but
the question, whether such approval should be by a majority or by a two-thirds (2/3) vote of the
outstanding capital stock, would depend on the existing law vis-a-vis the corporate act or acts
proposed to be done in the rehabilitation of the distressed corporation. The rehabilitation plan
submitted by petitioner merely consists of a repayment or re-structuring scheme of CRDC's bank
loans to Land Bank of the Philippines and Equitable-PCI Bank and of leasing out most of the
available spaces in the Megacenter, including the completion of the construction of the fourth
floor, to increase rental revenues. None of the proposed corporate actions would require a vote of
approval by the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock.
Merger and consolidation (Sec. 77).
Section 77. Stockholder's or member's approval.
Upon approval by majority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation, the same shall be submitted
for approval by the stockholders or members of each of such corporations at separate corporate
meetings duly called for the purpose. Notice of such meetings shall be given to ALL stockholders
or members of the respective corporations, at least two (2) weeks prior to the date of the meeting,
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either personally or by registered mail. Said notice shall state the purpose of the meeting and
shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or at least two-thirds (2/3) of the members in
the case of non-stock corporations shall be necessary for the approval of such plan. Any
dissenting stockholder in stock corporations may exercise his appraisal right in accordance with
the Code: Provided, That if after the approval by the stockholders of such plan, the board of
directors decides to abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such
amendment is approved by majority vote of the respective boards of directors or trustees of all
the constituent corporations and ratified by the affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each
of the constituent corporations. Such plan, together with any amendment, shall be considered as
the agreement of merger or consolidation.
Increase and Decrease of capital stock (Sec. 38).
Section 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness.
NO corporation shall increase or decrease its capital stock or incur, create or increase
any bonded indebtedness unless approved by a majority vote of the board of directors and,
at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness. Written notice of the proposed increase
or diminution of the capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder's meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation
and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares
of no-par stock thereof actually subscribed, the names, nationalities and residences of the
persons subscribing, the amount of capital stock or number of no-par stock subscribed by each,
and the amount paid by each on his subscription in cash or property, or the amount of capital
stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized; (
4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of
any bonded indebtedness shall require prior approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and
the other shall be filed with the Securities and Exchange Commission and attached to the original
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articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange
Commission shall NOT accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-five (25%) percent of the
amount subscribed has been paid either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That NO decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the
same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3)
of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
Adoption, amendment and repeal of by-laws (Sec. 48).
Section 48. Amendments to by-laws.
The board of directors or trustees, by a majority vote thereof, and the owners of at least
a majority of the outstanding capital stock, or at least a majority of the members of a non-stock
corporation, at a regular or special meeting duly called for the purpose, may amend or repeal
any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital
stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board
of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws:
Provided, That any power delegated to the board of directors or trustees to amend or repeal any
by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or a majority of the members in non-stock
corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-
laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof,
duly certified under oath by the corporate secretary and a majority of the directors or trustees,
shall be filed with the Securities and Exchange Commission the same to be attached to the
original articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are NOT inconsistent
with this Code
Declaration of stock dividends (Sec. 43).
Section 43. Power to declare dividends.
The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs
and expenses, while stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further, That NO stock dividend shall be issued
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WITHOUT the approval of stockholders representing NOT less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate expansion projects or programs approved by the
board of directors; or
(2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his consent,
and such consent has not yet been secured; or
(3) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special reserve for
probable contingencies
Management contracts (Sec. 44).
Section 44. Power to enter into management contract.
NO corporation shall conclude a management contract with another corporation unless
such contract shall have been approved by the board of directors and by stockholders
owning at least the majority of the outstanding capital stock, or by at least a majority of
the members in the case of a non-stock corporation, of both the managing and the
managed corporation, at a meeting duly called for the purpose: Provided, That
(1) where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or
(2) where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock
corporation. NO management contract shall be entered into for a period longer than five years
for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts, operating agreements or
otherwise: Provided, however, That such service contracts or operating agreements which relate
to the exploration, development, exploitation or utilization of natural resources may be entered
into for such periods as may be provided by the pertinent laws or regulations.
Fixing of consideration of no par value shares (Sec. 62).
Section 62. Consideration for stocks.
Stocks shall NOT be issued for a consideration less than the par or issued price
thereof. Consideration for the issuance of stock may be any or a combination of any two or more
of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary
or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of
the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
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5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible property
such as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and Exchange
Commission.
Shares of stock shall NOT be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or
by the board of directors pursuant to authority conferred upon it by the articles of incorporation or
the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.
Dissolution (Sec. 117,118 and 119)
Section 117. Methods of dissolution. –
A corporation formed or organized under the provisions of this Code may be dissolved
voluntarily or involuntarily. (n)
Section 118. Voluntary dissolution where no creditors are affected.
If dissolution of a corporation does NOT prejudice the rights of any creditor having a
claim against it, the dissolution may be effected by majority vote of the board of directors or
trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at
least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members
of a meeting to be held upon call of the directors or trustees after publication of the notice of
time, place and object of the meeting for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said corporation is located; and if no
newspaper is published in such place, then in a newspaper of general circulation in the
Philippines, after sending such notice to each stockholder or member either by registered mail or
by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation. The Securities and Exchange Commission
shall thereupon issue the certificate of dissolution. (62a)
Section 119. Voluntary dissolution where creditors are affected. –
Where the dissolution of a corporation may prejudice the rights of any creditor, the
petition for dissolution shall be filed with the Securities and Exchange Commission. The petition
shall be signed by a majority of its board of directors or trustees or other officers having
the management of its affairs, verified by its president or secretary or one of its directors
or trustees, and shall set forth all claims and demands against it, and that its dissolution was
resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or by at least two-thirds (2/3) of the members at a meeting of its
stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order
reciting the purpose of the petition, fix a date on or before which objections thereto may be filed
by any person, which date shall NOT be less than thirty (30) days nor more than sixty (60) days
after the entry of the order. Before such date, a copy of the order shall be published at least once
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a week for three (3) consecutive weeks in a newspaper of general circulation published in the
municipality or city where the principal office of the corporation is situated, or if there be no such
newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall
be posted for three (3) consecutive weeks in three (3) public places in such municipality or city.
Upon five (5) day's notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed to hear the
petition and try any issue made by the objections filed; and if NO such objection is sufficient,
and the material allegations of the petition are true, it shall render judgment dissolving the
corporation and directing such disposition of its assets as justice requires, and may appoint a
receiver to collect such assets and pay the debts of the corporation.
Incurring, creating or increasing bonded indebtedness (Sec. 38)
(b) Pre-emptive right — Sec. 39;
Section 39. Power to deny pre-emptive right.
ALL stockholders of a stock corporation shall enjoy pre-emptive right to subscribe
to ALL issues or disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or an amendment
thereto: Provided, That such pre-emptive right shall NOT extend to shares to be issued in
compliance with laws requiring stock offerings or minimum stock ownership by the public; or to
shares to be issued in good faith with the approval of the stockholders representing twothirds
(2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or
in payment of a previously contracted debt.
-Majority Stockholder of Ruby Industrial Corporation vs. Lim, 650 SCRA 461 [2011]
Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a
stockholder of a stock corporation to subscribe to all issues or disposition of shares of any class,
in proportion to their respective shareholdings. The right may be restricted or denied under the
articles of incorporation, and subject to certain exceptions and limitations. The stockholder must
be given a reasonable time within which to exercise their preemptive rights. Upon the expiration
of said period, any stockholder who has not exercised such right will be deemed to have waived
it. 65
The validity of issuance of additional shares may be questioned if done in breach of
trust by the controlling stockholders. Thus, even if the pre-emptive right does not exist, either
because the issue comes within the exceptions in Section 39 or because it is denied or limited in
the articles of incorporation, an issue of shares may still be objectionable if the directors acted in
breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to
"freeze out" the minority interest. 66 In this case, the following relevant observations should have
signaled greater circumspection on the part of the SEC — upon the third and last remand to it
pursuant to our January 20, 1998 decision — to demand transparency and accountability from
the majority stockholders, in view of the illegal assignments and objectionable features of the
Revised BENHAR/RUBY Plan, as found by the CA and as affirmed by this Court
Sec. 10(e), Securities Regulation Code, RA 8799 on Exempt Transactions — The
requirement of registration at securities shall NOT apply to the sale of capital stock of a
corporation to its own stockholders exclusively, where NO commission or other remuneration is
paid or given directly or indirectly in connection with the sale at such capital stock;
Corporation Law 2016: JVL & JSD
in close corporations: Sec. 102
Section 102. Pre-emptive right in close corporations.
The pre-emptive right of stockholders in close corporations shall extend to all stock to
be issued, including reissuance of treasury shares, whether for money, property or personal
services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.
(c) Rights to Dividends — Sec. 43;
Section 43. Power to declare dividends.
The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs
and expenses, while stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further, That NO stock dividend shall be issued
WITHOUT the approval of stockholders representing NOT less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate expansion projects or programs approved by the
board of directors; or
(2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his consent,
and such consent has not yet been secured; or
(3) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special reserve for
probable contingencies
- Imelda 0. Cojuanco, et al. vs. Sandiganbayan et al., G.R. No. 18327, April 24, 2009
Dividends are payable to the stockholders of record as of the date of the declaration of
dividends or holders of record on a certain future date, as the case may be, unless the parties
have agreed otherwise. 11 And a transfer of shares which is not recorded in the books of the
corporation is valid only as between the parties, hence, the transferor has the right to dividends
as against the corporation without notice of transfer but it serves as trustee of the real owner of
the dividends, subject to the contract between the transferor and transferee as to who is entitled
to receive the dividends.
- Republic Planters Bank vs. Agana, 269 SC RA 1 [1997])
The respondent judge also stated that since the stock certificate granted the private
respondents the right to receive a quarterly dividend of One Per Centum (1%), cumulative and
participating, it "clearly and unequivocably (sic) indicates that the same are 'interest bearing
stocks' or stocks issued by a corporation under an agreement to pay a certain rate of interest
thereon. As such, plaintiffs (private respondents herein) become entitled to the payment thereof
as a matter of right without necessity of a prior declaration of dividend." There is no legal basis for
this observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation
66
Code prohibit the issuance of any stock dividend without the approval of stockholders,
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose. These provisions underscore the fact that payment of
dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore,
"interest bearing stocks," on which the corporation agrees absolutely to pay interest before
dividends are paid to common stockholders, is legal only when construed as requiring payment of
interest as dividends from net earnings or surplus only. Clearly, the respondent judge, in
compelling the petitioner to redeem the shares in question and to pay the corresponding
dividends, committed grave abuse of discretion amounting to lack or excess of jurisdiction in
ignoring both the terms and conditions specified in the stock certificate, as well as the clear
mandate of the law.
(i) Form and Dividends — cash; property and stock —
- Fisher vs. Trinidad, 43 Phil. 973119221;
A dividend is defined as a corporate profit set aside, declared, and ordered by the
directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is
declared, the corporate profits belong to the corporation and not to the stockholders, and are
liable for the payment of the debts of the corporation.
A stock dividend, when declared, is merely a certificate of stock which evidences the
interest of the stockholder in the increased capital of the corporation. There is a clear distinction
between a cash dividend and a stock dividend. The one is a disbursement to the stockholder of
accumulated earnings, and the corporation parts irrevocably with all interest therein; the other
involves no disbursement by the corporation; the corporation parts with nothing to its stockholder.
When a cash dividend is declared and paid to stockholders, such cash becomes the absolute
property of the stockholders and cannot be reached by the creditors of corporation in the absence
of fraud. The property represented by a stock dividend, however, still being the property of
corporation, and not of the stockholder, it may be reached by an execution against the
corporation, and sold as a part of the property of the corporation. In such a case, if all of the
property of the corporation is sold under execution, then the stockholders certainly could not be
charged with having received an income by virtue of the issuance of the stock dividend. If the
ownership of the property represented by a stock dividend is still in the corporation and not in the
holder of such stock, certainly such stock cannot be regarded as income to the stockholder. The
stockholder has received nothing but a representation of an interest in the property of the
corporation and, as a matter of fact, he may never receive anything, depending upon the final
outcome of the business of the corporation.
- Nielson & Co. vs. Lepanto Con. Mining Co., 26 SCRA 540 [1968])
From Section 16 of the Corporation Law, the consideration for which shares of stock
may be issued are: (1) cash; (2) property and (3) undistributed profits. Shares of stock are given
the special name "stock dividends" only if they are issued in lieu of undistributed profits. If the
shares of stocks are issued in exchange of cash or Property then those shares do not fall under
the category of "stock dividends". A corporation may legally issue shares of stock in consideration
of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A
share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of
property because services is equivalent to property. Likewise a share of stock issued in payment
of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus
issued should be part of the original capital stock of the corporation upon its organization, or part
Corporation Law 2016: JVL & JSD
of the stocks issued when the increase of the capitalization of a corporation is properly
authorized.
A "stock dividend" is any dividend payable in shares of stock of the corporation
declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the
shares of stock of the corporation among the stockholders as dividends. A stock dividend of a
corporation is a dividend paid in shares of stock instead of cash and is properly payable only out
of surplus profits. So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced
use of the dividend money to purchase additional shares of stock at par. When a corporation
issues stock dividends, it shows that the corporations' accumulated profits have been capitalized
instead of distributed to the stockholders or retained as surplus available for distribution, in money
or in kind, should opportunity offer. Far from being a realization of profits for the stockholder, it
tends rather to postpone said realization, in that the fund represented by the new stock has been
transferred from the surplus to assets and no longer available for actual distribution.
The term "dividend" both in the technical sense and its ordinary acceptation, is that part
or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart
for ratable division among the holders of the capital stock. It means the fund actually set aside,
and declared by the directors of the corporation as a dividend, and duly ordered by the directory,
or by the stockholders at a corporate meeting to be divided or distributed among the stockholders
according to their respective interests.
(ii) Source of Dividends — unrestricted retained earnings —the undistributed
earnings of the corporation which have NOT been allocated for any managerial, contractual or
legal purposes and which are tree for distribution to the stockholders as dividends (SEC Rules
Governing Redeemable and Treasury Shares, 1982)
(iii) When Right to Dividends Vests — as soon as the same have been lawfully
declared by the Board of Directors. From that time, it becomes a debt owing by the corporation
to each stockholder.
(d) Right to Transfer Shares (Sec. 63);
Section 63. Certificate of stock and transfer of shares.
The capital stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. NO transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation showing the
names of the parties to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred. NO shares of stock against which the
corporation holds any unpaid claim shall be transferable in the books of the corporation.
- Fil-Estate Golf and Development vs. Vertex Sales and Trading Inc., D.R. No. 202079,
June 10, 2013
Section 63 of the Corporation Code provides:
SEC. 63. Certificate of stock and transfer of shares. — The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or vice-
67
president, countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the transfer is recorded in
the books of the corporation showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.
In this case, Vertex fully paid the purchase price by February 11, 1999 but the stock
certificate was only delivered on January 23, 2002 after Vertex filed an action for rescission
against FEGDI.
Under these facts, considered in relation to the governing law, FEGDI clearly failed to
deliver the stock certificates, representing the shares of stock purchased by Vertex, within a
reasonable time from the point the shares should have been delivered. This was a substantial
breach of their contract that entitles Vertex the right to rescind the sale under Article 1191 of the
Civil Code. It is not entirely correct to say that a sale had already been consummated as Vertex
already enjoyed the rights a shareholder can exercise. The enjoyment of these rights cannot
suffice where the law, by its express terms, requires a specific form to transfer ownership.
-Republic vs. Estate of Hans Menzi, 476 SCRA 20 [20051
The Corporation Code acknowledges that the delivery of a duly indorsed stock
certificate is sufficient to transfer ownership of shares of stock in stock corporations. Such mode
of transfer is valid between the parties. In order to bind third persons, however, the transfer must
be recorded in the books of the corporation. . . . The absence of delivery is a fatal defect which is
not cured by mere execution of a deed of assignment.
- Rural Bank of Lipa City, Inc. vs. CA, 366 SCRA 188
We have uniformly held that for a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law. The requirements are: (a) There must be
delivery of the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-
in-fact or other persons legally authorized to make the transfer; and (c) To be valid against third
parties, the transfer must be recorded in the books of the corporation.
While it may be true that there was an assignment of private respondents' shares to the
petitioners, said assignment was not sufficient to effect the transfer of shares since there was no
endorsement of the certificates of stock by the owners, their attorneys-in-fact or any other person
legally authorized to make the transfer. Moreover, petitioners admit that the assignment of shares
was not coupled with delivery, the absence of which is a fatal defect. The rule is that the delivery
of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from
the lawful owner to the transferee. Title may be vested in the transferee only by delivery of the
duly indorsed certificate of stock. . . . Consequently, the petitioners, as mere assignees, cannot
enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled to
dividends, insofar as the assigned shares are concerned. Parenthetically, the private respondents
cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of ownership
and transfer of the shares in question is resolved with finality.
Corporation Law 2016: JVL & JSD
- Thomson vs. CA, 298 SCRA 280 [1998]
Private respondent does not insist nor intend to transfer the club membership in its
name but rather to its designated nominee. The Manila Polo Club does not necessarily prohibit
the transfer of proprietary shares by its members. The Club only restricts membership to
deserving applicants in accordance with its rules, when the amended Articles of Incorporation
states that: "No transfer shall be valid except between the parties, and shall be registered in the
Membership Book unless made in accordance with these Articles and the By-Laws." Thus, as
between parties herein, there is no question that a transfer is feasible. Moreover, authority
granted to a corporation to regulate the transfer of its stock does not empower it to restrict the
right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as
to the formalities and procedure to be followed in effecting transfer. In this case, the petitioner
was the nominee of the private respondent to hold the share and enjoy the privileges of the club.
But upon the expiration of petitioner's employment as officer and consultant of AmCham, the
incentives that go with the position, including use of the MPC share, also ceased to exist. It now
behooves petitioner to surrender said share to private respondent's next nominee, another natural
person. Obviously this arrangement of trust and confidence cannot be defeated by the petitioner's
citation of the MPC rules to shield his untenable position, without doing violence to basic tenets of
justice and fair dealing.
- Batong Buhay Gold Mines vs. CA, 147 SC RA 4 [1987]
The stipulation of facts of the parties does not at all show that private respondent
intended to sell, or would sell or would have sold the stocks in question on specified dates, While
it is true that shares of stock may go up or down in value (as in fact the concerned shares here
really rose from fifteen (15) centavos to twenty three or twenty four (23/24) centavos per share
and then fell to about two (2) centavos per share, still whatever profits could have been made are
purely SPECULATIVE, for it was difficult to predict with any decree of certainty the rise and fall in
the value of the shares. Thus this Court has ruled that speculative damages cannot be recovered.
Forged and Unauthorized Transers
-J. Santamaria vs. Hongkong Shanghai Bkng. Corp. 89 Phil. 780 [1955]
The fact that, on the right margin of the said certificate, the name of S appeared written,
granting it to be true, cannot be considered sufficient reason to indicate that its owner was S,
considering that said certificate was indorsed in blank by W, in whose name it had been issued,
indorsement which was guaranteed by C's indorsement in blank and was transferred in due
course by the latter to the Bank under a letter of hypothecation. Said indicium could at best give
the impression that S was the original holder of the certificate
Even assuming that S had really approached the proper official of the Bank demanding
the return of the certificate or its value, such an incident would merely show that S has an
adverse claim to the ownership of said certificate of stock, but that would not necessarily place
the bank in a position to inquire as to the real basis of her claim, nor would it place the bank in the
obligation to recognize her claim and return to her the certificate outright. A mere claim of
ownership does not establish the fact of ownership
The most that S could claim is the return to her of the said certificate of stock (Howison
vs. Mechanics Sav. Bank, 183 Atl., p. 697). The defendant bank having expressed its willingness
from the very beginning to compromise the case by delivering to S the new certificate of stock
issued to the bank by the issuing corporation in lieu of the original, the defendant bank should be
ordered to deliver to S the said new certificate of stock.
68

- Neugene Marketing, Inc. vs. CA, 303 SC RA 295 [1999])
As stressed by the Court of Appeals, there is no reliable showing of any valuable
consideration for the supposed transfer of subject stocks to petitioners. Fundamental and crucial
is the rule that if a contract has no cause, it does not produce any effect whatsoever and is
inexistent or void from the beginning. The complete absence of a cause or consideration renders
the contract absolutely void and inexistent.
Stock and Transfer Book (Secs. 63, 72 and 74);
Section 72. Rights of unpaid shares.
Holders of subscribed shares NOT fully paid which are NOT delinquent shall have ALL
the rights of a stockholder
Section 74. Books to be kept; stock transfer agent.
Every corporation shall keep and carefully preserve at its principal office a record of
all business transactions and minutes of all meetings of stockholders or members, or of
the board of directors or trustees, in which shall be set forth in detail the time and place of
holding the meeting, how authorized, the notice given, whether the meeting was regular or
special, if special its object, those present and absent, and every act done or ordered done at the
meeting. Upon the demand of any director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting must be noted in the minutes;
and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a
record thereof carefully made. The protest of any director, trustee, stockholder or member on any
action or proposed action must be recorded in full on his demand.
The records of ALL business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or member of
the corporation at reasonable hours on business days and he may demand, in writing, for a
copy of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or trustees, the liability under this
section for such action shall be imposed upon the directors or trustees who voted for such
refusal: and Provided, further, That it shall be a defense to any action under this section that the
person demanding to examine and copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock and transfer
book", in which must be kept a record of ALL stocks in the names of the stockholders
alphabetically arranged; the installments paid and unpaid on all stock for which subscription has
been made, and the date of payment of any installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to whom made; and such other entries as
the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall be open for inspection by any
director or stockholder of the corporation at reasonable hours on business days.
Corporation Law 2016: JVL & JSD
NO stock transfer agent or one engaged principally in the business of registering
transfers of stocks in behalf of a stock corporation shall be allowed to operate in the
Philippines unless he secures a license from the Securities and Exchange Commission
and pays a fee as may be fixed by the Commission, which shall be renewable annually:
Provided, That a stock corporation is NOT precluded from performing or making transfer of its
own stocks, in which case all the rules and regulations imposed on stock transfer agents, except
the payment of a license fee herein provided, shall be applicable.
-Batangas Laguna Tayabas Bus Co. Inc. vs. Bitanga, 362 SC RA 635 [2001]
The SEC En Banc issued a writ of preliminary injunction against the Bitanga group. In
so ruling, the SEC En Banc merely exercised its wisdom and competence as a specialized
administrative agency specifically tasked to deal with corporate law issues. We are in full accord
with the SEC En Banc on this matter. Indeed, until registration is accomplished, the transfer,
though valid between the parties, cannot be effective as against the corporation. Thus, the
unrecorded transferee, the Bitanga group in this case, cannot vote nor be voted for. The purpose
of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a
stockholder, including the right to vote and to be voted for, and to inform the corporation of any
change in share ownership so that it can ascertain the persons entitled to the rights and subject
to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record
has a right to participate in any meeting; his vote can be properly counted to determine whether a
stockholders' resolution was approved, despite the claim of the alleged transferee. On the other
hand, a person who has purchased stock, and who desires to be recognized as a stockholder for
the purpose of voting, must secure such a standing by having the transfer recorded in the
corporate books. Until the transfer is registered, the transferee is not a stockholder but an
outsider.
- Fua Cun vs. Summers, 44 Phil. 704 [1923];
A banking corporation has no lien upon its own stock for the indebtedness of the
stockholders even when the by-laws provide that the shares shall be transferable only upon the
books of the corporation and that no such transfer shall be made if the holder of the shares is
indebted to the corporation.
n the absence of special agreement to the contrary, a subscriber for a certain number
of shares of stock does not, upon payment of one-half of the subscription price, become entitled
to the issuance of certificates for one-half the number of shares subscribed for; the subscriber's
right consists only in an equity entitling him to a certificate for the total number of shares
subscribed for by him upon payment of the remaining portion of the subscription price.
An equity in shares of stock may be assigned, the assignment becoming effective as
between the parties and as to third parties with notice.
An attachment levied upon assigned rights or interests in an action against the assignor
after the attaching creditor has received notice of the assignment creates no lien as against the
assignee.
Whether in this jurisdiction an equity in shares of stock may properly be made the
subject of a chattel mortgage, quaere, but such chattel mortgage will at least operate as a
conditional equitable assignment.
- Garcia vs. Jomouad, 323 SCRA 424;
69
 Section 63 of the Corporation Code reads: "Sec. 63 Certificate of stock and transfer of
shares. . . . No transfer, however, shall be valid, except as between the parties, until the transfer
is recorded in the books of the corporation showing the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates and the number of shares
transferred.
we hold that the transfer of the subject certificate made by Dico to petitioner was not
valid as to the spouses Atinon, the judgment creditors, as the same still stood in the name of
Dico, the judgment debtor, at the time of the levy on execution. In addition, as correctly ruled by
the CA, the entry in the minutes of the meeting of the Club's board of directors noting the
resignation of Dico as propriety member thereof does not constitute compliance with Section 63
of the Corporation Code. Said provision of law strictly requires the recording of the transfer in the
books of the corporation, and not elsewhere, to be valid as against third parties. Accordingly, the
CA committed no reversible error in rendering the assailed decision.
- Chemphil Export & Import Corp. vs. CA, 251 SC RA 257 [1995];
The attachment lien acquired by the consortium is valid and effective. Both the Revised
Rules of Court and the Corporation Code do not require annotation in the corporation's stock and
transfer books for the attachment of shares of stock to be valid and binding on the corporation
and third-party. Section 74 of the Corporation Code enumerates the instances where registration
in the stock and transfer books of a corporation is proper. Are attachments of shares of stock
included in the term "transfer" as provided in Sec. 63 of the Corporation Code? We rule in the
negative. As succinctly declared in the case of Monserrat v. Ceron, "chattel mortgage over shares
of stock need not be registered in the corporation's stock and transfer book inasmuch as chattel
mortgage over shares of stock does not involve a "transfer of shares," and that only absolute
transfers of shares of stock are required to be recorded in the corporation's stock and transfer
book in order to have "force and effect as against third persons." Although this Monserrat case
refers to a chattel mortgage over shares of stock, the same may be applied to the attachment of
the disputed shares of stock in the present controversy since an attachment does not constitute
an absolute conveyance of property but is primarily used as a means "to seize the debtor's
property in order to secure the debt or claim of the creditor in the event that a judgment is
rendered." Petitioner CEIC's claim is the Deed of Sale under which it purchased the disputed
shares. It is, however, a settled rule that a purchaser of attached property acquires it subject to an
attachment legally and validly levied thereon.
A secretary's major function is to assist his or her superior. He/she in effect an
extension of the latter. Obviously, as such, one of her duties is to receive letters and notices for
and in behalf of her superior, as in the case at bench. The notice of garnishment was addressed
to and was actually received by Chemphil's president through his secretary who formally received
it for him. Thus, in one case, we ruled that the secretary of the president may be considered an
"agent" of the corporation and held that service of summons on him is binding on the corporation.
Moreover, the service and receipt of the notice of garnishment was duly acknowledged and
confirmed by the corporate secretary of Chemphil, and his successor through their respective
certifications. We rule, therefore, that there was substantial compliance with Sec. 7(d), Rule 57 of
the Rules of Court.
- Torres vs. CA, 278 SCRA 793 [1997];
It is precisely the brewing family discord between Judge Torres and private
respondents — his nephew and nieces that should have placed Judge Torres on his guard. He
should have been more careful in ensuring that his actions (particularly the assignment of
Corporation Law 2016: JVL & JSD
qualifying shares to his nominees) comply with the requirements of the law. Petitioners cannot
use the flimsy excuse that it would have been a vain attempt to force the incumbent corporate
secretary to register the aforestated assignments in the stock and transfer book because the
latter belonged to the opposite faction. It is the corporate secretary's duty and obligation to
register valid transfers of stocks and if said corporate officer refuses to comply, the transferor-
stockholder may rightfully bring suit to compel performance. In other words, there are remedies
within the law that petitioners could have availed of, instead of taking the law in their own hands,
as the cliche goes.
All corporations, big or small, must abide by the provisions of the Corporation Code.
Being a simple family corporation is not an exemption. Such corporations cannot have rules and
practices other than those established by law. prLL||
- Magsaysay Labrador vs. CA 180 SCRA 266 [1989];
While a share of stock represents a proportionate or aliquot interest in the property of
the corporation, it does not vest the owner thereof with any legal right or title to any of the
property, his interest in the corporate property being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of corporate property, which is owned by the
corporation as a distinct legal person.
The petitioners cannot claim the right to intervene on the strength of the transfer of
shares allegedly executed by the late Senator. The corporation did not keep books and records.
Perforce, no transfer was ever recorded, much less affected as to prejudice third parties. The
transfer must be registered in the books of the corporation to affect third persons. The law on
corporations is explicit, Section 63 of the Corporation Code provides, thus: "No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred."
- Bitong vs. CA, 292 SCRA 503 [1998].
Section 63 of the Corporation Code envisions a formal certificate of stock which can be
issued only upon compliance with certain requisites. First, the certificates must be signed by the
president or vice-president, countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation. A mere typewritten statement advising a stockholder of the extent
of his ownership in a corporation without qualification and/or authentication cannot be considered
as a formal certificate of stock. Second, delivery of the certificate is an essential element of its
issuance. Hence, there is no issuance of a stock certificate where it is never detached from the
stock books although blanks therein are properly filled up if the person whose name is inserted
therein has no control over the books of the company. Third, the par value, as to par value
shares, or the full subscription as to no par value shares, must first be fully paid. Fourth, the
original certificate must be surrendered where the person requesting the issuance of a certificate
is a transferee from a stockholder. The certificate of stock itself once issued is a continuing
affirmation or representation that the stock described therein is valid and genuine and is at least
prima facie evidence that it was legally issued in the absence of evidence to the contrary.
However, this presumption may be rebutted. Similarly, books and records of a corporation which
include even the stock and transfer book are generally admissible in evidence in favor of or
against the corporation and its members to prove the corporate acts, its financial status and other
matters including one's status as a stockholder. They are ordinarily the best evidence of
corporate acts and proceedings. However, the books and records of a corporation are not
conclusive even against the corporation but are prima facie evidence only. Parol evidence may be
admitted to supply omissions in the records, explain ambiguities, or show what transpired where
70
no records were kept, or in some cases where such records were contradicted. The effect of
entries in the books of the corporation which purport to be regular records of the proceedings of
its board of directors or stockholders can be destroyed by testimony of a more conclusive
character than mere suspicion that there was an irregularity in the manner in which the books
were kept. The foregoing considerations are founded on the basic principle that stock issued
without authority and in violation of law is void and confers no rights on the person to whom it is
issued and subjects him to no liabilities. Where there is an inherent lack of power in the
corporation to issue the stock, neither the corporation nor the person to whom the stock is issued
is estopped to question its validity since an estoppel cannot operate to create stock which under
the law cannot have existence.
Based on the admission of petitioner, there is no truth to the statement written in
Certificate of Stock No. 008 that the same was issued and signed on 95 July 1983 by its duly
authorized officers specifically the President and Corporate Secretary because the actual date of
signing thereof was 17 March 1989. Verily, a formal certificate of stock could not be considered
issued in contemplation of law unless signed by the president or vice-president and
countersigned by the secretary or assistant secretary.
Situs of Shares of Stocks (Sec. 55;
Section 55. Right to vote of pledgors, mortgagors, and administrators.
In case of pledged or mortgaged shares in stock corporations, the pledgor or
mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee
or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is
recorded on the appropriate corporate books.
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or members
WITHOUT need of any written proxy.
Tayag vs. Benguet Consolidated, Inc. 26 SCRA 242 [1968].
The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or
any other person legally authorized to make the transfer shall be sufficient to effect the transfer of
shares only if the same is coupled with delivery. The delivery of the stock certificate duly
endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new
transferee. Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be
delivery of the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-
in-fact or other persons legally authorized to make the transfer; and, (c) to be valid against third
parties, the transfer must be recorded in the books of the corporation. At most, in the instant
case, petitioner has satisfied only the third requirement. Compliance with the first two requisites
has not been clearly and sufficiently shown.
(e) Right to Certificate of Stock for Fully Paid Shares (Sec. 64);
Section 64. Issuance of stock certificates.
NO certificate of stock shall be issued to a subscriber until the full amount of his
subscription together with interest and expenses (in case of delinquent shares), if any is due, has
been paid.
- Makati Sports Club, Inc. vs. Cheng, et aL, 621 SCRA 103 [2010]
Corporation Law 2016: JVL & JSD
A certificate of stock is the paper representative or tangible evidence of the stock itself
and of the various interests therein. The certificate is not a stock in the corporation but
is merely evidence of the holder's interest and status in the corporation, his ownership
of the share represented thereby. It is not in law the equivalent of such ownership. It
expresses the contract between the corporation and the stockholder, but is not
essential to the existence of a share of stock or the nature of the relation of shareholder
to the corporation.
Therefore, Mc Foods properly complied with the requirement of Section 30
(e) of the Amended By-Laws on MSCI's pre-emptive rights. Without doubt, MSCI failed
to repurchase Mc Foods' Class "A" share within the thirty (30) day pre-emptive period
as provided by the Amended By-Laws. It was only on January 29, 1996, or 32 days
after December 28, 1995, when MSCI received Mc Foods' letter of offer to sell the
share, that Mc Foods and Hodreal executed the Deed of Absolute Sale over the said
share of stock. While Hodreal had the right to demand the immediate execution of the
Deed of Absolute Sale after his full payment of Mc Foods' Class "A" share, he did not
do so. Perhaps, he wanted to wait for Mc Foods to first comply with the pre-emptive
requirement as set forth in the Amended By-Laws. Neither can MSCI argue that Mc
Foods was not yet a registered owner of the share of stock when the latter offered it for
resale, in order to void the transfer from Mc Foods to Hodreal. The corporation's
obligation to register is ministerial upon the buyer's acquisition of ownership of the
share of stock. The corporation, either by its board, its by-laws, or the act of its officers,
cannot create restrictions in stock transfers.
- Lao vs. Lao, O.R. No. 170585, October 6, 2008
While it may be true that petitioners were named as shareholders in the General
Information Sheet submitted to the SEC, that document alone does not conclusively prove that
they are shareholders of PFSC. The information in the document will still have to be correlated
with the corporate books of PFSC. As between the General Information Sheet and the corporate
books, it is the latter that is controlling.
It should be stressed that the burden of proof is on petitioners to show that they are
shareholders of PFSC. This is so because they do not have any certificates of shares in their
name. Moreover, they do not appear in the corporate books as registered shareholders. If they
had certificates of shares, the burden would have been with PFSC to prove that they are not
shareholders of the corporation.
- Tan vs. SEC, 206 SCRA 740 [1992]);
"But delivery is not essential where it appears that the persons sought to be held as
stockholders are officers of the corporation, and have the custody of the stock book . . ."
A certificate of stock is the paper representative or tangible evidence of the stock itself
and of the various interests therein. The certificate is not stock in the corporation but is merely
evidence of the holder's interest and status in the corporation, his ownership of the share
represented thereby, but is not in law the equivalent of such ownership. It expresses the contract
between the corporation and the stockholder, but it is not essential to the existence of a share in
stock or the creation of the relation of shareholder to the corporation.
In Philippine jurisprudence, a certificate of stock is not a negotiable instrument.
"Although it is sometime regarded as quasi-negotiable, in the sense that it may be transferred by
endorsement, coupled with delivery, it is well-settled that it is non-negotiable, because the holder
71
thereof takes it without prejudice to such rights or defenses as the registered owners or
transferor's creditor may have under the law, except insofar as such rights or defenses are
subject to the limitations imposed by the principles governing estoppel."
A by-law which prohibits a transfer of stock without the consent or approval of all the
stockholders or of the president or board of directors is illegal as constituting undue limitation on
the right of ownership and in restraint of trade.
Lost or Destroyed Certificates (Sec. 63 and 73)
Section 73. Lost or destroyed certificates.
The following procedure shall be followed for the issuance by a corporation of new
certificates of stock in lieu of those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal
representative shall file with the corporation an affidavit in triplicate setting forth, if possible,
the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the certificate and the name of the
corporation which issued the same. He shall also submit such other information and evidence
which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of the
corporation, said corporation shall publish a notice in a newspaper of general circulation
published in the place where the corporation has its principal office, once a week for three
(3) consecutive weeks at the expense of the registered owner of the certificate of stock
which has been lost, stolen or destroyed. The notice shall state the name of said corporation,
the name of the registered owner and the serial number of said certificate, and the number of
shares represented by such certificate, and that after the expiration of one (1) year from the date
of the last publication, if NO contest has been presented to said corporation regarding said
certificate of stock, the right to make such contest shall be barred and said corporation
shall cancel in its books the certificate of stock which has been lost, stolen or destroyed
and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or
other security in lieu thereof as may be required, effective for a period of one (1) year, for such
amount and in such form and with such sureties as may be satisfactory to the board of directors,
in which case a new certificate may be issued even before the expiration of the one (1) year
period provided herein: Provided, That if a contest has been presented to said corporation or if an
action is pending in court regarding the ownership of said certificate of stock which has been lost,
stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be
suspended until the final decision by the court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its
officers, NO action may be brought against any corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. (R.A.
201a)
(f) Right of Inspection (Sec. 74, 75 and 141)
Section 75. Right to financial statements.
Within ten (10) days from receipt of a written request of any stockholder or member,
the corporation shall furnish to him its most recent financial statement, which shall include a
balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable
year, showing in reasonable detail its assets and liabilities and the result of its operations.
Corporation Law 2016: JVL & JSD
At the regular meeting of stockholders or members, the board of directors or trustees
shall present to such stockholders or members a financial report of the operations of the
corporation for the preceding year, which shall include financial statements, duly signed and
certified by an independent certified public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial
statements may be certified under oath by the treasurer or any responsible officer of the
corporation. (n)
Section 141. Annual report or corporations.
Every corporation, domestic or foreign, lawfully doing business in the Philippines shall
submit to the Securities and Exchange Commission an annual report of its operations,
together with a financial statement of its assets and liabilities, certified by any independent
certified public accountant in appropriate cases, covering the preceding fiscal year and such
other requirements as the Securities and Exchange Commission may require. Such report shall
be submitted within such period as may be prescribed by the Securities and Exchange
Commission.
(i) Basis of Right —
Gokongwei, Jr. vs. SEC, 89 SCRA 336 [1979] —whether or not respondent SEC
gravely abused its discretion in denying petitioner's request for an examination of the records of
San Miguel International, Inc., a fully owned subsidiary of SMC.
The stockholders' right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is an incident of ownership
of the corporate property, whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or quasi-ownership. It is predicated upon the necessity of self-protection.
Where a right is granted by statute to the stockholder, it is given to him as such and
must be exercised by him with respect to his interest as stockholder and for some purpose
germane thereto or in the interest of the corporation. In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character
and not inimical to the interest of the corporation. It must be exercised in good faith, for specific
and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes.
On application for mandamus to enforce the right to examine the books of a
corporation, it is proper for the court to inquire into and consider the stockholder's good faith and
his purpose and motives in seeking inspection. The right given by the statute is not absolute and
may be refused when the information is not sought in good faith or is used to the detriment of the
corporation.
While the right of a stockholder to examine the books and records of a corporation for a
lawful purpose is a matter of law, the right of such stockholder to examine the books and records
of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.
Where a foreign subsidiary is wholly owned by respondent corporation and, therefore, under its
control, it would be in accord with equity, good faith and fair dealing to construe the statutory right
of a stockholder to inspect the books and records of the corporation as extending to books and
records of such wholly owned subsidiary which are in respondent corporation's possession and
control.
Aderito Z. Yujuico and Bonifacio C. Sumbilla vs. Cezar T. Quiambao and Eric C. Pilapil,
G.R. No. 180416, June 02, 2014
72
 While Section 74 of the Corporation Code expressly mentions the application of
Section 144 only in relation to the act of "refus[ing] to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from [the corporation's] records or
minutes," the same does not mean that the latter section no longer applies to any other possible
violations of the former section.
It must be emphasized that Section 144 already purports to penalize "[v]iolations" of
"any provision" of the Corporation Code "not otherwise specifically penalized therein." Hence, we
find inconsequential the fact that that Section 74 expressly mentions the application of Section
144 only to a specific act, but not with respect to the other possible violations of the former
section.
Indeed, we find no cogent reason why Section 144 of the Corporation Code cannot be
made to apply to violations of the right of a stockholder to inspect the stock and transfer book of a
corporation under Section 74 (4) given the already unequivocal intent of the legislature to
penalize violations of a parallel right, i.e., the right of a stockholder or member to examine the
other records and minutes of a corporation under Section 74 (2). Certainly, all the rights
guaranteed to corporators under Section 74 of the Corporation Code are mandatory for the
corporation to respect. All such rights are just the same underpinned by the same policy
consideration of keeping public confidence in the corporate vehicle thru an assurance of
transparency in the corporation's operations.
Verily, we find inaccurate the pronouncement of the RTC that the act of refusing to
allow inspection of the stock and transfer book is not a punishable offense under the Corporation
Code. Such refusal, when done in violation of Section 74 (4) of the Corporation Code, properly
falls within the purview of Section 144 of the same code and thus may be penalized as an
offense.
It is clear then that a criminal action based on the violation of the second or fourth
paragraphs of Section 74 can only be maintained against corporate officers or such other persons
that are acting on behalf of the corporation. Violations of the second and fourth paragraphs of
Section 74 contemplates a situation wherein a corporation, acting thru one of its officers or
agents, denies the right of any of its stockholders to inspect the records, minutes and the stock
and transfer book of such corporation.
(ii) Extent of and Limitations on Right –
Corporate Reports:
(aa) Books that record all business transactions of the corporation which shall include
contracts, memoranda, journal, ledgers, etc.
(bb) Minutes book for the meetings of stockholders or members
(cc) Minutes book for the meetings of the Board of Directors or trustees
(dd) Stock and Transfer Book –
Nautica Canning Corp. vs. Yumul, supra. — Lanuza vs. CA, 454 SCRA 54 [2005]
Thus, when the controversy involves matters purely civil in character, it is beyond the
ambit of the limited jurisdiction of the SEC. As held in Viray v. Court of Appeals, 29 the better
policy in determining which body has jurisdiction over a case would be to consider not only the
status or relationship of the parties, but also the nature of the question that is the subject of their
controversy. This, however, is now moot and academic due to the passage of Republic Act No.
8799 or The Securities Regulation Code which took effect on August 8, 2000. The Act transferred
from the SEC to the regional trial court jurisdiction over cases involving intra-corporate disputes.
Corporation Law 2016: JVL & JSD
Thus, whether or not the issue is intra-corporate, it is now the regional trial court and no longer
the SEC that takes cognizance of the controversy.
(ee) Annual Financial Statements
(ff) Annual Report to SEC
-Africa vs. PCGG, 205 SCRA 39 [1992]
Although the challenge against the temporary restraining order issued by the Securities
and Exchange Commission in SEC Case No. 3297 became moot and academic by virtue of the
expiration of its 20-day effectivity period, the Court nevertheless ruled that the issuance of the
same was tainted with grave abuse of discretion considering that the SEC Hearing Panel should
have then realized that there existed an element in the case which effectively removed it from the
jurisdiction of the SEC, to wit, the presence of the PCGG which, as another quasijudicial body, is
a co-equal entity over whose actions the SEC has no power of control.
- Philpotts vs. Phil. Mfg. Co., 40 Phil. 471 [1919]
The right of examination into corporate affairs which is conceded to the stockholder by
section 51 of the Corporation Law may be exercised either by the stockholder in person or by any
duly authorized representative.
- Veraguth vs. Isabela Sugar Co. 57 Phil. 266 [1932]
Directors of a corporation have the unqualified right to inspect the books and records of
the corporation at all reasonable times.
Pretexts may not be put forward by the officers of a corporation to keep a director or
shareholder from inspecting the books and minutes of the corporation, and the right of inspection
is not to be denied on the ground that the director or shareholder is on unfriendly terms with the
officers of the corporation whose records are sought to be inspected.
A director or shareholder can make copies, abstracts, and memoranda of documents,
books, and papers as an incident to the right of inspection, but cannot, without an order of a
court, be permitted to take books from the office of the corporation.
A director or stockholder has no absolute right to secure certified copies of the minutes
of a corporation until these minutes have been written up and approved by the directors.
On the facts and the law, it is ruled that the petitioner has not made out a case for relief
by mandamus.
- Pardo vs. Hercules Lumber Co., 47 Phil. 964 [1924]
A resolution of the board of directors of a corporation limiting the right of stockholders to
inspect its records to a period of ten days shortly prior to the annual stockholders' meeting is an
unreasonable restriction on the right of inspection may be exercised at reasonable hours on
business days throughout the year, and not merely during an arbitrary period of a few days
chosen by the directors.
(iii) Remedy it Denied — Rule 65;
RULE 65
Certiorari, Prohibition and Mandamus
73

- Rep. vs. Sandiganbayan 199 SC RA 39 [1991]);
In the absence of evidence, the PCGG cannot unilaterally deny a stockholder from
exercising his statutory right of inspection based on an unsupported and naked assertion that
private respondent's motive is improper or merely for curiosity or on the ground that the
stockholder is not in friendly terms with the corporation's officers. Being a stockholder beyond
doubt, there is no reason why private respondent may not exercise his statutory right of
inspection in accordance with Sec. 74 of the Corporation Code, the only express limitation being
that the right of inspection should be exercised at reasonable hours on business days; (2) the
person demanding to examine and copy excerpts from the corporation's records and minutes has
not improperly used any information secured through any previous examination of the records of
such corporation; and 3) the demand is made in good faith or for a legitimate purpose. The latter
two limitations, however, must be set up as a defense by the corporation if it is to merit judicial
cognizance.
- Gonzales vs. PNB, 122 SCRA 490 [1983];
The unqualified provision on the right of inspection previously contained in Section 51,
Act No. 1459, as amended, no longer holds true under the provisions of the present law. The
argument of the petitioner that the right granted to him under Section 51 of the former Corporation
law should not be dependent on the propriety of his motive or purpose in asking for the inspection
of the books of the respondent bank loses whatever validity it might have had before the
amendment of the law. If there is any doubt in the correctness of the ruling of the trial court that
the right of inspection granted under Section 51 of the old Corporation Law must be dependent
on a showing of proper motive on the part of the stockholder demanding the same, it now
dissipated by the clear language of the pertinent provision contained in Section 74 of Batas
Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in seeking the
inspection of the books of the respondent bank, he has not set forth the reasons and the
purposes for which be desires such inspection, except to satisfy himself as to the truth of
published reports regarding certain transactions entered into by the respondent bank and to
inquire into their validity. The circumstances under which he acquired one share of stock in the
respondent bank purposely to exercise the right of inspection do not argue in favor of his good
faith and proper motivation. Admittedly he sought to be a stockholder in order to pry into
transactions entered into by the respondent bank even before he became a stockholder. His
obvious purpose was to arm himself with materials which he can use against the respondent
bank for acts done by the latter when the petitioner was a total stranger to the same. He could
have been impelled by a laudable sense of civil consciousness, but it could not be said that his
purpose is germane to his interest as a stockholder.|
The Philippine National Bank is not an ordinary corporation. Having a charter of its
own, it is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the
said Code provides: "SEC. 4. — Corporations created by special laws or charters. —
Corporations created by special laws or charters shall be governed primarily by the provisions of
the special law or charter creating them or applicable to them, supplemented by the provisions of
this Code, insofar as they are applicable." The provision of Section 74 of Batas Pambansa Blg. 68
of the new Corporation Code with respect to the right of a stockholder to demand an inspection or
examination of the books of the corporation may not be reconciled with the above-quoted
provisions of the charter of the bank. It is not correct to claim, therefore, that the right of
Corporation Law 2016: JVL & JSD
inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity
to the charter of the respondent bank.
- Pascual vs. CA, 339 SC RA 117 [2000]
Sec. 5(b) of P.D. 902-A does not define what an intra-corporate controversy is, but
case law has fashioned out two tests for determining what suit is cognizable by the SEC or the
regular courts, and sometimes by the National Labor Relations Commission. The first test uses
the enumeration in §5(b) of the relationships to determine jurisdiction, to wit: (1) Those between
and among stockholders and members; (2) Those between and among stockholders and
members, on one hand, and the corporation, on the other hand; and (3) Those between the
corporation and the State but only insofar as its franchise or right to exist as an entity is
concerned. The second test, on the other hand, focuses on the nature of the controversy itself.
Recent decisions of this Court consider not only the subject of their controversy but also the
status of the parties.
It is true that a complaint for accounting, reconveyance, etc. of corporate properties has
previously been held to be within the jurisdiction of the SEC. Nonetheless, a distinction can be
drawn between those cases and the case at bar, for, in those cases, the corporations involved
were still existing, whereas in the present case, there is no more corporation involved. There is no
question that assessing the financial status of an existing corporation, for purposes of an action
for accounting, requires the expertise of the SEC. But in the case of a dissolved corporation, no
such expertise is required, for all its business has been properly accounted for already, and what
is left to be determined is properly within the competence of regular courts. It may be noted in this
connection that pursuant to R.A. No. 8799, §5.2, which took effect on August 8, 2000, the
jurisdiction of the SEC to decide cases involving intra-corporate dispute was transferred to courts
of general jurisdiction and, in accordance therewith, all cases of this nature, with the exception
only of those submitted for decision, were transferred to the regular courts. Hence, the question
whether this case should be filed in the SEC is now only of academic interest. For even if it
involves an intra-corporate dispute, it would be remanded to the Regional Trial Court just the
same.
-re Jurisdiction, Sec. 5.2, Securities Regulation Code -RA 8799 — The SEC's
jurisdiction over all cases enumerated under Section 5 of PD 502-A is now transferred to the
Courts of general jurisdiction or the appropriate Regional Trial Court;
- Government Service Insurance System vs. CA, et aL, G.R. No. 183905, April 16,
2009;
Securities and Exchange Commission et al. vs. Anthony V. Rosete et aL, G.R. No.
184275, April 16, 2009.
Shares of stock in corporations may be divided into voting shares and non-voting
shares, which are generally issued as "preferred" or "redeemable" shares. 45 Voting rights are
exercised during regular or special meetings of stockholders; regular meetings to be held
annually on a fixed date, while special meetings may be held at any time necessary or as
provided in the by-laws, upon due notice. 46 The Corporation Code provides for a whole range of
matters which can be voted upon by stockholders, including a limited set on which even non-
voting stockholders are entitled to vote on. 47 On any of these matters which may be voted upon
by stockholders, the proxy device is generally available. 48
Under Section 5 (c) of Presidential Decree No. 902-A, in relation to the SRC, the
jurisdiction of the regular trial courts with respect to election-related controversies is specifically
confined to "controversies in the election or appointment of directors, trustees, officers or
74
managers of corporations, partnerships, or associations". Evidently, the jurisdiction of the regular
courts over so-called election contests or controversies under Section 5 (c) does not extend to
every potential subject that may be voted on by shareholders, but only to the election of directors
or trustees, in which stockholders are authorized to participate under Section 24 of the
Corporation Code. 49
This qualification allows for a useful distinction that gives due effect to the statutory
right of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular courts over
election contests or controversies. The power of the SEC to investigate violations of its rules on
proxy solicitation is unquestioned when proxies are obtained to vote on matters unrelated to the
cases enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are
solicited in relation to the election of corporate directors, the resulting controversy, even if it
ostensibly raised the violation of the SEC rules on proxy solicitation, should be properly seen as
an election controversy within the original and exclusive jurisdiction of the trial courts by virtue of
Section 5.2 of the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A.
The conferment of original and exclusive jurisdiction on the regular courts over such
controversies in the election of corporate directors must be seen as intended to confine to one
body the adjudication of all related claims and controversy arising from the election of such
directors. For that reason, the aforequoted Section 2, Rule 6 of the Interim Rules broadly defines
the term "election contest" as encompassing all plausible incidents arising from the election of
corporate directors, including: (1) any controversy or dispute involving title or claim to any elective
office in a stock or nonstock corporation, (2) the validation of proxies, (3) the manner and validity
of elections and (4) the qualifications of candidates, including the proclamation of winners. If all
matters anteceding the holding of such election which affect its manner and conduct, such as the
proxy solicitation process, are deemed within the original and exclusive jurisdiction of the SEC,
then the prospect of overlapping and competing jurisdictions between that body and the regular
courts becomes frighteningly real. From the language of Section 5 (c) of Presidential Decree No.
902-A, it is indubitable that controversies as to the qualification of voting shares, or the validity of
votes cast in favor of a candidate for election to the board of directors are properly cognizable
and adjudicable by the regular courts exercising original and exclusive jurisdiction over election
cases. Questions relating to the proper solicitation of proxies used in such election are
indisputably related to such issues, yet if the position of GSIS were to be upheld, they would be
resolved by the SEC and not the regular courts, even if they fall within "controversies in the
election" of directors.
- Reyes vs. RTC Makati, Zenith Ins. Corp., 561 SCRA 598 [2008]
A review of relevant jurisprudence shows a development in the Court's approach in
classifying what constitutes an intra-corporate controversy. Initially, the main consideration in
determining whether a dispute constitutes an intra-corporate controversy was limited to a
consideration of the intra-corporate relationship existing between or among the parties. 19 The
types of relationships embraced under Section 5 (b), as declared in the case of Union Glass &
Container Corp. v. SEC, 20 were as follows: SAEHaC
a) between the corporation, partnership, or association and the public;
b) between the corporation, partnership, or association and its stockholders, partners,
members, or officers;
c) between the corporation, partnership, or association and the State as far as its
franchise, permit or license to operate is concerned; and
Corporation Law 2016: JVL & JSD
d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]
The existence of any of the above intra-corporate relations was sufficient to confer
jurisdiction to the SEC, regardless of the subject matter of the dispute. This came to be known as
the relationship test.
However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve,
Inc., 21 the Court introduced the nature of the controversy test. We declared in this case that it is
not the mere existence of an intra-corporate relationship that gives rise to an intra-corporate
controversy; to rely on the relationship test alone will divest the regular courts of their jurisdiction
for the sole reason that the dispute involves a corporation, its directors, officers, or stockholders.
We saw that there is no legal sense in disregarding or minimizing the value of the nature of the
transactions which gives rise to the dispute.
Under the nature of the controversy test, the incidents of that relationship must also be
considered for the purpose of ascertaining whether the controversy itself is intra-corporate. 22
The controversy must not only be rooted in the existence of an intra-corporate relationship, but
must as well pertain to the enforcement of the parties' correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the corporation. If the
relationship and its incidents are merely incidental to the controversy or if there will still be conflict
even if the relationship does not exist, then no intra-corporate controversy exists.
The Court then combined the two tests and declared that jurisdiction should be
determined by considering not only the status or relationship of the parties, but also the nature of
the question under controversy. 23 This two-tier test was adopted in the recent case of Speed
Distribution, Inc. v. Court of Appeals:
To determine whether a case involves an intra-corporate controversy, and is to be
heard and decided by the branches of the RTC specifically designated by the Court to try and
decide such cases, two elements must concur: (a) the status or relationship of the parties; and (2)
the nature of the question that is the subject of their controversy.
The first element requires that the controversy must arise out of intra-corporate or
partnership relations between any or all of the parties and the corporation, partnership, or
association of which they are stockholders, members or associates; between any or all of them
and the corporation, partnership, or association of which they are stockholders, members, or
associates, respectively; and between such corporation, partnership, or association and the State
insofar as it concerns their individual franchises. The second element requires that the dispute
among the parties be intrinsically connected with the regulation of the corporation. If the nature of
the controvers
- Consuelo Metal Corporation vs. Planters Development Bank, G.R. No. 152580, June
28, 2008.
Republic Act No. 8799 (R.A. 8799) 15 transferred to the appropriate regional trial courts
the SEC's jurisdiction defined under Section 5 (d) of Presidential Decree No. 902-A. Section 5.2
of R.A. 8799 provides:
The Commission's jurisdiction over all cases enumerated under Sec. 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate
Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The
Commission shall retain jurisdiction over pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved within one (1) year from the enactment of
75
this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.
However, the SEC's jurisdiction does not extend to the liquidation of a corporation.
While the SEC has jurisdiction to order the dissolution of a corporation, 16 jurisdiction over the
liquidation of the corporation now pertains to the appropriate regional trial courts. This is the
reason why the SEC, in its 29 November 2000 Omnibus Order, directed that "the proceedings on
and implementation of the order of liquidation be commenced at the Regional Trial Court to which
this case shall be transferred." This is the correct procedure because the liquidation of a
corporation requires the settlement of claims for and against the corporation, which clearly falls
under the jurisdiction of the regular courts. The trial court is in the best position to convene all the
creditors of the corporation, ascertain their claims, and determine their preferences.
-Rule 7, Interim Rules of Procedure Governing
-Mira-Corporate Controversies under RA 8799, SC A.M. No. 01-2-04
Complaint must state
(aa) that the case is for the enforcement of plaintiff's right of inspection of corporate
orders or records and/or to be furnished with financial statements under Sections 74 and 75 of
the Code;
(bb) that a demand was made for inspection and copying of books and records and/or
to be furnished financial statements made by the plaintiff upon defendant;
(cc) that the defendant refused to grant the demands of the plaintiff and the reasons
given for such refusal, if any; and
(dd) that the reasons why the refusal of defendant to grant the demands of the plaintiff
is unjustified and illegal, stating the law and jurisprudence in support thereof.
(ee) Court is given 2 days within which to dismiss outright, if not sufficient in form and
substance, or 11 sufficient, order the issuance of summons to be served within 2 days from the
issuance. Defendant is given 10 days from service of summons and the complaint.)
- Gulfo vs. Ancheta, 678 SCRA459 [2012]
We take this opportunity to reiterate what constitutes intra-corporate disputes.
Jurisprudence consistently states that an intra-corporate dispute is one that arises from intra-
corporate relations; relationships between or among stockholders; or the relationships between
the stockholders and the corporation. In order to limit the broad definition of intra-corporate
dispute, this Court has applied the relationship test and the controversy test. These two tests,
when applied, have been the guiding principle in determining whether the dispute is an intra-
corporate controversy or a civil case.
In Union Glass & Container Corp., et al. v. SEC, et al., 23 the Court declared that the
relationship test determines whether the relationship is: "[a] between the corporation, partnership
or association and the public; [b] between the corporation, partnership or association and its
stockholders, partners, members, or officers; [c] between the corporation, partnership or
association and the [S]tate [insofar] as its franchise, permit or license to operate is concerned;
and [d] among the stockholders, partners or associates themselves."
Under this test, no doubt exists that the parties were members of the same association,
but this conclusion must still be supplemented by the controversy test before it may be
considered as an intra-corporate dispute. Relationship alone does not ipso facto make the
dispute intra-corporate; the mere existence of an intra-corporate relationship does not always
Corporation Law 2016: JVL & JSD
give rise to an intra-corporate controversy. The incidents of that relationship must be considered
to ascertain whether the controversy itself is intra-corporate. This is where the controversy test
becomes material. EaISTD
Under the controversy test, the dispute must be rooted in the existence of an intra-
corporate relationship, and must refer to the enforcement of the parties' correlative rights and
obligations under the Corporation Code, as well as the internal and intra-corporate regulatory
rules of the corporation, in order to be an intra-corporate dispute. These are essentially
determined through the allegations in the complaint which determine the nature of the action.
We found from the allegations in the complaint that the respondent did not question the
status of the petitioners as members of the association. There were no allegations assailing the
petitioners' rights or obligations on the basis of the association's rules and by-laws, or regarding
the petitioners' relationships with the association. What were alleged were only demands for civil
indemnity and damages. The intent to seek indemnification only (and not the petitioners' status,
membership, or their rights in the association) is clear from paragraphs 7, 8 and 9 of the
complaint.
- Atwel, et al vs. Concepcion Progr Asso., Inc., 551 SCRA 272 [2008].
Originally, Section 5 of Presidential Decree (PD) 902-A 13 conferred on the SEC
original and exclusive jurisdiction over the following:
(1) Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, or members of any
corporation, partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or association relations,
between and among stockholders, members, or associates; or association of which they are
stockholders, members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers or
managers of corporations, partnerships, or associations; TAIESD
(4) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payment in cases where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the impossibility of meeting them when they
fall due or in cases where the corporation, partnership or association has no sufficient assets to
cover its liabilities but is under the management of a rehabilitation receiver or management
committee . . . (emphasis supplied)
Upon the enactment of RA 8799 in 2000, the jurisdiction of the SEC over intra-
corporate controversies and other cases enumerated in Section 5 of PD 902-A was transferred to
the courts of general jurisdiction. Under this authority, Branch 8 of the Tacloban City RTC, acting
as a special commercial court, deemed the mandatory injunction case filed by CPAI an intra-
corporate dispute falling under subparagraph (2) of the aforecited provision as it involved the
officers and members thereof.
To determine whether a case involves an intra-corporate controversy to be heard and
decided by the RTC, two elements must concur:
(1) the status or relationship of the parties and
(2) the nature of the question that is subject of their controversy.
76
 The first element requires that the controversy must arise out of intra-corporate or
partnership relations: (a) between any or all of the parties and the corporation, partnership or
association of which they are stockholders, members or associates; (b) between any or all of
them and the corporation, partnership or association of which they are stockholders, members or
associates and (c) between such corporation, partnership or association and the State insofar as
it concerns their individual franchises. On the other hand, the second element requires that the
dispute among the parties be intrinsically connected with the regulation of the corporation. 15 If
the nature of the controversy involves matters that are purely civil in character, necessarily, the
case does not involve an intra-corporate controversy.
- Punongbayan vs. Punongbayan, Jr., 491 SC RA 477 [2006]
Under Section 5 7 of Presidential Decree No. 902-A, the SEC has jurisdiction, among
others, to hear and decide controversies in the appointments of directors, trustees, officers or
managers of corporations.
Section 6 provides:
SECTION 6. In order to effectively exercise such jurisdiction, the Commission shall
possess the following powers:
xxx xxx xxx
d) To create a management committee . . .
The management committee . . . shall have the power to take custody of, and control
over, all the existing assets and property of such entities under management; to evaluate the
existing assets and liabilities, earnings and operations of such corporations, partnerships or other
associations; to determine the best way to salvage and protect the interest of the investors and
creditors; to study, review and evaluate the feasibility of continuing operations and restructure
and rehabilitate such entities if determined to be feasible by the Commission. It shall report and
be responsible to the Commission until dissolved by order of the Commission: Provided,
however, That the Commission may, on the basis of the findings and recommendation of the
management committee . . . or on its own findings, determine that the continuance in business of
such corporation or entity would not be feasible or profitable nor work to the best interest of the
stockholders, parties-litigants, creditors, or the general public, order the dissolution of such
corporation entity and its remaining assets liquidated accordingly. The management committee . .
. may overrule or revoke the actions of the previous management and board of directors of the
entity or entities under management notwithstanding any provision of law, articles of incorporation
or by-laws to the contrary. ATcaEH
xxx xxx xxx
A management committee is tasked to manage, take custody of and control all existing
assets, funds and records of the corporation, and to determine the best way to protect the interest
of its stockholders and creditors.
In this case, the SEC created a management committee, upon Sotero's application,
and appointed its five members. However, one member, Carmen Dormitorio (representing the
CHED), inhibited herself from sitting in the committee, resulting in a deadlock among the
remaining members. The committee became so divided, hence, the school's business and affairs
could no longer be conducted effectively to the prejudice of the stockholders and the students. In
Corporation Law 2016: JVL & JSD
the meantime, the SEC's jurisdiction over intra-corporate controversies was transferred to the
RTC. This prompted Sotero to file with the RTC, Branch 5, Iligan City, a motion to abolish the
management committee created by the SEC. The RTC denied his motion and instead, ordered
the reorganization of the management committee. Sotero challenged the RTC Orders before the
Court of Appeals via a petition for certiorari. The Appellate Court ruled that the RTC should have
directed the remaining members of the Board to reconvene instead of ordering the reorganization
of the management committee.
Republic Act No. 8799, which became effective on August 8, 2000, transferred the
jurisdiction of the SEC over cases involving intra-corporate disputes to the Regional Trial Courts.
8 Thus, the RTC assumed powers provided under Sections 5 and 6 of Presidential Decree No.
902-A quoted earlier. As such, it has the discretion to grant or deny an application for the creation
of a management committee. This discretion, however, must be exercised with great caution and
circumspection.
Having the power to create a management committee, it follows that the RTC can order
the reorganization of the existing management committee. Here, knowing that the deadlock
among the members of the committee (appointed by the SEC) may lead to the paralyzation of the
school's business operations, the RTC removed the said members and appointed new members.
This is pursuant to Section 11, Rule 9 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies which provides:
A member of the management committee is deemed removed upon appointment by the
court of his replacement chosen in accordance with Section 4 of this Rule.
Such appointment of new members does not mean the creation of a new management
committee. The existing management committee was not abolished. The RTC merely
reorganized it by appointing new members. The management committee created by the SEC
continues to exist. However, when it failed to function due to the division among the members,
the RTC replaced them. Clearly, there was no revocation of the final Order of the SEC.
- Calleja vs. Panday, 483 SC RA 680 [2006]
However, R.A. No. 8799 was passed and Section 5.2 thereof provides as follows:
5.2. The Commission's jurisdiction over all cases enumerated under Section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority
may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases.
...
Therefore, actions of quo warranto against persons who usurp an office in a
corporation, which were formerly cognizable by the Securities and Exchange Commission under
PD 902-A, have been transferred to the courts of general jurisdiction. But, this does not change
the fact that Rule 66 of the 1997 Rules of Civil Procedure does not apply to quo warranto cases
against persons who usurp an office in a private corporation. Presently, Section 1(a) of Rule 66
reads thus:
Section 1. Action by Government against individuals. — An action for the usurpation of
a public office, position or franchise may be commenced by a verified petition brought in the
name of the Republic of the Philippines against
(a) A person who usurps, intrudes into, or unlawfully holds or exercises a public office,
position or franchise;
77

xxx xxx xxx
As explained in the Unilongo 12 case, Section 1(a) of Rule 66 of the present Rules no
longer contains the phrase "or an office in a corporation created by authority of law" which was
found in the old Rules. Clearly, the present Rule 66 only applies to actions of quo warranto
against persons who usurp a public office, position or franchise; public officers who forfeit their
office; and associations which act as corporations without being legally incorporated despite the
passage of R.A. No. 8799. It is, therefore, The Interim Rules of Procedure Governing Intra-
Corporate Controversies Under R.A. No. 8799 (hereinafter the Interim Rules) which applies to the
petition for quo warranto filed by respondents before the trial court since what is being questioned
is the authority of herein petitioners to assume the office and act as the board of directors and
officers of St. John Hospital, Incorporated.
- Sy Chim vs. Sy Siy Ho & Sons, Inc., 480 SC RA 465 [2006]
Section 1, Rule 9 of the Interim Rules provides:
SECTION 1. Creation of a management committee. — As an incident to any of the
cases filed under these Rules or the Interim Rules on Corporate Rehabilitation, a party may apply
for the appointment of a management committee for the corporation, partnership or association,
when there is imminent danger of:
(1) Dissipation, loss, wastage or destruction of assets or other properties; and
(2) Paralyzation of its business operations which may be prejudicial to the interest of
the minority stockholders, parties-litigants or the general public.
The said Rules, which took effect on April 1, 2001, was promulgated by the Court
pursuant to its power to promulgate rules concerning "pleading, practice and procedure in all
courts . . . providing for simplified and inexpensive procedure for the speedy disposition of cases"
under Section 5(5), Article VIII of the Constitution.
We do not agree with petitioners' contention that the word "and" in Section 1, Rule 9 of
the Interim Rules should be interpreted to mean "or." While it is true that in Section 6(d) of
Presidential Decree No. 902-A, 56 an applicant for the appointment of a management committee
is mandated to prove only one of the two requisites provided therein, the Court, in Jacinto v. First
Women's Credit Corporation, 57 ruled that the two requisites should be present before a
management committee may be created and a receiver appointed by the RTC:
A reading of the aforecited legal provision reveals that for a minority stockholder to
obtain the appointment of an interim management committee, he must do more than merely
make a prima facie showing of a denial of his right to share in the concerns of the corporation; he
must show that the corporate property is in danger of being wasted and destroyed; that the
business of the corporation is being diverted from the purpose for which it has been organized;
and that there is serious paralyzation of operations all to his detriment. . . .
The rationale for the need to establish the confluence of the two (2) requisites under
Section 1, Rule 9 by an applicant for the appointment of a management committee is primarily
based upon the fact that such committee and receiver appointed by the court will immediately
take over the management of the corporation, partnership or association, including such power as
it may deem appropriate, and any of the powers specified in Section 5 of the Rule.
Corporation Law 2016: JVL & JSD
Indeed, upon the appointment of a receiver, the duly elected/appointed officers of the
corporation are divested of the management of such corporation in favor of the management
committee/receiver. Such transference of the corporation's management will certainly have a
negative, if not crippling effect, on the operations/affairs of the corporation not only with banks
and other business institutions including those abroad which it deals business with. A wall of
uncertainty is erected; the short and long-term plans of the management of the corporation are
disrupted, if not derailed.
Thus, the creation and appointment of a management committee and a receiver is an
extraordinary and drastic remedy to be exercised with care and caution; and only when the
requirements under the Interim Rules are shown. It is a drastic course for the benefit of the
minority stockholders, the parties-litigants or the general public are allowed only under pressing
circumstances and, when there is inadequacy, ineffectual or exhaustion of legal or other
remedies. The power to intervene before the legal remedy is exhausted and misused when it is
exercised in aid of such a purpose. The power of the court to continue a business of a
corporation, partnership or association must be exercised with the greatest care and caution.
There should be a full consideration of all the attendant facts, including the interest of all the
parties concerned.
Neither Presidential Decree No. 902-A and Republic Act No. 8799 nor the Interim Rules
of Procedure define "imminent danger." "Danger" is a general term, including peril, jeopardy,
hazard and risk; as used in the Rule, it refers to exposure or liability to injury. "Imminent" refers to
something which is threatening to happen at once, something close at hand, something to
happen upon the instant, close although not yet happening, and on the verge of happening.
In the present case, petitioners failed to make a strong showing that there was an
imminent danger of dissipation, loss, wastage or destruction of assets or other properties of
respondent corporation and paralysis of its business operations which may be prejudicial to the
interest of the parties-litigants, petitioners, or the general public. The RTC thus committed grave
abuse of its discretion amounting to excess of jurisdiction in creating a management committee
and the subsequent appointment of a comptroller.
(g) Appraisal Right (Secs. 81 to 86 and 105)
Section 81. Instances of appraisal right.
Any stockholder of a corporation shall have the right to dissent and demand
payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of
all or substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Section 82. How right is exercised.
The appraisal right may be exercised by any stockholder who shall have voted against
the proposed corporate action, by making a written demand on the corporation within thirty
(30) days after the date on which the vote was taken for payment of the fair value of his
shares: Provided, That failure to make the demand within such period shall be deemed a waiver
of the appraisal right. If the proposed corporate action is implemented or affected, the
corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock
78
representing his shares, the fair value thereof as of the day prior to the date on which the vote
was taken, excluding any appreciation or depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was approved by
the stockholders, the withdrawing stockholder and the corporation CANNOT agree on the fair
value of the shares, it shall be determined and appraised by three (3) disinterested persons,
one of whom shall be named by the stockholder, another by the corporation, and the third
by the two thus chosen. The findings of the majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty (30) days after such award is made : Provided,
That NO payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment: and Provided, further, That
upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith
transfer his shares to the corporation. (n)
Section 83. Effect of demand and termination of right. –
From the time of demand for payment of the fair value of a stockholder's shares until
either the abandonment of the corporate action involved or the purchase of the said shares by
the corporation, ALL rights accruing to such shares, including voting and dividend rights, shall be
suspended in accordance with the provisions of this Code, except the right of such stockholder
to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is NOT
paid the value of his shares within 30 days after the award, his voting and dividend rights shall
immediately be restored. (n)
Section 84. When right to payment ceases. - NO demand for payment under this
Title may be withdrawn unless the corporation consents thereto. If, however, such demand for
payment is withdrawn with the consent of the corporation, or if the proposed corporate action is
abandoned or rescinded by the corporation or disapproved by the Securities and Exchange
Commission where such approval is necessary, or if the Securities and Exchange Commission
determines that such stockholder is not entitled to the appraisal right, then the right of said
stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall
thereupon be restored, and all dividend distributions which would have accrued on his
shares shall be paid to him. (n)
Section 85. Who bears 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. (n)
Section 86. Notation on certificates; rights of transferee. –
Within ten (10) days AFTER demanding payment for his shares, a dissenting
stockholder shall submit the certificates of stock representing his shares to the corporation for
notation thereon that such shares are dissenting shares. His failure to do so shall, at the option
of the corporation, terminate his rights under this Title. If shares represented by the certificates
bearing such notation are transferred, and the certificates consequently cancelled, the rights of
the transferor as a dissenting stockholder under this Title shall cease and the transferee shall
have all the rights of a regular stockholder; and all dividend distributions which would have
accrued on such shares shall be paid to the transferee. (n)
Section 105. Withdrawal of stockholder or dissolution of corporation.
Corporation Law 2016: JVL & JSD
In addition and without prejudice to other rights and remedies available to a stockholder
under this Title, any stockholder of a close corporation may, for any reason, compel the
said corporation to purchase his shares at their fair value, which shall NOT be less than their
par or issued value, when the corporation has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by
written petition to the Securities and Exchange Commission, compel the dissolution of such
corporation whenever any of acts of the directors, officers or those in control of the corporation is
illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets are being misapplied or wasted.
Turner vs. Lorenzo Shipping Corporation, G.R. No. 157479, November 24, 2010
Clearly, the right of appraisal may be exercised when there is a fundamental change in
the charter or articles of incorporation substantially prejudicing the rights of the stockholders. It
does not vest unless objectionable corporate action is taken. It serves the purpose of enabling the
dissenting stockholder to have his interests purchased and to retire from the corporation.
Now, however, a corporation can purchase its own shares, provided payment is made
out of surplus profits and the acquisition is for a legitimate corporate purpose. In the Philippines,
this new rule is embodied in Section 41 of the Corporation Code.
The Corporation Code defines how the right of appraisal is exercised, as well as the
implications of the right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted against the
proposed corporate action by making a written demand on the corporation within 30 days after
the date on which the vote was taken for the payment of the fair value of his shares. The failure to
make the demand within the period is deemed a waiver of the appraisal right.
2. If the withdrawing stockholder and the corporation cannot agree on the fair value of
the shares within a period of 60 days from the date the stockholders approved the corporate
action, the fair value shall be determined and appraised by three disinterested persons, one of
whom shall be named by the stockholder, another by the corporation, and the third by the two
thus chosen. The findings and award of the majority of the appraisers shall be final, and the
corporation shall pay their award within 30 days after the award is made. Upon payment by the
corporation of the agreed or awarded price, the stockholder shall forthwith transfer his or her
shares to the corporation.
3. All rights accruing to the withdrawing stockholder's shares, including voting and
dividend rights, shall be suspended from the time of demand for the payment of the fair value of
the shares until either the abandonment of the corporate action involved or the purchase of the
shares by the corporation, except the right of such stockholder to receive payment of the fair
value of the shares.
4. Within 10 days after demanding payment for his or her shares, a dissenting
stockholder shall submit to the corporation the certificates of stock representing his shares for
notation thereon that such shares are dissenting shares. A failure to do so shall, at the option of
the corporation, terminate his rights under this Title X of the Corporation Code. If shares
represented by the certificates bearing such notation are transferred, and the certificates are
consequently canceled, the rights of the transferor as a dissenting stockholder under this Title
shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend
distributions that would have accrued on such shares shall be paid to the transferee.
5. If the proposed corporate action is implemented or effected, the corporation shall pay
to such stockholder, upon the surrender of the certificates of stock representing his shares, the
79
fair value thereof as of the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.
Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earnings in its books to cover the payment. In
case the corporation has no available unrestricted retained earnings in its books, Section 83 of
the Corporation Code provides that if the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and dividend rights shall immediately be
restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to
fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the
capital stock, property, and other assets of a corporation are regarded as equity in trust for the
payment of corporate creditors, who are preferred in the distribution of corporate assets. 24 The
creditors of a corporation have the right to assume that the board of directors will not use the
assets of the corporation to purchase its own stock for as long as the corporation has outstanding
debts and liabilities. 25 There can be no distribution of assets among the stockholders without
first paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice
of creditors is null and void.
(h) Derivative Suits
(Rule 8, Interim Rules of Procedure Governing Intra-Corporate Controversies under RA
8799, SC A.M. No. 01-2-04 - A stockholders or member may bring an action in the name of the
corporation or association, as the case may be, provided, that:
(i) he was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;
(ii) he exerted all reasonable efforts, and alleges the same with particularity
in the complaint, to exhaust all remedies available under the articles of incorporation;
by-laws, laws or rules governing the corporation or partnership to obtain the relief he
desires;
(iii) NO appraisal rights are available for the act or acts complained of; and
(iv) the suit is NOT a nuisance or harassment (otherwise, shall be
dismissed).
There will be NO discontinuance, compromise or settlement WITHOUT approval of the court.
During the pendency of the action, any sale of shares of the complaining stockholder shall be
approved by the court. If the court determines that the interest of the stockholders will be
substantially affected by the discontinuance, compromise or settlement, the court may direct that
notice, by publication or otherwise, be given to the stockholders or members whose interests it
determines will be so affected.
Rule 10, Provisional remedies - may be available for the purposes, but NO TRO or status quo
order shall be issued save in exceptional cases and only after hearing the parties and the posting
of a bond.
- Alfredo Villamor Jr. vs. John S. Umale in Substitution of Hernando Balmores, G.R. No. 172843,
September 24, 2014,
Corporation Law 2016: JVL & JSD
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (Interim
Rules) provides the five (5) requisite for filing derivative suits:
SECTION 1. Derivative action. — A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that: cDTaSH
(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the
first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or
member must be "in the name of [the] corporation or association. . . ." This requirement has
already been settled in jurisprudence.
Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., this court said that
"[a]mong the basic requirements for a derivative suit to prosper is that the minority shareholder
who is suing for and on behalf of the corporation must allege in his complaint before the proper
forum that he is suing on a derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join [him]."
Moreover, it is important that the corporation be made a party to the case.
This court explained in Asset Privatization Trust v. Court of Appeals why it is a condition sine qua
non that the corporation be impleaded as party in derivative suits. Thus:
Not only is the corporation an indispensible party, but it is also the present rule that it must be
served with process. The reason given is that the judgment must be made binding upon the
corporation in order that the corporation may get the benefit of the suit and may not bring a
subsequent suit against the same defendants for the same cause of action. In other words the
corporation must be joined as party because it is its cause of action that is being litigated and
because judgment must be a res judicata against it.
In the same case, this court enumerated the reasons for disallowing a direct individual
suit.
The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation itself for the benefit of
the stockholders." In other words, to allow shareholders to sue separately would conflict with the
separate corporate entity principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in
the case of Evangelista v. Santos, that 'the stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and the distribution among them of part
of the corporate assets before the dissolution of the corporation and the liquidation of its debts
80
and liabilities, something which cannot be legally done in view of Section 16 of the Corporation
Law. . .";
(3) the filing of such suits would conflict with the duty of the management to sue for the protection
of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act.
While it is true that the basis for allowing stockholders to file derivative suits on behalf of
corporations is based on equity, the above legal requisites for its filing must necessarily be
complied with for its institution.
-Nestor Ching and Andrew Wellington vs. Subic Bay Golf and Country Club Inc., et aL, G.R. No.
174353, September 10, 2014 \
A derivative suit must be differentiated from individual and representative or class suits, thus:
"Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of
directors or other persons may be classified into individual suits, class suits, and derivative suits.
Where a stockholder or member is denied the right of inspection, his suit would be individual
because the wrong is done to him personally and not to the other stockholders or the corporation.
Where the wrong is done to a group of stockholders, as where preferred stockholders' rights are
violated, a class or representative suit will be proper for the protection of all stockholders
belonging to the same group. But where the acts complained of constitute a wrong to the
corporation itself, the cause of action belongs to the corporation and not to the individual
stockholder or member. Although in most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of his interest therein would be impaired,
this fact of itself is not sufficient to give him an individual cause of action since the corporation is a
person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise,
not only would the theory of separate entity be violated, but there would be multiplicity of suits as
well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of
determining the amount of damages that should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the directors or
trustees themselves, a stockholder or member may find that he has no redress because the
former are vested by law with the right to decide whether or not the corporation should sue, and
they will never be willing to sue themselves. The corporation would thus be helpless to seek
remedy. Because of the frequent occurrence of such a situation, the common law gradually
recognized the right of a stockholder to sue on behalf of a corporation in what eventually became
known as a "derivative suit." It has been proven to be an effective remedy of the minority against
the abuses of management. Thus, an individual stockholder is permitted to institute a derivative
suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the
control of the corporation. In such actions, the suing stockholder is regarded as the nominal party,
with the corporation as the party in interest."
-Ang, for and in behalf of Sunrise Marketing (Bacolod), Inc. vs. Spouses Ang, G.R. No. 201675,
June 19, 2013
Corporation Law 2016: JVL & JSD
Since damage to the corporation was not sufficiently proven by Juanito, the Complaint cannot be
considered a bona fide derivative suit. A derivative suit is one that seeks redress for injury to the
corporation, and not the stockholder. No such injury was proven in this case.
The Complaint also failed to allege that all available corporate remedies under the
articles of incorporation, by-laws, laws or rules governing the corporation were exhausted, as
required under the Interim Rules.
-Legaspi Towers, Inc. vs. Muer, et al., 673 SCRA 453 [2012]
A derivative suit must be differentiated from individual and representative or class suits, thus:
Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of
directors or other persons may be classified into individual suits, class suits, and derivative suits.
Where a stockholder or member is denied the right of inspection, his suit would be individual
because the wrong is done to him personally and not to the other stockholders or the corporation.
Where the wrong is done to a group of stockholders, as where preferred stockholders' rights are
violated, a class or representative suit will be proper for the protection of all stockholders
belonging to the same group. But where the acts complained of constitute a wrong to the
corporation itself, the cause of action belongs to the corporation and not to the individual
stockholder or member. Although in most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of his interest therein would be impaired,
this fact of itself is not sufficient to give him an individual cause of action since the corporation is a
person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise,
not only would the theory of separate entity be violated, but there would be multiplicity of suits as
well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of
determining the amount of damages that should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the directors or
trustees themselves, a stockholder or member may find that he has no redress because the
former are vested by law with the right to decide whether or not the corporation should sue, and
they will never be willing to sue themselves. The corporation would thus be helpless to seek
remedy. Because of the frequent occurrence of such a situation, the common law gradually
recognized the right of a stockholder to sue on behalf of a corporation in what eventually became
known as a "derivative suit." It has been proven to be an effective remedy of the minority against
the abuses of management. Thus, an individual stockholder is permitted to institute a derivative
suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the
control of the corporation. In such actions, the suing stockholder is regarded as the nominal party,
with the corporation as the party-in-interest.
The stockholder's right to file a derivative suit is not based on any express provision of
The Corporation Code, but is impliedly recognized when the law makes corporate directors or
officers liable for damages suffered by the corporation and its stockholders for violation of their
fiduciary duties, which is not the issue in this case.
-Philip Go, et al. vs. Distinction Properties Development and Construction Inc., 671 SCRA 461
[2012]
The doctrine of exhaustion of administrative remedies is a cornerstone of our judicial system. The
thrust of the rule is that courts must allow administrative agencies to carry out their functions and
discharge their responsibilities within the specialized areas of their respective competence. It has
81
been held, however, that the doctrine of exhaustion of administrative remedies and the doctrine of
primary jurisdiction are not ironclad rules. In the case of Republic of the Philippines v. Lacap, the
Court enumerated the numerous exceptions to these rules, namely: (a) where there is estoppel
on the part of the party invoking the doctrine; (b) where the challenged administrative act is
patently illegal, amounting to lack of jurisdiction; (c) where there is unreasonable delay or official
inaction that will irretrievably prejudice the complainant; (d) where the amount involved is
relatively so small as to make the rule impractical and oppressive; (e) where the question
involved is purely legal and will ultimately have to be decided by the courts of justice; (f) where
judicial intervention is urgent; (g) where the application of the doctrine may cause great and
irreparable damage; (h) where the controverted acts violate due process; (i) where the issue of
non-exhaustion of administrative remedies has been rendered moot; (j) where there is no other
plain, speedy and adequate remedy; (k) where strong public interest is involved; and (l) in quo
warranto proceedings.
-Lisam Enterprises, Inc., et aL vs. Banco de Oro Unibank, Inc. et aL, 670 SCRA 310 [2012]
The Court enumerated the requisites for filing a derivative suit, as follows:
a)the party bringing the suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;
b)he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed his plea;
and
c)the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder bringing the
suit.
A reading of the amended complaint will reveal that all the foregoing requisites had been alleged
therein. Hence, the amended complaint remedied the defect in the original complaint and now
sufficiently states a cause of action.
-Atty. Garcia vs. Eastern Telecommunications Phils., Inc. and Any Salvador Hizon, G.R. Nos.
173115, April 16, 2009
We have ruled that an intra-corporate controversy is one which pertains to any of the following
relationships: (1) between the corporation, partnership or association and the public; (2) between
the corporation, partnership or association and the State insofar as the former's franchise, permit
or license to operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders, partners or
associates themselves. 89 In Lozon v. National Labor Relations Commission, 90 we declared that
Presidential Decree No. 902-A confers on the SEC original and exclusive jurisdiction to hear and
decide controversies and cases involving intra-corporate and partnership relations between or
among the corporation, officers and stockholders and partners, including their elections or
appointments . . .
Before a dismissal or removal could properly fall within the jurisdiction of the SEC, it
has to be first established that the person removed or dismissed was a corporate officer. 91
"Corporate officers" in the context of Presidential Decree No. 902-A 92 are those officers of the
corporation who are given that character by the Corporation Code or by the corporation's by-laws.
93 There are three specific officers whom a corporation must have under Section 25 of the
Corporation Code. 94 These are the president, secretary and the treasurer. The number of
Corporation Law 2016: JVL & JSD
officers is not limited to these three. A corporation may have such other officers as may be
provided for by its by-laws like, but not limited to, the vice-president, cashier, auditor or general
manager. The number of corporate officers is thus limited by law and by the corporation's by-
laws.
-Yujuico vs. Quiambao, 513 SC RA 243 [2007]
The duty of the court taking cognizance of an application for a writ of preliminary injunction is to
determine whether the requisites necessary for the grant of such writ are present. The requisites
for the issuance of a writ of preliminary injunction are: (1) the applicant for such writ must show
that he has a clear and unmistakable right that must be protected; and (2) there exists an urgent
and paramount necessity for the writ to prevent serious damage.
To repeat, the purpose of the writ of preliminary injunction is to preserve the status quo
until the court could hear the merits of the case. The status quo is the last actual peaceable
uncontested status that preceded the controversy which, in the instant case, is the holding of the
annual stockholders' meeting on March 1, 2004 and the ensuing election of the directors and
officers of STRADEC. But instead of preserving the status quo, Judge Emuslan's Order messed it
up when, in compliance therewith, a special stockholders' meeting was held anew and a new set
of directors and officers of STRADEC was elected. That effectively resolved respondents'
principal action without even a full-blown trial on the merits since the Order impliedly ruled that the
March 1, 2004 annual stockholders' meeting and election are void. Verily, the issuance of the
questioned Order violates the established principle that courts should avoid granting a writ of
preliminary injunction that would in effect dispose of the main case without trial.
-R.N. Symaco Trading Corp. vs. Santos, 467 SCRA 312 [2005]
The Court also agrees with the petitioners' contention that the CA erred in ordering that all the
original members of the MFBAI should be impleaded as parties in respondent Santos' complaint.
Contrary to the CA ruling, all the MFBAI members are not indispensable parties in a derivative
suit. It is enough that a member or a minority of such members file a derivative suit for and in
behalf of the corporation. After all, the members/stockholders who filed a derivative suit are
merely nominal parties, the real party-in-interest being the corporation.
-Chua vs. CA, 446 SCRA 259
Petitioner Chua's petition for mandamus in G.R. No. 152823, which seeks to compel
the Court of Appeals to consider the records of the case as reconstituted, must fail.
Reconstitution is not a ministerial task. It involves the exercise of discretion on the part of a court
in evaluating the authenticity and relevance of all evidence to be presented before it. Thus, the
extraordinary writ of mandamus cannot be used to dictate upon the court how it will rule in the
admission of the reconstituted evidence, inasmuch as this calls for the exercise of discretion. We
have ruled that the court may be compelled by mandamus to pass and act upon a question
submitted to it for decision, but it cannot be enjoined to decide for or against one of the parties. A
judicial act is not compellable by mandamus; the court has to decide a question according to its
own judgment and understanding of the law.
(i)Voting Devices Affecting Control
(i) Proxy (Sec. 58; Sec. 89; for listed companies: see Section 20, Securities Regulation
Code and Rule 20, of the Implementing Rules of the SRC)
82

Section 58. Proxies.
Stockholders and members may vote in person or by proxy in ALL meetings of
stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed
before the scheduled meeting with the corporate secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting for which it is intended. NO proxy shall be valid and
effective for a period longer than five (5) years at any one time
Section 89. Right to vote. - The right of the members of any class or classes to vote
may be limited, broadened or denied to the extent specified in the articles of incorporation or the
by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall
be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws,
a member may vote by proxy in accordance with the provisions of this Code. Voting by mail or
other similar means by members of non-stock corporations may be authorized by the by-laws of
non-stock corporations with the approval of, and under such conditions which may be prescribed
by, the Securities and Exchange Commission.
Section 20. Proxy solicitations. –
20.1. Proxies must be issued and proxy solicitation must be made in accordance with
rules and regulations to be issued by the Commission;
20.2. Proxies must be in writing, signed by the stockholder or his duly authorized
representative and file before the scheduled meeting with the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for
which it is intended. No proxy shall be valid only for the meting for which it is intended. No proxy
shall be valid and effective for a period longer than five (5) years at one time.
20.4. No broker or dealer shall give any proxy, consent or any authorization, in respect
of any security carried for the account of the customer, to a person other than the customer,
without written authorization of such customer.
20.5. A broker or dealer who holds or acquire the proxy for at least ten percent (10%)
or such percentage as the commission may prescribe of the outstanding share of such issuer,
shall submit a report identifying the beneficial owner of ten days after such acquisition, for its own
account or customer, to the issuer of security, to the exchange where the security is traded and to
the Commission.
Meaning;
Purpose;
Who may be a proxy;
Form;
Extent of Authority.
Kinds Duration;
Revocation;
(ii) Voting Trust Agreements (Sec. 59)
Section 59. Voting trusts.
One or more stockholders of a stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the right to vote and other rights
pertaining to the shares for a period NOT exceeding five (5) years at any time: Provided,
That in the case of a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding five (5) years but shall automatically expire upon full
Corporation Law 2016: JVL & JSD
payment of the loan. A voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such agreement shall be filed with
the corporation and with the Securities and Exchange Commission; otherwise, said agreement
is ineffective and unenforceable. The certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or
trustees stating that they are issued pursuant to said agreement. In the books of the corporation,
it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust
certificates, which shall be transferable in the same manner and wit
h the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner as any other corporate
book or record: Provided, That both the transferor and the trustee or trustees may exercise the
right of inspection of all corporate books and records in accordance with the provisions of this
Code.
Any other stockholder may transfer his shares to the same trustee or trustees upon the
terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all
the provisions of said agreement.
NO voting trust agreement shall be entered into for the purpose of circumventing
the law against monopolies and illegal combinations in restraint of trade or used for
purposes of fraud.
Unless expressly renewed, ALL rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificates as well as
the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled
and new certificates of stock shall be reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise.
-Lee v. CA, 205 SCRA 752 [1992];
Under Section 59 of the new Corporation Code which expressly recognizes voting trust
agreements, a more definite meaning may be gathered. The said provision partly reads: "Section
59. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for
the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to
the shares for a period not exceeding five (5) years at any one 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 (5) years but shall automatically expire upon full payment of the loan. A voting
trust agreement must be in writing and notarized, and shall specify the terms and conditions
thereof. A certified copy of such agreement shall be filed with the corporation and with the
Securities and Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall
be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they
are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the
transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement."
By its very nature, a voting trust agreement results in the separation of the voting rights
of a stockholder from his other rights such as the right to receive dividends, the right to inspect
the books of the corporation, the right to sell certain interests in the assets of the corporation and
other rights to which a stockholder may be entitled until the liquidation of the corporation.
However, in order to distinguish a voting trust agreement from proxies and other voting pools and
83
agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are
separated from the other attributes of ownership; (2) that the voting rights granted are intended to
be irrevocable for a definite period of time; and (3) that the principal purpose of the grant of voting
rights is to acquire voting control of the corporation.
The law simply provides that a voting trust agreement is an agreement in writing
whereby one or more stockholders of a corporation consent to transfer his or their shares to a
trustee in order to vest in the latter voting or other rights pertaining to said shares for a period not
exceeding five years upon the fulfillment of statutory conditions and such other terms and
conditions specified in the agreement. The five year-period may be extended in cases where the
voting trust is executed pursuant to a loan agreement whereby the period is made contingent
upon full payment of the loan.
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer
upon a trustee not only the stockholder's voting rights but also other rights pertaining to his
shares as long as the voting trust agreement is not entered "for the purpose of circumventing the
law against monopolies and illegal combinations in restraint of trade or used for purposes of
fraud." (section 59, 5th paragraph of the Corporation Code). Thus, the traditional concept of a
voting trust agreement primarily intended to single out a stockholder's right to vote from his other
rights as such and made irrevocable for a limited duration may in practice become a legal device
whereby a transfer of the stockholders shares is effected subject to the specific provision of the
voting trust agreement. The execution of a voting trust agreement, therefore, may create a
dichotomy between the equitable or beneficial ownership of the corporate shares of a
stockholder, on the one hand, and the legal title thereto on the other hand.
Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a party to its
execution — from legal title holder or owner of the shares subject of the voting trust agreement,
he becomes the equitable or beneficial owner.
-Everett v. Asia Banking Corporation, 49 Phil. 512 [1926]
When the board of directors in a corporation is under the complete control of the
principal defendants in the case and it is obvious that a demand upon the board of directors to
institute an action and prosecute the same effectively would be useless, the action may be
brought by one or more of the stockholders without such demand.|
-National Development Corporation vs. Aquino, 163 SCRA 153 [1988]
In any event, a voting trust transfers only voting or other rights pertaining to the shares
subject of the agreement, or control over the stock. The law on the matter is Section 59,
paragraph 1 of the Corporation Code (BP 68) which provides:
"Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create
a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other
rights pertaining to the shares for a period not exceeding five (5) years at any one time: . . ." 26
The acquisition by PNB-NIDC of the properties in question was not made or effected
under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just
and valid obligation of Batjak
Meaning;
Purpose;
Corporation Law 2016: JVL & JSD
Distinction from Proxy and Pooling Agreement
Extent of Authority
Duration
(iii) Pooling and Voting Agreements (Sec. 100)
Section 100. Agreements by stockholders. –
1. Agreements by and among stockholders executed before the formation and
organization of a close corporation, signed by all stockholders, shall survive the incorporation of
such corporation and shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such agreements are NOT inconsistent with
the articles of incorporation, irrespective of where the provisions of such agreements are
contained, except those required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by the
parties thereto, may provide that in exercising any voting rights, the shares held by them shall be
voted as therein provided, or as they may agree, or as determined in accordance with a
procedure agreed upon by them.
3. NO provision in any written agreement signed by the stockholders, relating to any
phase of the corporate affairs, shall be invalidated as between the parties on the ground that its
effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close corporation
shall NOT be invalidated on the ground that it so relates to the conduct of the business and
affairs of the corporation as to restrict or interfere with the discretion or powers of the board of
directors: Provided, That such agreement shall impose on the stockholders who are parties
thereto the liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be held to
strict fiduciary duties to each other and among themselves. Said stockholders shall be
personally liable for corporate torts unless the corporation has obtained reasonably adequate
liability insurance.
(iv) Cumulative Voting (See earlier discussion)
(v) Classification of Shares (Sec. 6 — voting and non-voting —redeemable and
preferred)
VII. STRUCTURE OF CORPORATION'S CAPITAL
A. Concept of "Capital Stock" — amount fixed usually by the corporate charter "to be
subscribed and paid in or secured to be paid in by the shareholders of a corporation, either in
money or property, labor or services at the organization of the corporation or afterwards, and
upon which it is to conduct its operations"
(11 Fletcher, Cyclopedia of the Law of Private Corporations, perm. ed. 14)
- Gamboa vs. Teves, 682 SCRA 397 [2012]; 652 SCRA 690 [2011]
The term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus in the present case only to common shares,
84
41 and not to the total outstanding capital stock comprising both common and non-voting
preferred shares.
Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation. 43 This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the corporation. 44 In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred shareholders are
often excluded from any control, that is, deprived of the right to vote in the election of directors
and on other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders. 45 In fact, under the Corporation
Code only preferred or redeemable shares can be deprived of the right to vote. 46 Common
shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the
articles of incorporation restricting the right of common shareholders to vote is invalid. 47
Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article XII of
the Constitution refers only to common shares. However, if the preferred shares also have the
right to vote in the election of directors, then the term "capital" shall include such preferred shares
because the right to participate in the control or management of the corporation is exercised
through the right to vote in the election of directors. In short, the term "capital" in Section 11,
Article XII of the Constitution refers only to shares of stock that can vote in the election of
directors.
- Cen. TxtL Mills v. Natl. Wage and Prod. Comm., 260 SCRA 368 [1996).
The guidelines on exemption specifically refer to paid-up capital, not authorized capital stock, as
the basis of capital impairment for exemption from WO No. NCR-02. The records reveal,
however, that petitioner included in its total paid-up capital payments on advance subscription,
although the proposed increase in its capitalization had not yet been approved by, let alone
presented for the approval of, the SEC. These payments cannot as yet be deemed part of
petitioner's paid-up capital, technically speaking, because its capital stock has not yet been
legally increased. Thus, its authorized capital stock in the year when exemption from WO No.
NCR-02 was sought stood at P128,000,000.00, which was impaired by loses of nearly 50%. Such
payments constitute deposits on future subscriptions, money which the corporation will hold in
trust for the subscribers until it files a petition to increase its capitalization and a certificate of filing
of increase of capital stock is approved and issued by the SEC. As a trust fund, this money is still
withdrawable by any of the subscribers at any time before the issuance of the corresponding
shares of stock, unless there is a pre-subscription agreement to the contrary, which apparently is
not present in the instant case. Consequently, if a certificate of increase has not yet been issued
by the SEC, the subscribers to the unauthorized issuance are not to be deemed as stockholders
possessed of such legal rights as the rights to vote and dividends.
- MSCI-NACUSIP Local Chap. v. Natl. Wages and Prod. Comm., 269 SCRA 173 (1997).
NWPC (National Wages and Productivity Commission) Guidelines No. 01, Series of 1992 as well
as the new NWPC Guidelines No. 01 Series of 1996, define Capital as referring to paid-up capital
at the end of the last full accounting period, in the case of corporations, or total invested capital at
the beginning of the period under review, in the case of partnerships and single proprietorships.
To have a clear understanding of what paid-up capital is, however, a referral to Sections 12 and
13 of BP Blg. 68 or the Corporation Code would be very helpful, viz: "Sec. 12. Minimum capital
stock required of stock corporations. — Stock corporations incorporated under this Code shall not
Corporation Law 2016: JVL & JSD
be required to have any minimum authorized capital stock except as otherwise specifically
provided for by special law, and subject to the provisions of the following section." "Sec. 13.
Amount of capital stock to be subscribed and paid for purposes of incorporation. — At least
twenty-five (25%) percent of the authorized capital stock as stated in the articles of incorporation
must be subscribed at the time of incorporation, and at least twenty-five (25%) percent of the total
subscription must be paid upon subscription, the balance to be payable on a date or dates fixed
in the contract of subscription without need of call, or in the absence of a fixed date or dates,
upon call for payment by the board of directors: Provided, however, That in no case shall the
paid-up capital be less than five thousand (P5,000.00) pesos. (n)" By express provision of Section
13, paid-up capital is that portion of the authorized capital stock which has been both subscribed
and paid. To illustrate, where the authorized capital stock of a corporation is worth P1 million and
the total subscription amounts to P250,000.00, at least 25% of this amount, namely, P62,500.00
must be paid up per Section 13. The latter, P62,500.00, is the paid-up capital or what should
more accurately be termed as "paid-up capital stock."
- National TeL Comm. v. CA, 311 SCRA 508, 514-515 (1999).
The term "capital" and other terms used to describe the capital structure of a
corporation are of universal acceptance, and their usages have long been established in
jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation.
The capital subscribed is the total amount of the capital that persons (subscribers or
shareholders) have agreed to take and pay for, which need not necessarily be, and can be more
than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive
of the premiums if any, in consideration of the original issuance of the shares. In the case of stock
dividends, it is the amount that the corporation transfers from its surplus profit account to its
capital account. It is the same amount that can loosely be termed as the "trust fund" of the
corporation.
"Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment
of the debts of the corporation, to which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed capital may be returned or released to the
stockholder (except in the redemption of redeemable shares) without violating this principle. Thus,
dividends must never impair the subscribed capital; subscription commitments cannot be
condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as
the consideration therefor.
Outstanding Capital Stock - Sec. 137
Section 137. Outstanding capital stock defined.
The term "outstanding capital stock", as used in this Code, means the total shares of
stock issued under binding subscription agreements to subscribers or stockholders,
whether or not fully or partially paid, except treasury shares.
- Tan vs. Sycip, ibid.
In stock corporations, the presence of a quorum is ascertained and counted on the
basis of the outstanding capital stock, as defined by the Code thus:
"SECTION 137. Outstanding capital stock defined. — The term 'outstanding capital
stock' as used in this Code, means the total shares of stock issued under binding subscription
85
agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury
shares."
B. Kinds of Shares of Stock— units into which the capital stock is divided - Sec. 6
- Hacienda Luisita, Inc. vs. Presidential Agrarian Reform Council, 653 SCRA 154 [2011]
1. Common Stocks
2. Preferred Stocks
(a) Preference as to Dividends
(i) Participating and Non-participating
(ii) Cumulative and Non-cumulative
(b) Preference as to Distribution of Assets at Liquidation
3. Par and No-Par (Sec. 6; Sec. 62; Sec. 65);
Section 65. Liability of directors for watered stocks.
Any director or officer of a corporation consenting to the issuance of stocks for a
consideration LESS than its par or issued value or for a consideration in any form other than
cash, valued in excess of its fair value, or who, having knowledge thereof, does NOT forthwith
express his objection in writing and file the same with the corporate secretary, shall be
solidarily, liable with the stockholder concerned to the corporation and its creditors for the
difference between the fair value received at the time of issuance of the stock and the par
or issued value of the same. (n)
- Delpher Trades Corp. v. IAC, 157 SCRA 349, 353-354 [1999])
"A no-par value share does not purport to represent any stated proportionate interest in
the capital stock measured by value, but only an aliquot part of the whole number of such shares
of the issuing corporation. The holder of no-par shares may see from the certificate itself that he
is only an aliquot sharer in the assets of the corporation. But this character of proportionate
interest is not hidden beneath a false appearance of a given sum in money, as in the case of par
value shares. The capital stock of a corporation issuing only no-par value shares is not set forth
by a stated amount of money, but instead is expressed to be divided into a stated number of
shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter what value they may have, to the extent of
100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested
in the financial condition of a corporation is focused upon the value of assets and the amount of
its debts.
4. Treasury Shares (Sec. 9; Sec. 137);
Section 9. Treasury shares.
Treasury shares are shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption, donation or
Corporation Law 2016: JVL & JSD
through some other lawful means. Such shares may again be disposed of for a reasonable price
fixed by the board of directors.
- Commissioner of Internal Revenue vs. Manning, 66 SCRA 14 [1970]; SEC Rules
Governing Redeemable and Treasury Shares [1982])
— Treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other means. They are therefore issued
shares, but being in the treasury they do not have the status of outstanding shares.
Consequently, although a treasury share, not having been retired by the corporation re-acquiring
it, may be re-issued or sold again, such share, as long as it is held by the corporation as a
treasury share, participates neither in dividends, because dividends cannot be declared by the
corporation to itself, nor in the meetings of the corporations as voting stock, for otherwise equal
distribution of voting powers among stockholders will be effectively lost and the directors will be
able to perpetuate their control of the corporation though it still represent a paid — for interest in
the property of the corporation.
Where the manifest intention of the parties to the trust agreement was, in sum and
substance, to treat the shares of a deceased stockholder as absolutely outstanding shares of said
stockholder's estate until they were fully paid. the declaration of said shares as treasury stock
dividend was a complete nullity and plainly violative of public policy.
5. Founders' Shares (Sec. 7)
Section 7. Founders' shares.
Founders' shares classified as such in the articles of incorporation may be given
certain rights and privileges NOT enjoyed by the owners of other stocks, provided that
where the exclusive right to vote and be voted for in the election of directors is granted, it must be
for a limited period NOT to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission. (n)
6. Special Kinds — Warrants; Options
7. Consideration for Shares of Stocks (Sec. 62; Sec.13; Secs. 67-71;)
Section 13. Amount of capital stock to be subscribed and paid for the purposes
of incorporation.
At least twenty-five percent (25%) of the authorized capital stock as stated in the
articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five
(25%) per cent of the total subscription must be paid upon subscription, the balance to be
payable on a date or dates fixed in the contract of subscription WITHOUT need of call, or in the
absence of a fixed date or dates, upon call for payment by the board of directors: Provided,
however, That in NO case shall the paid-up capital be less than five Thousand (P5,000.00)
pesos. (n)
- Velasco vs. Poizat, 37 Phil. 802 [1918];
A stock subscription is a contract between the corporation and the subscriber, and
courts will enforce it for or against either. No express promise to pay is necessary to make the
subscriber liable.
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 The corporation has two remedies against the subscriber to the corporate shares,
namely (1) to sell the stock for the account of the delinquent subscriber, and (2) to bring a legal
action against him for the amount due.
The provisions of section 38 to 48, inclusive, of the Corporation Law are applicable only
where the directors of a corporation intend to subject the stock of the delinquent subscriber to
sale in order to enforce payment of the subscription. They have no application in case a legal
action is brought to recover upon the stock subscription.
When insolvency supervenes upon a corporation and the court assumes jurisdiction
demand, and are at once recoverable in an action instituted by the assignee in insolvency.
A corporation has no legal capacity to release a subscriber to its capital stock from the
obligation to pay for his shares; and any agreement to this effect is invalid.
- Lingayen Gulf Elec. Power Co., Inc. vs. lrineo Baltazar, 93 Phil. 404 [1953])
If the corporation involved in insolvent, all unpaid stock subscriptions become payable
on demand and are immediately recoverable in an action instituted by the assignee. But when the
corporation is a solvent concern, the law requires that notice of any call for the payment of unpaid
subscription should be made not only personally but also by publication. (Act 1459, section 40 as
amended.)
In order to effect the release of a stockholder from his stock subscription, there must be
unanimous consent of the stockholders of the corporation. (18 C. J. S. 1874; 2 Thompson on
Corporations, pp. 186, 194.) From this rule, however, there are exceptions: "Where it is given
pursuant to a bona fide compromise, or to set off a debt due from the corporation, a release,
supported by consideration, will be effectual as against dissenting stockholders and subsequent
and existing creditors. A release which might originally have been held invalid may be sustained
after a considerable lapse of time."
D. Watered Stocks (Sec. 65;
Section 65. Liability of directors for watered stocks.
Any director or officer of a corporation consenting to the issuance of stocks for a consideration
LESS than its par or issued value or for a consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge thereof, does NOT forthwith express his
objection in writing and file the same with the corporate secretary, shall be solidarily, liable with
the stockholder concerned to the corporation and its creditors for the difference between
the fair value received at the time of issuance of the stock and the par or issued value of
the same.
Philippine Trust Co. vs. Rivera, 44 Phil. 469 [1923])
A corporation has no power to release an original subscriber to its capital stock from
the obligation of paying for his shares, without a valuable consideration for such release; and as
against creditors a reduction of the capital stock can take place only in the manner and under the
conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict
compliance with the statutory regulations is necessary
E. Trust Fund Doctrine — capital stock of a corporation, or the assets it an insolvent
corporation representing its capital, is a trust fund for the benefit of the company's creditors —
Fletcher, 7369; Sec. 122; -
Corporation Law 2016: JVL & JSD
Section 122. Corporate liquidation. –
Every corporation whose charter expires by its own limitation or is annulled by forfeiture
or otherwise, or whose corporate existence for other purposes is terminated in any other manner,
shall nevertheless be continued as a body corporate for three (3) years after the time when
it would have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of and convey its property and
to distribute its assets, but not for the purpose of continuing the business for which it was
established.
At any time during said three (3) years, the corporation is authorized and empowered
to convey all of its property to trustees for the benefit of stockholders, members, creditors, and
other persons in interest. From and after any such conveyance by the corporation of its property
in trust for the benefit of its stockholders, members, creditors and others in interest, ALL interest
which the corporation had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other persons in
interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, NO
corporation shall distribute any of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities.
-PLDT vs. NTC et aL, 539 SC RA 365 [2007]
Dividends, regardless of the form these are declared, that is, cash, property or stocks,
are valued at the amount of the declared dividend taken from the unrestricted retained earnings
of a corporation. Thus, the value of the declaration in the case of a stock dividend is the actual
value of the original issuance of said stocks. In G.R. No. 127937 we said that "in the case of stock
dividends, it is the amount that the corporation transfers from its surplus profit account to its
capital account" or "it is the amount that the corporation receives in consideration of the original
issuance of the shares." It is "the distribution of current or accumulated earnings to the
shareholders of a corporation pro rata based on the number of shares owned." Such distribution
in whatever form is valued at the declared amount or monetary equivalent.
Thus, it cannot be said that no consideration is involved in the issuance of stock
dividends. In fact, the declaration of stock dividends is akin to a forced purchase of stocks. By
declaring stock dividends, a corporation ploughs back a portion or its entire unrestricted retained
earnings either to its working capital or for capital asset acquisition or investments. It is simplistic
to say that the corporation did not receive any actual payment for these. When the dividend is
distributed, it ceases to be a property of the corporation as the entire or portion of its unrestricted
retained earnings is distributed pro rata to corporate shareholders.
When stock dividends are distributed, the amount declared ceases to belong to the
corporation but is distributed among the shareholders. Consequently, the unrestricted retained
earnings of the corporation are diminished by the amount of the declared dividend while the
stockholders' equity is increased. Furthermore, the actual payment is the cash value from the
unrestricted retained earnings that each shareholder foregoes for additional stocks/shares which
he would otherwise receive as required by the Corporation Code to be given to the stockholders
subject to the availability and conditioned on a certain level of retained earnings. Elsewise put,
where the unrestricted retained earnings of a corporation are more than 100% of the paid-in
capital stock, the corporate Board of Directors is mandated to declare dividends which the
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shareholders will receive in cash unless otherwise declared as property or stock dividends, which
in the latter case the stockholders are forced to forego cash in lieu of property or stocks.
In essence, therefore, the stockholders by receiving stock dividends are forced to
exchange the monetary value of their dividend for capital stock, and the monetary value they
forego is considered the actual payment for the original issuance of the stocks given as
dividends. Therefore, stock dividends acquired by shareholders for the monetary value they
forego are under the coverage of the SRF and the basis for the latter is such monetary value as
declared by the board of directors
-Ong Yong vs Tiu, supra.
The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even, for that
matter, on the earnest desire of the court a quo "to prevent further squabbles and future
litigations" unless the indispensable conditions and procedures for the protection of corporate
creditors are followed. Otherwise, the "corporate peace" laudably hoped for by the court will
remain nothing but a dream because this time, it will be the creditors' turn to engage in
"squabbles and litigations" should the court order an unlawful distribution in blatant disregard of
the Trust Fund Doctrine. In the instant case, the rescission of the Pre-Subscription Agreement will
effectively result in the unauthorized distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission
of a subscription agreement is not one of the instances when distribution of capital assets and
property of the corporation is allowed.
Garcia vs. Lim Chu Sing, 59 Phil. 562 [1934];
The shares of stock of a banking corporation do not constitute an indebtedness thereof
to the stockholder and, therefore, the latter is not a creditor of the former for such shares.
A stockholder's indebtedness to a banking corporation cannot be compensated with the
amount of his shares in the same institution, there being no relation of creditor and debtor with
regard to such shares.
-Boman Environmental Devt Corp. vs CA, 167 SC RA 540 [1988])
The requirement of unrestricted retained earnings to cover the shares is based on the
trust fund doctrine which means that the capital stock, property and other assets of a corporation
are regarded as equity in trust for the payment of corporate creditors. The reason is that creditors
of a corporation are preferred over the stockholders in the distribution of corporate assets. There
can be no distribution of assets among the stockholders without first paying corporate creditors.
Hence, any disposition of corporate funds to the prejudice of creditors is null and void. "Creditors
of a corporation have the right to assume that so long as there are outstanding debts and
liabilities, the board of directors will not use the assets of the corporation to purchase its own
stock . . ."
VIII. CORPORATE COMBINATIONS
A. Merger or Consolidation — Secs. 76, 77, 78, 79
Corporation Law 2016: JVL & JSD
Section 76. Plan or merger of consolidation. –
Two or more corporations may merge into a single corporation which shall be one of
the constituent corporations or may consolidate into a new single corporation which shall be
the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter
referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into
effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, with respect to the consolidated corporation in case of
consolidation, all the statements required to be set forth in the articles of incorporation for
corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are
deemed necessary or desirable. (n)
Section 77. Stockholder's or member's approval.
Upon approval by majority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation, the same shall be submitted
for approval by the stockholders or members of each of such corporations at separate corporate
meetings duly called for the purpose. Notice of such meetings shall be given to ALL stockholders
or members of the respective corporations, at least two (2) weeks prior to the date of the meeting,
either personally or by registered mail. Said notice shall state the purpose of the meeting and
shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or at least two-thirds (2/3) of the members in
the case of non-stock corporations shall be necessary for the approval of such plan. Any
dissenting stockholder in stock corporations may exercise his appraisal right in accordance with
the Code: Provided, That if after the approval by the stockholders of such plan, the board of
directors decides to abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such
amendment is approved by majority vote of the respective boards of directors or trustees of all
the constituent corporations and ratified by the affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each
of the constituent corporations. Such plan, together with any amendment, shall be considered as
the agreement of merger or consolidation.
Section 78. Articles of merger or consolidation. –
AFTER the approval by the stockholders or members as required by the preceding
section, articles of merger or articles of consolidation shall be executed by each of the constituent
corporations, to be signed by the president or vice-president and certified by the secretary
or assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of non-
stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and against
such plan, respectively. (n)
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 Section 79. Effectivity of merger or consolidation. –
The articles of merger or of consolidation, signed and certified as herein above
required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger or consolidation of banks or banking institutions,
building and loan associations, trust companies, insurance companies, public utilities, educational
institutions and other special corporations governed by special laws, the favorable
recommendation of the appropriate government agency shall first be obtained. If the Commission
is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with
the provisions of this Code and existing laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe
that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this
Code or existing laws, it shall set a hearing to give the corporations concerned the
opportunity to be heard. Written notice of the date, time and place of hearing shall be given to
each constituent corporation at least two (2) weeks before said hearing. The Commission shall
thereafter proceed as provided in this Code. (n)
1. Concepts —
Consolidation is the union of two or more existing corporations to Minn a new
corporation called the consolidated corporation.
Merger is a union whereby one or more existing corporations are absorbed by another
corporation which survives and continues the combined business. Parties to a merger or
consolidation are called constituent corporations. In consolidation all the constituents are
dissolved and absorbed by the new consolidated enterprise. In merger, all constituents, except
the surviving corporation, are dissolved. In both cases, however, there is NO liquidation of the
assets of the dissolved corporations, and the surviving or consolidated corporation acquires all
their properties, rights and franchises.
-Bank of Commerce vs. Radio Philippines Network Inc., et al., G.R. No. 195615, April
21, 2014
The Corporation Code requires the following steps for merger or consolidation:
(1)  The board of each corporation draws up a plan of merger or consolidation. Such
plan must include any amendment, if necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements required in the articles of incorporation
of a corporation.
(2)  Submission of plan to stockholders or members of each corporation for approval.
A meeting must be called and at least two (2) weeks' notice must be sent to all stockholders or
members, personally or by registered mail. A summary of the plan must be attached to the notice.
Vote of two-thirds of the members or of stockholders representing two-thirds of the outstanding
capital stock will be needed. Appraisal rights, when proper, must be respected.
(3)  Execution of the formal agreement, referred to as the articles of merger o[r]
consolidation, by the corporate officers of each constituent corporation. These take the place of
the articles of incorporation of the consolidated corporation, or amend the articles of incorporation
of the surviving corporation. AHcaDC
(4)  Submission of said articles of merger or consolidation to the SEC for approval.
(5)  If necessary, the SEC shall set a hearing, notifying all corporations concerned at
least two weeks before.
Corporation Law 2016: JVL & JSD
(6)  Issuance of certificate of merger or consolidation.
The dissenting opinion of Justice Mendoza finds, however, that a "de facto" merger
existed between TRB and Bancommerce considering that (1) the P & A Agreement between them
involved substantially all the assets and liabilities of TRB; (2) in an Ex Parte Petition for Issuance
of Writ of Possession filed in a case, Bancommerce qualified TRB, the petitioner, with the words
"now known as Bancommerce;" and (3) the BSP issued a Circular Letter (series of 2002) advising
all banks and non-bank financial intermediaries that the banking activities and transaction of TRB
and Bancommerce were consolidated and that the latter continued the operations of the former.
The idea of a de facto merger came about because, prior to the present Corporation
Code, no law authorized the merger or consolidation of Philippine Corporations, except insurance
companies, railway corporations, and public utilities. 16 And, except in the case of insurance
corporations, no procedure existed for bringing about a merger. 17 Still, the Supreme Court held
in Reyes v. Blouse, 18 that authority to merge or consolidate can be derived from Section 28 1/2
(now Section 40) of the former Corporation Law which provides, among others, that a corporation
may "sell, exchange, lease or otherwise dispose of all or substantially all of its property and
assets" if the board of directors is so authorized by the affirmative vote of the stockholders
holding at least two-thirds of the voting power. The words "or otherwise dispose of," according to
the Supreme Court, is very broad and in a sense, covers a merger or consolidation.
In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that under the
Corporation Code, "a de facto merger can be pursued by one corporation acquiring all or
substantially all of the properties of another corporation in exchange of shares of stock of the
acquiring corporation. The acquiring corporation would end up with the business enterprise of the
target corporation; whereas, the target corporation would end up with basically its only remaining
assets being the shares of stock of the acquiring corporation." (Emphasis supplied)
No de facto merger took place in the present case simply because the TRB owners did
not get in exchange for the bank's assets and liabilities an equivalent value in Bancommerce
shares of stock. Bancommerce and TRB agreed with BSP approval to exclude from the sale the
TRB's contingent judicial liabilities, including those owing to RPN, et al.
-Commission of Internal Revenue vs. Bank of Commerce, G.R. No. 180529, November
25, 2013
Merger is defined under Section 40 (C)(6)(b) of the Tax Code as follows:
"b) The term "merger" or "consolidation", when used in this Section, shall be
understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one
corporation of all or substantially all the properties of another corporation solely for stock:
Provided, [t]hat for a transaction to be regarded as a merger or consolidation within the purview of
this Section, it must be undertaken for a bona fide business purpose and not solely for the
purpose of escaping the burden of taxation: . . . ."
-PNB vs. Andrada Electric Eng'g Co., 381 SCRA 245 [2002];
Campos, Corporation Code, p.441).
A consolidation is the union of two or more existing entities to form a new entity called
the consolidated corporation. A merger, on the other hand, is a union whereby one or more
existing corporations are absorbed by another corporation that survives and continues the
combined business. The merger, however, does not become effective upon the mere agreement
of the constituent corporations. Since a merger or consolidation involves fundamental changes in
the corporation, as well as in the rights of stockholders and creditors, there must be an express
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provision of law authorizing them. For a valid merger or consolidation, the approval by the
Securities and Exchange Commission (SEC) of the articles of merger or consolidation is required.
These articles must likewise be duly approved by a majority of the respective stockholders of the
constituent corporations. In the case at bar, we hold that there is no merger or consolidation with
respect to PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code
was not followed.
-McLeod vs. NLRC, 512 SCRA 222 [2007]
As a rule, a corporation that purchases the assets of another will not be liable for the
debts of the selling corporation, provided the former acted in good faith and paid adequate
consideration for such assets, except when any of the following circumstances is present: (1)
where the purchaser expressly or impliedly agrees to assume the 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 selling corporation fraudulently
enters into the transaction to escape liability for those debts.
Consolidation is the union of two or more existing corporations to form a new
corporation called the consolidated corporation. It is a combination by agreement between two or
more corporations by which their rights, franchises, and property are united and become those of
a single, new corporation, composed generally, although not necessarily, of the stockholders of
the original corporations.
Merger, on the other hand, is a union whereby one corporation absorbs one or more
existing corporations, and the absorbing corporation survives and continues the combined
business.
The parties to a merger or consolidation are called constituent corporations. In
consolidation, all the constituents are dissolved and absorbed by the new consolidated
enterprise. In merger, all constituents, except the surviving corporation, are dissolved. In both
cases, however, there is no liquidation of the assets of the dissolved corporations, and the
surviving or consolidated corporation acquires all their properties, rights and franchises and their
stockholders usually become its stockholders.
The surviving or consolidated corporation assumes automatically the liabilities of the
dissolved corporations, regardless of whether the creditors have consented or not to such merger
or consolidation. 27
In the present case, there is no showing that the subject dation in payment involved
any corporate merger or consolidation. Neither is there any showing of those indicative factors
that SRTI is a mere instrumentality of PMI.
2. Procedure
(a) Plan of Merger or Consolidation (Sec. 76);
(b) Stockholders' or Members' Approval (Sec. 77);
(c) Articles of Merger or Consolidation (Sec. 78);
(d) Approval by SEC (Sec. 79) –
-Mindanao Savings and Loan Asso. Inc. vs. Willkom, et al., G.R. No. 178618, October
11, 2010
The steps necessary to accomplish a merger or consolidation, as provided for in
Sections 76, 24 77, 25 78, 26 and 79 27 of the Corporation Code, are:
Corporation Law 2016: JVL & JSD
(1) The board of each corporation draws up a plan of merger or consolidation. Such
plan must include any amendment, if necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements required in the articles of incorporation
of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A
meeting must be called and at least two (2) weeks' notice must be sent to all stockholders or
members, personally or by registered mail. A summary of the plan must be attached to the notice.
Vote of two-thirds of the members or of stockholders representing two-thirds of the outstanding
capital stock will be needed. Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r]
consolidation, by the corporate officers of each constituent corporation. These take the place of
the articles of incorporation of the consolidated corporation, or amend the articles of incorporation
of the surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at
least two weeks before. EACTSH
(6) Issuance of certificate of merger or consolidation. 28
Clearly, the merger shall only be effective upon the issuance of a certificate of merger
by the SEC, subject to its prior determination that the merger is not inconsistent with the
Corporation Code or existing laws. Where a party to the merger is a special corporation governed
by its own charter, the Code particularly mandates that a favorable recommendation of the
appropriate government agency should first be obtained.
-Poliand Industrial Ltd. vs. NDC, 467 SCRA 500 [2005]
Ordinarily, in the merger of two or more existing corporations, one of the combining
corporations survives and continues the combined business, while the rest are dissolved and all
their rights, properties and liabilities are acquired by the surviving corporation. The merger,
however, does not become effective upon the mere agreement of the constituent corporations. As
specifically provided under Section 79 of said Code, the merger shall only be effective upon the
issuance of a certificate of merger by the Securities and Exchange Commission (SEC), subject to
its prior determination that the merger is not inconsistent with the Code or existing laws. Where a
party to the merger is a special corporation governed by its own charter, the Code particularly
mandates that a favorable recommendation of the appropriate government agency should first be
obtained. The issuance of the certificate of merger is crucial because not only does it bear out
SEC's approval but also marks the moment whereupon the consequences of a merger take
place. By operation of law, upon the effectivity of the merger, the absorbed corporation ceases to
exist but its rights, and properties as well as liabilities shall be taken and deemed transferred to
and vested in the surviving corporation.
3. Effects of Merger or Consolidation (Sec. 80;
Section 80. Effects of merger or consolidation. –
The merger or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation which, in case of
merger, shall be the surviving corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of
the surviving or the consolidated corporation;
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 3. The surviving or the consolidated corporation shall possess ALL the rights,
privileges, immunities and powers and shall be subject to all the duties and liabilities of a
corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess
ALL the rights, privileges, immunities and franchises of each of the constituent corporations; and
all property, real or personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be deemed transferred to and vested
in such surviving or consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for ALL the
liabilities and obligations of each of the constituent corporations in the same manner as if such
surviving or consolidated corporation had itself incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by or against any of such constituent corporations
may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors
or liens upon the property of any of such constituent corporations shall NOT be impaired by such
merger or consolidation. (n)
- Bank of Philippine Islands vs. Lee, D.R. No. 190144, August 1, 2012
Corollarily, it should be emphasized that a merger of two corporations produces, among others,
the following effects:
1. The constituent corporations shall become a single corporation which, in case of
merger, shall be the surviving corporation designated in the plan of merger; and in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporation shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a corporation
organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess
all the rights, privileges, immunities and franchises of each of the constituent corporations; and all
property, real or personal, and all receivables due on whatever account, including subscriptions to
shares and other choses in action, and all and every other interest of, or belonging to, or due to
each constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner as if such
surviving or consolidated corporation had itself incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by or against any of such constituent corporations
may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors
or liens upon the property of any of such constituent corporations shall not be impaired by such
merger or consolidation.
- Bank of the Philippine Islands vs. BPI Employees Union-Davao Chapter, 637 SCRA 590 [2010]
Upon merger, BPI, as the surviving entity, absorbs FEBTC and continues the combined business
of the two banks. BPI assumes the legal personality of FEBTC, and automatically acquires
FEBTC's rights, privileges and powers, as well as its liabilities and obligations. Section 80 of
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Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines"
enumerates the effects of merger, to wit:
1. The constituent corporations shall become a single corporation which, in case of
merger, shall be the surviving corporation designated in the plan of merger; ...
2. The separate existence of the constituent corporations shall cease, except that of the
surviving ...corporation;
3. The surviving ...corporation shall possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under this
Code; DAESTI
4. The surviving ...corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations;and all property, real
or personal, and all receivables due on whatever account, including subscriptions to shares and
other choses in action, and all and every other interest of, or belonging to, or due to each
constituent corporation, shall be deemed transferred to and vested in such surviving ...corporation
without further act or deed; and
5. The surviving ...corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving
...corporation had itself incurred such liabilities or obligations; and any pending claim, action or
proceeding brought by or against any of such constituent corporations may be prosecuted by or
against the surviving or consolidated corporation. The rights of creditors or liens upon the
property of any of such constituent corporations shall not be impaired by such merger. (Emphasis
supplied)
Among the obligations and liabilities of FEBTC is to continue the employment of
FEBTC employees. These employees have already acquired certain employment status, tenure,
salary and benefits. They are regular employees of FEBTC. Since after the merger, BPI has
continued the business of FEBTC, FEBTC's obligation to these employees is assumed by BPI,
and BPI becomes duty-bound to continue the employment of these FEBTC employees.
Under Article 279 of the Labor Code,regular employees acquire security of tenure, and
hence, may not be terminated by the employer except upon legal grounds. These grounds are
the "just causes" enumerated under Article 282 of the Code, which include serious misconduct or
willful disobedience by the employee, gross habitual neglect of duties, fraud or willful breach of
employer's trust, and commission of a crime; or "authorized causes" under Article 283, which
include installation of labor saving devices, redundancy, retrenchment to prevent losses, and
closing or cessation of business operations. Without any of these legal grounds, the employer
cannot validly terminate the employment of regular employees; otherwise, the employees' right to
security of tenure would be violated.
The merger of two corporations does not authorize the surviving corporation to
terminate the employees of the absorbed corporation in the absence of just or authorized causes
as provided in Articles 282 and 283 of the Labor Code.Merger of two corporations is not one of
the just or authorized causes for termination of employment. Not even a union shop agreement is
just or authorized cause to terminate a permanent employee. A union shop clause is only a
ground to terminate a probationary employee who refuses to join the union as a condition for
continued employment. Once an employee becomes permanent, he is protected by the security
of tenure clause in the Constitution, and he can be terminated only for just or authorized causes
as provided by law.
The right to security of tenure of regular employees is enshrined in the Constitution.
This right cannot be eroded, let alone be forfeited except upon a clear and convincing showing of
a just and lawful cause. 36 In this case, there is no showing that legal ground exists to warrant a
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termination of the FEBTC employees. Therefore, BPI is obligated to continue FEBTC employees'
regular employment in deference to their constitutional right to security of tenure. SDTaHc
Meanwhile, the FEBTC employees had no choice but to accept the absorption by way
of merger. A merger is a legitimate management prerogative which cannot be opposed or
rejected by the employees of the merging entities. Hence, the absorption by BPI of the FEBTC
employees was not within the FEBTC employees' control, and the latter had no choice but to be
absorbed by BPI, unless they opted to give up their means of livelihood
-Associated Bank v. Court of Appeals, 291 SCRA 511 [1998];
The fact that the promissory note was executed after the effectivity date of the merger does not
militate against petitioner. The agreement itself clearly provides that all contracts — irrespective
of the date of execution — entered into in the name of CBTC shall be understood as pertaining to
the surviving bank, herein petitioner. Since, in contrast to the earlier aforequoted provision, the
latter clause no longer specifically refers only to contracts existing at the time of the merger, no
distinction clause must have been deliberately included in the agreement in order to protect the
interests of the combining banks; specifically, to avoid giving the merger agreement a farcical
interpretation aimed at evading fulfillment of a due obligation. Thus, although the subject
promissory note names CBTC as the payee, the reference to CBTC in the note shall be
construed, under the very provisions of the merger agreement, as a reference to petitioner bank,
as if such reference [was a] direct reference to the latter for all intents and purposes. No other
construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity,
the provision must be given its literal meaning and applied without a convoluted interpretation.
Verba legis non est recedendum. In light of the foregoing, the Court holds that petitioner has a
valid cause of action against private respondent. Clearly, the failure of private respondent to
honor his obligation under the promissory note constitutes a violation of petitioners right to collect
the proceeds of the loan it extended to the former.
-First General Marketing Corp. v. NLRC, 223 SC RA 337 [1993]).
Merger agreement compelled the respondents, FGMC and Uy, to respect the permanent status of
the complainants. They could not be dismissed without cause. The seasonal demand of
respondents for workers was not a lawful cause to dismiss the complainants who have always
been considered permanent, rather than seasonal, workers at Paramount. The respondents were
directed to reinstate then to their former positions with full back wages. Jose Uy signed the
agreement as President and General Manager of both Paramount Gloves Phils. Inc. and FGMC.
Therefore, he is estopped from disclaiming any liability under it. The probationary employment
contracts which the private respondents were made to sign on May 23, 1988, a week after the
execution of the merger agreement on March 16, 1988, violated the terms of the merger
agreement and the employees' right to security of tenure.
B. Sale of All or Substantially All Corporate Assets. (Sec. 40)
Section 40. Sale or other disposition of assets.
Subject to the provisions of existing laws on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of ALL or SUBSTANTIALLY ALL of its property and
assets, including its goodwill, upon such terms and conditions and for such consideration, which
may be money, stocks, bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient, when authorized by the
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vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or
in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a
stockholder's or member's meeting duly called for the purpose. Written notice of the proposed
action and of the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the conditions provided in this
Code.
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of
directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange,
mortgage, pledge or other disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval by the stockholders or
members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other disposition of
such property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are NO members with voting rights, the vote of
at least a majority of the trustees in office will be sufficient authorization for the corporation to
enter into any transaction authorized by this section.
IX. DISSOLUTION
A. Voluntary Dissolution (Sec. 117)
Section 117. Methods of dissolution. –
A corporation formed or organized under the provisions of this Code may be dissolved voluntarily
or involuntarily
B. Involuntary Dissolution (Sec. 121; Rule 66, Rules of Court)
Section 121. Involuntary dissolution.
A corporation may be dissolved by the Securities and Exchange Commission upon
filing of a verified complaint and after proper notice and hearing on the grounds provided by
existing laws, rules and regulations.
1. Quo Warranto
2. Expiration of Term
3. Shortening of Corporate Term (Sec. 120)
Section 120. Dissolution by shortening corporate term. –
A voluntary dissolution may be effected by amending the articles of incorporation
to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended
articles of incorporation shall be submitted to the Securities and Exchange Commission in
accordance with this Code. Upon approval of the amended articles of incorporation of the
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expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved
without any further proceedings, subject to the provisions of this Code on liquidation. (n)
4. Non-user of Corporate Charter and Continuous Inoperation of a Corporation (Sec.
22)
Section 22. Effects on non-use of corporate charter and continuous inoperation
of a corporation. –
If a corporation does NOT formally organize and commence the transaction of its
business or the construction of its works within two (2) years from the date of its incorporation, its
corporate powers cease and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall be a ground for the
suspension or revocation of its corporate franchise or certificate of incorporation. (19a) This
provision shall NOT apply if the failure to organize, commence the transaction of its businesses
or the construction of its works, or to continuously operate is due to causes beyond the control of
the corporation as may be determined by the Securities and Exchange Commission.
C. Legal Effects of Dissolution
-Alabang Development Corporation vs. Alabang Hills Village Association and Rafael Tinio, G.R.
No. 187456, June 02, 2014
It is to be noted that the time during which the corporation, through its own officers,
may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three
years from the time the period of dissolution commences; but there is no time limit within which
the trustees must complete a liquidation placed in their hands. It is provided only (Corp. Law, Sec.
78 [now Sec. 122]) that the conveyance to the trustees must be made within the three-year
period. It may be found impossible to complete the work of liquidation within the three-year period
or to reduce disputed claims to judgment. The authorities are to the effect that suits by or against
a corporation abate when it ceased to be an entity capable of suing or being sued (7 R.C.L.,
Corps., par. 750); but trustees to whom the corporate assets have been conveyed pursuant to the
authority of Sec. 78 [now Sec. 122] may sue and be sued as such in all matters connected with
the liquidation. .
In the absence of trustees, this Court ruled, thus:
. . . Still in the absence of a board of directors or trustees, those having any pecuniary interest in
the assets, including not only the shareholders but likewise the creditors of the corporation, acting
for and in its behalf; might make proper representations with the Securities and Exchange
Commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate concerns.
-Metropolitan Bank & Trust Co., Inc. vs. The Board of Trustees of Riverside Mills Corp. Provident
and Retirement Fund, et al., 630 SCRA 350 [2010]
Under Section 122 of the Corporation Code, a dissolved corporation shall nevertheless continue
as a body corporate for three (3) years for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it was
established. Within those three (3) years, the corporation may appoint a trustee or receiver who
shall carry out the said purposes beyond the three (3)-year winding-up period. Thus, a trustee of
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a dissolved corporation may commence a suit which can proceed to final judgment even beyond
the three (3)-year period of liquidation.
In the same manner, during and beyond the three (3)-year winding-up period of RMC,
the Board of Trustees of RMCPRF may do no more than settle and close the affairs of the Fund.
The Board retains its authority to act on behalf of its members, albeit, in a limited capacity. It may
commence suits on behalf of its members but not continue managing the Fund for purposes of
maximizing profits. Here, the Board's act of issuing the Resolution authorizing petitioner to
release the Fund to its beneficiaries is still part of the liquidation process, that is, satisfaction of
the liabilities of the Plan, and does not amount to doing business. Hence, it was properly within
the Board's power to promulgate.
-Paramount Insurance Corp. vs. A.C. Ordonez Corp., 561 SC RA 327 [2008]
There is likewise no merit in petitioner's claim that respondent corporation lacks legal personality
to file an appeal. Although the cancellation of a corporation's certificate of registration puts an end
to its juridical personality, Sec. 122 of the Corporation Code, however provides that a corporation
whose corporate existence is terminated in any manner continues to be a body corporate for
three years after its dissolution for purposes of prosecuting and defending suits by and against it
and to enable it to settle and close its affairs. 11 Moreover, the rights of a corporation, which is
dissolved pending litigation, are accorded protection by law pursuant to Sec. 145 of the
Corporation Code, to wit:
Section 145. Amendment or repeal. No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by
any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or
impaired either by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof.
Dissolution or even the expiration of the three-year liquidation period should not be a
bar to a corporation's enforcement of its rights as a corporation.
-Pepsi-Cola Products Phils., Inc. vs. CA, 446 SC RA 571
The termination of the life of a corporate entity does not by itself cause the extinction or
diminution of the rights and liabilities of such entity. 27 If the three-year extended life has expired
without a trustee or receiver having been expressly designated by the corporation, within that
period, the board of directors (or trustees) itself, may be permitted to so continue as "trustees" by
legal implication to complete the corporate liquidation.
-Knecht vs. United Cigarette Corp., 384 SCRA 45 [2002]
The dissolution of UCC itself, or the expiration of its three-year liquidation period,
should not be a bar to the enforcement of its rights as a corporation. One of these rights, to be
sure, includes the UCC's right to seek from the court the execution of a valid and final judgment in
Civil Case No. 9165 — through its trustee/liquidator Encarnacion Gonzales Wong — for the
benefit of its stockholders, creditors and any other person who may have legal claims against it.
To hold otherwise would be to allow petitioners to unjustly enrich themselves at the expense of
UCC. This, in effect, renders nugatory all the efforts and expenses of UCC in its quest to secure
justice, not to mention the undue delay in disposing of this case prejudicial to the administration of
justice.
-Clement vs. Court of Appeals, 242 SCRA 717, 723 [1995]
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The corporation continues to be a body corporate for three (3) years after its dissolution for
purposes of prosecuting and defending suits by and against it and for enabling it to settle and
close its affairs, culminating in the disposition and distribution of its remaining assets. It may,
during the three-year term, appoint a trustee or a receiver who may act beyond that period. The
termination of the lite of a juridical entity does NOT by itsell cause the extinction or diminution of
the rights and liabilities of such entity nor those of its owners and creditor. It the three-year
extended lite has expired without a trustee or receiver having been expressly designated by the
corporation within that period, the board of directors (or trustee) itselt, tollowing the rationale of
the Supreme Courts decision in Gelano v. Court of Appeals (103 SCRA 90) may be permitted to
so continue as °trustees" by legal implication to complete the corporate liquidation . Still in the
absence of a board of directors or trustees, those having any pecuniary interest in the assets,
including NOT only the shareholders but likewise the creditors of the corporation, acting for and in
its behalf, might make proper representations with the Securities and Exchange Commission,
which has primary and sufficient broad jurisdiction in matters of this nature, for working out a final
settlement of the corporate concerns.
Reburiano vs. Court of Appeals, 301 SCRA 342 [1999]
In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later
case of Clemente vs. Court of Appeals [242 SCRA 717 (1995)], we held that the board of
directors may be permitted to complete the corporate liquidation by continuing as "trustees" by
legal implication. Under Section 145 ot the Corporation Code, NO right ot remedy in favor or
against any corporation . . . shall be removed or impaired either by the subsequent dissolution of
said corporation or by any subsequent amendment or repeal of this Code or of any part thereof."
This provision safeguards the rights ot a corporation which is dissolved pending litigation.
X. CLOSE CORPORATION
A. Definition (Sec. 96;
Sec. 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall
be held of record by not more than a specified number of persons, not exceeding twenty
(20);
(2) all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and
(3) The corporation shall not list in any stock exchange or make any public
offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall
NOT be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation within the
meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest in accordance with the provisions of this
Code.
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The provisions of this Title shall primarily govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply suppletorily except insofar as this Title
otherwise provides.
-Manuel R. Dulay Enterprises v. CA, 225 SCRA 678 [1993];
Petitioner corporation is classified as a close corporation and consequently a board
resolution authorizing the sale or mortgage of the subject property is not necessary to bind the
corporation for the action of its president. At any rate, a corporate action taken at a board meeting
without proper call or notice in a close corporation is deemed ratified by the absent director unless
the latter promptly files his written objection with the secretary of the corporation after having
knowledge of the meeting which, in this case, petitioner Virgilio Dulay failed to do. Petitioners'
claim that the sale of the subject property by its president, Manuel Dulay, to private respondents
spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed without the
knowledge and consent of the other members of the board of directors cannot be sustained. The
sale of the subject property to private respondents by Manuel Dulay is valid and binding.
-San Juan Structural and Steel Fabricators, Inc. v. CA, 296 SCRA 631, 645 [1998]).
he articles of incorporation of Motorich Sales Corporation does not contain any
provision stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of
shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any
stock exchange or making a public offering of such stocks is prohibited. From its articles, it is
clear that Respondent Motorich is not a close corporation. Motorich does not become one either,
just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital
stock. The "[m]ere 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 personalities." So, too, a narrow distribution of ownership does not, by itself, make a
close corporation.
B. Articles of Incorporation Requirements (Sec. 97)
Section 97. Articles of incorporation.
The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the
same and restrictions on their transfers as may be stated therein, subject to the provisions of the
following section;
2. For a classification of directors into one or more classes, each of whom may be
voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors
than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the
corporation shall be managed by the stockholders of the corporation rather than by a board of
directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation
shall be deemed to be directors for the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
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The articles of incorporation may likewise provide that all officers or employees or that specified
officers or employees shall be elected or appointed by the stockholders, instead of by the board
of directors
1. Pre-Emptive Rights (Sec. 102)
Section 102. Pre-emptive right in close corporations.
The pre-emptive right of stockholders in close corporations shall extend to all stock to
be issued, including reissuance of treasury shares, whether for money, property or personal
services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.
2. Amendment (Sec. 103)
Section 103. Amendment of articles of incorporation. –
Any amendment to the articles of incorporation which seeks to delete or remove any
provision required by this Title to be contained in the articles of incorporation or to reduce a
quorum or voting requirement stated in said articles of incorporation shall NOT be valid or
effective unless approved by the affirmative vote of at least two-thirds (2/3) of the
outstanding capital stock, whether with or without voting rights, or of such greater
proportion of shares as may be specifically provided in the articles of incorporation for
amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the
purpose.
C. Restriction on Transfer of Shares (Secs. 98 and 99)
Section 98. Validity of restrictions on transfer of shares. –
Restrictions on the right to transfer shares must appear in the articles of incorporation
and in the by-laws as well as in the certificate of stock; otherwise, the same shall NOT be binding
on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting
the existing stockholders or the corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration
of said period, the existing stockholders or the corporation fails to exercise the option to
purchase, the transferring stockholder may sell his shares to any third person.
Section 99. Effects of issuance or transfer of stock in breach of qualifying
conditions. –
1. If stock of a close corporation is issued or transferred to any person who is not
entitled under any provision of the articles of incorporation to be a holder of record of its stock,
and if the certificate for such stock conspicuously shows the qualifications of the persons entitled
to be holders of record thereof, such person is conclusively presumed to have notice of the fact of
his ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the number of persons,
not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the
certificate for such stock conspicuously states such number, and if the issuance or transfer of
stock to any person would cause the stock to be held by more than such number of persons, the
person to whom such stock is issued or transferred is conclusively presumed to have notice of
this fact.
3. If a stock certificate of any close corporation conspicuously shows a restriction on
transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have
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notice of the fact that he has acquired stock in violation of the restriction, if such acquisition
violates the restriction.
4. Whenever any person to whom stock of a close corporation has been issued or
transferred has, or is conclusively presumed under this section to have, notice either
(a) that he is a person not eligible to be a holder of stock of the corporation, or
(b) that transfer of stock to him would cause the stock of the corporation to be held by
more than the number of persons permitted by its articles of incorporation to hold stock
of the corporation, or
(c) that the transfer of stock is in violation of a restriction on transfer of stock, the
corporation may, at its option, refuse to register the transfer of stock in the name of the
transferee.
5. The provisions of subsection (4) shall NOT be applicable if the transfer of stock,
though contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of
the close corporation, or if the close corporation has amended its articles of incorporation in
accordance with this Title.
6. The term "transfer", as used in this section, is NOT limited to a transfer for value.
7. The provisions of this section shall NOT impair any right which the transferee may
have to rescind the transfer or to recover under any applicable warranty, express or implied.
D. Agreements by Stockholder (Secs. 100,101
Section 100. Agreements by stockholders. –
1. Agreements by and among stockholders executed before the formation and
organization of a close corporation, signed by all stockholders, shall survive the incorporation of
such corporation and shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such agreements are not inconsistent with
the articles of incorporation, irrespective of where the provisions of such agreements are
contained, except those required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by the
parties thereto, may provide that in exercising any voting rights, the shares held by them shall be
voted as therein provided, or as they may agree, or as determined in accordance with a
procedure agreed upon by them.
3. NO provision in any written agreement signed by the stockholders, relating to any
phase of the corporate affairs, shall be invalidated as between the parties on the ground that its
effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close corporation
shall NOT be invalidated on the ground that it so relates to the conduct of the business and
affairs of the corporation as to restrict or interfere with the discretion or powers of the board of
directors: Provided, That such agreement shall impose on the stockholders who are parties
thereto the liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be held to
strict fiduciary duties to each other and among themselves. Said stockholders shall be
personally liable for corporate torts unless the corporation has obtained reasonably adequate
liability insurance.
Section 101. When board meeting is unnecessary or improperly held. –
Unless the by-laws provide otherwise, any action by the directors of a close corporation
without a meeting shall nevertheless be deemed valid if:
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 1. Before or after such action is taken, written consent thereto is signed by ALL the
directors; or
2. ALL the stockholders have actual or implied knowledge of the action and make NO
prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied
acquiescence of ALL the stockholders; or
4. ALL the directors have express or implied knowledge of the action in question and
none of them makes prompt objection thereto in writing. If a director's meeting is held without
proper call or notice, an action taken therein within the corporate powers is deemed ratified by a
director who failed to attend, unless he promptly files his written objection with the secretary of
the corporation after having knowledge thereof.
E. Deadlocks (Sec. 104)
Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of
incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or
stockholders are so divided respecting the management of the corporation's business and affairs
that the votes required for any corporate action CANNOT be obtained, with the consequence that
the business and affairs of the corporation can no longer be conducted to the advantage of the
stockholders generally, the Securities and Exchange Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the
Commission shall have authority to make such order as it deems appropriate, including an order:
(1) cancelling or altering any provision contained in the articles of incorporation, by-
laws, or any stockholder's agreement;
(2) cancelling, altering or enjoining any resolution or act of the corporation or its board
of directors, stockholders, or officers;
(3) directing or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action;
(4) requiring the purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its books,
or by the other stockholders;
(5) appointing a provisional director;
(6) dissolving the corporation; or
(7) granting such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a stockholder nor a
creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further
qualifications, if any, may be determined by the Commission. A provisional director is NOT a
receiver of the corporation and does NOT have the title and powers of a custodian or receiver. A
provisional director shall have ALL the rights and powers of a duly elected director of the
corporation, including the right to notice of and to vote at meetings of directors, until such time as
he shall be removed by order of the Commission or by all the stockholders. His compensation
shall be determined by agreement between him and the corporation subject to approval of the
Commission, which may fix his compensation in the absence of agreement or in the event of
disagreement between the provisional director and the corporation
. denomination, for the healthful recreation and entertainment of its stockholders and members;
F. Withdrawal and Dissolution
Xl. NON-STOCK CORPORATIONS AND FOUNDATION
Corporation Law 2016: JVL & JSD
A. Theory on Non-Stock Corporation (Secs. 14(2), 43, 87, 88 and 94(5)
Section 43. Power to declare dividends.
The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs
and expenses, while stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further, That NO stock dividend shall be issued
WITHOUT the approval of stockholders representing NOT less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)
Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is one
where no part of its income is distributable as dividends to its members, trustees, or officers,
subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for which the corporation was organized,
subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of this Title. (n)
Sec. 88. Purposes. - Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof, subject to the special provisions of this Title governing particular classes of
non-stock corporations. (n)
Section 94. Rules of distribution.
In case dissolution of a non-stock corporation in accordance with the provisions of this
Code, its assets shall be applied and distributed as follows
5. In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of distribution
adopted pursuant to this Chapter. (n)
-Coll. of Internal Revenue v. Club Filipino, Inc. de Cebu, 5 SCRA 321 [1962])
The plain and ordinary meaning of a business is restricted to activities or affairs where profit is the
purpose or livelihood is the motive, and the term business when used without qualification, should
be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood.
3. ID.; CLUB FILIPINO INC. DE CEBU; NOT ENGAGED IN BAR AND RESTAURANT. — The
Club Filipino Inc. de Cebu was organized to develop and cultivate sports of all class and
that upon its dissolution, its remaining assets after paying debts shall be donated to a charitable
Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees
and dues; that the Club's bar and restaurant catered only to its members and their guests; that
there was in fact no cash dividend distribution to its stockholders and that whatever was derived
on retail from its bar and restaurant was used to defray its overall overhead expenses and to
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improve its golf course (cost-plus-expenses-basis), it stands to reason that the Club is not
engaged in the business of an operator of bar and restaurant.
- Tan vs. Sycip, supra.
In nonstock corporations, the voting rights attach to membership. 39 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. 40 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.
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.
B. What is a Foundation? (Secs. 30 and 34 (H), NIRC of 1997, Sec. 24, Revenue Regulations
No. 2; BIR-NEDA Regulations no. 1-81, as amended)
C. Termination ot Membership — Sec. 91
Section 91. Termination of membership. –
Membership shall be terminated in the manner and for the causes provided in the
articles of incorporation or the by-laws. Termination of membership shall have the effect of
extinguishing ALL rights of a member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws. (n)
- Calatagan Golf Club, Inc vs. Sixto Clemente Jr., G.R. No. 165443, April 16, 2009
It is plain that Calatagan had endeavored to install a clear and comprehensive
procedure to govern the payment of monthly dues, the declaration of a member as delinquent,
and the constitution of a lien on the shares and its eventual public sale to answer for the
member's debts. Under Section 91 of the Corporation Code, membership in a non-stock
corporation "shall be terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws". The By-law provisions are elaborate in explaining the manner and
the causes for the termination of membership in Calatagan, through the execution on the lien of
the share. The Court is satisfied that the By-Laws, as written, affords due protection to the
member by assuring that the member should be notified by the Secretary of the looming
execution sale that would terminate membership in the club. In addition, the By-Laws guarantees
that after the execution sale, the proceeds of the sale would be returned to the former member
after deducting the outstanding obligations. If followed to the letter, the termination of membership
under this procedure outlined in the By-Laws would accord with substantial justice.
- Valley Golf & Country Club, Inc vs. Rosa 0. Vda de Caram, G.R. No. 158805, April 16, 2009
Corporation Law 2016: JVL & JSD
However, there is a specific provision under the Title XI, on Non-Stock Corporations of the
Corporation Code dealing with termination of membership. Section 91 of the Corporation Code
provides:
SEC. 91. Termination of membership. — Membership shall be terminated in the
manner and for the causes provided in the articles of incorporation or the by-laws. Termination of
membership shall have the effect of extinguishing all rights of a member in the corporation or in
its property, unless otherwise provided in the articles of incorporation or the by-laws.
Clearly, the right of a non-stock corporation such as Valley Golf to expel a member
through the forfeiture of the Golf Share may be established in the by-laws alone, as is the
situation in this case. Thus, both the SEC and the appellate court are wrong in holding that the
establishment of a lien and the loss of the Golf Share consequent to the enforcement of the lien
should have been provided for in the articles of incorporation.
Former SEC Chairperson, Rosario Lopez, in her commentaries on the Corporation
Code, explains the import of Section 91 in a manner relevant to this case:
The prevailing rule is that the provisions of the articles of incorporation or by-laws of
termination of membership must be strictly complied with and applied to the letter. Thus, an
association whose member fails to pay his membership due and annual due as required in the
by-laws, and which provides for the termination or suspension of erring members as well as
prohibits the latter from intervening in any manner in the operational activities of the association,
must be observed because by-laws are self-imposed private laws binding on all members,
directors and officers of the corporation.
Section 94. Rules of distribution. –
In case dissolution of a non-stock corporation in accordance with the provisions of this
Code, its assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer or
conveyance, and which condition occurs by reason of the dissolution, shall be returned,
transferred or conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use
only for charitable, religious, benevolent, educational or similar purposes, but NOT held
upon a condition requiring return, transfer or conveyance by reason of the dissolution,
shall be transferred or conveyed to one or more corporations, societies or
organizations engaged in activities in the Philippines substantially similar to those of
the dissolving corporation according to a plan of distribution adopted pursuant to this
Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be
distributed in accordance with the provisions of the articles of incorporation or the by-
laws, to the extent that the articles of incorporation or the by-laws, determine the
distributive rights of members, or any class or classes of members, or provide for
distribution; and
5. In any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for profit, as may be specified
in a plan of distribution adopted pursuant to this Chapter. (n)
Section 95. Plan of distribution of assets. –
A plan providing for the distribution of assets, not inconsistent with the provisions of this
Title, may be adopted by a non-stock corporation in the process of dissolution in the
following manner:
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 The board of trustees shall, by majority vote, adopt a resolution recommending a plan
of distribution and directing the submission thereof to a vote at a regular or special meeting of
members having voting rights. Written notice setting forth the proposed plan of distribution or a
summary thereof and the date, time and place of such meeting shall be given to each member
entitled to vote, within the time and in the manner provided in this Code for the giving of notice of
meetings to members. Such plan of distribution shall be adopted upon approval of at least
two-thirds (2/3) of the members having voting rights present or represented by proxy at
such meeting. (n)
XII. FOREIGN CORPORATION
A. Definition (Sec. 123;
Section 123. Definition and rights of foreign corporations.
For the purposes of this Code, a foreign corporation is one formed, organized or
existing under any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state. It shall have the right to
transact business in the Philippines after it shall have obtained a license to transact business in
this country in accordance with this Code and a certificate of authority from the appropriate
government agency
Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 [1997])
In Communication Materials and Design, Inc. et. al. vs. Court of Appeals, G.R. No.
102223, August 22, 1996, it was observed that: "There is no exact rule or governing principle as
to what constitutes doing or engaging in or transacting business. Indeed, such case must be
judged in the light of its peculiar circumstances, upon its peculiar facts and upon the language of
the statute applicable. The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for which it was organized. Article
44 of the Omnibus Investments Code of 1987 defines the phrase to include: 'soliciting orders,
purchases, service contracts, opening offices, whether called 'liaison' offices or branches;
appointing representatives or distributors who are domiciled in the Philippines or who in any
calendar year stay in the Philippines for a period or periods totaling one hundred eighty (180)
days or more; participating in the management, supervision or control of any domestic business
firm, entity or corporation in the Philippines, and any other act or acts that imply a continuity or
commercial dealings or arrangements and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business organization.'" The
term ordinarily implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of the functions normally incident
to and in progressive prosecution of the purpose and object of its organization. A single act or
transaction made in the Philippines, however, could qualify a foreign corporation to be doing
business in the Philippines, if such singular act is not merely incidental or casual, but indicates
the foreign corporation's intention to do business in the Philippines. HECTaA
A foreign corporation, is one which owes its existence to the laws of another state,
[Section 123, Corporation Code of the Philippines] and generally, has no legal existence within
the state in which it is foreign. In Marshall Wells Co. vs. Elser, No. 22015, September 1, 1924, 46
Phil. 70, it was held that corporations have no legal status beyond the bounds of the sovereignty
Corporation Law 2016: JVL & JSD
by which they are created. Nevertheless, it is widely accepted that foreign corporations are, by
reason of state comity, allowed to transact business in other states and to sue in the courts of
such fora. In the Philippines foreign corporations are allowed such privileges, subject to certain
restrictions, arising from the state's sovereign right of regulation. Before a foreign corporation can
transact business in the country, it must first obtain a license to transact business here [Section
125, 126, Corporation Code of the Philippines] and secure the proper authorizations under
existing law. If a foreign corporation engages in business activities without the necessary
requirements, it opens itself to court actions against it, but it shall not be allowed to maintain or
intervene in an action, suit or proceeding for its own account in any court or tribunal or agency in
the Philippines. [Section 133, id.]
The purpose of the law in requiring that foreign corporations doing business in the
country be licensed to do so, is to subject the foreign corporations doing business in the
Philippines to the jurisdiction of the courts, otherwise, a foreign corporation illegally doing
business here because of its refusal or neglect to obtain the required license and authority to do
business may successfully though unfairly plead such neglect or illegal act so as to avoid service
and thereby impugn the jurisdiction of the local courts. The same danger does not exist among
foreign corporations that are indubitably not doing business in the Philippines. Indeed, if a foreign
corporation does not do business here, there would be no reason for it to be subject to the State's
regulation. As we observed, in so far as the State is concerned, such foreign corporation has no
legal existence. Therefore, to subject such corporation to the courts' jurisdiction would violate the
essence of sovereignty.
B. Statutory Concept of "Doing Business" (Art. 44, Executive Order No. 226, Omnibus Investment
Code; Sec. 3(d), R.A. No. 7042, Foreign Investment Act of 1991;
Article 44. Definition of terms. As used in this Book, the term "investment" shall mean
equity participation in any enterprise formed, organized or existing under the laws of the
Philippines; and the phrase "doing business" shall include soliciting orders, purchases,
service contracts, opening offices, whether called "liaison" offices or branches;
appointing representatives or distributors who are domiciled in the Philippines for a
period or periods totalling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business firm, entity or corporation
in the Philippines, and any other act or acts that imply a continuity of commercial dealings
or arrangements and contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization.
d. The phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar year stay in the country for a
period or periods totaling one hundred eighty [180] days or more; participating in the
management, supervision or control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial dealings or
arrangements and contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of commercial gain or
of the purpose and object of the business organization: Provided, however, That the phrase
"doing business" shall NOT be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business, and/or the exercise
of rights as such investor; nor having a nominee director or officer to represent its
98
interests in such corporation; nor appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name and for its own account;
- Steelcase Inc. vs. Design International Selections, Inc. 670 SCRA 64 [2012]
The phrase "doing business" is clearly defined in Section 3 (d) of R.A. No. 7042
(Foreign Investments Act of 1991), to wit:
d) The phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar year stay in the country for a
period or periods totalling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works, or the exercise
of some of the functions normally incident to, and in progressive prosecution of, commercial gain
or of the purpose and object of the business organization: Provided, however, That the phrase
"doing business" shall not be deemed to include mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to do business, and/or the exercise of rights as
such investor; nor having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account.
This definition is supplemented by its Implementing Rules and Regulations, Rule I,
Section 1 (f) which elaborates on the meaning of the same phrase:
f." Doing business" shall include soliciting orders, service contracts, opening offices,
whether liaison offices or branches; appointing representatives or distributors, operating under full
control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in
the country for a period totalling one hundred eighty [180] days or more; participating in the
management, supervision or control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works, or the exercise
of some of the functions normally incident to and in progressive prosecution of commercial gain
or of the purpose and object of the business organization.
The following acts shall not be deemed "doing business" in the Philippines:
1. Mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor;
2. Having a nominee director or officer to represent its interest in such corporation;
3. Appointing a representative or distributor domiciled in the Philippines which transacts
business in the representative's or distributor's own name and account;
4. The publication of a general advertisement through any print or broadcast media;
5. Maintaining a stock of goods in the Philippines solely for the purpose of having the
same processed by another entity in the Philippines;
6. Consignment by a foreign entity of equipment with a local company to be used in the
processing of products or export; cEISAD
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of sale which are not on
a continuing basis, such as installing in the Philippines machinery it has manufactured or
Corporation Law 2016: JVL & JSD
exported to the Philippines, servicing the same, training domestic workers to operate it, and
similar incidental services.
- Cargill, Inc. vs. Intra Strata Assurance Corporation, 615 SCRA 304 [2010]
The determination of whether a foreign corporation is doing business in the Philippines must be
based on the facts of each case.
- MR Holdings, Ltd. vs. Bafar, 380 SCRA 617 [2002])
The Court of Appeals ruled that petitioner has no legal capacity to sue in the Philippine
courts because it is a foreign corporation doing business here without license. A review of this
ruling does not pose much complexity as the principles governing a foreign corporation's right to
sue in local courts have long been settled by our Corporation Law. These principles may be
condensed in three statements, to wit: a) if a foreign corporation does business in the Philippines
without a license, it cannot sue before the Philippine courts; b) if a foreign corporation is not doing
business in the Philippines, it needs no license to sue before Philippine courts on an isolated
transaction or on a cause of action entirely independent of any business transaction; and c) if a
foreign corporation does business in the Philippines with the required license, it can sue before
Philippine courts on any transaction. Apparently, it is not the absence of the prescribed license
but the "doing (of) business" in the Philippines without such license which debars the foreign
corporation from access to our courts.
In the case at bar, the Court of Appeals categorized as "doing business" petitioner's
participation under the "Assignment Agreement" and the "Deed of Assignment." This is simply
untenable. The expression "doing business" should not be given such a strict and literal
construction as to make it apply to any corporate dealing whatever. At this early stage and with
petitioner's acts or transactions limited to the assignment contracts, it cannot be said that it had
performed acts intended to continue the business for which it was organized. It may not be amiss
to point out that the purpose or business for which petitioner was organized is not discernible in
the records. No effort was exerted by the Court of Appeals to establish the nexus between
petitioner's business and the acts supposed to constitute "doing business. " Thus, whether the
assignment contracts were incidental to petitioner's business or were continuation thereof is
beyond determination. We cannot apply the case cited by the Court of Appeals, Far East Int'l
Import and Export Corp. vs. Nankai Kogyo Co., Ltd., which held that a single act may still
constitute "doing business" if "it is not merely incidental or casual, but is of such character as
distinctly to indicate a purpose on the part of the foreign corporation to do other business in the
state." In said case, there was an express admission from an official of the foreign corporation
that he was sent to the Philippines to look into the operation of mines, thereby revealing the
foreign corporation's desire to continue engaging in business here. But in the case at bar, there is
no evidence of similar desire or intent. Unarguably, petitioner may, as the Court of Appeals
suggested, decide to operate Marcopper's mining business, but, of course, at this stage, that is a
mere speculation. Or it may decide to sell the credit secured by the mining properties to an
offshore investor, in which case the acts will still be isolated transactions. To see through the
present facts an intention on the part of petitioner to start a series of business transaction is to
rest on assumptions or probabilities falling short of actual proof. Courts should never base its
judgments on a state of facts so inadequately developed that it cannot be determined where
inference ends and conjecture begins.
C. Resident Agent (Sec. 127 and 128)
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 Section 127. Who may be a resident agent. –
A resident agent may be either an individual residing in the Philippines or a
domestic corporation lawfully transacting business in the Philippines: Provided, That in the
case of an individual, he must be of good moral character and of sound financial standing. (n)
Section 128. Resident agent; service of process. –
The Securities and Exchange Commission shall require as a condition precedent to the
issuance of the license to transact business in the Philippines by any foreign corporation that
such corporation file with the Securities and Exchange Commission a written power of attorney
designating some person who must be a resident of the Philippines, on whom any summons and
other legal processes may be served in all actions or other legal proceedings against such
corporation, and consenting that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign corporation at its home office.
Any such foreign corporation shall likewise execute and file with the Securities and Exchange
Commission an agreement or stipulation, executed by the proper authorities of said corporation,
in form and substance as follows:
"The (name of foreign corporation) does hereby stipulate and agree, in consideration of
its being granted by the Securities and Exchange Commission a license to transact business in
the Philippines, that if at any time said corporation shall cease to transact business in the
Philippines, or shall be WITHOUT any resident agent in the Philippines on whom any summons
or other legal processes may be served, then in any action or proceeding arising out of any
business or transaction which occurred in the Philippines, service of any summons or other legal
process may be made upon the Securities and Exchange Commission and that such service
shall have the same force and effect as if made upon the dulyauthorized officers of the
corporation at its home office."
Whenever such service of summons or other process shall be made upon the
Securities and Exchange Commission, the Commission shall, within ten (10) days thereafter,
transmit by mail a copy of such summons or other legal process to the corporation at its home or
principal office. The sending of such copy by the Commission shall be necessary part of and shall
complete such service. All expenses incurred by the Commission for such service shall be paid in
advance by the party at whose instance the service is made. In case of a change of address of
the resident agent, it shall be his or its duty to immediately notify in writing the Securities and
Exchange Commission of the new address. (72a; and n)
- Expertravel & Tours, Inc. vs. CA, 459 SC RA 147 [2005];
While Atty. Aguinaldo is the resident agent of the respondent in the Philippines, this
does not mean that he is authorized to execute the requisite certification against forum shopping.
Under Section 127, in relation to Section 128 of the Corporation Code, the authority of the
resident agent of a foreign corporation with license to do business in the Philippines is to receive,
for and in behalf of the foreign corporation, services and other legal processes in all actions and
other legal proceedings against such corporation.
- H.B. Zachry Company International vs. CA, 232 SCRA 329 [1994]).
However, the enforcement of the preliminary attachment on 27 March 1990, although
simultaneous with the service of the summons and a copy of the complaint, did not bind Zachry
because the service of the summons was not validly made. When a foreign corporation has
designated a person to receive service of summons pursuant to the Corporation Code, that
designation is exclusive and service of summons on any other person is inefficacious. 49 The
Corporation Law 2016: JVL & JSD
valid service of summons and a copy of the amended complaint was only made upon it on 24
April 1990, and it was only then that the trial court acquired jurisdiction over Zachry's person.
Accordingly, the levy on attachment made by the sheriff on 27 April 1990 was invalid.
D. Applicable Laws to Foreign Corporations (Sec. 129;
Section 129. Law applicable. –
Any foreign corporation lawfully doing business in the Philippines shall be bound by all
laws, rules and regulations applicable to domestic corporations of the same class, except
such only as provide for the creation, formation, organization or dissolution of corporations or
those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or
officers of corporations to each other or to the corporation. (73a)
Grey vs. Insular Lumber Co., 67 Phil. 139 [1939]
The defendant was and is a corporation organized and existing under the laws of the
State of New York, licensed to engage in business in the Philippines, with offices in the City of
Manila, in Fabrica, Occidental Negros, in New York and in Philadelphia. Under the law of New
York, the rights of a stockholder to examine the books and records of a corporation organized
under the laws of that State, consist in making a written request to the treasurer or other fiscal
officer thereof for a statement of its affairs, under oath, embracing a particular account of all its
assets and liabilities, and the treasurer shall make such statement and deliver it to the person
making the request within thirty days thereafter. The plaintiff not being a stockholder owning at
least three per cent of the capital stock of the defendant corporation, has no right to examine the
books and records.
E. Amendment of Articles of Incorporation (Sec. 130)
Section 130. Amendments to articles of incorporation or by-laws of foreign
corporations. –
Whenever the articles of incorporation or by-laws of a foreign corporation authorized to
transact business in the Philippines are amended, such foreign corporation shall, within sixty (60)
days after the amendment becomes effective, file with the Securities and Exchange Commission,
and in the proper cases with the appropriate government agency, a duly authenticated copy of
the articles of incorporation or by-laws, as amended, indicating clearly in capital letters or by
underscoring the change or changes made, duly certified by the authorized official or officials of
the country or state of incorporation. The filing thereof shall not of itself enlarge or alter the
purpose or purposes for which such corporation is authorized to transact business in the
Philippines. (n)
F. Merger and Consolidation (Sec. 132; Art 51, Omnibus Investments Code)
Section 132. Merger or consolidation involving a foreign corporation licensed in
the Philippines.
One or more foreign corporations authorized to transact business in the Philippines
may merge or consolidate with any domestic corporation or corporations if such is permitted
under Philippine laws and by the law of its incorporation: Provided, That the requirements on
merger or consolidation as provided in this Code are followed.
Whenever a foreign corporation authorized to transact business in the Philippines shall
be a party to a merger or consolidation in its home country or state as permitted by the law of its
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incorporation, such foreign corporation shall, within sixty (60) days after such merger or
consolidation becomes effective, file with the Securities and Exchange Commission, and in
proper cases with the appropriate government agency, a copy of the articles of merger or
consolidation duly authenticated by the proper official or officials of the country or state under the
laws of which merger or consolidation was effected: Provided, however, That if the absorbed
corporation is the foreign corporation doing business in the Philippines, the latter shall at the
same time file a petition for withdrawal of its license in accordance with this Title. (n)
Article 51. Mergers and Consolidations.
The provisions of this Book Two shall apply to any merger, consolidation, syndicate or
any other combination of firms, associations, partnership or other forms of business organization
that will result in ownership or control by persons or entities that are NOT Philippine nationals or
have foreign equity participation, of more than forty per cent (40%) of the outstanding capital of
whatever organizations results from the merger, consolidation, syndicate or other combination
G. Revocation of License (Secs. 134 and 135; Art. 50, Omnibus Investments Code)
Section 134. Revocation of license. –
Without prejudice to other grounds provided by special laws, the license of a foreign
corporation to transact business in the Philippines may be revoked or suspended by the
Securities and Exchange Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required by this
Title;
3. Failure, after change of its resident agent or of his address, to submit to the
Securities and Exchange Commission a statement of such change as required by this
Title;
4. Failure to submit to the Securities and Exchange Commission an authenticated copy
of any amendment to its articles of incorporation or by-laws or of any articles of merger
or consolidation within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit or
other document submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully
due to the Philippine Government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which
such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines. (n)
Section 135. Issuance of certificate of revocation. –
Upon the revocation of any such license to transact business in the Philippines, the
Securities and Exchange Commission shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government agency in the proper cases. The
Securities and Exchange Commission shall also mail to the corporation at its registered office in
the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation.
(n)
Article 50. Cause for Cancellation of Certificate of Authority or Payment of Fine.
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A violation of any of the requirements set forth in Article 49 or of the terms and
conditions which the Board may impose shall be sufficient cause to cancel the certificate of
authority issued pursuant to this Book and/or subject firms to the payment of fines in accordance
with the rules and regulations issued by the Board: Provided, however, That aliens or foreign
firms, associations, partnerships, corporations or other forms of business organization NOT
organized or existing under the laws of the Philippines which may have been lawfully licensed to
do business in the Philippines prior to the effectivity of R.A. 5455, shall, with respect to the
activities for which they were licensed and actually engaged in prior to the effectivity of said Act,
NOT be subject to the provisions of Article 48 and 49 but shall be subject to the reporting
requirements prescribed by the Board: Provided, further, That where the issuance of said license
has been irregular or contrary to law, any person adversely affected thereby may file an action
with the Regional Trial Court where said alien or foreign business organization resides or has its
principal office to cancel the said license. In such cases, NO injunction shall issue without notice
and hearing; and appeals and other proceedings for review shall be filed directly with the
Supreme Court.
H. Withdrawal of Foreign Corporation (Sec. 136)
Section 136. Withdrawal of foreign corporations. –
Subject to existing laws and regulations, a foreign corporation licensed to transact
business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for
withdrawal of license. NO certificate of withdrawal shall be issued by the Securities and
Exchange Commission unless all the following requirements are met;
1. All claims which have accrued in the Philippines have been paid, compromised or
settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political subdivisions have been paid; and
3. The petition for withdrawal of license has been published once a week for three (3)
consecutive weeks in a newspaper of general circulation in the Philippines.
XIII. PENALTY PROVISIONS OF THE CODE
A. Penalty Clause for Violations of the Provisions of the Code (Sec. 144)
Section 144. Violations of the Code. –
Violations of any of the provisions of this Code or its amendments not otherwise
specifically penalized therein shall be punished by a fine of not less than one thousand
(P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for
not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the
court. If the violation is committed by a corporation, the same may, after notice and hearing, be
dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided,
That such dissolution shall NOT preclude the institution of appropriate action against the director,
trustee or officer of the corporation responsible for said violation: Provided, further, That nothing
in this section shall be construed to repeal the other causes for dissolution of a corporation
provided in this Code. (190 1/2 a)
B. Disqualification (Sec. 27)
Section 27. Disqualification of directors, trustees or officers. –
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 NO person convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to
the date of his election or appointment, shall qualify as a director, trustee or officer of any
corporation. (n)
C. Specific application (Sec. 74)
Section 74. Books to be kept; stock transfer agent. –
Every corporation shall keep and carefully preserve at its principal office a record of all
business transactions and minutes of all meetings of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in detail the time and place of holding the
meeting, how authorized, the notice given, whether the meeting was regular or special, if special
its object, those present and absent, and every act done or ordered done at the meeting. Upon
the demand of any director, trustee, stockholder or member, the time when any director, trustee,
stockholder or member entered or left the meeting must be noted in the minutes; and on a similar
demand, the yeas and nays must be taken on any motion or proposition, and a record thereof
carefully made. The protest of any director, trustee, stockholder or member on any action or
proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, in writing, for a copy
of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of an offense which shall be
punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to
a resolution or order of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted for such refusal: and
Provided, further, That it shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination of the records or minutes
of such corporation or of any other corporation, or was not acting in good faith or for a legitimate
purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock and transfer
book", in which must be kept a record of all stocks in the names of the stockholders
alphabetically arranged; the installments paid and unpaid on all stock for which subscription has
been made, and the date of payment of any installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to whom made; and such other entries as
the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of
the corporation or in the office of its stock transfer agent and shall be open for inspection
by any director or stockholder of the corporation at reasonable hours on business days.
NO stock transfer agent or one engaged principally in the business of registering
transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines
unless he secures a license from the Securities and Exchange Commission and pays a fee
as may be fixed by the Commission, which shall be renewable annually: Provided, That a
stock corporation is NOT precluded from performing or making transfer of its own stocks, in which
case all the rules and regulations imposed on stock transfer agents, except the payment of a
license fee herein provided, shall be applicable.
Corporation Law 2016: JVL & JSD
D. Violation of Section 133 by Foreign Corporations
Section 133. Doing business without a license. –
NO foreign corporation transacting business in the Philippines without a license,
or its successors or assigns, shall be permitted to maintain or intervene in any action, suit
or proceeding in any court or administrative agency of the Philippines; but such corporation
may be sued or proceeded against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws
XIV. CORPORATE REHABILITATION
- Wonder Book Corporation vs. Philippine Bank of Communications, 676 SCRA 489 [2012]
Rehabilitation contemplates a continuance of corporate life and activities in an effort to
restore and reinstate the corporation to its former position of successful operation and solvency.
The purpose of rehabilitation proceedings is to enable the company to gain a new lease on life
and thereby allow creditors to be paid their claims from its earnings. The rehabilitation of a
financially distressed corporation benefits its employees, creditors, stockholders and, in a larger
sense, the general public.
Rehabilitation proceedings in our jurisdiction, much like the bankruptcy laws of the
United States, have equitable and rehabilitative purposes. On one hand, they attempt to provide
for the efficient and equitable distribution of an insolvent debtor's remaining assets to its creditors;
and on the other, to provide debtors with a "fresh start" by relieving them of the weight of their
outstanding debts and permitting them to reorganize their affairs. The rationale of Presidential
Decree No. 902-A, as amended, is to "effect a feasible and viable rehabilitation," by preserving a
floundering business as going concern, because the assets of a business are often more valuable
when so maintained than they would be when liquidated.
Under Section 23, Rule 4 of the Interim Rules, a rehabilitation plan may be approved if
there is a showing that rehabilitation is feasible and the opposition entered by the creditors
holding a majority of the total liabilities is unreasonable. In determining whether the objections to
the approval of a rehabilitation plan are reasonable or otherwise, the court has the following to
consider: (a) that the opposing creditors would receive greater compensation under the plan than
if the corporate assets would be sold; (b) that the shareholders would lose their controlling
interest as a result of the plan; and (c) that the receiver has recommended approval.
Rehabilitation is therefore available to a corporation who, while illiquid, has assets that
can generate more cash if used in its daily operations than sold. Its liquidity issues can be
addressed by a practicable business plan that will generate enough cash to sustain daily
operations, has a definite source of financing for its proper and full implementation, and anchored
on realistic assumptions and goals. This remedy should be denied to corporations whose
insolvency appears to be irreversible and whose sole purpose is to delay the enforcement of any
of the rights of the creditors, which is rendered obvious by the following: (a) the absence of a
sound and workable business plan; (b) baseless and unexplained assumptions, targets and
goals; (c) speculative capital infusion or complete lack thereof for the execution of the business
plan; (d) cash flow cannot sustain daily operations; and (e) negative net worth and the assets are
near full depreciation or fully depreciated.
Another reason for this Court's denial of Wonder Book's petition is its failure to comply
with Section 5 of the Interim Rules, which enumerates the minimum requirements of an
acceptable rehabilitation plan:
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 Sec. 5. Rehabilitation Plan. — The rehabilitation plan shall include: (a) the desired
business targets or goals and the duration and coverage of the rehabilitation; (b) the terms and
conditions of such rehabilitation which shall include the manner of its implementation, giving due
regard to the interests of secured creditors; (c) the material financial commitments to support the
rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include
conversion of the debts or any portion thereof to equity, restructuring of the debts, dacion en
pago, or sale of assets or of the controlling interest; (e) a liquidation analysis that estimates the
proportion of the claims that the creditors and shareholders would receive if the debtor's
properties were liquidated; and (f) such other relevant information to enable a reasonable investor
to make an informed decision on the feasibility of the rehabilitation plan. ESIcaC
It is imperative for a distressed corporation seeking rehabilitation to present "material
financial commitments" as this is critical in determining its resolve, determination, earnestness
and good faith in financing its proposed rehabilitation plan. As discussed above, Wonder Book's
"material financial commitments" are limited to converting all deposits for future subscriptions to
common stock and treating all its payables to its officers and stockholders as trade payables.
These, unfortunately, do not qualify as sincere commitment and even betray Wonder Book's
intent to fund the implementation of its rehabilitation plan using whatever cash it will generate
during the reprieve provided by the stay order and the moratorium on the principal and interest
payments. This scheme is certainly unfair as PBCOM or any of Wonder Book's creditors cannot
be compelled to finance Wonder Book's rehabilitation by a delay in the payment of their claims or
a considerable reduction in the amounts thereof.
- San Jose Timber Corporation, et aL vs. SEC, et I., 667 SCRA 13 [2012]
"A successful rehabilitation usually depends on two factors: (1) a positive change in the
business fortunes of the debtor, and (2) the willingness of the creditors and shareholders to arrive
at a compromise agreement on repayment burdens, extent of dilution, etc. The debtor must
demonstrate by convincing and compelling evidence that these circumstances exist or are likely
to exist by the time the debtor submits his 'revised or substitute rehabilitation plan for the final
approval of the court.'"
Given the high standards that the Rules require, mere unsupported assertions by the
debtor that "the parties are close to an agreement" or that "business is expected to pick up in the
next several quarters" are not sufficient. Circumstances that might demonstrate in a convincing
and compelling manner that the debtor could successfully be rehabilitated include the following:
a) the business fortunes of the debtor have actually improved since the petition was
filed;
b) the general circumstances and forecast for the sector in which the debtor is
operating supports the likelihood that the debtor's business will revive;
c) the debtor has taken concrete steps to improve its operating efficiency;
d) the debtor has obtained legally binding investment commitments from parties
contingent on the approval of a rehabilitation plan;
e) the debtor has successfully addressed other factors that would increase the risk that
the debtor's rehabilitation plan would fail;
f) the majority of the secured and unsecured creditors have expressly demonstrated a
preference that the debtor be rehabilitated rather than liquidated and are willing to compromise on
their claims to reach that result;
g) the debtor's shareholders have expressed a willingness to dilute their equity in
connection with a debt equity swap.
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- Veterans Philippines Scout Security Agency, Inc. vs. First Dominion Prime Holdings. Inc., 679
SCRA 168 [2012]
An essential function of corporate rehabilitation is the mechanism of suspension of all
actions and claims against the distressed corporation upon the due appointment of a
management committee or rehabilitation receiver. 25 Section 6 (c) of PD 902-A mandates that
upon appointment of a management committee, rehabilitation receiver, board, or body, all actions
for claims against corporations, partnerships or associations under management or receivership
pending before any court, tribunal, board, or body shall be suspended. The actions to be
suspended cover all claims against a distressed corporation whether for damages founded on a
breach of contract of carriage, labor cases, collection suits or any other claims of pecuniary
nature. Jurisprudence is settled that the suspension of proceedings referred to in the law
uniformly applies to "all actions for claims" filed against the corporation, partnership or association
under management or receivership, without distinction, except only those expenses incurred in
the ordinary course of business. 26 The stay order is effective on all creditors of the corporation
without distinction, whether secured or unsecured.
More importantly, Section 20 of the 2008 Rules of Procedure on Corporate
Rehabilitation provides: DcCASI
SEC. 20. Effects of Rehabilitation Plan. — The approval of the rehabilitation plan by the court
shall result in the following:
(a) The plan and its provisions shall be binding upon the debtor and all persons who
may be affected thereby, including the creditors, whether or not such persons have participated in
the proceedings or opposed the plan or whether or not their claims have been scheduled;
(b) The debtor shall comply with the provisions of the plan and shall take all actions
necessary to carry out the plan;
(c) Payments shall be made to the creditors in accordance with the provisions of the
plan;
(d) Contracts and other arrangements between the debtor and its creditors shall be
interpreted as continuing to apply to the extent that they do not conflict with the provisions of the
plan; and
(e) Any compromises on amounts or rescheduling of timing of payments by the debtor
shall be binding on creditors regardless of whether or not the plan is successfully implemented.
(Emphasis ours.)
To stress, the rehabilitation plan, once approved, is binding upon the debtor and all persons who
may be affected by it, including the creditors, whether such persons have or have not participated
in the proceedings or have opposed the plan or whether their claims have or have not been
scheduled. With the approval by the Rehabilitation Court of the plan for the FDPHI Group of
Companies, there is nothing left to be done but to enforce the terms and schedule of payment as
provided in the said plan.
- Express Investments 111 Private Ltd., et aL vs. Bayan Telecommunications, Inc. 687 SCRA 50
[2012]
In order to effectively exercise such jurisdiction, Section 6 (c), PD 902-A empowers the Regional
Trial Court to appoint one or more receivers of the property, real and personal, which is the
subject of the pending action before the Commission whenever necessary in order to preserve
the rights of the parties-litigants and/or protect the interest of the investing public and creditors.
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 Under Section 6, Rule 4 of the Interim Rules, if the court finds the petition to be
sufficient in form and substance, it shall issue, not later than five (5) days from the filing of the
petition, an Order with the following pertinent effects:
(a) appointing a Rehabilitation Receiver and fixing his bond;
(b) staying enforcement of all claims, whether for money or otherwise and whether
such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties
not solidarily liable with the debtor;
(c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any
manner any of its properties except in the ordinary course of business;
(d) prohibiting the debtor from making any payment of its liabilities outstanding as at the
date of filing of the petition; . . . (Emphasis supplied)
The stay order shall be effective from the date of its issuance until the dismissal of the
petition or the termination of the rehabilitation proceedings. 61 Under the Interim Rules, the
petition shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of 180
days from the date of the initial hearing. The court may grant an extension beyond this period
only if it appears by convincing and compelling evidence that the debtor may successfully be
rehabilitated. In no instance, however, shall the period for approving or disapproving a
rehabilitation plan exceed 18 months from the date of filing of the petition
- Town and Country Enterprises, Inc. vs. Quisumbing Jr., 682 SCRA 128 [2012]
Viewed in the foregoing light, the CA cannot be faulted for upholding the RTC's grant of
a writ of possession in favor of Metrobank on 11 January 2005. If the purchaser at the foreclosure
sale, upon posting of the requisite bond, is entitled to a writ of possession even during the
redemption period under Section 7 of Act 3135, as amended, it has been consistently ruled that
there is no reason to withhold said writ after the expiration of the redemption period when no
redemption is effected by the mortgagor. Indeed, the rule is settled that the right of the purchaser
to the possession of the foreclosed property becomes absolute after the redemption period,
without a redemption being effected by the property owner. Since the basis of this right to
possession is the purchaser's ownership of the property, the mere filing of an ex parte motion for
the issuance of the writ of possession would suffice, and no bond is required.
- Siochi Fishery Enterprises, Inc. vs. BPI, 659 SCRA 817 [2011]
As provided in the Interim Rules, the basic procedure is as follows:
1. The petition is filed with the appropriate Regional Trial Court;
2. If the petition is found to be sufficient in form and substance, the trial court shall
issue a Stay Order, which shall provide, among others, for the appointment of a Rehabilitation
Receiver; the fixing of the initial hearing on the petition; a directive to the petitioner to publish the
Order in a newspaper of general circulation in the Philippines once a week for two (2) consecutive
weeks; and a directive to all creditors and all interested parties (including the Securities and
Exchange Commission) to file and serve on the debtor a verified comment on or opposition to the
petition, with supporting affidavits and documents;
3. Publication of the Stay Order;
4. Initial hearing on any matter relating to the petition or on any comment and/or
opposition filed in connection therewith. If the trial court is satisfied that there is merit in the
petition, it shall give due course to the petition;
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5. Referral for evaluation of the rehabilitation plan to the rehabilitation receiver who
shall submit his recommendations to the court;
6. Modifications or revisions of the rehabilitation plan as necessary;
7. Submission of final rehabilitation plan to the trial court for approval;
8. Approval/disapproval of rehabilitation plan by the trial court
As an officer of the court and an expert, the rehabilitation receiver plays an important
role in corporate rehabilitation proceedings. In Pryce Corporation v. Court of Appeals, 17 the
Court held that, "the purpose of the law in directing the appointment of receivers is to protect the
interests of the corporate investors and creditors." 18 Section 14 of the Interim Rules of
Procedure on Corporate Rehabilitation enumerates the powers and functions of the rehabilitation
receiver: (1) verify the accuracy of the petition, including its annexes such as the schedule of
debts and liabilities and the inventory of assets submitted in support of the petition; (2) accept and
incorporate, when justified, amendments to the schedule of debts and liabilities; (3) recommend
to the court the disallowance of claims and rejection of amendments to the schedule of debts and
liabilities that lack sufficient proof and justification; (4) submit to the court and make available for
review by the creditors a revised schedule of debts and liabilities; (5) investigate the acts,
conduct, properties, liabilities, and financial condition of the debtor, the operation of its business
and the desirability of the continuance thereof, and any other matter relevant to the proceedings
or to the formulation of a rehabilitation plan; (6) examine under oath the directors and officers of
the debtor and any other witnesses that he may deem appropriate; (7) make available to the
creditors documents and notices necessary for them to follow and participate in the proceedings;
(8) report to the court any fact ascertained by him pertaining to the causes of the debtor's
problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement, and
irregularities committed by the stockholders, directors, management, or any other person; (9)
employ such person or persons such as lawyers, accountants, appraisers, and staff as are
necessary in performing his functions and duties as rehabilitation receiver; (10) monitor the
operations of the debtor and to immediately report to the court any material adverse change in
the debtor's business; (11) evaluate the existing assets and liabilities, earnings and operations of
the debtor; (12) determine and recommend to the court the best way to salvage and protect the
interests of the creditors, stockholders, and the general public; (13) study the rehabilitation plan
proposed by the debtor or any rehabilitation plan submitted during the proceedings, together with
any comments made thereon; (14) prohibit and report to the court any encumbrance, transfer, or
disposition of the debtor's property outside of the ordinary course of business or what is allowed
by the court; (15) prohibit and report to the court any payments outside of the ordinary course of
business; (16) have unlimited access to the debtor's employees, premises, books, records, and
financial documents during business hours; (17) inspect, copy, photocopy, or photograph any
document, paper, book, account, or letter, whether in the possession of the debtor or other
persons; (18) gain entry into any property for the purpose of inspecting, measuring, surveying, or
photographing it or any designated relevant object or operation thereon; (19) take possession,
control, and custody of the debtor's assets; (20) notify the parties and the court as to contracts
that the debtor has decided to continue to perform or breach; (21) be notified of, and to attend all
meetings of the board of directors and stockholders of the debtor; (22) recommend any
modification of an approved rehabilitation plan as he may deem appropriate; (23) bring to the
attention of the court any material change affecting the debtor's ability to meet the obligations
under the rehabilitation plan; (24) recommend the appointment of a management committee in
the cases provided for under Presidential Decree No. 902-A, as amended; (25) recommend the
termination of the proceedings and the dissolution of the debtor if he determines that the
continuance in business of such entity is no longer feasible or profitable or no longer works to the
best interest of the stockholders, parties-litigants, creditors, or the general public; and (26) apply
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to the court for any order or directive that he may deem necessary or desirable to aid him in the
exercise of his powers.
- Molina vs. Pacific Plans, Inc. 655 SCRA 356 [2011]
The Court's ruling in the more recent case of Castillo v. Uniwide Warehouse Club, Inc. 14 is
instructive, thus:
An essential function of corporate rehabilitation is the mechanism of suspension of all actions and
claims against the distressed corporation, which operates upon the due appointment of a
management committee or rehabilitation receiver. The governing law concerning rehabilitation
and suspension of actions for claims against corporations is P.D. No. 902-A, as amended.
Section 6(c) of the law mandates that, upon appointment of a management committee,
rehabilitation receiver, board, or body, all actions for claims against corporations, partnerships or
associations under management or receivership pending before any court, tribunal, board, or
body shall be suspended. It materially provides:
Section 6 (c). . . .
. . . Provided, finally, that upon appointment of a management committee, rehabilitation receiver,
board or body, pursuant to this Decree, all actions for claims against corporations, partnerships or
associations under management or receivership pending before any court, tribunal, board or
body, shall be suspended accordingly.
In Finasia Investments and Finance Corporation v. Court of Appeals [G.R. No. 107002,
October 7, 1994, 237 SCRA 446, 450], the term "claim" has been construed to refer to debts or
demands of a pecuniary nature, or the assertion to have money paid. It was referred to, in
Arranza v. B.F. Homes, Inc., [389 Phil. 318], as an action involving monetary considerations and
in Philippine Airlines v. Kurangking [438 Phil. 375], the term was identified as the right to
payment, whether or not it is reduced to judgment, liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed, legal or equitable, and secured or unsecured.
Furthermore, the actions that were suspended cover all claims against a distressed corporation
whether for damages founded on a breach of contract of carriage, labor cases, collection suits or
any other claims of a pecuniary nature. More importantly, the new rules on corporate
rehabilitation, as well as the interim rules, provide an all-encompassing definition of the term and,
thus, include all claims or demands of whatever nature or character against a debtor or its
property, whether for money or otherwise. There is no doubt that petitioner's claim in this case,
arising as it does from his alleged illegal dismissal, is a claim covered by the suspension order
issued by the SEC, as it is one for pecuniary consideration.
Jurisprudence is settled that the suspension of proceedings referred to in the law
uniformly applies to "all actions for claims" filed against a corporation, partnership or association
under management or receivership, without distinction, except only those expenses incurred in
the ordinary course of business. In the oft-cited case of Rubberworld (Phils.), Inc. v. NLRC [G.R.
No. 126773, April 14, 1999, 305 SCRA 721], the Court noted that aside from the given exception,
the law is clear and makes no distinction as to the claims that are suspended once a
management committee is created or a rehabilitation receiver is appointed. Since the law makes
no distinction or exemptions, neither should this Court. Ubi lex non distinguit nec nos distinguere
debemos. Philippine Airlines, Inc. v. Zamora [G.R. No. 166996, February 6, 2007, 514 SCRA
584, 605] declares that the automatic suspension of an action for claims against a corporation
Corporation Law 2016: JVL & JSD
under a rehabilitation receiver or management committee embraces all phases of the suit, that is,
the entire proceedings of an action or suit and not just the payment of claims.
The reason behind the imperative nature of a suspension or stay order in relation to the
creditors' claims cannot be downplayed, for indeed the indiscriminate suspension of actions for
claims intends to expedite the rehabilitation of the distressed corporation by enabling the
management committee or the rehabilitation receiver to effectively exercise its/his powers free
from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the
debtor company. To allow such other actions to continue would only add to the burden of the
management committee or rehabilitation receiver, whose time, effort and resources would be
wasted in defending claims against the corporation, instead of being directed toward its
restructuring and rehabilitation.
- BPI Family Savings Bank, Inc. vs. Pryce Gases, Inc., 653 SCRA 42 [2011]
Section 5 of the Interim Rules on Corporate Rehabilitation provides that "(t)he review of
any order or decision of the court or an appeal therefrom shall be in accordance with the Rules of
Court . . . ." Under A.M. No. 00-8-10-SC, a petition for corporate rehabilitation is considered a
special proceeding. 20 Thus, the period of appeal provided in paragraph 19 (b) of the Interim
Rules Relative to the Implementation of Batas Pambansa Blg. 129 for special proceedings shall
apply, 21 that is, the period of appeal shall be 30 days since a record of appeal is required.
- JAPRL Development Corp. vs. Security Bank Corpo, 650 SCRA 645 [2011]
Indeed, Section 6 (b) of the Interim Rules of Procedure of Corporate Rehabilitation which the
appellate court cited in the earlier-quoted portion of its decision, provides that a stay order does
not apply to sureties who are solidarily liable with the debtor. In Limson and Arollado's case, their
solidary liability with JAPRL is documented.
Liability of the Surety — The liability of the Surety is solidary and not contingent upon
the pursuit by the Bank of whatever remedies it may have against the Debtor or the
collaterals/liens it may possess. If any of the Guaranteed Obligation is not paid or performed on
due date (at stated maturity or by acceleration), the Surety shall, without need for any notice,
demand or any other act or deed, immediately become liable therefor and the Surety shall pay
and perform the same.
Limson and Arollado, as sureties, whose liability is solidary cannot, therefore, claim protection
from the rehabilitation court, they not being the financially-distressed corporation that may be
restored, not to mention that the rehabilitation court has no jurisdiction over them. Article 1216 of
the Civil Code clearly is not on their side:
ART. 1216.The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against any one of them shall not be an obstacle to
those which may subsequently be directed against the others, so long as the debt has not been
fully collected.
- Umale v. ASB Realty Corporation, 625 SCRA 215 [2011]
Corporate rehabilitation is defined as "the restoration of the debtor to a position of
successful operation and solvency, if it is shown that its continuance of operation is economically
feasible and its creditors can recover by way of the present value of payments projected in the
plan more if the corporation continues as a going concern than if it is immediately liquidated." 56
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It was first introduced in the Philippine legal system through PD 902-A, as amended. 57 The
intention of the law is "to effect a feasible and viable rehabilitation by preserving a floundering
business as a going concern, because the assets of a business are often more valuable when so
maintained than they would be when liquidated." 58 This concept of preserving the corporation's
business as a going concern while it is undergoing rehabilitation is called debtor-in-possession or
debtor-in-place. This means that the debtor corporation (the corporation undergoing
rehabilitation), through its Board of Directors and corporate officers, remains in control of its
business and properties, subject only to the monitoring of the appointed rehabilitation receiver. 59
The concept of debtor-in-possession, is carried out more particularly in the SEC Rules, the rule
that is relevant to the instant case. 60 It states therein that the interim rehabilitation receiver of the
debtor corporation "does not take over the control and management of the debtor corporation." 61
Likewise, the rehabilitation receiver that will replace the interim receiver is tasked only to monitor
the successful implementation of the rehabilitation plan. 62 There is nothing in the concept of
corporate rehabilitation that would ipso facto deprive 63 the Board of Directors and corporate
officers of a debtor corporation, such as ASB Realty, of control such that it can no longer enforce
its right to recover its property from an errant lessee.
To be sure, corporate rehabilitation imposes several restrictions on the debtor
corporation. The rules enumerate the prohibited corporate actions and transactions 64 (most of
which involve some kind of disposition or encumbrance of the corporation's assets) during the
pendency of the rehabilitation proceedings but none of which touch on the debtor corporation's
right to sue. The implication therefore is that our concept of rehabilitation does not restrict this
particular power, save for the caveat that all its actions are monitored closely by the receiver, who
can seek an annulment of any prohibited or anomalous transaction or agreement entered into by
the officers of the debtor corporation.
Indeed, PD 902-A, as amended, provides that the receiver shall have the powers
enumerated under Rule 59 of the Rules of Court. But Rule 59 is a rule of general application. It
applies to different kinds of receivers — rehabilitation receivers, receivers of entities under
management, ordinary receivers, receivers in liquidation — and for different kinds of situations.
While the SEC has the discretion 65 to authorize the rehabilitation receiver, as the case may
warrant, to exercise the powers in Rule 59, the SEC's exercise of such discretion cannot simply
be assumed. There is no allegation whatsoever in this case that the SEC gave ASB Realty's
rehabilitation receiver the exclusive right to sue.
- Asiatrust Development Bank vs. First Aikka Development, Inc., G.R. No. 179558, June 22, 2011
Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative
purposes. On the one hand, they attempt to provide for the efficient and equitable
distribution of an insolvent debtor's remaining assets to its creditors; and on the other, to
provide debtors with a "fresh start" by relieving them of the weight of their outstanding debts
and permitting them to reorganize their affairs. 55 The purpose of rehabilitation proceedings
is to enable the company to gain a new Lease on life and thereby allow creditors to be paid
their claims from its earnings. The determination of the true and correct amount due
petitioner is important in assessing whether FADI may be successfully rehabilitated. It is thus
necessary that petitioner be given the opportunity to be heard by the rehabilitation court. The
court should admit petitioner's comment on or opposition to FADI's petition for rehabilitation
and allow petitioner to participate in the rehabilitation proceedings to determine if indeed
FADI could maintain its corporate existence. A remand of the case to the rehabilitation court
is, therefore, imperative. To be sure, the successful rehabilitation of a distressed corporation
will benefit its debtors, creditors, employees, and the economy in general.
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- Castillo vs. Uniwide Warehouse Club, Inc., 619 SSCRA 641 [2010]
Jurisprudence is settled that the suspension of proceedings referred to in the law uniformly
applies to "all actions for claims" filed against a corporation, partnership or association under
management or receivership, without distinction, except only those expenses incurred in the
ordinary course of business. 22 In the oft-cited case of Rubberworld (Phils.), Inc. v. NLRC, the
Court noted that aside from the given exception, the law is clear and makes no distinction as to
the claims that are suspended once a management committee is created or a rehabilitation
receiver is appointed. Since the law makes no distinction or exemptions, neither should this
Court. Ubi lex non distinguit nec nos distinguere debemos. Philippine Airlines, Inc. v. Zamora
declares that the automatic suspension of an action for claims against a corporation under a
rehabilitation receiver or management committee embraces all phases of the suit, that is, the
entire proceedings of an action or suit and not just the payment of claims.
The reason behind the imperative nature of a suspension or stay order in relation to the
creditors' claims cannot be downplayed, for indeed the indiscriminate suspension of actions for
claims intends to expedite the rehabilitation of the distressed corporation by enabling the
management committee or the rehabilitation receiver to effectively exercise its/his powers free
from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the
debtor company. To allow such other actions to continue would only add to the burden of the
management committee or rehabilitation receiver, whose time, effort and resources would be
wasted in defending claims against the corporation, instead of being directed toward its
restructuring and rehabilitation.
At this juncture, it must be conceded that the date when the claim arose, or when the
action was filed, has no bearing at all in deciding whether the given action or claim is covered by
the stay or suspension order. What matters is that as long as the corporation is under a
management committee or a rehabilitation receiver, all actions for claims against it, whether for
money or otherwise, must yield to the greater imperative of corporate revival, excepting only, as
already mentioned, claims for payment of obligations incurred by the corporation in the ordinary
course of business.
It is, thus, not difficult to see why the subject action for illegal dismissal and damages
against respondent corporation ought to have been suspended at the first instance respondents
submitted before the Labor Arbiter their motion to suspend proceedings in the illegal dismissal
case. This, considering that at the time the labor case was filed on August 26, 2002, respondent
corporation was undergoing proceedings for rehabilitation and was later on declared to be in a
state of suspension of payments.
- Pacific Wide Realty and Development Corporation vs. Puerto Azul Land, Inc., 605 SCRA 503
[2010]
The Interim Rules of Procedure on Corporate Rehabilitation is silent on the
enforcement of claims specifically against the properties of accommodation mortgagors. It only
covers the suspension, during the pendency of the rehabilitation, of the enforcement of all claims
against the debtor, its guarantors and sureties not solidarily liable with the mortgagor.
Furthermore, the newly adopted Rules of Procedure on Corporate Rehabilitation has a specific
provision for this special arrangement among a debtor, its creditor and its accommodation
mortgagor. Section 7 (b), Rule 3 of the said Rules explicitly allows the foreclosure by a creditor of
a property not belonging to a debtor under corporate rehabilitation, as it provides:
SEC. 7. Stay Order. — . . . (b) staying enforcement of all claims, whether for money or
otherwise and whether such enforcement is by court action or otherwise, against the debtor, its
guarantors and persons not solidarily liable with the debtor; provided, that the stay order shall not
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cover claims against letters of credit and similar security arrangements issued by a third party to
secure the payment of the debtor's obligations; provided, further, that the stay order shall not
cover foreclosure by a creditor of property not belonging to a debtor under corporate
rehabilitation; provided, however, that where the owner of such property sought to be foreclosed
is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of
excussion as such guarantor.

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